Costing 11 Attempts Compilation M24 - Unlocked

CA Intermediate
Paper 4
Cost &
Management
Accounting
Chapter-wise compilation
of RTP, MTP and PYP
May’24
Prakshal Shah | 8779794646

11
CA Finalist _______________________________
(Once you print this write your name in this blank to give you the much-needed motivation. Remember what
you see is what you achieve!)
Disclaimer:
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GETTING THE MOST FROM THIS BOOK
A QUICK GUIDE
1 INITIAL READING
After your initial reading of a
particular chapter in your
study material, go through the
questions in our 3, 5, and 11
attempt’s compilations,
focusing on the chapter
you've just covered. Make
note of challenging questions
for later reference.
2
FIRST REVISION
During your first revision, revisit the marked questions.
If you still can't answer them, highlight them in red and
review the related concepts to improve your
understanding. This process helps you to grasp the key
concepts and address your weak points
3 KEEP GOING WITH THE

REVISIONS
Repeat the reading and revision process
as often as possible before your exams.
Each iteration will enhance your
confidence and knowledge.
4 EXAMINERS COMMENTS
Pay attention to the examiner's comments in
our compilations, as they highlight common
mistakes. Learning from these errors will
help you avoid them in your exams

Frequently Asked Questions
1. Why RTP’s, MTP’s and PYP’s?
RTP’s, MTP’s, and PYP’s are extremely important to ensure that you reproduce ICAI language.
These questions train you to understand what is important and what is expected of you.
At least 41% of questions* are asked from previous RTP’s, MTP’s and PYP’s.
2. What is included?
In this compiler, all questions from the last 3, 5 or 11 attempts depending on the one you have
selected will be available. There will be references to the marks and the attempt from which
they were asked. Identical or similar questions have been removed and references for both
attempts are mentioned.
3. What is the benefit of Chapter-wise?

We have categorized each and every question from all Old RTPs, MTP’s, and PYP’s into
chapters. This means that you don't have to wait until you've completed your entire syllabus
to tackle an RTP, MTP, or past paper. You can start solving these questions to check your
conceptual clarity right after finishing a particular chapter.
4. What does amended for the latest attempt mean?

When we reviewed all the questions from the past 11 attempts of RTP, MTP, and PYP’S, we
didn't just segregate them Chapterwise; we also updated them to reflect the latest provisions.
All the answers provided in the compilation are applicable for the May 2024 examination. So,
there's no need to stress about outdated or incorrect information.
5. How are Old RTP’s, MTP’s & PYP’s beneficial for me?
All old RTPs, MTPs, and PYPs have been organized according to the new syllabus issued by ICAI.
This means that if a specific chapter from the old scheme is not included in the new scheme,
it has been omitted. If a particular chapter in the new scheme is based on concepts from two
or more chapters in the old scheme, it has been adapted to align with how the chapter should
be in the new scheme. If a chapter is only partially included in the new scheme, the questions
related to those specific concepts are only included in the corresponding chapter of the new
scheme. A comprehensive reconciliation of the chapters between the new scheme and the old
scheme is provided on the following page.
6. What if a new attempt is added post my purchase?

If you have purchased materials for the May 2024 attempt, you will receive a file with the
questions segregated Chapterwise specifically for that attempt.
7. What does N/A mean?

It could mean any of the following:
1. No questions from that chapter have been included in the selected attempts.
2. The chapter is newly introduced, and as a result, no questions have been previously asked
in RTP’s, MTP’s, or PYP’s.
*This is on an average based on the last 11 attempts

Cost and Management Accoun ng
Reconcilia on of chapters of the new scheme (May’24) with old course
New Chapter Name as per NEW Syllabus Paper No. as per
Chapter Old Course
No.
1 Introduction to Cost and Management Accounting Same
2 Material Cost Same
3 Employee Cost and Direct Expenses Same
4 Overheads – Absorption Costing Method Same
5 Activity Based Costing Same
6 Cost Sheet Same
7 Cost Accounting Systems Same
8 Unit & Batch Costing Same
9 Job Costing Same
10 Process & Operation Costing Same
11 Joint Products and By Products Same
12 Service Costing Same
13 Standard Costing Same
14 Marginal Costing Same
15 Budgets and Budgetary Control Same
Note:
Contract Cos&ng as per the Old Syllabus has been removed in the New Syllabus.

Table of Contents
Sr. Particulars Page
No Number
1 Introduction to Cost and Management Accounting 1.1 – 1.15
2 Material Cost 2.1 – 2.41
3 Employee Cost and Direct Expenses 3.1 – 3.38
4 Overheads – Absorption Costing Method 4.1 – 4.42
5 Activity Based Costing 5.1 – 5.54
6 Cost Sheet 6.1 – 6.40
7 Cost Accounting Systems 7.1 -7.27
8 Unit & Batch Costing 8.1 – 8.15
9 Job Costing 9.1 – 9.10
10 Process & Operation Costing 10.1 – 10.42
11 Joint Products and By Products 11.1 – 11.27
12 Service Costing 12.1 – 12.49
13 Standard Costing 13.1 – 13.45
14 Marginal Costing 14.1 – 14.53
15 Budgets and Budgetary Control 15.1 – 15.34
21 MTPs: March’18, April’18, Aug’18, Oct’18, May’19, April’19, Oct’19,

May’20, Oct’20, March’21, April’21, Oct ’21, Nov ’21, March
’22, April ’22, Sep ’22, Oct ’22, March ’23, April '23, Sep ’23 &
Oct ‘23
11 PYPs: May’18, Nov’18, May’19, Nov’19, Nov’20, Jan’21, July ’21, Dec
’21, May’22, Nov ’22, May ‘23
12 RTPs: May’18, Nov’18, May’19, Nov’19, May’20, Nov’20, May’21, Nov
’21, May ’22, Nov ’22, May ’23, Nov ‘23

1.1
Chapter 1
Introduction to Cost and Management Accounting
Question 1
Discuss the impact of Information Technology in Cost Accounting. (MTP 5 Marks March ’19 & April ’23
& Sep ‘23, PYP 5 Marks Jan ’21, RTP May ’20, RTP May’22)
Answer 1
The impact of IT in cost accounting may include the followings:
(i) After the introduction of ERPs, different functional activities get integrated and as a consequence
a single entry into the accounting system provides custom made reports for every purpose and
saves an organization from preparing different sets of documents. Reconciliation process of results
of both cost and financial accounting systems become simpler and less sophisticated.
(ii) A move towards paperless environment can be seen where documents like Bill of Material, Material
Requisition Note, Goods Received Note, labour utilization report etc. are no longer required to be
prepared in multiple copies, the related department can get e -copy from the system.
(iii) Information Technology with the help of internet (including intranet and extranet) helps in resource
procurement and mobilization. For example, production department can get materials from the stores
without issuing material requisition note physically. Similarly, purchase orders can be initiated to the
suppliers with the help of extranet. This enables an entity to shift towards Just-in-Time (JIT) approach
of inventory management and production.
(iv) Cost information for a cost center or cost object is ascertained with accuracy in timely manner. Each
cost center and cost object is codified and all related costs are assigned to the cost object or cost
center. This process automates the cost accumulation and ascertainment process. The cost
information can be customized as per the requirement. For example, when an entity manufacture or
provide services, it can know information job -wise, batch-wise, process-wise, cost center wise etc.
(v) Uniformity in preparation of report, budgets and standards can be achieved with the help of IT. ERP
software plays an important role in bringing uniformity irrespective of location, currency, language
and regulations.
(vi) Cost and revenue variance reports are generated in real time basis which enables the management to
take control measures immediately.
(vii) IT enables an entity to monitor and analyse each process of manufacturing or service activity closely
to eliminate non value added activities.
The above are examples of few areas where Cost Accounting is done with the help of IT.
Question 2
Discuss the four different methods of costing along with their applicability to concerned industry? (MTP
March ‘18, 5 Marks)
Answer 2
Four different methods of costing along with their applicability to concerned industry have been
discussed as below:
(i) Job Costing: The objective under this method of costing is to ascertain the cost of each job order. A
job card is prepared for each job to accumulate costs. The cost of the job is determined by adding all
costs against the job it has incurred. This method of costing is used in printing press, foundries and
general engineering workshops, advertising etc.
(ii) Batch Costing: This system of costing is used where small components/ parts of the same kind are
required to be manufactured in large quantities. Here batch of similar products is treated as a job and
cost of such a job is ascertained as discussed under (1), above. If in a cycle manufacturing unit, rims
are produced in batches of 2,500 units each, then the cost will be determined in relation to a batch of
2,500 units.
(iii) Contract Costing: If a job is very big and takes a long time for its completion, then method used for
costing is known as Contract Costing. Here the cost of each contract is ascertained separately. It is
Chapter 1 Introduction to Cost and Management Accounting
1.2
suitable for firms engaged in the construct ion of bridges, roads, buildings etc.
(iv) Operating Costing: The method of Costing used in service rendering undertakings is known as
operating costing. This method of costing is used in undertakings like transport, supply of water,
telephone services, hospitals, nursing homes etc.
Question 3
Discuss the prerequisite of installing cost accounting system. (MTP Aug ‘18 5 Marks)
Answer 3
Before setting up a system of cost accounting the under mentioned factors should be studied:
(i) Objective: The objective of costing system, for example whether it is being introduced for fixing
prices or for insisting a system of cost control.
(ii) Nature of Business or Industry: The Industry in which business is operating. Every business industry
has its own peculiarity and objectives. According to its cost information requirement cost accounting
methods are followed. For example, an oil refinery maintains process wise cost accounts to find out
cost incurred on a particular process say in crude refinement process etc.
(iii) Organizational Hierarchy: Costing system should fulfil the information requirement s of different
levels of management. Top management is concerned with the corporate strategy, strategic level
management is concerned with marketing strategy, product diversification, product pricing etc.
Operational level management needs the information on standard quantity to be consumed, report
on idle time etc.
(iv) Knowing the product: Nature of product determines the type of costing system to be implemented.
The product which has by -products requires costing system which account for by-products as well.
In case of perishable or short self - life, marginal costing method is required to know the contribution
and minimum price at which it can be sold.
(v) Knowing the production process: A good costing system can never be established without the
complete knowledge of the production process. Cost apportionment can be done on the most
appropriate and scientific basis if a cost accountant can identify degree of effort or resources
consumed in a particular process. This also includes some basic technical know -how and process
peculiarity.
(vi) Information synchronization: Establishment of a department or a system requires substantial
amount of organizational resources. While drafting a costing system, information needs of various
other departments should be taken into account. For example, in a typical business organization
accounts department needs to submit monthly stock statement to its lender bank, quantity wise
stock details at the time of filing returns to tax authorities etc.
(vii) Method of maintenance of cost records: The manner in which Cost and Financial accounts could be
inter-locked into a single integral accounting system and how the results of separate sets of accounts
i.e. cost and financial, could be reconciled by means of control accounts.
(viii) Statutory compliances and audit: Records are to be maintained to comply with statutory
requirements and applicable cost accounting standards to be followed.
(ix) Information Attributes: Information generated from the Costing system should possess all the
attributes of information i.e. complete, accurate, timeliness, relevant etc. to have an effective
management information system (MIS).
Question 4
Discuss the essential features of a good cost accounting system. (MTP Oct ‘19, 5 Marks, Old & New SM)
Answer 4
The essential features, which a good cost accounting system should possess, are as follows:
(a) Informative and simple: Cost accounting system should be tailor-made, practical, simple and capable of
meeting the requirements of a business concern. The system of costing should not sacrifice the utility by
introducing inaccurate and unnecessary details.
(b) Accurate and authentic: The data to be used by the cost accounting system should be accurate and
authenticated; otherwise it may distort the output of the system and a wrong decision may be taken.
Prakshal Shah(c) Uniformity
| 8779794646 and consistency: There should be uniformity and consistency in classification, treatment and
1.3
reporting of cost data and related information. This is required for benchmarking and comparability of the
results of the system for both horizontal and vertical analysis.
(d) Integrated and inclusive: The cost accounting system should be integrated with other systems like financial
accounting, taxation, statistics and operational research etc. to have a complete overview and clarity in
results.
(e) Flexible and adaptive: The cost accounting system should be flexible enough to make necessary
amendment and modifications in the system to incorporate changes in technological, reporting, regulatory
and other requirements.
(f) Trust on the system: Management should have trust on the system and its output. For this, an active role
of management is required for the development of such a system that reflects a strong conviction in using
information for decision making.
Question 5
State the limitations of cost and management accounting. (MTP Oct ’18 5 Marks, RTP Nov’21)
Answer 5
Like other branches of accounting, cost and management accounting is also having certain limitations.
The limitations of cost and management accounting are as follows:
1. Expensive: It is expensive because analysis, allocation and absorption of overheads require
considerable amount of additional work, and hence additional money.
2. Requirement of Reconciliation: The results shown by cost accounts differ from those shown by
financial accounts. Thus Preparation of reconciliation statements is necessary to verify their accuracy.
3. Duplication of Work: It involves duplication of work as organization has to maintain two sets of
accounts i.e. Financial Account and Cost Account.
4. Inefficiency: Costing system itself does not control costs but its usage does.
Question 6
DISCUSS the steps to be followed to exercise control over cost. (MTP 5 Marks Oct’20)
Answer 6
To exercise control over cost, following steps are followed:
(i) Determination of pre-determined standard or results: Standard cost or performance targets for a
cost object or a cost centre is set before initiation of production or service activity. These are desired
cost or result that need to be achieved.
(ii) Measurement of actual performance: Actual cost or result of the cost object or cost centre is
measured. Performance should be measured in the same manner in which the targets are set i.e. if
the targets are set up operation-wise, and then the actual costs should also be collected and
measured operation-wise to have a common basis for comparison.
(iii) Comparison of actual performance with set standard or target: The actual performance so
measured is compared against the set standard and desired target. Any deviation (variance) between
the two is noted and reported to the appropriate person or authority.
(iv) Analysis of variance and action: The variance in results so noted are further analysed to know the
reasons for variance and appropriate action is taken to ensure compliance in future. If necessary,
the standards are further amended to take developments into account.
Question 7
DISCUSS the Standard and Discretionary Cost Centres (MTP 5 Marks March’21 & Oct ‘23, Old & New SM)
Answer 7
(i) Standards Cost Centre: Cost Centre where output is measurable and input required for the output can
be specified. Based on a well-established study, an estimate of standard units of input to produce a
unit of output is set. The actual cost for inputs is compared with the standard cost. Any deviation
1.4
(variance) in cost is measured and analysed into controllable and uncontrollable cost. The manager of
the cost centre is supposed to comply with the standard and held responsible for adverse cost
variances. The input-output ratio for a standard cost centre is clearly identifiable.
(ii) Discretionary Cost Centre: The cost center whose output cannot be measured in financial terms,
thus input-output ratio cannot be defined. The cost of input is compared with allocated budget for
the activity. Example of discretionary cost centers are Research & Development department,
Advertisement department where output of these department cannot be measured with certainty
and co-related with cost incurred on inputs.
Question 8
DISTINGUISH between cost control and cost reduction (MTP 5 Marks, Apr’21, Apr 19, Aug 18 & Oct ‘23)
(RTP (Nov ’21, May 19, Nov ’18 & Nov ’22 & May ‘23) (PYP May ‘19 5 Marks, PYP 5 Marks Dec ’21)
Answer 8
Difference between Cost Control and Cost Reduction
Cost Control Cost Reduction
1. Cost control aims at maintaining the costs in 1. Cost reduction is concerned with reducing
accordance with the established standards. costs. It challenges all standards and
endeavours to improvise them continuously
2. Cost control seeks to attain lowest possible 2. Cost reduction recognises no condition as
cost under existing conditions. permanent, since a change will result in
lower cost.
3. In case of cost control, emphasis is on past 3. In case of cost reduction, it is on present
and present and future.
4. Cost control is a preventive function 4. Cost reduction is a corrective function. It
operates even when an efficient cost control
system exists.
5. Cost control ends when targets are 5. Cost reduction has no visible end and is a
achieved. continuous process.
EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:
In this theoretical question on ‘Cost control and Cost reduction’, below average
performance of the examinees was observed.
The theory question required knowledge of the concepts of two terms Cost Control and
Cost Reduction to identify differences between them. Most of the examinees answered
partly correct. Performance of the examinees was below average.
Question 9
EXPLAIN the difference between Cost Accounting and Management Accounting (MTP 5 Marks, Oct ’21
& March ‘23) (RTP Nov’19, May ’20 & Nov ‘22) (PYP 5 Marks Nov 20)
Answer 9
Difference between Cost Accounting and Management Accounting
Basis Cost Accounting Management Accounting
(i) Nature It records the quantitative It records both qualitative and
aspect only. quantitative aspect.
(ii) Objective It records the cost of It Provides information to
producing a product and management for planning and
providing a service. co-ordination.
1.5
(iii) Area It only deals with cost It is wider in scope as it includes

Ascertainment. financial accounting, budgeting,
taxation, planning etc.
(iv) Recording of data It uses both past and It is focused with the projection of
present figures. figures for future.
(v) Development Its development is related It develops in accordance to the
to industrial revolution. need of modern business world.
(vi) Rules and It follows certain principles It does not follow any specific
Regulation and procedures for recording rules and regulations.
costs of different products.
Question 10
How do you deal with the following in cost accounts?
(i) Fringe benefits
(ii) Bad debts. (MTP 5 Marks, Oct’21)
Answer 10
(i) Fringe benefits: These are the additional payments or facilities provided to the workers apart from
their salary and direct cost-allowances like house rent, dearness and city compensatory allowances.
These benefits are given in the form of overtime, extra shift duty allowance, holiday pay, pension
facilities etc. These indirect benefits stand to improve the morale, loyalty and stability of employees
towards the organization. If the amount of fringe benefit is considerably large, it may be recovered as
direct charge by means of a supplementary wage or labour rate; otherwise, these may be collected as
part of production overheads.
(ii) Bad debts: There is no unanimity among different authors of Cost Accounting about the treatment of
bad debts. One view is that ‘bad debts’ should be excluded from cost. According to this view bad debts are
financial losses and therefore, they should not be included in the cost of a particular job or product.
According to another view it should form part of selling and distribution overheads, especially when
they arise in the normal course of trading. Therefore, bad debts should be treated in cost accounting
in the same way as any other selling and distribution cost. However extra ordinarily large bad debts
should not be included in cost accounts.
Question 11
DISCUSS cost classification based on variability and controllability. (MTP 5 Marks Nov ’21 & March ‘18)
(RTP May ’21 & May ’19, Old & New SM)
Answer 11
Cost classification based on variability
(i) Fixed Costs – These are the costs which are incurred for a period, and which, within certain output and
turnover limits, tend to be unaffected by fluctuations in the levels of activity (output or turnover). They
do not tend to increase or decrease with the changes in output. For example, rent, insurance of factory
building etc., remain the same for different levels of production.
(ii) Variable Costs – These costs tend to vary with the volume of activity. Any increase in the activity results
in an increase in the variable cost and vice-versa. For example, cost of direct labour, etc.
(iii) Semi-variable Costs – These costs contain both fixed and variable components and are thus partly
affected by fluctuations in the level of activity. Examples of semi variable costs are telephone bills, gas
and electricity etc.
Cost classification based on controllability
(i) Controllable Costs - Cost that can be controlled, typically by a cost, profit or investment centre
manager is called controllable cost. Controllable costs incurred in a particular responsibility centre
can be influenced by the action of the executive heading that responsibility centre. For example, direct
costs comprising direct labour, direct material, direct expenses and some of the overheads are
generally controllable by the shop level management.
1.6
(ii) Uncontrollable Costs - Costs which cannot be influenced by the action of a specified member of an
undertaking are known as uncontrollable costs. For example, expenditure incurred by, say, the tool
room is controllable by the foreman in-charge of that section but the share of the tool-room
expenditure which is apportioned to a machine shop is not to be controlled by the machine shop
foreman.
Question 12
STATE Direct Expenses with examples. (MTP 5 Marks April ’19)
Answer 12
Expenses other than direct material cost and direct employee cost, which are incurred to
manufacture a product or for provision of service and can be directly traced in an economically
feasible manner to a cost object. The following costs are examples for direct expenses:
(a) Royalty paid/ payable for production or provision of service;
(b) Hire charges paid for hiring specific equipment;
(c) Cost for product/ service specific design or drawing;
(d) Cost of product/ service specific software;
(e) Other expenses which are directly related with the production of goods or provision of service.
Question 13
EXPLAIN the difference between product cost and period cost. (5 Marks April ’19, Oct’22)
Answer 13
Product costs are those costs that are identified with the goods purchased or produced for resale. In
a manufacturing organisation they are attached to the product and that are included in the inventory
valuation for finished goods, or for incomplete goods. Product cost is also known as inventoriable
cost. Under absorption costing method it includes direct material, direct labour, direct expenses,
directly attributable costs (variable and non-variable) and other production (manufacturing)
overheads. Under marginal costing method Product Costs includes all variable production costs and
the all fixed costs are deducted from the contribution.
Periods costs are the costs, which are not assigned to the products but are charged as expense
against revenue of the period in which they are incurred. General Administration, marketing, sales
and distributor overheads are recognized as period costs.
Question 14
Some of the items of PR Company, a manufacturer of corporate office furniture, are provided below. As
the company is in the process of developing a formal cost accounting system, you are required to
CLASSIFY the items into three categories namely: (i) Cost tracing (ii) Cost allocation (iii) Non-
manufacturing item. Carpenter wages, Depreciation - office building, Glue for assembly, Lathe
department supervisor, Metal brackets for drawers, Factory washroom supplies, Lumber, Samples for
trade shows, Lathe depreciation, Lathe operator wages. (MTP 4 Marks March ’22)
Answer 14
Item Cost Tracing Cost Allocation Non-manufacturing
Carpenter wages √
Depreciation - office building √
Glue for assembly √
Lathe department supervisor √
Metal brackets for drawers √
Factory washroom supplies √
Lumber √
Samples for trade shows √
1.7
Lathe depreciation √
Lathe operator wages √
Question 15
STATE the method of costing for the following industries:
(i) Sugar manufacturing
(ii) Bridge Construction
(iii) Advertising
(iv) Car Assembly (MTP 4 Marks April ’22)
Answer 15
S. No. Industry Method of costing
(i) Sugar manufacturing Process costing
(ii) Bridge Construction Contract Costing
(iii) Advertising Job costing
Question 16
DEFINE cost units? WRITE the cost unit basis against each of the following Industry/Product-
Automobile, Steel, Cement, Chemicals, Power and Transport. (5 Marks March ’23)(RTP Nov ’22)
Answer 16
Cost units are usually the units of physical measurement like number, weight, area, volume, length,
time and value.
Industry or Product Cost Unit Basis

Automobile Number
Steel Ton
Cement Ton/ per bag etc.
Chemicals Litre, gallon, kilogram, ton etc.
Power Kilo-watt hour (kWh)
Transport Passenger- kilometer
Question 17
DISCUSS short notes on (i) Discretionary Cost Centre and (ii) Investment Centre (RTP Nov 20 & May ‘18)
Answer 17
(i) Discretionary Cost Centre: The cost centre whose output cannot be measured in financial terms, thus
input-output ratio cannot be defined. The cost of input is compared with allocated budget for the
activity. Example of discretionary cost centres are Research & Development department, Advertisement
department where output of these department cannot be measured with certainty and co-related with
cost incurred on inputs.
(ii) Investment Centres: These are the responsibility centres which are not only responsible for profitability
but also has the authority to make capital investment decisions. The performance of these responsibility
centres are measured on the basis of Return on Investment (ROI) besides profit. Examples of investment
centres are Maharatna, Navratna and Miniratna companies of Public Sector Undertakings of Central
Government.
Question 18
DESCRIBE Operation costing with two examples of industries where operation costing is applied. (RTP
Nov ’20)
Answer 18
This product costing system is used when an entity produces more than one variant of final product
using different materials but with similar conversion activities. This means conversion activity is similar
1.8
for all the product variants but materials differ significantly. Operation Costing method is also known as
Hybrid product costing system as materials costs are accumulated by job order or batch wise but
conversion costs i.e. labour and overheads costs are accumulated by department, and process costing
methods are used to assign these costs to products. Moreover, under operation costing, conversion
costs are applied to products using a predetermined application rate. This predetermined rate is based
on budgeted conversion costs. The two examples of industries are Ready made garments and Jeweler
making.
Question 19
DEFINE Controllable Cost and Uncontrollable Cost. (RTP Nov ’18) (MTP 5 Marks March ’19, April ’23 &
Sep ‘23)
Or
EXPLAIN the difference between controllable & uncontrollable costs? (RTP May ’22)
Answer 19
(i) Controllable Costs: - Cost that can be controlled, typically by a cost, profit or investment centre manager
is called controllable cost. Controllable costs incurred in a particular responsibility centre can be influenced
by the action of the executive heading that responsibility centre. For example, direct costs comprising
direct labour, direct material, direct expenses and some of the overheads are generally controllable by the
shop level management.
(ii) Uncontrollable Costs - Costs which cannot be influenced by the action of a specified member of an
undertaking are known as uncontrollable costs. For example, expenditure incurred by, say, the tool room is
controllable by the foreman in-charge of that section but the share of the tool-room expenditure which is
apportioned to a machine shop is not to be controlled by the machine shop foreman.
Question 20
SUGGEST the unit of cost for following industries: (RTP May 23)
(a) Transport
(b) Power
(c) Hotel
(d) Hospital
(e) Steel
(f) Coal mining
(g) Professional Services
(h) Gas
(i) Engineering
(j) Oil
Answer 20
Cost units are as follows:
Industry or Product Cost Unit Basis

Transport Passenger- kilometer
Hotel Room
Hospitals Patient day
Steel Ton
Coal mining Tonne/ton
Professional services Chargeable hour, job, contract
Prakshal Shah | 8779794646 Gas Cubic feet
1.9
Engineering Contract, job

Oil Barrel, tonne, litre
Question 21
Narrate the objectives of cost accounting. (Nov ’23)
Answer 21
The main objectives of introduction of a Cost Accounting System in a manufacturing organization are
as follows:
(i) Ascertainment of cost: The main objective of a Cost Accounting system is to ascertain cost for
cost objects. Costing may be post completion or continuous but the aim is to arrive at a complete
and accurate cost figure to assist the users to compare, control and make various decisions.
(ii) Determination of selling price: Cost Accounting System in a manufacturing organisation enables
to determine desired selling price after adding expected profit margin with the cost of the goods
manufactured.
(iii) Cost control and Cost reduction: Cost Accounting System equips the cost controller to adhere
and control the cost estimate or cost budget and assist them to identify the areas of cost
reduction.
(iv) Ascertainment of profit of each activity: Cost Accounting System helps to classify cost on the
basis of activity to ascertain activity wise profitability.
(v) Assisting in managerial decision making: Cost Accounting System provides relevant cost
information and assists managers to make various decisions.
Question 22
Mention the Cost Unit of the following Industries:
(i) Electricity
(ii) Automobile
(iii) Cement
(iv) Steel
(v) Gas
(vi) Brick Making
(vii) Coal Mining
(viii) Engineering
(ix) Professional Services (PYP Nov’19,5 Marks)
Answer 22
Cost Unit of Industries:
S. No. Industry Cost Unit Basis
(i) Electricity Kilowatt-hour (kWh)
(ii) Automobile Number
(iii) Cement Ton/ per bag etc.
(iv) Steel Ton
(v) Gas Cubic feet
(vi) Brick-making 1,000 bricks
(vii) Coal mining Tonne/ton
(viii) Engineering Contract, job
(ix) Professional services Chargeable hour, job, contract
(x) Hospitals Patient day

1.10
This was a theoretical question based on cost unit in industries. Performance of the
examinees was Average.
Question 23
Why are cost and management accounting information are required by the staff at operational level?
Describe. (PYP May ‘18, 5 Marks)
Answer 23
Operational level staffs- The operational level staffs like supervisors, foreman, team leaders are
requiring information
(i) to know the objectives and performance goals for them
(ii) to know product and service specifications like volume, quality and process etc.
(iii) to know the performance parameters against which their performance is measured and evaluated.
(iv) to know divisional (responsibility centre) profitability etc.
Question 24
Mention and explain types of responsibility centers. (PYP Nov ‘18, 5 Marks)
Answer 24
There are four types of responsibility centres:
(i) Cost Centres: The responsibility centre which is held accountable for incurrence of costs which are under
its control. The performance of this responsibility centre is measured against pre- determined standards
or budgets. The cost centres are of two types:
(a) Standard Cost Centre and (b) Discretionary Cost Centre
(ii) Revenue Centres: The responsibility centres which are accountable for generation of revenue for the
entity. Sales Department for example, is the responsible for achievement of sales target and revenue
generation. Though, revenue centres does not have control on the all expenditures it incurs but some
time expenditures related with selling activities like commission to sales person etc. are incurred by
revenue centres.
(iii) Profit Centres: These are the responsibility centres which have both responsibility of generation of
revenue and incurrence of expenditures. Since, managers of profit centres are accountable for both costs
as well as revenue, profitability is the basis for measurement of performance of these responsibility
centres. Examples of profit centres are decentralised branches of an organisation.
(iv) Investment Centres: These are the responsibility centres which are not only responsible for profitability
but also has the authority to make capital investment decisions. The performance of these responsibility
centres is measured based on Return on Investment (ROI) besides profit.
This was a theoretical question on responsibility centres. Below average performance was
observed.
Question 25
State the Method of Costing to be used in the following industries: ". (PYP 5 Marks Nov ‘20)
(i) Real Estate
(ii) Motor repairing workshop
(iii) Chemical Industry
(iv) Transport service
1.11
(v) Assembly of bicycles

(vi) Biscuits manufacturing Industry
(vii) Power supply Companies
(viii) Car manufacturing Industry
(ix) Cement Industry
(x) Printing Press
Answer 25
Method of costing used in different industries:
S. No. Industries Method of Costing
(i) Real Estate Contract Costing
(ii) Motor Repairing Workshop Job Costing
(iii) Chemical Industry Process Costing
(iv) Transport Service Service/Operating Costing
(v) Assembly of Bicycles Unit/ Single/Output/Multiple Costing
(vi) Biscuits Manufacturing Industry Batch Costing
(vii) Power Supply Companies Service/Operating Costing
(viii) Car Manufacturing Industry Multiple Costing
(ix) Cement Industry Unit/Single/Output Costing
(x) Printing Press Job Costing
Question 26
State the method of costing that would be most suitable for:
(i) Oil Refinery
(ii) Interior Decoration
(iii) Airlines Company
(iv) Advertising
(v) Car Assembly. (PYP 5 Marks Jan ‘21)
Answer 26
Method of Costing
S.No. Industry Method of Costing
(i) Oil Refinery Process Costing
(ii) Interior Job Costing
Decoration
(iii) Airlines Company Operation/ Service Costing
(iv) Advertising Job Costing
(v) Car Assembly Multiple Costing
Question 27
Specify the types of Responsibility centres under the following situations:
(i) Purchase of bonds, stocks, or real estate property.
(ii) Ticket counter in a Railway station.
(iii) Decentralized branches of an organization.
(iv) Maharana, Navratna and Miniratna public sector undertaking (PSU) of Central Government.
(v) Sales Department of an organization. (PYP 5 Marks July 21)
Answer 27
Particulars Types of
Responsibility Centre
(i) Purchase of bonds, stocks, or real estate property. Investment Centre
(ii) Ticket counter in a Railway station.
Prakshal Shah | 8779794646 Revenue Centre
1.12
(iii) Decentralized branches of an organization. Profit Centre

(iv) Maharatna, Navratna and Miniratna public sector Investment Centre
undertaking (PSU) of Central Government.
(v) Sales Department of an organization. Revenue Centre
It was a theoretical question requiring examinees to specify the type of responsibility

centre for the given five statements. Majority of the examinees failed to give clear
responses to the statements. Performance of the examinees was below average.
Question 28
Explain Direct Expenses and how these are measured and their treatment in cost accounting. (PYP May
’19 5 Marks)
Answer 28
Direct Expense: Expenses other than direct material cost and direct employee cost, which are incurred
to manufacture a product or for provision of service and can be directly traced in an economically feasible
manner to a cost object. The following costs are examples for direct expenses:
(i) Royalty paid/ payable for production or provision of service;
(ii) Hire charges paid for hiring specific equipment;
(iii) Cost for product/ service specific design or drawing;
(iv) Cost of product/ service specific software;
(v) Other expenses which are directly related with the production of goods or provision of service. The above
list of expenses is not exhaustive; any other expenses which are directly attributable to the production
or service are also included as direct expenses.
Measurement of Direct Expenses
The direct expenses are measured at invoice or agreed price net of rebate or discount but includes duties
and taxes (for which input credit not available), commission and other directly attributable costs. In case
of sub-contracting, where goods are get manufactured by job workers independent of the principal
entity, are measured at agreed price. Where the principal supplies some materials to the job workers,
the value of such materials and other incidental expenses are added with the job charges paid to the job
workers.
Treatment of Direct Expenses
Direct Expenses forms part the prime cost for the product or service to which it can be directly traceable
and attributable. In case of lump-sum payment or one-time payment, the cost is amortized over the
estimated production volume or benefit derived. If the expenses incurred are of insignificant amount. i.e.
not material, it can be treated as part of overheads.
This theoretical question was related to ‘Direct Expenses’. Poor performance of the
examinees was observed.
Question 29
Briefly explain the ‘techniques of costing’. (PYP 5 Marks Dec ‘21)

1.13
Answer 29
Techniques Description
Uniform When a number of firms in an industry agree among themselves to follow the same
Costing system of costing in detail, adopting common terminology for various items and
processes they are said to follow a system of uniform costing.
Advantages of such a system are:
i. A comparison of the performance of each of the firms can be made with that
of another, or with the average performance in the industry.
ii. Under such a system, it is also possible to determine the cost of production of
goods which is true for the industry as a whole. It is found useful when tax-
relief or protection is sought from the Government.
Marginal It is defined as the ascertainment of marginal cost by differentiating between fixed
Costing and variable costs. It is used to ascertain effect of changes in volume or type of
output on profit.
Standard It is the name given to the technique whereby standard costs are pre-determined
Costing and subsequently compared with the recorded actual costs. It is thus a technique of
an cost ascertainment and cost control. This technique may be used in conjunction with
d Variance any method of costing. However, it is especially suitable where the manufacturing
Analysis method involves production of standardized goods of repetitive nature.
Historical It is the ascertainment of costs after they have been incurred. This type of costing
Costing has limited utility.
 Post Costing: It means ascertainment of cost after production is completed.
 Continuous costing: Cost is ascertained as soon as the job is completed or
even when the job is in progress.
Absorption It is the practice of charging all costs, both variable and fixed to operations, processes
Costing or products. This differs from marginal costing where fixed costs are excluded.
Direct costing Direct costing is a specialized form of cost analysis that only uses variable costs to
make decisions. It does not consider fixed costs, which are assumed to be associated
with the time periods in which they are incurred.
This theory question on technique of costing was not answered well. Examinees answered
different methods of costing instead of techniques. Performance of the examinees was
poor.
Question 30
Identify the methods of costing from the following statements:
(i) Costs are directly charged to a group of products.
(ii) Nature of the product is complex and method cannot be ascertained.
(iii) Costs ascertained for a single product.
(iv) All costs are directly charged to a specific job.
(v) Costs are charged to operations and averaged over units produced. (PYP 5 Marks May’22)
Answer 30
Method of costing followed:
Situation Method of costing
(i) Costs are directly charged to a group of products. Batch costing
(ii) Nature of the product is complex and method cannot be Multiple costing
ascertained.
1.14
(iii) Cost is ascertained for a single product. Unit/ Single/Output costing

(iv) All costs are directly charged to a specific job. Job costing
(v) Costs are charged to operations and averaged over units Process costing
produced.
Question 31
Mention the cost units (physical measurements) for the following Industry/product:
(i) Automobile
(ii) Gas
(iii) Brick works
(iv) Power
(v) Steel
(vi) Transport (by road)
(vii) Chemical
(viii) Oil
(ix) Brewing
(x) Cement (PYP 5 Marks Nov 22)
Answer 31
Industry or Product Cost Units
Automobile Number
Gas Cubic feet
Brick works 1,000 bricks
Steel Tonne
Transport (by road) Passenger- kilometer or Tonne-kilometer
Chemical Litre, gallon, kilogram, tonne etc.
Oil Barrel, tonne, litre
Brewing Barrel
Cement Ton/ per bag etc.
Question 32
Explain: Opportunity cost (PYP 2 Marks May ’18)
Answer 32
Opportunity Cost - This cost refers to the value of sacrifice made or benefit of opportunity foregone in
accepting an alternative course of action. For example, a firm financing its expansion plan by
withdrawing money from its bank deposits. In such a case the loss of interest on the bank deposit is the
opportunity cost for carrying out the expansion plan.
Question 33
Define cost objects and give examples of any four cost objects. (PYP 5 Marks, May ‘23)
Answer 33
Definition of cost objects
Cost object is anything for which a separate measurement of cost is required. Cost object may be a
product, a service, a project, a customer, a brand category, an activity, a department or a programme
etc.
Examples of cost objects
Product Smart phone, Tablet computer, SUV Car, Book etc.
Service An airline flight from Delhi to Mumbai, Concurrent audit
assignment, Utility bill payment facility etc.
1.15
Project Metro Rail project, Road projects etc.

Activity Quality inspection of materials, Placing of orders etc.
Process Refinement of crudes in oil refineries, melting of billets or ingots in
rolling mills etc.
Department Production department, Finance & Accounts, Safety etc.

2.1
Chapter 2
Material Cost
Question 1
DISTINGUISH clearly between Bin cards and Stores Ledger. (MTP 4 Marks March ’22 & March
’23, Old & New SM)
Answer 1
Difference between Bin Card & Stores Ledger
Bin Card Stores Ledger

It is maintained by the storekeeper in the It is maintained in cost accounting
store. department.
It contains only quantitative details of It contains information both in quantity and
material received, issued and returned to value.
stores.
Entries are made when transaction takes It is always posted after the
place. transaction.
Each transaction is individually Transactions may be summarized and then
posted. posted.
Inter-department transfers do not appear in Material transfers from one job to another
Bin Card. job are recorded for costing purposes.
Question 2
A Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of Exe, 2 kg of Dee is
required. As per the sales forecast conducted by the company, it will able to sale 20,000 units of
Exe in the coming year. The following is the information regarding the raw material Dee:
(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 20 kg. more than the average consumption per day.
(iii) There is an opening stock of 2,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is Rs.125 per kg.
There is an opening stock of 1,800 units of the finished product Exe. The rate of interest charged
by bank on Cash Credit facility is 13.76%.
To place an order company has to incur Rs. 720 on paper and documentation work. From the above
information COMPUT E the followings in relation to raw material Dee:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) Impact on the profitability of the company by not ordering the EOQ.
[Take 364 days for a year] (MTP April ‘19, 10 Marks)(RTP May’19)(Same concept different figures RTP
May 21)
Answer 2
Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘Dee’:
Sales forecast of the product ‘Exe’ 20,000 units
Less: Opening stock of ‘Exe’ 1,800 units
Fresh units of ‘Exe’ to be produced 18,200 units
Raw material required to produce 18,200 units of ‘Exe’ (18,200 units × 2 36,400 kg.
Chapter 2 Material Cost
2.2
kg.)
Less: Opening Stock of ‘Dee’ 2,000 kg.
Annual demand for raw material ‘Dee’ 34,400 kg.
Computation of Economic Order Quantity (EOQ):
√2 𝑋 𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑜𝑓 "𝐷𝑒𝑒′ 2𝑋34,400 𝑘𝑔.𝑋 𝑅𝑠.720

EOQ = =√
𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡 𝑃𝑒𝑟 𝑎𝑛𝑛𝑢𝑚 𝑅𝑠.125 𝑋 13.76%
√2𝑥34,400𝑘𝑔.𝑋 𝑅𝑠.720
= 𝑅𝑠.17.2
= 1,697 kg.
(ii) Re- Order level:

= (Maximum consumption per day × Maximum lead time)
𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑜𝑓 ′𝐷𝑒𝑒′
= {( + 20𝑘𝑔. ) 𝑋 8 𝑑𝑎𝑦𝑠}
364 𝐷𝑎𝑦𝑠
36,400𝑘𝑔.
= {( + 20𝑘𝑔. ) 𝑋 8 𝑑𝑎𝑦𝑠} = 960kg.
364 𝐷𝑎𝑦𝑠
(iii) Minimum consumption per day of raw material ‘Dee’:

Average Consumption per day = 100kg.
Hence, Maximum Consumption per day = 100 kg. + 20 kg. = 120 kg.
So, Minimum consumption per day will be
Average Consumption = Min.consumption + Max.consumption / 2
Or, 100 kg. = Min.consumption 120kg. / 2
Or, Min. consumption = 200 kg – 120 kg. = 80 kg.
(a) Re-order Quantity:
EOQ – 200 kg. = 1,697 kg. – 200 kg. = 1,497 kg.
(b) Maximum Stock level:
= Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead time)
= 960 kg. + 1,497 kg. – (80 kg. × 4 days)
= 2,457 kg. – 320 kg. = 2,137 kg.
(c) Minimum Stock level:
= Re-order level – (Average consumption per day × Average lead time)
= 960 kg. – (100 kg. × 6 days) = 360 kg.
(d) Impact on the profitability of the company by not ordering the EOQ.
When purchasing the ROQ When purchasing the
EOQ
I Order quantity 1,497 kg. 1,697 kg.
II No. of orders a year 34,400kg./1,497kg. 34,400 kg./1,697kg.
= 22.9or 23orders = 20.27or 21orders
III Ordering Cost 23 orders × Rs. 720 = Rs.16,560 21 orders × Rs. 720 =
Rs.15,120
IV Average Inventory 1,497kg./2 = 748.5kg. 1,697kg./2 = 848.5kg.

V Carrying Cost 748.5 kg. × Rs. 17.2 = 848.5 kg. × Rs. 17.2 =
Rs.12,874.2 Rs.14,594.2
VI Total Cost Rs. 29,434.20 Rs. 29,714.20

2.3
Cost saved by not ordering EOQ = Rs. 29,714.20 - Rs. 29,434.20 = Rs. 280.
Question 3
A store keeper has prepared the below list of items kept in the store of the factory.
Item Units Unit cost (₹ )
A 12,000 30.00
B 18,000 3.00
C 6,000 35.00
D 750 220.00
E 3,800 75.00
F 400 105.00
G 600 300.00
H 300 350.00
I 3,000 250.00
J 20,000 7.50
K 11,500 27.50
L 2,100 75.00
The store keeper requires your help to classify the items for prioritization. You are required to
APPLY ABC analysis to classify the store items as follows:
Store items which constitutes approx. 70%, 20% and 10% of total value as A, B and C respectively.
(MTP March ‘18, 10 Marks)
Answer 3
Statement of Total Cost and Ranking
Item Units % of Total Unit cost (₹ ) Total cost (₹ ) % of Total cost Ranking
units
A 12,000 15.30% 30.00 3,60,000 12.97% 2
B 18,000 22.94% 3.00 54,000 1.95% 11
C 6,000 7.65% 35.00 2,10,000 7.57% 5
D 750 0.96% 220.00 1,65,000 5.95% 7
E 3,800 4.84% 75.00 2,85,000 10.27% 4
F 400 0.51% 105.00 42,000 1.51% 12
G 600 0.76% 300.00 1,80,000 6.49% 6
H 300 0.38% 350.00 1,05,000 3.78% 10
I 3,000 3.82% 250.00 7,50,000 27.03% 1
J 20,000 25.49% 7.50 1,50,000 5.41% 9
K 11,500 14.66% 27.50 3,16,250 11.40% 3
L 2,100 2.68% 75.00 1,57,500 5.68% 8
78,450 100.00% 27,74,750 100.00%
Statement of classification of Inventory
Ranking Item % of Total units Cost (₹) % of Total Cost Category
1 I 3.82% 7,50,000 27.03%
2 A 15.30% 3,60,000 12.97%
3 K 14.66% 3,16,250 11.40%
4 E 4.84% 2,85,000 10.27%
2.4
5 C 7.65% 2,10,000 7.57%

Total 46.27% 19,21,250 69.24% A
6 G 0.76% 1,80,000 6.49%
7 D 0.96% 1,65,000 5.95%
8 L 2.68% 1,57,500 5.68%
9 J 25.49% 1,50,000 5.41%
Total 29.89% 6,52,500 23.53% B
10 H 0.38% 1,05,000 3.78%
11 B 22.94% 54,000 1.95%
12 F 0.51% 42,000 1.51%
Total 23.84% 2,01,000 7.24 C
12 100% 27,74,750 100%
Question 4
The annual demand for an item of raw material is 4,000 units and the purchase price is expected to
be Rs. 90 per unit. The incremental cost of processing an order is Rs. 135 and the annual cost of
storage is estimated to be Rs. 12 per unit. COMPUTE the optimal order quantity and t otal relevant
cost of this order quantity? Suppose that Rs. 135 as estimated to be the incremental cost of
processing an order is incorrect and should have been Rs. 80. All other estimates are correct.
ESTIMATE the difference in cost on account of this error? Assume at the commencement of the
period that a supplier offers 4,000 units at a price of Rs. 86. The materials will be delivered
immediately and placed in the stores. Assume that the incremental cost of placing the order is zero
and original estimate of Rs. 135 for placing an order for the economic batch is correct. ANALYSE,
should the order be accepted? (MTP Aug ‘18, 10 Marks)
Answer 4
2×4,000×135
(i) Optimal order quantity i.e. E.O.Q. = √ 12
= √90,000
= 300 units
Relevant Cost of this order quantity Rs.

4,000
Ordering Cost = 300 13.33 say 14 orders at Rs.135 1,890
1
Carrying Cost = 2 ×300× 12 1,800
Relevant cost 3,690
2×4,000×80
(ii) Revised EOQ = √ = 231 units
12
4,000
Ordering Cost = 231
= 17.32 say 18 orders at Rs. 80 1,440
1
Carrying Cost = 2 × 231 × 12 1,386
Different in cost on account of this error = 3,690 – 2,826 = Rs. 864

(iii) In case of discount in purchase price, the total cost of Purchase cost, ordering cost and
carrying cost should be compared.
Original offer at Rs. 90 per Supplier offered at Rs. 86
unit per unit
Rs. Rs.
2.5
Purchase Cost 3,60,000 Purchase cost 4,000 × 86 3,44,000

Ordering cost 1,890 Ordering cost Nil
Carrying cost 1,800 Carrying cost 1/2 ×4,000 × 12 24,000
Total cost 3,63,690 3,68,000

This special offer at Rs. 86 per unit should not be accepted as its total cost is higher by Rs. 4,310
(3,68,000 – 3,63,690).as compared to original offer.
Question 5
A Ltd. manufactures a product X which requires two raw materials A and B in a ratio of 1:4. The
sales department has estimated a demand of 5,00,000 units for the product for the year. To produce
one unit of finished product, 4 units of material A is required.
Stock position at the beginning of the year is as below:
Product- X 12,000 units
Material A 24,000 units
Material B 52,000 units
To place an order the company has to spend Rs.15,000. The company is financing its working capital
using a bank cash credit @13% p.a.
Product X is sold at Rs.1,040 per unit. Material A and B are purchased at Rs.150 and Rs.200 respectively.
Required:
COMPUTE economic order quantity (EOQ):
(i) If purchase order for the both materials is placed separately.
(ii) If purchase order for the both materials is not placed separately. (MTP Oct. ‘19, 5 Marks)
Answer 5
Workings:
Annual production of Product X = Annual demand – Opening stock
= 5,00,000 – 12,000 = 4,88,000 units
Annual requirement for raw materials = Annual production × Material per unit – Opening stock of
material
Material A = 4,88,000 × 4 units – 24,000 units = 19,28,000 units
Material B = 4,88,000 × 16 units – 52,000 units = 77,56,000 units
(i) Computation of EOQ when purchase order for the both materials is placed separately
2×𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 𝑓𝑜𝑟 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 ×𝑂𝑟𝑑𝑒𝑖𝑛𝑔 𝑐𝑜𝑠𝑡

EOQ = √
𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑝𝑒𝑟 𝑎𝑛𝑛𝑢𝑚
2×19,28,000𝑢𝑛𝑖𝑡𝑠 ×𝑅𝑠.15,000
Material A = √
13% 𝑜𝑓 𝑅𝑠.150
38,56,000×𝑅𝑠.15,000
=√
𝑅𝑠.19.5
= 54,462 units
2×77,56,000𝑢𝑛𝑖𝑡𝑠 ×𝑅𝑠.15,000
Material B = √ 13% 𝑜𝑓 𝑅𝑠.200
1,55,12,000×𝑅𝑠.15,000
=√ 𝑅𝑠.26
= 94,600 units
(ii) Computation of EOQ when purchase order for the both materials is not placed separately

2.6
2×19,28,000𝑢𝑛𝑖𝑡𝑠+77,56,000)𝑢𝑛𝑖𝑡𝑠 ×𝑅𝑠.15,000
Material A & B = √
13% 𝑜𝑓 𝑅𝑠.190∗
1,93,68,000×𝑅𝑠.15,000
=√ 𝑅𝑠.24.7
= 1,08,452units
1,08,452×19,28,000
Material A = 96,84,000
= 21,592 units
1,08,452 ×77,56,000
Material A = 96,84,000
= 86,860 Units
∗(𝑅𝑠.150×19,28,000)(𝑅𝑠.200×77,56,000)
= (19,28,000 77,56,000)
=Rs.190
Question 6
Distinguish between Bill of Materials and Material Requisition Note. (MTP Oct. ‘19, Oct’20 5 Marks)
Answer 6
Bills of Material Material Requisition Note
1. It is document or list of materials It is prepared by the foreman of the consuming
prepared by the engineering/ department.
drawing department.
2. It is a complete schedule of It is a document authorizing
component parts and raw materials
required for a particular job or work Store-Keeper to issue material to the consuming
order. department
3. It often serves the purpose of a It cannot replace a bill of material.

Store Requisition as it shows the
complete schedule of materials
required for a particular job i.e. it
can replace stores requisition.
4 It can be used for the It is useful in arriving historical cost only.

purpose of quotation.
5 It helps in keeping a quantitative It shows the material actually drawn from stores.
control on materials drawn through
Stores Requisition.
Question 7
A company manufactures a product from a raw material, which is purchased at Rs.180 per kg. The
company incurs a handling cost of Rs.1,460 plus freight of Rs.940 per order. The incremental
carrying cost of inventory of raw material is Rs.2.5 per kg per month. In addition, the cost of working
capital finance on the investment in inventory of raw material is Rs.18per kg per annum. The annual
production of the product is 1,00,000 units and 2.5 units are obtained from one kg. of raw material.
Required:
(i) CALCULATE the economic order quantity of raw materials.
(ii) DETERMINE, how frequently company should order for procurement be placed.
(iii) If the company proposes to rationalize placement of orders on quarterly basis, DETERMINE the
percentage of discount in the price of raw materials should be negotiated? Assume 360 days in a year.
(MTP 10 Marks May 20, RTP May’23) (Same concept different figures MTP 5 Marks Oct’18)
Answer 7
(i) Calculation of Economic Order Quantity (E.O.Q)
Annual requirement (usage) of raw material in kg. (A) = 1,00,000units / 2.5 units per kg. = 40,000kg.

2.7
Ordering Cost (Handling & freight cost) (O) = Rs.1,460 + Rs.940 = Rs.2,400
Carrying cost per unit per annum (C) i.e. inventory carrying cost + working capital cost
= (Rs.2.5 × 12 months) + Rs.18 = Rs.48 per kg.
2𝐴𝑂 2×40,000𝑘𝑔.×𝑅𝑠.2,400
E.O.Q. = √ 𝐶
=√ 𝑅𝑠.48
= 2,000 kg.
(ii) Frequency of placing orders for procurement:

Annual consumption (A) = 40,000 kg.
Quantity per order (E.O.Q) = 2,000 kg.

𝐴 40.000𝑘𝑔.
No. of orders per annum(𝐸.𝑂.𝑄) = 2,000𝑘𝑔.
= 20 orders
360𝑑𝑎𝑦𝑠
Frequency of placing orders( in days) = = 18 days
20𝑜𝑟𝑑𝑒𝑟𝑠
(iii) Percentage of discount in the price of raw materials to be negotiated:

Particulars On Quarterly Basis On E.O.Q Basis
1. Annual Usage (in Kg.) 40,000 kg. 40,000 kg.
2. Size of the order 10,000 kg. 2,000 kg.
3. No. of orders (1 ÷ 2) 4 20
4. Cost of placing orders or Rs.9,600 Rs.48,000
Ordering cost (4 order × Rs2,400) (20 orders × Rs2,400)
(No. of orders × Cost per order)
5. Inventory carrying cost Rs.2,40,000 Rs.48,000
(Average inventory × Carrying cost (10,000 kg. × ½ × Rs.48) (2,000 kg. × ½ × Rs.48)
per unit)
6. Total Cost (4 + 5) Rs.2,49,600 Rs.96,000
When order is placed on quarterly basis the ordering cost and carrying cost increased by Rs.1,53,600
(Rs.2,49,600 - Rs.96,000).
So, discount required = Rs.1,53,600
Total annual purchase = 40,000 kg. × Rs.180 = Rs.72,00,000. So, Percentage of discount to be negotiated
Question 8
Joy Toy Limited deals in trading of ‘superhero’ toy figure. The annual demand for the toy car is
14,400 units. The company incurs fixed order placement and transportation cost of ₹212 each time
an order is placed. Each toy costs ₹ 450 and the trader has a carrying cost of 25 percent p.a. The
company has been offered a quantity discount of 8% on the purchase of ‘superhero’ toy figure
provided the order size is 5,000 units at a time.
Required:
(i) COMPUTE the economic order quantity

(ii) STATE whether the quantity discount offer can be accepted. (MTP 5 Marks March ’23 & Oct 20,
Old & New SM)
Answer 8
2𝐴𝑂
i.Calculation of Economic Order Quantity (EOQ) = √ 𝐶
2 𝑋 14,400 𝑢𝑛𝑖𝑡𝑠 𝑋𝑅𝑠.212
=√ 𝑅𝑠.450 𝑋 25%
= 233 units

2.8
ii.Evaluation of Profitability of Different Options of Order Quantity

(A) When EOQ is ordered (₹)
Purchase Cost (14,400 units x Rs. 450) 64,80,000
Ordering Cost [(14,400 units/233 units) x Rs. 13,102
212]
Carrying Cost (233 units x 1/2 x 450 x 25%) 13,106
Total Cost 65,06,208
(B) When Quantity Discount of 8% is accepted

(₹)
Ordering Cost [(14,400 units/5,000 units) x Rs212] 611
Carrying Cost (5,000 units x 1/2 x Rs.414 x 25%) 2,58,750
Advise – The total cost of inventory is lower if quantity discount is accepted. The
company would save Rs. 2,85,247 (Rs. 65,06,208 - Rs. 62,20,961).
Note: Figures may change slightly because of approximation and decimals)
Question 9
A company manufactures 10,000 units of a product per month. The cost of placing an order is ₹200.
The purchase price of the raw material is ₹20 per kg. The re-order period is 4 to 8 weeks. The
consumption of raw materials varies from 200 kg to 900 kg per week, the average consumption
being 550 kg. The carrying cost of inventory is 20% per annum.
You are required to CALCULATE:
(i) Re-order quantity (ii) Re-order level
(iii) Maximum level (iv) Minimum level
(v) Average stock level (MTP 5 Marks April 23 & March ‘21) (Same concept different
figures PYP 5 Marks Nov’18)
Answer 9
(i) Reorder Quantity (ROQ) = 1,691 kg. (Refer to working note)
(ii) Reorder level (ROL) = Maximum usage × Maximum re-order period
= 900 kg. × 8 weeks = 7,200 kg.
(iii) Maximum level = ROL + ROQ – (Min. usage × Min. re-order period)
= 7,200 kg. + 1,691 kg. – (200 kg.× 4 weeks)
= 8,091 kg.
(iv) Minimum level = ROL – (Normal usage × Normal re-order period)
= 7,200 kg. – (550 kg. × 6 weeks)
= 3,900 kg.
(v) Average stock level = 1/2 (Maximum level + Minimum level)
= ½ (8,091 kg. + 3,900 kg.) = 5,995.5 kg.
OR
= Minimum Level + ½ ROQ
= 3,900 kg. + ½ X 1,691 kg. = 4,745.5 kg.
Working Note
2.9
Annual consumption of raw material (A) = (550 kg. × 52 weeks) = 28,600 kg.
Cost of placing an order (O) = ₹ 200
Carrying cost per kg. Per annum (c × i) = ₹ 20 × 20% = ₹4
2𝐴𝑂
Economic order quantity (EOQ) = √𝐶 𝑋 𝑖
2 𝑋 28,600 𝑘𝑔𝑠.𝑋 𝑅𝑠.200
=√ 𝑅𝑠.4
= 1,691 kg. (Approx)

In this question, performance of the examinees was below average. Most of the examinees
have made mistake by taking output instead of raw material consumed figure for
calculation of re order quantity.
Question 10
EXPLAIN the advantages that would accrue in using the LIFO method of pricing for the valuation
of raw material stock. (MTP 5 Marks, April’21)
Answer 10
The advantages that would accrue in using the LIFO method of pricing for the valuation of raw material
stock are as follows:
• The cost of materials issued will be either nearer to and or will reflect the current market price. Thus,
the cost of goods produced will be related to the trend of the market price of materials. Such a trend in
price of materials enables the matching of cost of production with current sales revenues.
• The use of the method during the period of rising prices does not reflect undue high profit in the income
statement as it was under the first-in-first-out or average method. In fact, the profit shown here is
relatively lower because the cost of production takes into account the rising trend of material prices.
• In the case of falling prices profit tends to rise due to lower material cost, yet the finished products appear
to be more competitive and are at market price.
• Over a period, the use of LIFO helps to iron out the fluctuations in profits.
• In the period of inflation LIFO will tend to show the correct profit and thus avoid paying undue taxes to
some extent.
Question 11
The yearly production of a company's product which has a steady market is 40,000 units. Each unit
of a product requires 1 kg. of raw material. The cost of placing one order for raw material is ₹ 1,000
and the inventory carrying cost is ₹ 20 per annum. The lead time for procurement of raw material
is 36 days and a safety stock of 1,000 kg. of raw materials is maintained by the company. The
company has been able to negotiate the following discount structure with the raw material
supplier:
Order quantity (kg.) Discount (₹)
Up to 6,000 NIL
6,001 – 8,000 4,000
8,001 – 16,000 20,000
16,001 – 30,000 32,000
30,001 – 45,000 4,0000
You are REQUIRED to:
(i) Calculate the re-order point considering 30 days in a month.
(ii) Prepare a statement showing the total cost of procurement and storage of raw material after
considering the discount of the company elects to place one, two, four or five orders in the year.

2.10
(iii) State the number of orders which the company should place to minimize the costs after taking EOQ
also into consideration. (MTP 10 Marks, Oct ‘21)
Answer 11
(a) Working notes
1. Annual production = 40,000 units
2. Raw material required for 40,000 units (40,000 units × 1 kg.) = 40,000 kg.
3. EOQ = √2 × 40,000𝑘𝑔𝑠.× 𝑅𝑠. 1,000 /𝑅𝑠. 20 = 2,000 kgs.

4. Total cost of procurement and storage when the order size is equal to EOQ or
2,000 kg. No. of orders (40,000 kg. ÷ 2,000 kg.) = 20 times
Ordering cost (20 orders × ₹1,000) = ₹ 20,000
Carrying cost (₹) (½ × 2,000 kg. × ₹ 20) = ₹ 20,000
Total cost ₹ 40,000
(i) Re-order point = Safety stock + Lead time consumption
= 1,000 kg. + 40,000kg.×36days
= 1,000 kg. + 4,000 kg. = 5,000 kg.

(ii) statement showing the total cost of procurement and storage of raw materials
(after considering the discount)
Order No. of Total cost of Average Total cost of Discount Total cost
size orders procurement stock storage of raw
materials
Kg. (₹) Kg. (₹) (₹) (₹)
(1) (2) (3)=(2)×₹1,000 (4)=½×(1) (5)=(4)×₹20 (6) (7)=[(3)+(5)– (6)
40,000 1 1,000 20,000 4,00,000 40,000 3,61,000
20,000 2 2,000 10,000 2,00,000 32,000 1,70,000
10,000 4 4,000 5,000 1,00,000 20,000 84,000
8,000 5 5,000 4,000 80,000 4,000 81,000
(iii) Number of orders which the company should place to minimize the costs after taking
EOQ also into consideration is 20 orders each of size 2,000 kg. The total cost of
procurement and storage in this case comes to ₹ 40,000, which is minimum. (Refer to
working notes 3 and 4)
Question 12
The annual demand for an item of raw material is 48,000 units and the purchase price is ₹ 80 per
unit. The cost of processing an order is ₹ 1,350 and the annual cost of storage is ₹ 15 per unit.
(i) DETERMINE is the optimal order quantity and total relevant cost for the order?
(ii) If the cost of processing an order is ₹ 800 and all other data remain same, then DETERMINE the
differential cost?
(iii) If the supplier offers bulk purchase of 48,000 units at a price of ₹ 72 and cost of placing the is Nil,
SHOULD the order be accepted? (MTP 5 Marks Nov ’21)
Answer 12
(i) Optimal order quantity i.e. E.O.Q.
2×48,000×1,350
=√ 15
= √86,40,000 = 2, 939 units
2.11
Relevant Cost of this order quantity ₹

Ordering cost = 48,000 / 2,939 =16.33, say 17 22,950.00
orders at ₹1,350
Carrying Cost = 1/2 × 2, 939 × 15 22,042.50
Relevant cost 44,992.50

2×48,000×800
(ii) Revised EOQ = √ 15
= 2,263 units
Relevant Cost of this order quantity ₹
Ordering cost =48,000 / 2,2,63 21.21, say 22 orders at ₹
800 17,600.00
Carrying cost = 1/2 × 2,263 × 15
16,972.50
Relevant cost 34,572.50
Differential cost = 44,992.50 – 34,572.50 = ₹ 10,420
(iii) In case of discount in purchase price, the total cost of Purchase cost, ordering cost and carrying
cost should be compared.
Original offer at ₹ 80 per unit Supplier offered at ₹ 72 per unit
₹ ₹
Purchase Cost (48,000 × 80) 38,40,000.00 Purchase cost 34,56,000.00
(48,000 × 72)
Ordering cost 22,950.00 Ordering cost 0.00
Carrying cost 22,042.50 Carrying cost 3,60,000.00
½ × 48, 000 ×
15
Total cost 38,84,992.50 38,16,000.00
This special offer at ₹ 72 per unit should be accepted as it saves ₹ 68,992.50 as compared to
original offer.
Question 13
M/s SE Traders is a distributor of an electronic items. A periodic inventory of electronic items on
hand is taken when books are closed at the end of each quarter. The following information is
available for the quarter ended on 30th September, 2021:
Sales ₹ 2,19,30,000
Opening Stock 12,500 units @ ₹ 600 per unit
Administrative Expenses ₹ 5,62,500
Purchases (including freight inward):
- July 1, 2021 25,000 units @ ₹ 573 per unit
- September 30, 2021 12,500 units @ ₹ 630 per unit
Closing stock- September 30, 2021 16,000 units
You are required to COMPUTE the following by WAM (Weighted Average Method), FIFO method
and LIFO method assuming issue/ consumption pattern was even throughout the quarter:
(i) Value of Inventory on 30th September, 2021.
(ii) Profit or loss for the quarter ended 30th September, 2021. (MTP 10 Marks April ’22)
Answer 13
(i) Computation of Value of Inventory as on 30th September 2021:
2.12
Date Particulars Units WAM (₹) FIFO (₹) LIFO (₹)

01-07-21 Opening Stock 12,500 75,00,000 75,00,000 75,00,000
(₹600×12,500) (₹600×12,500) (₹600×12,500)
01-07-21 Purchases 25,000 1,43,25,000 1,43,25,000 1,43,25,000
(₹573×25,000) (₹573×25,000) (₹573×25,000)
30-09-21 Purchases 12,500 78,75,000 78,75,000 78,75,000
(₹630×12,500) (₹630×12,500) (₹630×12,500)
01-07-21 Issues/ 34,000 2,01,96,000* 1,98,19,500** 2,01,94,500***
to Consumption
30-09-21 (Balancing
figure)
30-09-21 Closing Stock 16,000 95,04,000 98,80,500 95,05,500
𝑅𝑠.75,00,000+𝑅𝑠.1,43,25,000+𝑅𝑠.78,75,000
Weighted average rate = (12,500+25,000+12,500)𝑢𝑛𝑖𝑡𝑠
= Rs. 594
* ₹ 594 x 34,000 = ₹ 2,01,96,000

** ₹ 600 × 12,500 + ₹ 573 × 21,500 = ₹ 1,98,19,500
*** ₹ 630 × 12,500 + ₹ 573 × 21,500 = ₹ 2,01,94,500
(ii) Computation of Profit or Loss for the Quarter ended 30th September 2021
Particulars WAM (₹) FIFO (₹) LIFO (₹)
Sales 2,19,30,000 2,19,30,000 2,19,30,000
Less: Consumption 2,01,96,000 1,98,19,500 2,01,94,500
Less: Administrative Exp. 5,62,500 5,62,500 5,62,500
Profit or Loss 11,71,500 15,48,000 11,73,000
Question 14
A company produces a product 'AB' by using two raw materials - 'Material Ae' and 'Material Be' in
the ratio of 5:3.
A sales volume of 50,000 kgs is estimated for the month of December by the managers expecting the
trend will continue for entire year. The ratio of input and output is 8:5.
Other Information about Raw Material Ae is as follows:
Purchase Price ₹ 150 per kg
Re-order period 2 to 3 days
Carrying Cost 12%
Note: Material Ae is perishable in nature and if not used within 3.5 days of purchase it becomes obsolete.
To place an order for material 'Ae’, the company has to incur an administrative cost of ₹ 375 per order.
At present, material ‘Ae’ is purchased in a lot of 7,500 kgs. to avail the discount on purchase. Company
works for 25 days in a month and production is carried out evenly.
(i) Economic Order Quantity (EOQ) for Material Ae;
(ii) Maximum stock level for Material Ae. (MTP 5 Marks Sep’22)
Answer 14
(i) Monthly production of AB = 50,000 kgs
Raw material required = 50,000/5 x 8 = 80,000 kgs Material Ae and Material Be ratio = 5:3
Therefore, material Ae = 80,000/8 x 5 =50,000 kgs
2.13
(2 x (Annual demand x cost per order)

Calculation of EOQ= √
Annual holding cost per unit
2 x 50,000 kgs x 12 x 375

EOQ= √ 12% of ₹ 150
= 5,000 kgs
(ii) Calculation of maximum stock level of Material Ae which is perishable in nature and is required to be
used within 3.5 days.
(a) Stock equals to 3.5 days consumption = 50,000 kgs/ 25 days x 3.5 days = 7,000 kgs
(b) Maximum stock level for Material Ae
Maximum stock = Reorder quantity + reorder level – (minimum consumption x minimum lead time)
Where, reorder quantity = 7,500 kgs
Reorder level = maximum consumption* x maximum lead time
= 50,000/ 25 x 3 days = 6,000 kgs
Now, Maximum stock level = 7,500 kgs + 6,000 kgs – (50,000 /25 days x 2 days) = 9,500 kgs
Stock required for 3.5 days consumption is lower than the maximum stock level calculated above.
Therefore, maximum stock level will be 7,000 kgs.
(*since production is processed evenly throughout the month hence material consumption will also be
even.)
Question 15
BRIEF the treatment of following while calculating purchase cost of material: Trade Discount, Cash
Discount, Penalty, Insurance charges, Commission paid. (MTP 5 Marks Sep’22)
Answer 15
Trade Discount Trade discount is deducted from the purchase price if it is not shown as
deduction in the invoice.
Cash Discount Cash discount is not deducted from the purchase price. It is treated as
interest and finance charges. It is ignored.
Penalty Penalty of any type is not included with the cost of purchase
Insurance charges Insurance charges are paid for protecting goods during transit. It is
added with the cost of purchase.
Commission paid Commission or brokerage paid is added with the cost of purchase.
Question 16
The following are the details of receipts and issues of a material of stores in a manufacturing
company for the period of three months ending 30th June, 2022:
Receipts:
Date Quantity (kg.) Rate per kg. (₹)
April 10 1,600 50.00
April 20 2,400 49.00
May 5 1,000 51.00
May 17 1,100 52.00
May 25 800 52.50
June 11 900 54.00
June 24 1,400 55.00
There was 1,500 kg. in stock at April 1, 2022 which was valued at ₹ 48.00 per kg.
Issues:
Date Quantity (kg.)
2.14
April 4 1,100
April 24 1,600
May 10 1,500
May 26 1,700
June 15 1,500
June 21 1,200
Issues are to be priced on the basis of weighted average method.
The stock verifier of the company reported a shortage of 80 kgs. on 31st May, 2022 and 60 kgs. on 30th
June, 2022.
You are required to PREPARE a Stores Ledger Account. (MTP 10 Marks Oct’22)
Answer 16
Stores Ledger Account for the three months ending 30th June, 2022 (Weighted Average Method)
Receipts Issues Balance
GRN Rates Rates Amount Qty. Amount Rate for further
Date Qty. (Kg.) (Rs.) Amounts MR No. Qty. (Kg.) (Rs.) (Rs.) (Rs.) Issue (Rs.)
No. (Kg.)
April 1 1,500 72,000 48.00

April 4 1,100 48.00 52,800 400 19,200 48.00
99,200
April 10 1,600 50.00 80,000 2,000 99,200 = 49.60
2,000
2,16,800
April 20 2,400 49.00 1,17,600 4,400 216,800 = 49.30
4,400
1,37,920
April 24 1,600 49.30 78,880 2,800 137,920 = 49.30
2,800
1,88,920
May 5 1,000 51.00 51,000 3,800 188,920 = 49.70
3,800
1,14,370
May 10 1,500 49.70 74,550 2,300 114,370 = 49.70
2,300
1,71,570
May 17 1,100 52.00 57,200 3,400 171,570 = 50.50
3,400
2,13,570
May 25 800 52.50 42,000 4,200 213,570 = 50.90
4,200
1,27,040
May 26 1,700 50.90 86,530 2,500 127,040 = 50.90
2,500
1,27,040
May 31 Shortage 80 2,420 127,040 = 52.50
2,420
1,75,640
June 11 900 54.00 48,600 3,320 175,640 = 49.60
3,320
99,200
June 15 1,500 52.90 79,350 1,820 96,290 = 52.90
2,000
32,810
June 21 1,200 52.90 63,480 620 32,810 = 52.90
620
1,09,810
June 24 1,400 55.00 77,000 2,020 109,810 = 54.40
2,020
1,09,810
June 30 Shortage 60 1,960 109,810 = 56.00
1,960
Question 17
P Limited produces product 'P'. It uses annually 60,000 units of a material 'Rex' costing ` 10 per unit.
Other relevant information are:
Cost of placing an order : ` 800 per order
Carrying cost : 15% per annum of average inventory

Re-order period : 10 days
Safety stock : 600 units
The company operates 300 days in a year.
You are required to calculate:
2.15
(i) Economic Order Quantity for material 'Rex'.

(ii) Re-order Level.
(iii) Maximum Stock Level.
(iv) Average Stock Level. (MTP 5 Marks , Oct ’23)
Answer 17
I. Economic Order Quantity (E.O.Q)
2X Annual requiremnet of Rex′ X Ordering cost per order
= √ Annual Carrying cost per unit per annum
2 ×60,000 𝑢𝑛𝑖𝑡𝑠 ×𝑅𝑠.800 9,60,00,000

=√ =√ = 8,000 Units
𝑅𝑠.10 ×15% 𝑅𝑠.1.5
II. Re-order Level = Safety Stock + (Normal daily Usage × Re-order period)
60,000 𝑢𝑛𝑖𝑡𝑠
= 600 + ( 300 𝑑𝑎𝑦𝑠
𝑋 10 𝐷𝑎𝑦𝑠)
= 600 + 2,000
= 2,600 units
III. Maximum Stock Level = E.O.Q (Re-order Quantity) + Safety Stock
= 8,000 units + 600 units
= 8,600 units
1
IV. Average Stock Level = Minimum Stock level + Re – order Quantity
2
1
= 600* + 2 8,000 units
= 4,600 units
OR
𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝑆𝑡𝑜𝑐𝑘 𝑙𝑒𝑣𝑒𝑙+𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝑆𝑡𝑜𝑐𝑘 𝐿𝑒𝑣𝑒𝑙
Average Stock Level = 2
8,600 𝑢𝑛𝑖𝑡𝑠+600 𝑢𝑛𝑖𝑡𝑠
= 2
= 4,600 units
* Minimum Stock Level = Re- Order Level - (Normal daily usage × Re-order period)
= 2,600 - (300 𝑑𝑎𝑦𝑠
𝑋 10 𝐷𝑎𝑦𝑠)
= 2,600 – 2,000
= 600 units
OR
Minimum Stock Level = Safety Stock level = 600 units
Question 18
Arnav Electronics manufactures electronic home appliances. It follows weighted average Cost
method for inventory valuation. Following are the data of component X:
Date Particulars Units Rate per
unit (₹ )
15-12-19 Purchase Order- 008 10,000 9,930
30-12-19 Purchase Order- 009 10,000 9,780
01-01-20 Opening stock 3,500 9,810
05-01-20 GRN*-008 (against the Purchase Order- 008) 10,000 -
05-01-20 MRN**-003 (against the Purchase Order- 008) 500 -
2.16
06-01-20 Material Requisition-011 3,000 -

07-01-20 Purchase Order- 010 10,000 9,750
12-01-20 GRN-009 (against the Purchase Order- 009) 10,000 -
12-01-20 MRN-004 (against the Purchase Order- 009) 400 -
25-01-20 GRN-010 (against the Purchase Order- 010) 10,000 -
*GRN- Goods Received Note; **MRN- Material Returned Note Based on the above data, you are
required to CALCULATE:
(i) Re-order level
(ii) Maximum stock level
(iii) Minimum stock level
(iv) PREPARE Store Ledger for the period January 2020 and DETERMINE the value of stock as on 31-01- 2020.
(v) Value of components used during the month of January, 2020.
(vi) Inventory turnover ratio. (RTP May’20)
Answer 18
Workings:
Consumption is calculated on the basis of material requisitions:
Maximum component usage = 4,500 units (Material requisition on 10-01-20) Minimum component usage
= 1,500 units (Material requisition on 24-01-20)
Lead time is calculated from purchase order date to material received date
Maximum lead time = 21 days (15-12-2019 to 05-01-2020)

Minimum lead time = 14 days (30-12-2019 to 12-01-2020)
Calculations:
(i) Re-order level
= Maximum usage × Maximum lead time
= 4,500 units × 21 days = 94,500 units
(ii) Maximum stock level
= Re-order level + Re-order Quantity – (Min. Usage × Min. lead time)
= 94,500 units + 10,000 units – (1,500 units × 14 days)
= 1,04,500 units – 21,000 units = 83,500 units
(iii) Minimum stock level
= Re-order level – (Avg. consumption × Avg. lead time)
= 94,500 units – (3,000 units × 17.5 days)
= 94,500 units – 52,500 units
= 42,000 units
(iv) Store Ledger for the month of January 2020:
Date Receipts Issue
Balance

2.17
GRN/ Units Rate Amt. MRN/ Units Rate Amt. Units Rate Amt.
MRN ₹ (₹ ‘000) MR ₹ (₹ ‘000) ₹ (₹ ‘000)
01-01-20 - - - - - - - - 3,500 9,810 34,335
05-01-20 008 10,000 9,930 99,300 003 500 9,930 4,965 13,000 9,898 1,28,670
06-01-20 - - - - 011 3,000 9,898 29,694 10,000 9,898 98,980
10-01-20 - - - - 012 4,500 9,898 44,541 5,500 9,898 54,439
12-01-20 009 10,000 9,780 97,800 004 400 9,780 3,912 15,100 9,823 1,48,327
15-01-20 - - - - 013 2,200 9,823 21,611 12,900 9,823 1,26,716
24-01-20 - - - - 014 1,500 9,823 14,734 11,400 9,823 1,11,982
25-01-20 010 10,000 9,750 97,500 - - - - 21,400 9,789 2,09,482
28-01-20 - - - - 015 4,000 9,789 39,156 17,400 9,789 1,70,326
31-01-20 - - - - 016 3,200 9,789 31,325 14,200 9,789 1,39,001
Note: Decimal figures may be rounded-off to the nearest rupee value wherever required)
Value of stock as on 31-01-2020 (‘000) = ₹ 1,39,001
(v) Value of components used during the month of January 2020:
Sum of material requisitions 011 to 016 (‘000)
= ₹ 29,694 + ₹ 44,541 + ₹ 21,611 + ₹ 14,734 + ₹ 39,156 + ₹ 31,325 = ₹ 1,81,061
(vi) Inventory Turnover Ratio
𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝒎𝒂𝒕𝒆𝒓𝒊𝒂𝒍𝒔 𝒖𝒔𝒆𝒅
=
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒔𝒕𝒐𝒄𝒌 𝒗𝒂𝒍𝒖𝒆
𝑹𝒔.𝟏,𝟖𝟏,𝟎𝟔𝟏 𝑹𝒔.𝟏,𝟖𝟏,𝟎𝟔𝟏
= = = 2.09
(𝟏,𝟑,𝟎𝟎𝟏+𝟑𝟒,𝟑𝟑𝟓)/𝟐 𝑹𝒔.𝟖𝟔,𝟔𝟔𝟖
Question 19
HBL Limited produces product ‘M’ which has a quarterly demand of 20,000 units. Each product
requires 3 kg. and 4 kg. of material X and Y respectively. Material X is supplied by a local supplier
and can be procured at factory stores at any time, hence, no need to keep inventory for material X.
The material Y is not locally available, it requires to be purchased from other states in a specially
designed truck container with a capacity of 10 tons. The cost and other information related with
the materials are as follows: (RTP Nov’19)
Particulars Material –X Material-Y
Purchase price per kg. (excluding GST) ₹ 140 ₹ 640
Rate of GST 18% 18%
Freight per trip (fixed, irrespective of quantity) - ‘28,000
Loss of materials in transit* - 2%
Loss in process* 4% 5%
*On purchased quantity
Other information:
- The company has to pay 15% p.a. to bank for cash credit facility.
- Input credit is available on GST paid on materials.
Required:
(i) CALCULATE cost per kg. of material X and Y
(ii) CALCULATE the Economic Order quantity for both the materials.
Answer 19
Working Notes:(a) Annual purchase quantity for material X and Y:
Annual demand for product M- 20,000 units × 4 = 80,000 units
Particulars Mat-X Mat-Y
Quantity required for per unit of product M 3 kg. 4 kg.
2.18
Net quantity for materials required 2,40,000kg. 3,20,000 kg.

Add: Loss in transit - 6,881 kg.
Add: Loss in process 10,000 kg. 17,204 kg
Purchase quantity 2,50,000 kg. 3,44,085 kg

Note - Input credit on GST paid is available; hence, it will not be included in cost of material.
(i) Calculation of cost per kg. of material X and Y:
Purchase quantity 2,50,000 kg. 3,44,085 kg.
Rate per kg. ‘140 ‘640
Purchase price ‘3,50,00,000
‘22,02,14,400
Add: Freight 0 ‘9,80,000*
Total cost ‘3,50,00,000 ‘22,11,94,400
Net Quantity 2,40,000 kg. 3,20,000 kg
Cost per kg. ‘145.83 ‘691.23
3,44,085𝑘𝑔
*No. of trucks = 10𝑡𝑜𝑛×1,000= 34.40 trucks or 35 trucks
Therefore, total freight = 35 trucks × ‘28,000 = ‘9,80,000

(ii) Calculation of Economic Order Quantity (EOQ) for Mat.-X and Y:
2× 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 𝑂𝑟𝑑𝑒𝑟 𝑐𝑜𝑠𝑡
EOQ = √
𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑝.𝑎

Annual Requirement 2,50,000 kg. 3,44,085 kg.
Ordering cost 0 ‘28,000
Cost per unit ‘145.83 ‘691.23
Carrying cost 15% 15%
Carrying cost per unit p.a. 0* ‘103.68
EOQ 0 13,632.62 kg.
Question 20
Rounak Ltd. is the manufacturer of monitors for PCs. A monitor requires 4 units of Part -M. The
following are the details of its operation during 20X8:
Average monthly market demand 2,000 Monitors
Ordering cost ₹ 1,000 per order
Inventory carrying cost 20% per annum
Cost of Pat ₹ 350 per part
Normal usage 425 parts per week
Minimum usage 140 parts per week
Maximum usage 710 parts per week
Lead time to supply 3-5 weeks
COMPUTE from the above:
(i) Economic Order Quantity (EOQ). If the supplier iswilling to supply quarterly 30,000 units of Part- M at a
discount of 5%, is it worth accepting?
(ii) Reorder level
(iii) Maximum level of stock
2.19
(iv) Minimum level of stock. (RTP Nov’18)

Answer 20
A = Annual usage of parts = Monthly demand for monitors × 4 parts × 12 months
= 2,000monitors × 4 parts × 12 months = 96,000 units O = Ordering cost per order = ₹ 1,000/- per order
C1 = Cost per part =₹ 350/-
iC1 = Inventory carrying cost per unit per annum
= 20% × ₹ 350 = ₹ 70/- per unit, per annum Economic order quantity (EOQ):
2𝐴𝑂 2 𝑋 96,000 𝑢𝑛𝑖𝑡𝑠 𝑋 1,000

E.O.Q = √ = √
𝑖𝐶1 "70
= 1,656 parts (approx.)

The supplier is willing to supply 30,000 units at a discount of 5%, therefore cost of each part shall be
₹ 350 – 5% of 350 = ₹ 332.5
Total cost (when order size is 30,000 units):
= Cost of 96,000 units + Ordering cost + Carrying cost.
= (96,000 units × ₹ 332.50) + (96,000 units / 30,000 units × ′1,000) + 1/2 (30,000 units × 20% × ₹
332.50)
= ₹3,19,20,000+ ₹3,200* + ₹9,97,500=₹3,29,20,700
Total cost (when order size is 1,656 units):
= (96,000 units × ₹350) + + (96,000 units / 1,656 units × ′1,000) + 1/2 (1,656 units × 20% × ₹ 350)
= ₹ 3,36,00,000 + ₹ 57,970* + ₹ 57,960 = ₹ 3,37,15,930
Since, the total cost under the supply of 30,000 units with 5% discount is lower than that when order size is
1,656 units, therefore the offer should be accepted.
Note: While accepting this offer consideration of capital blocked on order size of 30,000 units has been
ignored.
*Order size can also be taken in absolute figure.
(1) Reorder level
= Maximum consumption × Maximum re-order period
= 710 units × 5 weeks = 3,550 units
(2) Maximum level of stock
= Re-order level + Reorder quantity – (Min. usage × Min. reorder period)
= 3,550 units + 1,656 units – (140 units × 3 weeks) = 4,786 units.
(3) Minimum level of stock
= Re-order level – Normal usage × Average reorder period
= 3,550 units – (425 units × 4 weeks) = 1,850 units.
Question 21
Aditya Brothers supplies surgical gloves to nursing homes and polyclinics in the city. These surgical
gloves are sold in pack of 10 pairs at price of ₹ 250 per pack.
For the month of April 2018, it has been anticipated that a demand for 60,000 packs of surgical
gloves will arise. Aditya Brothers purchases these gloves from the manufacturer at ₹ 228 per pack
within a 4 to 6 days lead time. The ordering and related cost is ₹ 240 per order. The storage cost is
10% p.a. of average inventory investment.
Required:
(i) CALCULATE the Economic Order Quantity (EOQ)
2.20
(ii) CALCULATE the number of orders needed every year

(iii) CALCULATE the total cost of ordering and storage of the surgical gloves.
(iv) DETERMINE when should the next order to be placed. (Assuming that the company does maintain a
safety stock and that the present inventory level is 10,033 packs with a year of 360 working days). (RTP
May 18)
Answer 21
(i) Calculation of Economic Order Quantity:
2𝑋𝐴𝑋𝑂 2 𝑋 (60,000 𝑝𝑎𝑐𝑘𝑠 ×12 𝑚𝑜𝑛𝑡ℎ𝑠)×′240

EOQ =√ 𝐶𝑖
= √ ′228×10%
= 3,893.3 packs or 3,893 packs.

(ii) Number of orders per year
Annual requirements
𝐴𝑛𝑛𝑢𝑎𝑙 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡𝑠 7,20,000𝑝𝑎𝑐𝑘𝑠
𝐸.𝑂.𝑄.
= 3,893 𝑝𝑎𝑐𝑘𝑠
= 184.9or185orders a year
(iii) Ordering and storage costs

(₹ )
Ordering costs :– 185 orders x ₹ 240 44,400.00
Storage cost :– ½ (3,893 packs x 10% of ₹ 228) 44,380.20
Total cost of ordering & storage 88,780.20
(iv) Timing of next order
(a) Day’s requirement served by each order.
𝑵𝒐.𝒐𝒇 𝒘𝒐𝒓𝒌𝒊𝒏𝒈 𝒅𝒂𝒚𝒔 𝟑𝟔𝟎 𝒅𝒂𝒚𝒔
Number of day requirements = = = 1.94 days supply.
𝑵𝒐.𝒐𝒇 𝒐𝒓𝒅𝒆𝒓 𝒊𝒏 𝒂 𝒚𝒆𝒂𝒓 𝟏𝟖𝟓 𝒐𝒓𝒅𝒆𝒓𝒔
This implies that each order of 3,893 packs supplies for requirements of 1.94 days only.
(b) Days requirement covered by inventory
𝑈𝑛𝑖𝑡𝑠 𝑖𝑛 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
= 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑜𝑟𝑑𝑒𝑟 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
x (Day’s requirement served by an order)
10,033 𝑝𝑎𝑐𝑘𝑠
∴ 3,893 𝑝𝑎𝑐𝑘𝑠
x 1.94 days = 5 days requirement
(c) Time interval for placing next order

Inventory left for day’s requirement – Average lead time of delivery
5 days – 5 days = 0 days
This means that next order for the replenishment of supplies has to be placed immediately.
Question 22
A company uses four raw materials A, B, C and D for a particular product for which the following
data apply :–
Raw Usage Re-order Price Delivery period (in Re- Minimum

Material per unit Quantity per Kg. weeks) order level
of (Kg.) (₹) Minimum Average Maximum level (Kg.)
product (Kg.)
(Kg.)
A 12 12,000 12 2 3 4 60,000 ?
B 8 8,000 22 5 6 7 70,000 ?
C 6 10,000 18 3 5 7 ? 25,500
D 5 9,000 20 1 2 3 ? ?
2.21
Weekly production varies from 550 to 1,250 units, averaging 900 units of the said product. What
would be the following quantities:–
(i) Minimum Stock of A?
(ii) Maximum Stock of B?
(iii) Re-order level of C?
(iv) Average stock level of A?
(v) Re-order level of D?
(vi) Minimum Stock level of D? (RTP Nov ’20) (Same concept different figures MTP 5 Marks,
April ’21, Old & New SM)
Answer 22
(i) Minimum stock of A
Re-order level – (Average consumption × Average time required to obtain delivery)
= 60,000 kg. – (900units × 12 kg. × 3 weeks) = 27,600 kg.
(ii) Maximum stock of B
Re-order level + Re-order quantity– (Min. Consumption × Min. Re-order period)
= 70,000 kg.+ 8,000 kg– (550units ×8 kg.× 5 weeks).
=78,000–22,000 = 56,000 kg.

(iii) Re-order level of C
Maximum re-order period × Maximum Usage
= 7 weeks × (1,250units × 6 kg.) = 52,500 kg.
OR
= Minimum stock of C+(Average consumption × Average delivery time)
= 25,500 kg.+ [(900 units ×6 kg.)×5 weeks] =52,500 kg.
(iv) Average stock level of A
𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝑆𝑡𝑜𝑐𝑘+𝑀𝑎𝑥𝑖𝑚𝑢𝑚
= 𝑆𝑡𝑜𝑐𝑘 2
(Refer to Working Note)
27,600+58,800
= 2
= 43,200 kg.
Working note
Maximum stock of A = ROL + ROQ – (Minimum consumption × Minimum re-order period)
= 60,000 kg. + 12,000 kg. – [(550units × 12 kg.) × 2 weeks] = 58,800 kg.
(v) Re-order level of D
Maximum re-order period × Maximum Usage
= 3 weeks × (1,250 units × 5 kg.) = 18,750 kg
(vi) Minimum stock of D
Re-order level – (Average consumption × Average time required to obtain delivery)
= 18,750 kg. – (900units × 5 kg. × 2 weeks) = 9,750 kg.
Question 23
The following data are available in respect of material X for the year ended 31st March, 2021:
(Rs.)
Opening stock 9,00,000
Purchases during the year 1,70,00,000
2.22
Closing stock 11,00,000

(i) CALCULATE:
(a) Inventory turnover ratio, and
(b) The number of days for which the average inventory is held.
(ii) INTERPRET the ratio calculated as above if the industry inventory turnover rate is 10. (RTP
Nov ’21, Old & New SM)
Answer 23
(i)
(a) Inventory turnover ratio (Refer to working note)
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝑟𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑑
= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘 𝑜𝑓 𝑟𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙
𝑅𝑠.1,68,00,000
= 𝑅𝑠.10,00,.000
= 16.8
(b) Average number of days for which the average inventory is held
365 365 𝑑𝑎𝑦𝑠
= 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜 = 16.8
= 21.73 days
Working Note:
Particulars (₹)
Opening stock of raw material 9,00,000
Add: Material purchases during the year 1,70,00,000
Less: Closing stock of raw material 11,00,000
1,68,00,000
(ii) The Inventory turnover ratio for material X is 16.8 which mean an inventory item takes only
21.73 or 22 days to issue from stores for production process. The rate is better than the
industry rate which is 10 time or 36.5 days. This inventory turnover ratio indicates better
inventory management system and good demand for the final product in market.
Question 24
Sky & Co., an unregistered supplier under GST, purchased material from Vye Ltd. which is
registered under GST. The following information is available for one lot of 5,000 units of material
purchased:
Listed price of one lot ₹ 2,50,000
Trade discount @ 10% on listed price
CGST and SGST (Credit Not available) 12% (6% CGST + 6% SGST) Cash discount
@ 10%
(Will be given only if payment is made within 30 days.)
Toll Tax paid ₹ 5,000
Freight and Insurance ₹ 17,000
Demurrage paid to transporter ₹ 5,000
Commission and brokerage on purchases ₹ 10,000 Amount deposited for returnable
containers ₹ 30,000 Amount of refund on returning
the container ₹ 20,000
Other Expenses @ 2% of total cost
20% of material shortage is due to normal reasons.
The payment to the supplier was made within 21 days of the purchases. You are required to
2.23
CALCULATE cost per unit of material purchased by Sky & Co. (RTP May ’22, Old & New SM) (Same
concept different figures MTP 5 Marks March ’22 & Sep ‘23)
Answer 24
Calculation of cost per unit:
Particulars Units (₹)
Listed Price of Materials 5,000 2,50,000
Less: Trade discount @ 10% on invoice price (25,000)
2,25,000
Add: CGST @ 6% of ₹ 2,25,000 13,500
Add: SGST @ 6% of ₹ 2,25,000 13,500
2,52,000
Add: Toll Tax 5,000
Freight and Insurance 17,000
Commission and Brokerage Paid 10,000
Add: Cost of returnable containers:
Amount deposited ₹ 30,000
Less: Amount refunded ₹ 20,000 10,000
2,94,000
₹ 2,94,000 6,000
Add: Other Expenses @ 2% of Total Cost ( 98 𝑋2)
Total cost of material 3,00,000

Less: Shortage material due to normal reasons @ 20% 1,000 -
Total cost of material of good units 4,000 3,00,000
Cost per unit (₹ 3,00,000/4,000 units) 75
Note:
1. GST is payable on net price i.e., listed price less discount.
2. Cash discount is treated as interest and finance charges; hence it is ignored.
3. Demurrage is penalty imposed by the transporter for delay in uploading or off -loading of materials. It
is an abnormal cost and not included.
4. Shortage due to normal reasons should not be deducted from cost to ascertain total cost of good units.
Question 25
M/s Tanishka Materials Private Limited produces a product which names “ESS”. The consumption
of raw material for the production of “ESS” is 210 Kgs to 350 Kgs per week. Other information is as
follows:
Procurement Time: 5 to 9 Days
Purchase price of Raw Materials: ₹ 100 per kg
Ordering Cost per Order: ₹ 200
Storage Cost: 1% per month plus ₹ 2 per unit per annum Consider
365 days a year.
(a) Economic Order Quantity
(b) Re-Order Level (ROL)
2.24
(c) Maximum Stock Level

(d) Minimum Stock Level
(e) Average Stock Level
(f) Number of Orders to be placed per year
(g) Total Inventory Cost
(h) If the supplier is willing to offer 1% discount on purchase of total annual quantity in two orders, whether
offer is acceptable?
(i) If the Answer is no, what should be the counteroffer w.r.t. percentage of discount? ( RTP Nov’22)
Answer 25
As procurement time is given in days, consumption should also be calculated in days:
350
Maximum Consumption per Day: = 50 𝑘𝑔𝑠
7
210
Minimum Consumption per Day = 30 𝑘𝑔𝑠
7
(50+30)
Average Consumption per Day = 40 𝑘𝑔𝑠
2
(a) Calculation of Economic Order Quantity (EOQ)

Annual consumption of Raw Materials (A): 40 Kgs x 365 days = 14,600 Kgs Storage or Carrying Cost per unit
per annum (C):(₹ 100 x 1% x 12 months) + ₹ 2 = ₹ 14
Ordering Cost (O): ₹ 200 per Order
2×𝐴×0
EOQ√ 𝑐
2×14,600×200
√ = 646 Kgs.
14
(b) Re-Order Level (ROL) = (Maximum consumption Rate × Maximum Procurement Time)
= 50 kgs per day × 9 days
= 450 kgs
(c) Maximum Stock Level =Recorder Level + Recorder Quantity – (Minimum

Consumption Rate × Minimum Procurement Time)
= 450 kgs + 646 kgs - (30 kgs X 5 days) = 946 kgs
(d) Minimum Stock Level = Recorder Level – (Average consumption Rate ×

Average Procurement Time)
= 450 kgs – (40 kgs X 7 days) = 170 kgs
Maximum Stock Level + Minimum Stock Level
(e) Average Stock Level = 2
946 kgs + 170 kgs
= 2
=558 kgs
(f) Number of Orders to be placed per year

Annual Consumption of Raw Materials
= 𝐸𝑂𝑄
14600𝑘𝑔𝑠
= 646𝑘𝑔𝑠
=22.60 Orders or 23 Orders
(g) Total Inventory Cost

Cost of Materials (A x Purchase Price) (14600 kgs x ₹ 100)=₹ 14,60,000
2.25
Total Ordering Cost (No. of Orders x O) (23 Orders x 200) =₹ 4,600

Total Carrying Cost (EOQ / 2 x C) (646 kgs / 2 x ₹ 14)=₹4,522
Total Inventory Cost =₹ 14,69,122
(h) If the supplier is willing to offer 1% discount on purchase of total annual quantity in two orders:
Offer Price = ₹ 100 x 99% = ₹ 99
Revised Carrying Cost = (₹ 99 x 1% x 12 months) + ₹2 = ₹ 13.88
Revised Order Quantity = 14600 kgs / 2 Orders = 7300 kgs
Total Inventory Cost at Offer Price
Cost of Materials (A x Purchase Price) (14600 kgs x ₹ 99) = ₹ 14,45,400
Total Ordering Cost (No. of Orders x O) (2 Orders x 200) = ₹ 400
Total Carrying Cost (EOQ / 2 x C) (7300 kgs / 2 x ₹13.88) = ₹ 50,662
Total Inventory Cost ₹ 14,96,462
Advice: As total inventory cost at offer price is ₹ 27,340 (14,96,462 – 14,69,122) higher, offer should not
be accepted.
(i) Counter-offer:
Let Discount Rate = z%
Counter-Offer Price = ₹ 100 – z% = ₹ 100 – z
Revised Carrying Cost = [(₹ 100 – z) x 1% x 12 months] + ₹ 2 = ₹ 12 -0.12z + ₹ 2 = ₹ 14 – 0.12z
Total Inventory Cost at Counter-Offer Price
Cost of Materials (A x Purchase Price) [14600 kgs x (₹ 100 – z)] = ₹ 14,60,000 – 14,600z
Total Ordering Cost (No. of Orders x O) (2 Orders x 200) = ₹ 400
Total Carrying Cost (EOQ / 2 x C) [7300 kgs / 2 x (₹ 14 – 0.12z)] = ₹ 51,100 – 438z Total Inventory Cost
₹ 15,11,500 – 15038z
₹ 14,69,122 = ₹ 15,11,500 – 15038z Or 15038z = 42,378
Or
z = 2.82
Therefore, discount should be at least 2.82% in offer price.
Question 26
Following details are related to a manufacturing concern:
Re-order Level 1,60,000 units
Economic Order Quality 90,000
Minimum Stock Level 1,00,000 units
Maximum Stock Level 1,90,000 units
Average Lead Time 6 days
Difference between minimum lead time and Maximum lead 4 days
time
Calculate:
(i) Maximum consumption per day
(ii) Minimum consumption per day (Nov ’23)
Answer 26
2.26
Difference between Minimum lead time Maximum lead time

= 4 days Max. lead time – Min. lead time = 4 days
Or, Max. lead time = Min. lead time + 4 days………………………………. (i)
Average lead time is given as 6 days i.e.
𝑀𝑎𝑥.𝑙𝑒𝑎𝑑𝑡𝑖𝑚𝑒+𝑀𝑖𝑛.𝑙𝑒𝑎𝑑 𝑡𝑖𝑚𝑒
2
= 6 Days ………………………………………….(ii)
Putting the value of (i) in (ii),

𝑀𝑖𝑛.𝑙𝑒𝑎𝑑 𝑡𝑖𝑚𝑒+4 𝐷𝑎𝑦𝑠+𝑀𝑖𝑛.𝑙𝑒𝑎𝑑 𝑇𝑖𝑚𝑒
2
= 6 Days
Or, Min. lead time + 4 days + Min. lead time = 12 days

Or, 2 Min. lead time = 8 days
8 𝑑𝑎𝑦𝑠
Or, Minimum lead time = 2
= 4 Days
Putting this Minimum lead time value in (i), we get
Maximum lead time = 4 days + 4 days = 8 days
(i) Maximum consumption per day:
Re-order level = Max. Re-order period × Maximum Consumption per day 1,60,000 units
= 8 days × Maximum Consumption per day
1,60,000 𝑢𝑛𝑖𝑡𝑠
Or, Maximum Consumption per day = 8 𝑑𝑎𝑦𝑠
= 20,000 units
(ii) Minimum Consumption per day:

Maximum Stock Level =
Re-order level + Re-order Quantity – (Min. lead time × Min. Consumption per day) Or,
1,90,000 units = 1,60,000 units + 90,000 units – (4 days × Min. Consumption per day) Or, 4
days × Min. Consumption per day = 2,50,000 units – 1,90,000 units
Or, Minimum Consumption per day = 4 𝑑𝑎𝑦𝑠
= 15,000 units
Question 27
Define Inventory Control and give its objectives.
List down the basis to be adopted for Inventory Control. (PYP Nov’19, 5 Marks)
Answer 27
Inventory Control: The Chartered Institute of Management Accountants (CIMA) defines Inventory
Control as “The function of ensuring that sufficient goods are retained in stock to meet all requirements
without carrying unnecessarily large stocks.”
The objective of inventory control is to make a balance between sufficient stock and over - stock. The stock
maintained should be sufficient to meet the production requirements so that uninterrupted production
flow can be maintained. Insufficient stock not only pause the production but also cause a loss of revenue
and goodwill. On the other hand, Inventory requires some funds for purchase, storage, maintenance of
materials with a risk of obsolescence, pilferage etc. A trade-off between Stock-out and Over-stocking is
required. The management may employ various methods of Inventory control to have a balance.
Management may adopt the following basis for Inventory control:

2.27
By Setting On the basis

of Relative Analysis

This was a numerical question relating to the topic ‘Material cost’ to calculate EOQ and Total
Inventory cost. Performance of the examinees was good.
Question 28
Surekha Limited Produces 4000 Litres of paints on a quarterly basis. Each Litre requires 2 kg of raw
material. The cost of placing one order for raw material isRs. 40 and the purchasing price of raw
material is Rs. 50 per kg. The storage cost and interest cost is 2% and 6% per annum respectively.
The lead time for procurement of raw material is 15 days. Calculate Economic Order Quantity and
Total Annual Inventory Cost in respect of the above raw material. (PYP Nov’19,5 Marks)
Answer 28
Working:
Calculation of Annual demand of raw material
= 4,000 Litres (per quarter) x 4 (No. of Quarter in a year) x 2 kg. (raw material required for each Litre of paint) =
32,000 kg.
Calculation of Carrying cost
Storage rate = 2%
Interest Rate = 6%
Total = 8% per annum
Carrying cost per unit per annum = 8% of Rs . 50 = Rs. 4 per unit per annum
𝟐 × 𝑨𝒏𝒏𝒖𝒂𝒍 𝒅𝒆𝒎𝒂𝒏𝒅(𝑨) × 𝑶𝒓𝒅𝒆𝒓𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 𝒑𝒆𝒓 𝒐𝒓𝒅𝒆𝒓(𝑶)
√
𝑪𝒂𝒓𝒓𝒚𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕 𝒑𝒆𝒓 𝒂𝒏𝒏𝒖𝒎(𝑪)
2×32,000𝑘𝑔.×′40
(i) EOQ = √ ′4
= 800 Kg
(ii) Total Annual Inventory Cost

Purchasing cost of 32,000 kg @Rs. 50 per kg = Rs. 16,00,000
32,000kg
Ordering Cost ( 800kg × Rs. 40) = Rs.1,600
15 days
Carrying Cost of Inventory(30 days × 800 kg × Rs. 40 = Rs. 1,600
Rs. 16,03,200

This was a theoretical question based on Inventory Control. Below Average performance
was observed by the examinees.

2.28
Question 29
The following are the details of receipt and issue of material ‘CXE’ in a manufacturing Co. during
the month of April 2019:
Date Particulars Quantity (kg) Rate per kg
April 4 Purchase 3,000 ₹ 16
April8 Issue 1,000
April15 Purchase 1,500 ₹ 18
April 20 Issue 1,200
April 25 Return to supplier out of purchase made on April 15 300
April 26 Issue 1,000
April 28 Purchase 500 ₹ 17
Opening stock as on 01-04-2019 is 1,000 kg @Rs. 15 per kg.

On 30th April, 2019 it was found that 50 kg of material ‘CXE’ was fraudulently misappropriated by the
store assistant and never recovered by the Company.
Required:
(i) Prepare a store ledger account under each of the following method of pricing the issue:
(a) Weighted Average Method
(b) LIFO
(ii) What would be the value of material consumed and value of closing stock as on 30-04-2019
as per these two methods? (PYP May ‘19, 10 Marks)
Answer 29
(i) (a) Stores Ledger Account for the month of April, 2019 (Weighted Average Method)
Receipt Issue Balance
1-4-19 _ _ _ _ _ _ 1,000 15.00 15,000

4-4-19 3,000 16.00 48,000 _ _ _ 4,000 15.75 63,000
8-4-19 _ _ _ 1,000 15.75 15,750 3,000 15.75 47,250
15-4-19 1,500 18.00 27,000 _ _ _ 4,500 16.50 74,250
20-4-19 _ _ _ 1,200 16.50 19,800 3,300 16.50 54,450
25-4-19 _ _ _ 300 18.00 5,400 3,000 16.35 49,050
26-4-19 _ _ _ 1,000 16.35 16,350 2,000 16.35 32,700
28-4-19 500 17.00 8,500 _ _ _ 2,500 16.48 41,200
30-4-19 _ _ _ 50 16.48 824 2,450 16.48 40,376
(b) Stores Ledger Account for the month of April, 2019 (LIFO)
Date Qty Units Rate Amount Qty Units Rate Amount Qty Units Rate Amount
(‘) (‘) (‘) (‘) (‘) (‘)
1-4-19 _ _ _ _ _ _ 1,000 15 15,000
4-4-19 3,000 16 48,000 _ _ _ 1,000 15 15000
3,000 16 48,000
8-4-19 _ _ _ 1,000 16 16,000 1,000 15 15,000
2,000 16 32,000
15-4-19 1,500 18 27,000 _ _ _ 1,000 15 15,000
2,000 16 32,000
1,500 18 27,000
20-4-19 _ _ _ 1,200 18 21,600 1,000 15 15,000
2,000 16 32,000
300 18 5,400
25-4-19 _ _ _ 300 18 5,400 1,000 15 15,000
2.29
2,000 16 32,000
26-4-19 _ _ _ 1,000 16 16,000 1,000 15 15,000
1,000 16 16,000
28-4-19 500 17 8,500 _ _ _ 1,000 15 15,000
1,000 16 16,000
500 17 8,500
30-4-19 _ _ _ 50 17 850 1,000 15 15,000
1,000 16 16,000
450 17 7,650
(ii) Value of Material Consumed and Closing Stock
Opening stock as on 01-04-2019 Weighted Average method (₹ ) LIFO method(₹ )
15,000 15,000
Add: Purchases 83,500 83,500
98,500 98,500
Less: Return to supplier 5,400 5,400
Less: Abnormal loss 824 850
Less: Closing Stock as on 30-04-2019 40,376 38,650
Value of Material Consumed 51,900 53,600

In this numerical question to ‘Material’ students were asked to prepare Store ledger
account under Weighted Average method and LIFO method. Only few numbers of students
attempted this question correctly.
Question 30
M/s. X Private Limited is manufacturing a special product which requires a component "SKY BLUE".
The following particulars are available for the year ended 31st March, 2018:
Annual demand of "SKY BLUE" 12000 Units Cost of placing an order ₹ 1,800
Cost per unit of "SKY BLUE ₹ 640
Carrying cost per annum 18.75%
The company has been offered a quantity discount of 5 on the purchases of "SKY BLUE" provided the
order size is 3000 components at a time.
You are required to:
(i) Compute the Economic Order Quantity.
(ii) Advise whether the quantity discount offer can be accepted. (PYP May ‘18, 5 Marks)
Answer 30
(i) Calculation of Economic Order Quantity
𝟐𝐀𝐎 𝟐×𝟏𝟐,𝟎𝟎𝟎 𝐮𝐧𝐢𝐭𝐬 ×𝐑𝐬.𝟏,𝟖𝟎𝟎
EOQ = √ 𝐂
=√ 𝐑𝐬.𝟔𝟒𝟎 ×𝟏𝟖.𝟕𝟓 /𝟏𝟎𝟎
= 600 units
(ii) Evaluation of Profitability of Different Options of Order Quantity

When EOQ is ordered (₹ )
Ordering Cost [A/Q × O - (12,000 units/ 600 units) x Rs. 1,800] 36,000
Carrying Cost (Q/2 × C × i - 600 units x Rs. 640 x ½ x 18.75/100) 36,000
2.30
When Quantity Discount is accepted

(`)
Purchase Cost (12,000 units X ` 608) 72,96,000
(12,000 units/3,000 units) X ` 1,800] 7,200
Ordering Cost
𝐴
[ XO
𝑄
Carrying Cost (3,000 units X ` 608 X ½ X 18.75/100)] 1,71,000

𝑄
[2 X C X i

Advise – The total cost of inventory is higher if EOQ is adopted. If M/s. X Private Limited gets a discount
of 5% on the purchases of “SKY BLUE” (if order size is 3,000 components at a time), there will be financial
benefit of ` 2,77,800 (77,52,000 - 74,74,200). However, order size of big quantity will increase volume
of average inventory to 5 times. There may be risk of shrinkage, pilferage and obsolescence etc., of
inventory due to increase in the average volume of inventory holding. This aspect also has to be taken
into consideration before opting the discount offer and taking final decision.
Question 31
Explain ‘Just In Time’ (JIT) approach of inventory management. (PYP May ‘18, 5 Marks)
Answer 31
Just in Time (JIT) Inventory Management
JIT is a system of inventory management with an approach to have a zero inventories in stores. According
to this approach material should only be purchased when it is actually required for production.
JIT is based on two principles
(i) Produce goods only when it is required and
(ii) the products should be delivered to customers at the time only when they want.
It is also known as ‘Demand pull’ or ‘Pull through’ system of production. In this system, production process
actually starts after the order for the products is received. Based on the demand, production process starts
and the requirement for raw materials is sent to the purchase department for purchase. This can be
understood with the help of the following diagram:
Question 32
Explain: FIFO and LIFO method of stores issue. (PYP May ‘18, 2 Marks)
Answer 32
First-in First-out (FIFO) method: It is a method of pricing the issues of materials, in the order in which
they are purchased. In other words, the materials are issued in the order in which they arrive in the
store or the items longest in stock are issued first. Thus each issue of materia l only recovers the
purchase price which does not reflect the current market price. This method is considered suitable in
times of falling price because the material cost charged to production will be high while the
replacement cost of materials will be low.
Last-in-First-out (LIFO) method: It is a method of pricing the issues of materials. This method is based
on the assumption that the items of the last batch (lot) purchased are the first to be issued. Therefore,
2.31
under this method the prices of the last batch (lot) are used for pricing the issues, until it is exhausted,
and so on. If however, the quantity of issue is more than the quantity of the latest lot than earlier (lot)
and its price will also be taken into consideration. During inflationary period or period of rising prices,
the use of LIFO would help to ensure that the cost of production determined on the above basis is
approximately the current one.
Question 33
Explain obsolescence and circumstances under which materials become obsolete. State the steps
to be taken for its treatment. (PYP Nov ‘18, 5 Marks)
Answer 33
Obsolescence: Obsolescence is defined as “the loss in the intrinsic value of an asset due to its
supersession”.
Materials may become obsolete under any of the following circumstances:
(i) where it is a spare part, or a component of a machinery used in manufacture and that machinery becomes
obsolete;
(ii) where it is used in the manufacture of a product which has become obsolete;
(iii) where the material itself is replaced by another material due to either improved quality or fall in price.
Treatment: In all three cases, the value of the obsolete material held in stock is a total loss and immediate
steps should be taken to dispose it off at the best available price. The loss arising out of obsolete materials
on abnormal loss does not form part of the cost of manufacture.

This was a theoretical question on obsolescence of material. Below average performance
was observed.
Question 34
An automobile company purchases 27,000 spare parts for its annual requirements. The cost per
order is ₹ 240 and the annual carrying cost of average inventory is 12.5%. Each spare part costs ₹
50. At present, the order size is 3,000 spare parts. (Assume that number of days in a year = 360
days) Find out:
(i) How much the company's cost would be saved by opting EOQ model?
(ii) The Re-order point under EOQ model if lead time is 12 days.
(iii) How frequently should orders for procurement be placed under EOQ model? (PYP 10 Marks
Nov 20)
Answer 34
Working Notes:
Annual requirement (A) = 27,000 units
Cost per order (O) = ₹ 240
Inventory carrying cost (i) = 12.5%
Cost per unit of spare (c) = ₹ 50
Carrying cost per unit (i × c) = ₹ 50 × 12.5% = ₹ 6.25
2×A×O 2×27,000×240
Economic Order Quantity (EOQ) =√ C×i
= √ 6.25
= 1440 Units
(i) Calculation of saving by opting EOQ:

Existing Order policy EOQ Model
No. of orders 9 18.75 or 19
27,000 27,000
( ) ( )
3,000 1,440
2.32
A. Ordering Cost (₹) 2,160 4,500

(₹ 240 × 9) 27,000
{𝑅𝑠. 240 × ( )}
1,440
B. Carrying cost (₹) 9,375 4,500

𝟏, 𝟒𝟒𝟎 × 𝑹𝒔. 𝟔. 𝟐𝟓
3,000 × 𝑅𝑠. 6.25 ( )
( ) 𝟐
2
Total cost (A+B) (₹) 11,535 9,000
Savings of Cost by opting EOQ Model = ₹ 11,535 – ₹ 9,000 = ₹ 2,535
(ii) Re-order point under EOQ:
Re-order point/ Re-order level = Maximum consumption × Maximum lead time
Consumption per day = 360 𝑑𝑎𝑦𝑠
= 75 units
Re-order point/ Re-order level = 75 units × 12 days = 900 units
(iii) Frequency of Orders (in days):
360 𝑑𝑎𝑦𝑠 360 𝑑𝑎𝑦𝑠
= = 18.95 days or 19 days
𝑁𝑜.𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠 𝑎 𝑦𝑒𝑎𝑟 19
Question 35
State how the following items are treated in arriving at the value of cost of material purchased:
(i) Detention Charges/Fines
(ii) Demurrage
(iii) Cost of Returnable containers
(iv) Central Goods and Service Tax (CGST)
(v) Shortage due to abnormal reasons. (PYP 5 Marks Jan 21)
Answer 35
Treatment of items in arriving at the value of cost of material Purchased
S. No. Items Treatment
(i) Detention charges/ Fine Detention charges/ fines imposed for non- compliance of
rule or law by any statutory authority. It is an abnormal cost
and not included with cost of purchase.
(ii) Demurrage Demurrage is a penalty imposed by the transporter for
delay in uploading or offloading of materials. It is an
abnormal cost and not included with cost of purchase.
(iii) Cost of returnable Treatment of cost of returnable containers are as follows:
containers
Returnable Containers: If the containers are returned and
their costs are refunded, then cost of
containers should not be considered in the cost of purchase.
If the amount of refund on returning the container is less
than the amount paid, then, only the short fall is added
with the cost of purchase.
(iv) Central Goods and Central Goods and Service Tax (CGST) is paid on
Service Tax (CGST) manufacture and supply of goods and collected from the
2.33
buyer. It is excluded from the cost of purchase if the input

credit is available for the same. Unless mentioned
specifically CGST is not added with the cost of purchase.
(v) Shortage due to Shortage arises due to abnormal reasons such as material
abnormal reasons mishandling, pilferage, or due to any avoidable reasons are
not absorbed by the good units. Losses due to abnormal
reasons are debited to costing profit and loss account.
Question 36
MM Ltd. has provided the following information about the items in its inventory.
Item Code Number Units Unit Cost (₹)
101 25 50
102 300 01
103 50 80
104 75 08
105 225 02
106 75 12
MM Ltd. has adopted the policy of classifying the items constituting 15% or above of Total Inventory
Cost as 'A' category, items constituting 6% or less of Total Inventory Cost as 'C' category and the
remaining items as 'B' category.
(i) Rank the items on the basis of % of Total Inventory Cost.
(ii) Classify the items into A, B and C categories as per ABC Analysis of Inventory Control adopted by
MM Ltd. (PYP 5 Marks July 21)
Answer 36
(i) Statement of Total Inventory Cost and Ranking of items
Item Units % of Total Unit Total Inventory % of Total Ranking
code no. units cost cost (₹) Inventory cost
(₹)
101 25 3.33 50 1,250 16.67 2
102 300 40.00 1 300 4.00 6
103 50 6.67 80 4,000 53.33 1
104 75 10.00 8 600 8.00 4
105 225 30.00 2 450 6.00 5
106 75 10.00 12 900 12.00 3
750 100 153 7,500 100
(ii) Classifying items as per ABC Analysis of Inventory Control

Basis for ABC Classification as % of Total Inventory Cost
15% & above -- ‘A’ items
7% to 14% -- ‘B’ items
6% & Less -- ‘C’ items
Ranking Item code % of Total Total Inventory % of Total Category
No. units cost (₹) Inventory Cost
1 103 6.67 4,000 53.33
2 101 3.33 1,250 16.67
Total 2 10.00 5,250 70.00 A
3 106 10.00 900 12.00
2.34
4 104 10.00 600 8.00

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

It was a practical problem on inventory control for assigning ranks based on inventory cost
percentage. The second part was related to ABC classification by following the criteria
given in the question. Most of the examinees answered in the correct line. Above average
performance was observed.
Question 37
Write a short note on VED analysis of Inventory Control. (PYP 5 Marks July ‘21)
Answer 37
Vital, Essential and Desirable (VED): Under this system of inventory analysis, inventories are classified
on the basis of its criticality for the production function and final product. Generally, this classification
is done for spare parts which are used for production.
(i) Vital- Items are classified as vital when its unavailability can interrupt the production process and
cause a production loss. Items under this category are strictly controlled by setting re-order level.
(ii) Essential- Items under this category are essential but not vital. The unavailability may cause sub
standardization and loss of efficiency in production process. Items under this category are reviewed
periodically and get the second priority.
(iii) Desirable- Items under this category are optional in nature; unavailability does not cause any
production or efficiency loss.

It was a theoretical question requiring examinees to write a short note on the concept of
VED analysis of Inventory Control. Performance of the examinees was below average .
Question 38
The following details are provided by M/s. SKU Enterprises for the year ended 31st March, 2018:
Particulars Material-M (₹) Material-N (₹)
Stock as on 01-04-2017 6,00,000 10,00,000
Stock as on 31-03-2018 4,50,000 7,25,000
Purchases during the year 9,50,000 18,40,000
(i) Calculate Turnover Ratio of both the materials.
(ii) Advise which of the two materials is fast moving. (Assume 360 days in a year). (PYP 5 Marks May
‘18) (Same concept different figures PYP Dec’21 5 Marks)
Answer 38
Material M Material N
Turnover ratio Turnover ratio
Cost of stock of raw material consumed / Cost of stock of raw material consumed /
= =
Average stock of raw material Average stock of raw material
2.35
= ₹6,00,000 + ₹9,50,000 -₹4,50,000 / = ₹10,00,000 + ₹18,40,000 -₹7,25,000. /

(6,00,000+ 4,50,000) / 2 =2.09 (10,00,000+ 7,25,000) / 2=2.45
Average number of days for which the average Average number of days for which the
inventory is held average inventory is held
360 / Inventory turnover ratio 360 / Inventory turnover ratio
= =
360 days / 2.09 = 172.25 days 360 days / 2.45 = 146.94 days
= =
(ii) Advice
Comparatively Material M is slower than Material N since Inventory holding period of ‘M’ is 172.25 days
in Comparison to ‘N’ i.e. 146.94 days. Infact, both materials have slow inventory turnover. Though, different
business has their own expected rates for inventory turnover like food shops have fast inventory
turnover, shop selling furniture etc. will have slower inventory turnover while manufacturers of
large items of plant will have very long inventory turnover. If it is not as per the Industry Standard,
then a slow turnover may indicate that excessive inventory is held and risk of obsolete or spoiled
inventory will increase. Large quantity of slow moving material means that capital is locked up in
business and not earning revenue. It is advisable to make proper investigations into slow moving
materials and take steps to minimize the loss arises therefrom as it may impact overall financial
health of the organisation.
Question 39
What is Bill of Material? Describe the uses of Bill of Material in following departments:
(i) Purchases Department
(ii) Production Department
(iii) Stores Department
(iv) Cost/Accounting Department (PYP 5 Marks Dec ‘21)
Answer 39
Bill of Material: It is a detailed list specifying the standard quantities and qualities of materials and
components required for producing a product or carrying out of any job.
Uses of Bill of Material in different department:
Purchase Production Stores Cost/ Accounting
Department Department Department Department
Materials are Production is planned It is used as a It is used to estimate cost
procured according to the nature, reference document and profit. Any purchase,
(purchased) on volume of the materials while issuing materials issue and usage are
the basis of required to be used. to the requisitioning compared/ verified
specifications Accordingly, material department. against this document.
mentioned in it. requisition lists are
prepared.

This theory question on Bill of Material was not answered in the correct line. Most of the students
had written the concept of invoicing of material instead of bill of material. Performance of the
examinees was poor.
Question 40
A Limited a toy company purchases its requirement of raw material from S Limited at ₹ 120 per kg.
The company incurs a handling cost of ₹ 400 plus freight of ₹ 350 per order. The incremental
carrying cost of inventory of raw material is ₹ 0.25 per kg per month. In addition the cost of working
capital finance on the investment in inventory of raw material is ₹ 15 per kg per annum. The annual
2.36
production of the toys is 60,000 units and 5 units of toys are obtained from one kg. of raw material.
Required:
(i) Calculate the Economic Order Quantity (EOQ) of raw materials.
(ii) Advise, how frequently company should order to minimize its procurement cost. Assume 360 days
in a year.
(iii) Calculate the total ordering cost and total inventory carrying cost per annum as per EOQ. (PYP 5
Marks May’22)
Answer 40
60,000 units
Annual requirement of raw material in kg. (A) = 5 units per kg = 12,000 kg.
Ordering Cost (Handling & freight cost) (O) = ₹ 400 + ₹ 350 = ₹ 750
Carrying cost per unit per annum i.e. inventory carrying cost + working capital cost (c × i)
= (₹ 0.25 × 12 months) + ₹15 = ₹ 18 per kg
2 × 12,000kgs × ₹750
(i) E.O.Q.=√ = 1,000 kg.
₹18
(ii) Frequency of orders for procurement:
Annual consumption (A)= 12,000 kg.
Quantity per order (EOQ) = 1,000 kg.
No. of orders per annum

𝐴 12,000kg
[𝐸𝑂𝑄] = 1,000kg
= 12
12 𝑚𝑜𝑛𝑡ℎ𝑠
Frequency of placing orders (in months) = 12 𝑜𝑟𝑑𝑒𝑟𝑠
= 1 months
360𝑑𝑎𝑦𝑠
Or, (in days) = = 30 days
12 𝑜𝑟𝑑𝑒𝑟𝑠
(iii) Calculation of total ordering cost and total inventory carrying cost as per EOQ:
Amount/Quantity
Size of the order 1,000 kg.
No. of orders 12
Cost of placing orders ₹ 9,000 (12 orders × ₹ 750)
Inventory carrying cost ₹ 9,000 (1,000 kg. × ½ × ₹ 18)
Total Cost ₹18,000
Question 41
Write down the treatment of following items associated with purchase of materials.
(i) Cash discount
(ii) IGST
(iii) Demurrage
(iv) Shortage
(v) Basic Custom Duty (PYP 5 Marks May’22)
Answer 41
Treatment of items associated with purchase of materials is tabulated as below
S. Items Treatment
No.
(i) Cash Discount Cash discount is not deducted from the purchase price. It is treated
as interest and finance charges. It is ignored.
2.37
(ii) Integrated Goods and Integrated Goods and Service Tax (IGST) is paid on inter- state
Service Tax (IGST) supply of goods and provision of services and collected from the
buyers. It is excluded from the cost of purchase if credit for the
same is available. Unless mentioned specifically it should not form
part of cost of purchase.
(iii) Demurrage Demurrage is a penalty imposed by the transporter for delay in
uploading or offloading of materials. It is an abnormal cost and not
included with cost of purchase
(iv) Shortage Shortage in materials are treated as follows:
Shortage due to normal reasons: Good units absorb the cost of
shortage due to normal reasons. Losses due to breaking of bulk,
evaporation, or due to any unavoidable conditions etc. are the
reasons of normal loss.
Shortage due to abnormal reasons: Shortage arises due to abnormal
reasons such as material mishandling, pilferage, or due to any
avoidable reasons are not absorbed by the good units. Losses due
to abnormal reasons are debited to costing profit and loss account.
(v) Basic Custom Duty Basic Custom duty is paid on import of goods from outside India. It
is added with the purchase cost.
Question 42
MM Ltd. uses 7500 valves per month which is purchased at a price of ₹ 1.50 per unit. The carrying
cost is estimated to be 20% of average inventory investment on an annual basis. The cost to place
an order and getting the delivery is ₹ 15. It takes a period of 1.5 months to receive a delivery from
the date of placing an order and a safety stock of 3200 valves is desired.
You are required to determine:
(i) The Economic Order Quantity (EOQ) and the frequency of orders.
(ii) The re-order point.
(iii) The Economic Order Quantity (EOQ) if the valve cost ₹ 4.50 each instead of 1.50 each.
(Assume a year consists of 360 days) (PYP 5 Marks Nov 22)
Answer 42
(i) Calculation of Economic Order Quantity
Annual requirement (A) = 7500×12= 90,000 Valves
Cost per order (O) = ₹ 15
Inventory carrying cost (i) = 20%
Cost per unit of spare (c) = ₹ 1.5
Carrying cost per unit (i × c) = ₹ 1.5 × 20% = ₹ 0.30
2 ×𝐴×𝑂
Economic Order Quantity (EOQ) = √ 𝑖×𝑐
2×90,000×15
=√ = 3,000 Valves
0.3
Frequency of order or Number of Orders = 90,000/3,000 = 30 orders.

So Order can be placed in every 12 (360days/30) days
(ii) Re-order Quantity = {Maximum Consumption X Maximum lead time} + safety Stock
= {7500X1.5} + 3200 = 14,450 Valves
(iii) Calculation of Economic Order Quantity if valve costs ₹ 4.50
Carrying cost is 20% of ₹ 4.50 = ₹ 0.90
2.38
2 ×𝐴×𝑂
Economic Order Quantity (EOQ) = √
𝑖×𝑐
2×90,000×15
=√
0.9
= 1732.0508 units or 1733 Valves
Question 43
Which system of inventory management is known as 'Demand pull' or 'Pull through' system of
production? Explain. Also, specify the two principles on which this system is based. (PYP 5 Marks
Nov 22)
Answer 43
Just in Time (JIT) Inventory Management is also known as ‘Demand pull’ or ‘Pull through’ system of
production. In this system, production process actually starts after the order for the products is
received. Based on the demand, production process starts and the requirement for raw materials is
sent to the purchase department for purchase.
It is a system of inventory management with an approach to have a zero inventories in stores.
According to this approach material should only be purchased when it is actually required for
production.
JIT is based on two principles
(i) Produce goods only when it is required and
(ii) the products should be delivered to customers at the time only when they want.
Question 44
The following information pertains to ZB Limited for the year:
Profit volume ratio 30%
Margin of Safety (as % of total sales 25%
Fixed cost ` 12,60,000
(i) Break even sales value (`).
(ii) Total sales value (`) at present,
(iii) Proposed sales value (`) if company wants to earn the present profit after reduction of 10% in
fixed cost,
(iv) Sales in value (`) to be made to earn a profit of 20% on sales assuming fixed cost remains
unchanged,
(v) New Margin of Safety if the sales value at present as computed in (ii) decreased by
12.5%. (PYP 5 Marks, May ‘23)
Answer 44
i) Calculation of Break-even sales in value:
= Fixed Cost ÷ P/V Ratio
= ` 12,60,000 ÷ 30% = ` 42,00,000
ii) Calculation of Total Sales value:
Sales value (S) = Break-even Sales + Margin of Safety
Or, S = 42,00,000 + 0.25 S
Or, 0.75 S = 42,00,000
Or, S = 42,00,000 ÷ 0.75
Or, Sales = ` 56,00,000
2.39
iii) Calculation of proposed sales value to earn present profit:

Present profit = Sales – Variable cost – Fixed Cost
= ` 56,00,000 – 70% of 56,00,000 – ` 12,60,000
= ` 56,00,000 – ` 39,20,000 – ` 12,60,000
= ` 4,20,000
Proposed Sales value (S) = 0.7S + (90% of ` 12,60,000) + 4,20,000
S = 0.7S + 11,34,000 + 4,20,000
S = 15,54,000 ÷ 0.3 = ` 51,80,000
iv) Calculation of sales value to earn 20% on sales:
Sales Value (S) = 0.7 S + 12,60,000 + 0.2S
S = 12,60,0000 ÷ 0.10 = ` 1,26,00,000
v) New Margin of Safety:
= (Sales – BES) ÷ Sales
= (87.5% of 56,00,000 – 42,00,000) ÷ (87.5% of 56,00,000)
= (49,00,000 – 42,00,000) ÷ 49,00,000 = 7,00,000 ÷
49,00,000 = 14.29%
Or
= (Sales – BES)
= (87.5% of 56,00,000 – 42,00,000)
= ` 7,00,000
Question 45
A Limited has furnished the following information for the months from 1st January to 30th April,
2023:
January February March April
Number of Working days 25 24 26 25
Production (in units) per working day 50 55 60 52
Raw Material Purchases (% by weights 21% 26% 30% 23%

to total of 4 months)
Purchase price of raw material (per kg) ` 10 ` 12 ` 13 ` 11

Quantity of raw material per unit of product: 4 kg.
Opening stock of raw material on 1stJanuary: 6,020 kg. (Cost ` 63, 210)
Closing stock of raw material on 30thApril: 5,100 kg.
All the purchases of material are made at the start of each month.
Required:
(i) Calculate the consumption of raw materials (in kgs) month-by- month and in total.
(ii) Calculate the month-wise quantity and value of raw materials purchased.
(iii) Prepare the priced stores ledger for each month using the FIFO method. (PYP 10 Marks, May ‘23)

2.40
Answer 45
i) Calculation of consumption of Raw Material (in kgs) month by month and total
Particulars Jan Feb March April Total

No. of working days 25 24 26 25 -
Production (Per day) 50 55 60 52 -
Production 1,250 1,320 1,560 1,300 5,430
Raw Material Consumed (in kgs) 5,000 5,280 6,240 5,200 21,720
Calculation of Raw Material Purchased
Purchased (Kg)
Closing stock on 30th April 5,100
Add: Raw Material consumed 21,720
Less: Opening stock on 1st January (6,020)
Raw Material purchased 20,800
ii) Calculation of month wise quantity and value of raw material purchased
% Purchased (Kg) Price (`) Value (`)

January 21 4,368 10 43,680
February 26 5,408 12 64,896
March 30 6,240 13 81,120
April 23 4,784 11 52,624
Total 20,800 2,42,320
iii) Store Price Ledger by using FIFO method.
Receipts Issue Balance

Months Particulars Qty Rate Amount Qty Rate Amount Qty Rate Amount
(`) (`) (`)
Jan Opening 6,020 10.5 63,210
Purchases 4,368 10 43,680 6,020 10.5 63,210
4,368 10 43,680
Consumption 5,000 10.5 52,500 1,020 10.5 10,710
4,368 10 43,680
Feb Purchases 5,408 12 64,896 1,020 10.5 10,710
4,368 10 43,680
5,408 12 64,896
Consumption 1,020 10.5 10,710 108 10 1,080
4,260 10 42,600 5,408 12 64,896
March Purchase 6,240 13 81,120 108 10 1,080
5,408 12 64,896
6,240 13 81,120
Consumption 108 10 1,080
5,408 12 64,896
724 13 9,412 5,516 13 71,708
April Purchases 4,784 11 52,624 5,516 13 71,708
2.41
4,784 11 52,624
Consumption 5,200 13 67,600 316 13 4,108
4,784 11 52,624
56,732

3.1
Chapter 3
Employee Cost and Direct Expenses
Question 1
A, B and C are three industrial workers working in Sports industry and are experts in making cricket
pads. A, B and C are working in Mahi Sports, Virat Sports and Sikhar Sports companies respectively.
Workers are paid under different incentive schemes. Company wise incentive schemes are as
follows:
Company Incentive scheme
Mahi Sports Emerson’s efficiency system
Virat Sports Merrick differential piece rate system
Sikhar Sports Taylor’s differential piece work system
The relevant information for the industry is as under:
Standard working hours 8 hours a day
Standard output per hour (in units) 2
Daily wages rate Rs. 360
No. of working days in a week 6 days
Actual outputs for the week are as follows:
A B C
132 units 108 units 96 units
You are required to calculate effective wages rate and weekly earnings of all the three workers.
(MTP March ‘19, 10 Marks)
Answer 1
Calculation of effective wages rate and weekly earnings of the workers A, B and C
Workers A B C
Standard 96 units 96 units 96 units
Output
(8 hrs. × 2 units × 6 (8 hrs. × 2 units × (8 hrs. × 2 units × 6
days) 6 days) days)
Actual 132 units 108 units 96 units
Output
132 𝑈𝑛𝑖𝑡𝑠 108 𝑈𝑛𝑡𝑖𝑠 96 𝑈𝑛𝑖𝑡𝑠
×100= 100
96 𝑈𝑛𝑖𝑡𝑠
Efficiency 96 𝑈𝑛𝑖𝑡𝑠 96 𝑈𝑛𝑖𝑡𝑠
(%) ×100= 137.5 ×100= 112.5
Daily wages Rs. 360 Rs. 360 Rs. 360
Rate
Incentive Emerson’s Efficiency Merrick differential Taylor’s differential
system System piece rate system piece work system
Rate of 57.5% of time rate 20% of ordinary 25% of ordinary

Bonus (20% + 37.5% ) piece rate piece rate
Effective Rs. 70.875 per Rs. 27 per piece Rs. 28.125 per
Wage Rate hour piece
𝑅𝑠. 360 𝑅𝑠. 360 𝑅𝑠. 360
( 157.5%) ( 120%) ( 125%)
8 𝐻𝑜𝑢𝑟𝑠 16 𝑈𝑛𝑖𝑡𝑠 16 𝑈𝑛𝑖𝑡𝑠
Total weekly Rs. 3,402 Rs. 2,916 Rs. 2,700
earnings

Chapter 3 Employee Cost and Direct Expenses
3.2
(8 hours × 6 days × (108 units × Rs. 27) (96 units × Rs.

Rs.70.875) 28.125)
Question 2
Discuss the accounting treatment of Idle time and overtime wages. (MTP May’20, April ‘19, 5
Marks, RTP May’19, Old & New SM)
Answer 2
Accounting treatment of idle time wages & overtime wages in cost accounts: 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 cos t 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.
Under Cost Accounting, the overtime premium is treated as follows:
If overtime is resorted to at the desire of the customer, then the overtime premium may be charged
to the job directly.
If overtime is required to cope with general production program or for meeting urgent orders, the
overtime premium should be treated as overhead cost of particular depart ment or cost center which
works overtime.
Overtime worked on account of abnormal conditions should be charged to costing Profit & Loss
Account. If overtime is worked in a department due to the fault of another department the overtime
premium should be charged to the latter department.
OR
Normal idle time: It is the time which cannot be avoided or reduced in the normal course of business.
It is treated as a part of cost of production. Thus, in the case of direct workers an allowance for normal
idle time is considered setting of standard hours or standard rate.
In case of indirect workers, normal idle time is considered for the computation of overhead rate.
Abnormal idle time: Apart from normal idle time, there may be factors which give riseto abnormal idle
time. 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. The cost of abnormal idle time should be further
categorized into controllable and uncontrollable. For each category, the break-up of cost due to various
factors should be separately shown. This would help the management in fixing responsibility for
controlling idle time. Management should aim at eliminating controllable idle time and on a long- term
basis reducing even the normal idle time. This would require a detailed analysis of the causes leading
to suchidle time.
Causes of Overtime and Treatment of Overtime premium in cost accounting
Causes Treatment
(1) The customer may agree to bearthe entire (1) If overtime is resorted to at the desire of the
charge of overtime because urgency of customer, then overtime premium may be
work. chargedto the job directly.
(2) Overtime may be called for to make up (2) If overtime is required to cope with general
any shortfall inproduction due to some production programmes orfor meeting urgent
unexpected development. orders, the overtime premium should be
treated as overhead cost of the particular
department or cost centre which works
overtime.
(3) Overtime work may be necessary to (3) If overtime is worked in adepartment due to the
make up a shortfallin production due to fault of another department, the overtime
some faultof management. premium should be charged to the latter
department.

3.3
(4) Overtime work may be resorted to, to (4) Overtime worked on account of abnormal
secure an out-turn in excess of the conditions such as flood, earthquake etc.,
normal output to take advantage of an should not be charged to cost, but to Costing
expandingmarket or of rising demand Profit and Loss Account.
Question 3
Anirban Ltd. wants to ascertain the profit lost during the year 20X8-X9 due to increased labour
turnover. For this purpose, they have given you the following information
(1) Training period of the new recruits is 50,000 hours. During this period their productivity is 60%
of the experienced workers. Time required by an experienced worker is 10 hours per unit.
(2) 20% of the output during training period was defective. Cost of rectification of a defective unit
was Rs. 25.
(3) Potential productive hours lost due to delay in recruitment were 1,00,000 hours.
(4) Selling price per unit is Rs.180 and P/V ratio is 20%.
(5) Settlement cost of the workers leaving the organization was Rs.1,83,480.
(6) Recruitment cost was Rs.1,56,340
(7) Training cost was Rs.1,13,180.
You are required to CALCULATE the profit lost by the company due to increased labour
turnover during the year 20X8-X9. (MTP 5 Marks ,April ’19 & Sep ‘23 , RTP May ’18)
Answer 3
Output by experienced workers in 50,000 hours = 50,000/10= 5,000 units
Output by new recruits = 60% of 5,000 = 3,000 units
Less of output = 5,000 – 3,000 = 2,000 units

Total loss of output = 10,000 + 2,000 = 12,000 units
Contribution per unit = 20% of 180 = Rs. 36
Total contribution cost = 36 × 12,000 = Rs. 4,32,000
Cost of repairing defective units = 3,000 × 0.2 × 25 = Rs. 15,000
Profit forgone due to labour turnover
(Rs.)
Loss of Contribution 4,32,000
Cost of repairing defective units 15,000
Recruitment cost 1,56,340
Training cost 1,13,180
Settlement cost of workers leaving 1,83,480
Profit forgone in 20X8-X9 9,00,000
Question 4
Two workers ‘A’ and ‘B’ produce the same product using the same material. Their normal wage rate
is also the same. ‘A’ is paid bonus according to Rowan scheme while ‘B’ is paid bonus according to
Halsey scheme. The time allowed to make the product is 120 hours. ‘A’ takes 90 hours while ‘B’ takes
100 hours to complete the product. The factory overhead rate is Rs. 50 per hour actually worked.
The factory cost of product manufactured by ‘A’ is Rs. 80,200 and for product manufactured by ‘B’
is Rs. 79,400.
Required:
(i) COMPUTE the normal rate of wages.
3.4
(ii) CALCULATE the material cost.

(iii) PREPARE a statement comparing the factory cost of the product as made by two workers. (MTP
March ‘18, 5 Marks) (Same concept different figures Old & New SM)
Answer 4
Let x be the cost of material and y be the normal rate of wage/hour
Worker A (Rs. ) Worker B (Rs. )
Material cost x x
Labour wages 90 y 100 y
Bonus Rowan system Halsey system
𝑇𝑖𝑚𝑒 𝑆𝑎𝑣𝑒𝑑
𝑇𝑖𝑚𝑒 𝑎𝑙𝑙𝑜𝑤𝑒𝑑
× hour worked ×rate Hours Saved
× 50% × 𝑟𝑎𝑡𝑒
Overheads 30 1
× 90× Y = 22.5y 20 × × y = 10y
120 2
90× Rs. 50 = 4,500 100 x Rs. 50 = 5,000
Factory cost x + 110y + 5,000 =
x + 112.5y + 4,500 = 80,200 79,400
∴x + 112.5y = 75,700 (1) ∴ x + 110y =
74,400…. (2)
Solving (1) and (2) we get x = Rs. 17,200 and y = Rs. 520
(i) Normal rate of wages is Rs. 520 per hour.
(ii) Cost of materials = Rs. 17,200.
(iii) Comparative Statement of factory cost
Worker A (Rs.) Worker B (Rs. )
Material cost 17,200 17,200
Wages 46,800 52,000
(90 x Rs. (100 x Rs. 520)
520)
Bonus 11,700 5,200
30 1
(120 × 90 × 520) (20 × 2 × 520)
Overheads 4,500 5,000
Factory Cost 80,200 79,400
Question 5
Corrs Consultancy Ltd. is engaged in BPO industry. One of its trainee executives in the Personnel
department has calculated labour turnover rate 24.92% for the last year using Flux method.
Following is the some data provided by the Personnel department for the last year:
Employees At the beginning Joined Left At the end
Data 540 1,080 60 1,560
Processors
Payroll ? 20 60 40
Processors
Supervisors ? 60 --- ?
Voice Agents ? 20 20 ?
Assistant ? 20 --- 30
Managers
3.5
Senior Voice 4 --- --- 12

Agents
Senior Data 8 --- --- 34
Processors
Team Leaders ? --- --- ?
Employees transferred from the Subsidiary Company
Senior Voice --- 8 --- ---
Agents
Senior Data --- 26 --- ---
Processors
Employees transferred to the Subsidiary Company
Team Leaders --- --- 60 ---
Assistant --- --- 10 ---
Managers
At the beginning of the year there were total 772 employees on the payroll of the company. The
opening strength of the Supervisors, Voice Agents and Assistant Managers were in the ratio of 3 :
3 : 2. The company has decided to abandon the post of Team Leaders and consequently all the
Team Leaders were transferred to the subsidiary company.
The company and its subsidiary are maintaining separate set of books of account and separate
Personnel Department.
(a) Labour Turnover rate using Replacement method and Separation method.
(b) Verify the Labour turnover rate calculated under Flux method by the trainee executive
of the Corrs Consultancy Ltd. (MTP Aug ‘18, 10 Marks)
Answer 5
Working Notes:
(i) Calculation of no. of employees at the beginning and end of the year
At the Beginning At the end
of the year of the year
Data Processors 540 1,560
Payroll Processors [Left- 60 + Closing- 40 – 80 40
Joined- 20]
Supervisors* 30 90
Voice Agents* 30 30
Assistant Managers* 20 30
Senior Voice Agents 4 12
Senior Data Processors 8 34
Team Leaders 60 0
Total 772 1,796
(*) At the beginning of the year:
Strength of Supervisors, Voice Agents and Asst.Managers =
[772 – {540 + 80 + 4 + 8 + 60} employees] or [772 – 692 = 80 employees]
3 3 2
[{𝑆𝑢𝑝𝑒𝑟𝑣𝑖𝑠𝑜𝑟𝑠 − 80 × = 30, 𝑉𝑜𝑖𝑐𝑒 𝐴𝑔𝑒𝑛𝑡𝑠 − 80 × = 30 &𝐴𝑠𝑠𝑡. 𝑀𝑎𝑛𝑎𝑔𝑒𝑟𝑠 − 80 ×
8 8 8
= 20} 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠]

3.6
At the end of the year :

[Supervisor-(Opening- 30 + 60 Joining) = 90; Voice Agents- (Opening- 30 + 20 Joined – 20 Left)
= 30]
(ii) No. of Employees Separated, Replaced and newly recruited during the year
Particulars Separations New Replacement Total
Recruitment Joining
Data 60 1,020 60 1,080
Processors
Payroll 60 -- 20 20
Processors
Supervisors -- 60 -- 60
Voice Agents 20 -- 20 20
Assistant 10 10 10 20
Managers
Sr. Voice -- 8 -- 8
Agents
Sr. Data -- 26 -- 26
Processors
Team Leaders 60 -- -- --
Total 210 1,124 110 1,234
(Since, Corrs Consultancy Ltd. and its subsidiary are maintaining separate Personnel Department,
so transfer-in and transfer -out are treated as recruitment and separation respectively.)
(a) Calculation of Labour Turnover:
𝑁𝑜.𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑟𝑒𝑝𝑙𝑎𝑐𝑒 𝐷𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
Replacement Method = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑜.𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑜𝑛𝑟𝑜𝑙𝑙
× 100
110 100
× 100 = × 100 = 8.57%
(772+1,796)/2 1,284
𝑁𝑜.𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑠𝑒𝑝𝑎𝑟𝑎𝑡𝑒 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟

Separation Method = × 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑜.𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑜𝑛𝑟𝑜𝑙𝑙
210
= 1,284 × 100 = 16.36%
(b) Labour Turnover under Flux Method
𝑁𝑜.𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 (𝐽𝑜𝑖𝑛𝑒𝑑 𝑆𝑒𝑝𝑎𝑟𝑎𝑡𝑒𝑑)𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑜.𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑜𝑛𝑟
× 10
𝑁𝑜.𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 (𝑅𝑒 𝑃𝑙𝑎𝑐𝑒𝑑 𝑁𝑒𝑤 𝑟𝑒𝑐𝑟𝑢𝑖𝑡𝑒𝑑 𝑆𝑒𝑝𝑎𝑟𝑎𝑡𝑒𝑑 )𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑜.𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑜𝑛𝑟𝑜𝑙𝑙
× 100
1,234+210
1,284
× 10 = 112.46%
Labour Turnover calculated by the executive trainee of the Personnel department is incorrect as it
has not taken the No. of new recruitment while calculating the labour turnover under Flux method.
Question 6
Discuss the remedial steps to be taken to minimize the labour turnover. (MTP Oct‘19, 5 Marks)
Answer 6
The following steps are useful for minimizing labour turnover:
(a) Exit interview: An interview to 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
3.7
employees.
(d) Organization should create healthy atmosphere, providing education, medical and housing facilities
for workers.
(e) Committee for settling workers grievances.
Question 7
RST Company Ltd. has computed labour turnover rates for the quarter ended 31st March, 2017 as
20%, 10% and 5% under flux method, replacement method and separation method respectively. If
the number of workers replaced during that quarter is 50.
Calculate:
(i) Workers recruited and joined
(ii) Workers left and discharged and
(iii) Average number of workers on roll. (MTP Oct‘18, 5 Marks) (Same concept different figures MTP
5 Marks Mar’21, MTP 5 Marks Oct’22)
Answer 7
𝑁𝑜.𝑜𝑓 𝑊𝑜𝑟𝑘𝑒𝑟𝑠 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑑
Labour Turnover Rate (Replacement Method) = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠
× 100
10 50
Or, =
100 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠
Thus, Average No. of workers = 500
𝑁𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑑
Labour Turnover Rate (Separation Method) = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠
× 100
5 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 𝑠𝑒𝑝𝑎𝑟𝑎𝑡𝑒𝑑
Or, 100 = 50
Thus, No. of workers separated =25
Labour Turnover Rate (Flux Method)
𝑁𝑜.𝑜𝑓 𝑆𝑒𝑝𝑎𝑟𝑎𝑡𝑖𝑜𝑛𝑠+𝑁𝑜.𝑜𝑓 𝐴𝑐𝑐𝑒𝑠𝑠𝑖𝑜𝑛 (𝐽𝑜𝑖𝑛𝑖𝑛𝑔𝑠)
= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠
× 100
20 25+𝑁𝑜.𝑜𝑓 𝑎𝑐𝑐𝑒𝑠𝑠𝑖𝑜𝑛𝑠 (𝑗𝑜𝑖𝑛𝑖𝑛𝑔𝑠)
Or, = =
100 500
Or, 100(25+No.of Accessions) = 10,000
Or, 25+No. of Accessions = 100
Thus, No. of Accessions = 100-25=75
Accordingly,
(i) Workers recruited and Joined = 75
(ii) Workers left and discharged = 25
(iii) Average number of workers on roll = 500
Question 8
A company is undecided as to what kind of wage scheme should be introduced. The following
particulars have been compiled in respect of three workers, which are under consideration of the
management.
I II III
Actual hours worked 380 100 540
Hourly rate of wages (in Rs.) 40 50 60
Productions in units:
- Product A 210 - 600
- Product B 360 - 1350
- Product C 460 250 -
Standard time allowed per unit of each product is:
3.8
A B C
Minutes 15 20 30
For the purpose of piece rate, each minute is valued at Rs. 1/- You are required to COMPUTE the
wages of each worker under:
(i) Guaranteed hourly rate basis.
(ii) Piece work earning basis, but guaranteed at 75% of basic pay (Guaranteed hourly rate if his earnings
are less than 50% of basic pay.)
(iii) Premium bonus basis where the worker received bonus based on Rowan scheme. (MTP 5 Marks May
’20, RTP May’19)(Same concept different figures MTP 5 Marks Nov’21)
Answer 8
(i) Computation of Wages of Each Worker Under Guaranteed Hourly Rate Basis
Worker Actual hours worked Hourly wage rate (Rs.) Wages (Rs.)
(Hours)
I 380 40 15,200
II 100 50 5,000
III 540 60 32,400
(ii) Computation of Wages of each worker under piece work earning basis
Product Piece rate Worker-I Worker-II Worker-III
per unit
Units Wages Units Wages Units Wages
(Rs.) (Rs.) (Rs.) (Rs.)
A 15 210 3,150 - - 600 9,000
B 20 360 7,200 - - 1,350 27,000
C 30 460 13,800 250 7,500 - -
Total 24,150 7,500 36,000
Since each worker’s earnings are more than 50% of basic pay. Therefore, worker-I, II and III will be
paid the wages as computed i.e. Rs. 24,150, Rs. 7,500 and Rs. 36,000 respectively.
Working Note:
a. Piece rate per unit
Product Standard time per Piece rate each Piece rate per unit
unit in minute minute (Rs.) (Rs.)
A 15 1 15
B 20 1 20
C 30 1 30
(ii) Computation of wages of each worker under Premium bonus basis (where each worker
receives bonus based on Rowan Scheme
Worker Time Time Time Wage Earnings Bonus Total
Allowed Taken saved Rate per (Rs.) (Rs.)* Earning
(Hr.) (Hr.) (Hr.) hour (Rs.) (Rs.)
I 402.5 380 22.5 40 15,200 850 16,050
II 125 100 25 50 5,000 1,000 6,000
III 600 540 60 60 32,400 3,240 35,640
Working Note:
1. Time allowed to each worker

Worker Product-A Product-B Product-C Total Time (Hours)
I 210 units × 15 360 units × 20 460 units × 30 24,150/60
= 3,150 = 7,200 = 13,800 = 402.50
II - - 250 units × 30 7,500/60
3.9
= 7,500 = 125
III 600 units × 15 1, 350 units × 20 - 36,000/60
= 9,000 = 27,000 = 600
Time Taken / Time Allowed X Time Saved × Wage Rate
380
Worker-I = 402.5
× 22.5 × 40 =850
100
Worker-II = 125 × 25 × 50 = 1,000
540
Worker-III =600 × 60 × 60 = 3,240
Question 9
In a factory, the basic wage rate is Rs. 300 per hour and overtime rates are as follows:
Before and after normal working hours 180% of basic wage rate
Sundays and holidays 230% of basic wage rate
During the previous year, the following hours were worked
- Normal time 1,00,000 hours
- Overtime before and after working hours 20,000 hours
Overtime on Sundays and holidays 5,000 hours
Total 1,25,000 hours
The following hours have been worked on job ‘A’

Normal 1,000 hours
Overtime before and after working hrs. 100 hours.
Sundays and holidays 25 hours.
Total 1,125 hours
You are required to CALCULATE the labour cost chargeable to job ‘A’ and overhead in each of
the following instances:
(i) Where overtime is worked regularly throughout the year as a policy due to the workers’
shortage.
(ii) Where overtime is worked irregularly to meet the requirements of production.
(iii) Where overtime is worked at the request of the customer to expedite the job. (MTP 10
Marks, Oct.’20) (Same concept different figures RTP Nov’21, Old & New SM)
Answer 9
Workings Basic wage rate:300 per hour Overtime wage rate before and after working hours : 300 ×
180% = 540 per hour Overtime wage rate for Sundays and holidays: Rs. 300 × 230% = 690 per hour
Computation of average inflated wage rate (including overtime premium):

Particulars Amount (Rs.)
Annual wages for the previous year for normal time (1,00,000 hrs. × Rs. 300) 3,00,00,000
Wages for overtime before and after working hours (20,000 hrs. × Rs. 540) 1,08,00,000
Wages for overtime on Sundays and holidays (5,000 hrs. × Rs. 690) 34,50,000
Total wages for 1,25,000 hrs. 4,42,50,000
. , , ,
Rs 4 42 50 000
Average inflated wage rate = 1,25,000hours
= 354
(i) Where overtime is worked regularly as a policy due to workers’ shortage:
The overtime premium is treated as a part of employee cost and job is charged at an inflated wage
3.10
rate. Hence, employee cost chargeable to job ‘A’

= Total hours × Inflated wage rate = 1,125 hrs. × Rs. 354 = Rs. 3,98,250
(ii) Where overtime is worked irregularly to meet the requirements of production:
Basic wage rate is charged to the job and overtime premium is charged to factory overheads as under:
Employee cost chargeable to Job ‘A’: 1,125 hours @ Rs.300 per hour = Rs.3,37,500 Factory overhead:
{100 hrs. × Rs. (540 – 300)} + {25 hrs. × Rs. (690 – 300)}
= {Rs. 24,000 + Rs. 9,750} = Rs. 33,750
(iii) Where overtime is worked at the request of the customer, overtime premium is also charged to
the job as under:
Job ‘A’ Employee cost 1,125 hrs. @ Rs. 300 = 3,37,500
Overtime premium 100 hrs. @ Rs. (540 – 300) = 24,000
25 hrs. @ Rs. (690 – 300) = 9,750
Total 3,71,250
Question 10
From the following information, CALCULATE employee turnover rate using – (i) Separation Method,
(ii) Replacement Method, (iii) New Recruitment Method, and (iv) Flux Method:
No. of workers as on 01.04.2020 = 3,800 No. of workers as on 31.03.2021 = 4,200
During the year, 40 workers left while 160 workers were discharged and 600 workers were recruited
during the year; of these, 150 workers were recruited because of exits and the rest were recruited in
accordance with expansion plans. (MTP 5 Marks, Apr’21, RTP May 23) (Same concept but different
figures as RTP May’20, PYP 10 Marks May’18)
Answer 10
(i) Separation Method:
no. of workers left + no. of workers discharge
∗ 100
average no. of workers
40 + 160 200
∗ 100 = ∗ 100 = 5%
(3800 + 4200)/2 4000
(ii) Replacement method
no.of workers replced 150
average no.of workers
*100 = 4000
∗ 100 = 3.75%
(iii) New recruitment method

𝑛𝑜. 𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 𝑛𝑒𝑤𝑙𝑦 𝑟𝑒𝑐𝑟𝑢𝑡𝑒𝑑
∗ 100
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑜. 𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠
𝑛𝑜. 𝑜𝑓 𝑟𝑒𝑐𝑟𝑢𝑡𝑚𝑒𝑛𝑡𝑠 − 𝑛𝑜. 𝑜𝑓 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡
∗ 100
600 − 150 450
∗ 100 = ∗ 100 = 11.25%
4000 4000
(iv) Flux method:
𝑛𝑜. 𝑜𝑓 𝑠𝑒𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛 + 𝑛𝑜. 𝑜𝑓 𝑎𝑐𝑐𝑒𝑠𝑠𝑖𝑜𝑛
∗ 100
(200 + 600) 800
∗ 100 = ∗ 100 = 20%
(3800 + 4200)/2 4000

3.11
Question 11
ABC Ltd. has its factory at two locations viz Noida and Patparganj. Rowan plan is used at Noida factory
and Halsey plan at Patparganj factory.
Standard time and basic rate of wages are same for a job which is similar and is carried out on similar
machinery. Normal working hours is 9 hours per day in a 5 day week.
Job at Noida factory is completed in 36 hours while at Patparganj factory it has taken 33 hours 45
minutes. Conversion costs at Noida and Patparganj are Rs. 6,084 and Rs. 5,569 respectively. Overheads
account for Rs. 25 per hour. (MTP 10 Marks, Oct’21, PYP Nov’19 10 Marks)
REQUIRED:
(i) To find out the normal wage; and

(ii) To compare the respective conversion costs.
Answer 11
Particulars Noida Patparganj
Hours worked 36 hr. 33.75 hr.
Conversion Costs Rs. 6,084 Rs. 5,569
Less: Overheads Rs. 900 Rs.Rs.844
(Rs. 25 × 36 hr.) (Rs.25 × 33.75 hr.)
Labour Cost Rs.5,184 Rs.Rs.4,725
(i) Finding of Normal wage rate:
Let Wage rate be Rs. R per hour, this is same for both the Noida and Patparganj factory.
Normal wage rate can be found out taking total cost of either factory.
Noida: Rowan Plan
Total Labour Cost = Wages for hours worked + Bonus as per Rowan plan
𝑇𝑖𝑚𝑒 𝑠𝑎𝑣𝑒𝑑
Rs.5184 = hours worked * rate per hour + ( 𝑇𝑖𝑚𝑒 𝑎𝑙𝑙𝑜𝑤𝑒𝑑 * Hours worked * Rate per hour)
45−36
Or, Rs. 5184= Hours worked * Rate per hour + ( 45
∗ 36 ∗ 𝑅)
Or, Rs. 5184= 36R+7.2R
R = 120
Normal wage = 36 hours * Rs.120 = Rs.4,320
OR
Patparganj: Halsey Plan

Total Labour Cost = Wages for hours worked + Bonus as per Halsey plan
Rs. 4,725 = Hours worked × Rate per hour + (50%×Hours saved × Rate per hour)
Rs.4,725 = 33.75 hr. × R + 50% × (45 hr. – 33.75 hr.) × R
Rs.4,725 = 39.375 R
R = Rs.120
Normal Wage = 33.75 hrs × Rs.120 = Rs.4,050
(ii) Comparison of conversion costs:

Particulars Noida (Rs.) Patparganj (Rs.)
Normal Wages (36 x 120) 4,320
(33.75 x 120) 4,050
Bonus (7.2 x 120) 864
(5.625 x 120) 675
3.12
Overhead 900 844

6,084 5,569

This was a numerical question relating to the topic ‘Employee Cost’. The question
comprised of two parts viz. (i) to find out normal wage rate using Rowan / Halsey plan and
(ii) to compare the respective conversion costs. Very well answered by some of the
examinees and these examinees have obtained full marks. Overall performance of the
examinees in this question was average.
Question 12
The standard time allowed for a certain piece of work is 240 hours. Normal wage rate is ₹ 75 per
hour.
The bonus system applicable to the work is as follows:
Percentage of time saved to time allowed (slab Bonus
rate)
(i) Up to the first 20% of time allowed 25% of the corresponding saving in time.
(ii) For and within the next 30% of time allowed 40% of the corresponding saving in time.
(iii) For and within the next 30% of time allowed 30% of the corresponding saving in time.
(iv) For and within the next 20% of time allowed 10% of the corresponding saving in time.
CALCULATE the total earnings of a worker over the piece of work and his earnings per hour when
he takes-
(a) 256 hours,
(b) 120 hours, and
(c) 24 hours respectively. (MTP 10 Marks March ‘22)
Answer 12
Calculation of total earnings and earnings per hour:
Particulars (a) Time taken is (b) Time taken is (c) Time taken is
256 hours 120 hours 24 hours
A. Time Allowed 240 hours 240 hours 240 hours
B. Time taken 256 hours 120 hours 24 hours
C. Time Saved (A-B) Nil 120 hours 216 hours
D. Bonus hours (Refer Nil 40.80 hours 64.80 hours
workings)
E. Hours to be paid (B+D) 256 hours 160.80 hours 88.80 hours
F. Wages rate per hour ₹ 75 ₹ 75 ₹ 75
G. Total earnings (E×F) ₹ 19,200 ₹ 12,060 ₹ 6,660
H. Earnings per hour (G÷B) ₹ 75 ₹ 100.50 ₹ 277.50
Working Notes:
Calculation of bonus hours:
Time saved 120 Time saved 216 hours
hours
For first 20% of time allowed i.e. 48 hours 12 12
(25% of 48 hours) (25% of 48 hours)
For next 30% of time allowed i..e. 72 hours 28.80 28.80
(40% of 72 hours) (40% of 72 hours)
For next 30% of time allowed i..e. 72 hours - 21.60
3.13
(30% of 72 hours)
For next 20% of time allowed i..e. 48 hours - 2.40
(10% of 24 hours)
Bonus hours 40.80 64.80
Question 13
R Ltd. is facing increasing employee turnover in the factory and before analyzing the causes and taking
remedial steps; the management wants to have an idea of the profit foregone as a result of employee
turnover in the last year. Last year sales amounted to ₹ 99,63,960 and P/V ratio was 20%.
The total number of actual hours worked by the direct employee force was 5.34 lakhs. The actual direct
employee hours included 36,000 hours attributable to training new recruits, out of which half of the
hours were unproductive. As a result of the delays by the Personnel Department in filling vacancies
due to employee turnover, 1,20,000 potentially productive hours (excluding unproductive training
hours) were lost. The costs incurred consequent on employee turnover revealed, on analysis, the
following: Settlement cost due to leaving ₹ 52,584
Recruitment costs ₹ 32,088
Selection costs ₹ 15,300
Training costs ₹ 36,588
Assuming that the potential production lost as a consequence of employee turnover could have been
sold at prevailing prices, FIND the profit foregone last year on account of employee turnover. (MTP 5
Marks April ’22) (Same concept different figures Old & New SM)
Answer 13
Workings:
(i) Computation of productive hours
Actual hours worked 5,34,000
Less: Unproductive training hours 18,000
Actual productive hours 5,16,000
(ii) Productive hours lost:
Loss of potential productive hours + Unproductive training hours
= 1,20,000 + 18,000 = 1,38,000 hours
(iii) Loss of contribution due to unproductive hours:
Sales value / Actual productive hours ×Total unproductive hours =
₹ 99,63,960 / 5,16,000 hrs × 1,38,000 hours = ₹ 26,64,780
Contribution lost for 1,38,000 hours = Rs. 26,64,780/100 × 20= ₹ 5,32,956
Computation of profit forgone on account of employee turnover
(₹)
Contribution foregone (as calculated above) 5,32,956
Settlement cost due to leaving 52,584
Recruitment cost 32,088
Selection cost 15,300
Training costs 36,588
Profit foregone 6,69,516
Question 14
BRIEF OUT advantages and disadvantages of Halsey Premium Plan. (MTP 4 Marks April ’22)
3.14
Answer 14
Advantages Disadvantages
1. Time rate is guaranteed while there is 1. Incentive is not so strong as with piece rate
opportunity for increasing earnings by system. In fact the harder the worker works, the
increasing production. lesser he gets per piece.
2. The system is equitable in as much as the 2. The sharing principle may not be liked by
employer gets a direct return for his efforts employees.
in improving production methods and
providing better equipment.
Question 15
Archika Tyre Manufacturing Private Limited has four workers Ram, Shyam, Mohan & Kundan who are
paid wages on the basis of ₹ 100 per day, ₹ 120 per day, ₹ 130 per day & ₹ 2500 per month respectively.
Standard working days in a week are six of 8 hours per day. For the month of October 2022, there was
only one holiday other than Sunday for which no payment was made to employees except Kundan who
was paid for full month. Sundays are considered paid holidays i.e. employees are paid for Sunday also
even there is no working on that day. Provident fund contribution is 8% of monthly wages by employer
and employee each. ESI contribution is 5% of monthly wages by employer and 4% of monthly wages by
employee.
On the basis of above information, you are required to CALCULATE (regarding the month of October
2022):
(i) Amount of net wages receivable by each employee from the employer.
(ii) What is the total amount of Provident Fund required to be deposited by employer?
(iii) What is the total amount of ESI required to be deposited by employer?
(iv) What is the total labour cost to employer?
(v)If total material cost is ₹ 20,000 for October 2022 and overheads are charged equal to labour cost,
calculate total cost for the month. (MTP 10 Marks Sep’22)
Answer 15
(i) Calculation of net wages receivable by each employee from the employer (October 2022):
Ram (₹) Shyam Mohan Kundan Total
(₹) (₹) (₹) (₹)
Wages for October 2022 3,000 3,600 3,900 2,500 13,000
(₹ 100 x (₹ 120 x (₹ 130 x
30 days) 30 days) 30 days)
Less: Employee
Contribution to PF @ 8% 240 288 312 200 1,040
Less: Employee
Contribution to ESI @ 4% 120 144 156 100 520
Net Wages Receivable 2,640 3,168 3,432 2,200 11,440
(ii) Calculation of total amount of Provident Fund required to be deposited by employer (October 2022):
(₹)
Total Wages for the month 13,000
Employer’s Contribution to Provident Fund @8% of ₹ 13,000 1,040
Add: Employee’s Contribution to Provident Fund @8% of ₹ 13,000 1,040
Total amount of Provident Fund required to be deposited by 2,080
employer
(iii) Calculation of total amount of ESI required to be deposited by employer (October 2022):
(₹)
3.15

Employer’s Contribution to ESI @5% of ₹ 13,000 650
Add: Employee’s Contribution to ESI @4% of ₹ 13,000 520
Total amount of ESI required to be deposited by employer 1,170
(iv) Total labour cost to employer (October 2022):

(₹)
Add: Employer’s Contribution to Provident Fund @8% of ₹ 13,000 1,040
Add: Employer’s Contribution to ESI @5% of ₹ 13,000 650
Total labour cost to employer 14,690
(v) Calculation of Total Cost for October 2022
(₹)
Total Material Cost 20,000
Total Labour Cost 14,690
Total Overheads (Equal to Labour Cost) 14,690
Total Cost 49,380
Question 16
STATE various causes of and treatment of Overtime Premium in Cost Accounting. (MTP 5 Marks Oct’22)
Answer 16
Causes and Treatment of Overtime premium in cost accounting
Causes Treatment
(1) The customer may agree to bear the (1) If overtime is resorted to at the desire of the
entire charge of overtime because customer, then overtime premium may be
urgency of work. charged to the job directly.
(2) Overtime may be called for to make up (2) If overtime is required to cope with general
any shortfall in production due to some production programmes or for meeting urgent
unexpected development. orders, the overtime premium should be
treated as overhead cost of the particular
department or cost centre which works
overtime.
(3) Overtime work may be necessary to make (3) If overtime is worked in a department due to the
up a shortfall in production due to some fault of another department, the overtime
fault of management. premium should be
charged to the latter department.
(4) Overtime work may be resorted to, to (4) Overtime worked on account of abnormal
secure an out-turn in excess of the conditions such as flood, earthquake etc.,
normal output to take advantage of an should not be charged to cost, but to Costing
expanding market or of rising demand Profit and Loss Account.
Question 17
The rate of change of labour force in a company during the year ending 31st March, 2023 was
calculated as 13%,8% and 5% respectively under 'Flux Method', 'Replacement method' and 'Separation
method'. The number of workers separated during the year is 40.
(i) Average number of workers on roll.
(ii) Number of workers replaced during the year.
(iii) Number of new accessions i.e. new recruitment.
Number of workers at the beginning of the year.(MTP 5 Marks Oct ’23)
3.16
Answer 17
(i) Labour Turnover Rate(Separation Method)
𝑵𝒐.𝒐𝒇 𝒘𝒐𝒓𝒌𝒆𝒓𝒔 𝒔𝒆𝒑𝒂𝒓𝒂𝒕𝒆𝒅
= 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒏𝒐.𝒐𝒇 𝒘𝒐𝒓𝒌𝒆𝒓𝒔 𝒐𝒏 𝒓𝒐𝒍𝒍
𝟓 𝟒𝟎
Or, =
𝟏𝟎𝟎 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒏𝒐.𝒐𝒇 𝒘𝒐𝒓𝒌𝒆𝒓𝒔 𝒐𝒏 𝒓𝒐𝒍𝒍
Or, Average no. of workers on roll = 800
(ii) Labour Turnover Rate (Replacement method)

𝑵𝒐.𝒐𝒇 𝒘𝒐𝒓𝒌𝒆𝒓𝒔 replaced
= 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒏𝒐.𝒐𝒇 𝒘𝒐𝒓𝒌𝒆𝒓𝒔 𝒐𝒏 𝒓𝒐𝒍𝒍
8 𝑁𝑜.𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑑

Or, 100
= 800
Or, No. of workers replaced = 64
(iii) Labour Turnover Rate (Flux Method)
𝑁𝑜. 𝑜𝑓 𝑆𝑒𝑝𝑎𝑟𝑎𝑡𝑖𝑜𝑛𝑠 + 𝑁𝑜. 𝑜𝑓 𝑎𝑐𝑐𝑒𝑠𝑠𝑖𝑜𝑛𝑠 (𝑁𝑒𝑤 𝑟𝑒𝑐𝑟𝑢𝑖𝑡𝑚𝑒𝑛𝑡𝑠)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑁𝑜. 𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 𝑜𝑛 𝑟𝑜𝑙𝑙
13 40+𝑁𝑜.𝑜𝑓 𝑎𝑐𝑐𝑒𝑠𝑠𝑖𝑜𝑛𝑠 (𝑁𝑒𝑤 𝑟𝑒𝑐𝑟𝑢𝑖𝑡𝑚𝑒𝑛𝑡𝑠)
Or, 100
= 800
Or, 100 (40 + No. of Accessions) = 10,400

Or, No. of new accessions = 64
(iv) No. of workers at the beginning of the year

Let workers at the beginning of the year were ‘X’
𝑤𝑜𝑟𝑘𝑒𝑟𝑠 𝑎𝑡 𝑡ℎ𝑒 𝑏𝑒𝑔𝑖𝑛𝑖𝑛𝑔+𝑤𝑜𝑟𝑘𝑒𝑟𝑠 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑
Average no. of workers on roll =
2
𝑋+(𝑋+𝑁𝑒𝑤 𝑎𝑐𝑐𝑒𝑠𝑠𝑖𝑜𝑛𝑠 −𝑆𝑒𝑝𝑎𝑟𝑎𝑡𝑖𝑜𝑛𝑠)
800 = 2
𝑋+(𝑋+64−40)
800 =
2
𝑋+(𝑋+24)
800 = =
2
2X = 1,600 – 24 or, X = 788 workers
Question 18
ADV Pvt. Ltd. manufactures a product which requires skill and precision in work to get quality products.
The company has been experiencing high labour cost due to slow speed of work. The management of
the company wants to reduce the labour cost but without compromising with the quality of work. It
wants to introduce a bonus scheme but is indifferent between the Halsey and Rowan scheme of bonus.
For the month of November 2019, the company budgeted for 24,960 hours of work. The workers are
paid ‘80 per hour.
Required:
CALCULATE and suggest the bonus scheme where the time taken (in %) to time allowed to complete the
works is (a) 100% (b) 75% (c) 50% & (d) 25% of budgeted hours. (RTP Nov’19)
Answer 18
The Cost of labour under the bonus schemes are tabulated as below:
Time Time taken Wages (₹) Bonus (₹) Total Wages (₹) Earning per hour (₹)
Allowed
Halsey* Rowan** Halsey Rowan Halsey Rowan
(1) (2) (3) (4) (5) (6) (7) (8) (9)
= (2) ×₹ 80 = (3) + (4) = (3) + (5) = (6)/(2) = (7)/(2)
3.17
24,960 24,960 19,96,800 - - 19,96,800 19,96,800 80.00 80.00

24,960 18,720 14,97,600 2,49,600 3,74,400 17,47,200 18,72,000 93.33 100.00
24,960 12,480 9,98,400 4,99,200 4,99,200 14,97,600 14,97,600 120.00 120.00
24,960 6,240 4,99,200 7,48,800 3,74,400 12,48,000 8,73,600 200.00 140.00
* Bonus under Halsey Plan = 50% of (Time Allowed – Time Taken) × Rate per hour
** Bonus under Rowan Plan =

Time taken
Time allowed
Time saved× Rate per hour
Rowan scheme of bonus keeps checks on speed of work as the rate of incentive increases only upto 50% of
time taken to time allowed but the rate decreases as the time taken to time allowed comes below 50%. It
provides incentives for efficient workers for saving in time but also puts check on careless speed. On
implementation of Rowan scheme, the management of ADV Pvt. Ltd. would resolve issue of the slow speed
work while maintaining the skill and precision required maintaining the quality of product.
Question 19
A job can be executed either through workman A or B. A takes 32 hours to complete the job while B
finishes it in 30 hours. The standard time to finish the job is 40 hours.
The hourly wage rate is same for both the workers. In addition workman A is entitled to receive bonus
according to Halsey plan (50%) sharing while B is paid bonus as per Rowan plan. The works overheads
are absorbed on the job at ₹ 7.50 per labour hour worked. The factory cost of the job comes to ₹ 2,600
irrespective of the workman engaged.
INTERPRET the hourly wage rate and cost of raw materials input. Also show cost against each element
of cost included in factory cost. (RTP Nov.’18)
Answer 19
Calculation of:
1. Time saved and wages:
Workmen A B
Standard time (hrs.) 40 40
Actual time taken (hrs.) 32 30
Time saved (hrs.) 8 10
Wages paid @ ₹ x per hr. (₹ ) 32x 30x
2. Bonus Plan:
Halsey Rowan
Time saved (hrs.) 8 10
Bonus (₹) 4x 7.5 x
8ℎ𝑟𝑠 × 𝑋 ℎ𝑟𝑠
10 ⌊40 ℎ𝑟𝑠 × 30ℎ𝑟𝑠.× ′𝑋⌋
⌊ ⌋
2
3.Total wages:
Workman A: 32x + 4x = ₹ 36x
Workman B: 30x + 7.5x = ₹ 37.5x

Statement of factory cost of the job
Workmen A (₹ ) B (₹ )
Material cost (assumed) y y
Wages (shown above) 36x 37.5x
Works overhead 240 225
Factory cost (given) 2,600 2,600
The above relations can be written as follows:
3.18
36x +y+ 240=2,600 (i)

37.5x+ y+ 225 = 2,600 (ii)
Subtracting (i) from (ii) we get 1.5x – 15 = 0
Or, 1.5 x = 15
Or, x = ₹ 10 per hour
On substituting the value of x in (i) we get y = ₹ 2,000
Hence the wage rate per hour is ₹ 10 and the cost of raw material is ₹ 2,000 on the job.
Question 20
GZ Ld. pays the following to a skilled worker engaged in production works. The following are the
employee benefits paid to the employee:
(a) Basic salary per day ₹1,000
(b) Dearness allowance (DA) 20% of basic salary
(c) House rent allowance 16% of basic salary
(d) Transport allowance ₹50 per day of actual work
(e) Overtime Twice the hourly rate (considers basic and DA), only
if works more than 9 hours a day otherwise no
overtime allowance. If works for more than 9 hours
a day then overtime is considered after 8th hours.
(f) Work of holiday and Double of per day basic rate provided works atleast
Sunday 4 hours. The holiday and Sunday basic is eligible for
all allowances and statutory deductions.
(h) Earned leave & Casual These are paid leave.
leave
(h) Employer’s contribution to 12% of basic and DA
Provident fund
(i) Employer’s contribution to 7% of basic and DA
Pension fund
The company normally works 8-hour a day and 26-day in a month. The company provides 30 minutes
lunch break in between.
During the month of August 2020, Mr.Z works for 23 days including 15 th August and a Sunday and
applied for 3 days of casual leave. On 15th August and Sunday he worked for 5 and 6 hours
respectively without lunch break.
On 5th and 13th August he worked for 10 and 9 hours respectively. During the month Mr. Z worked for
100 hours on Job no.HT200. You are required to CALCULATE:
(i) Earnings per day
(ii) Effective wages rate per hour of Mr. Z.
(iii) Wages to be charged to Job no.HT200. (RTP Nov ’20)
Answer 20
Workings:
1. Normal working hours in a month = (Daily working hours – lunch break) × no. of days
= (8 hours – 0.5 hours) × 26 days = 195 hours
2. Hours worked by Mr.Z = No. of normal days worked + Overtime + holiday/ Sunday worked
= (21 days × 7.5 hours) + (9.5 hours + 8.5 hours) + (5 hours + 6 hours)
= 157.5 hours + 18 hours + 11 hours = 186.50 hours.

3.19
(i) Calculation of earnings per day

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

Additional basic salary for Sunday & holiday (₹1,000 × 2 days) 2,000
33,600
Transport allowance (₹50 × 23 days) 1,150
Overtime allowance (₹160 × 2 × 2 hours)* 640
Total monthly wages 46,254
Hours worked by Mr. Z (hours) 186.5
Effective wage rate per hour 248
*(Daily Basic + DA) ÷ 7.5 hours
= (1,000+200) ÷ 7.5 = ₹160 per hour
(iii) Calculation of wages to be charged to Job no. HT200
= ₹ 248 × 100 hours = ₹ 24,800
Question 21
JBL Sisters operates a boutique which works for various fashion houses and retail stores. It has
employed 26 workers and pays them on time rate basis. On an average an employee is allowed 8 hours
for boutique work on a piece of garment. In the month of December 2020, two workers M and J were
given 15 pieces and 21 pieces of garments respectively for boutique work. The following are the details
of their work:
M J
Work assigned 15 pcs. 21 pcs.
Time taken 100 hours 140 hours
Workers are paid bonus as per Halsey System. The existing rate of wages is ₹ 60 per hour. As per the
new wages agreement the workers will be paid ₹ 72 per hour w.e.f. 1 stJanuary 2021. At the end of the
month December 2020, the accountant of the company has wrongly calculated wages to these two
workers taking ₹ 72 per hour.
3.20
Required:
(i) CALCULATE the loss incurred due to incorrect rate selection.
(ii) CALCULATE the loss incurred due to incorrect rate selection, had Rowan scheme of bonus payment
followed.
(iii) CALCULATE the loss/ savings if Rowan scheme of bonus payment had followed.
(iv) DISCUSS the suitability of Rowan scheme of bonus payment for JBL Sisters? (RTP May ’21)
Answer 21
Workings Notes:
Calculation of Total hours saved:
M J
No. of garments assigned (Pieces.) 15 21
Hour allowed per piece (Hours) 8 8
Total hours allowed (Hours) 120 168
Hours Taken (Hours) 100 140
Hours Saved (Hours) 20 28
(i) Calculation of loss incurred due to incorrect rate selection:

(While calculating loss only excess rate per hour has been taken)
M J Total
(₹) (₹) (₹)
Basic Wages 1,200 1,680 2,880
(100 Hrs. × ₹12) (140 Hrs. × ₹12)
Bonus (as per Halsey Scheme) 120 168 288
(50% of Time Saved × Excess Rate) (50% of 20 Hrs. × ₹12) (50% of 28 Hrs. × ₹12)
Excess Wages Paid 1,320 1,848 3,168
(ii) Calculation of loss incurred due to incorrect rate selection had Rowan scheme of bonus
payment followed:
M J Total (₹)
(₹) (₹)
Basic Wages 1,200 1,680 2,880
(100 Hrs. × ₹12) (140 Hrs. × ₹12)
Bonus (as per Rowan Scheme) 200 280 480
𝑇𝑖𝑚𝑒 𝑇𝑎𝑘𝑒𝑛
( × 𝑇𝑖𝑚𝑒 𝑆𝑎𝑣𝑒𝑑
𝑇𝑖𝑚𝑒 𝐴𝑙𝑙𝑜𝑤𝑒𝑑
× 𝐸𝑥𝑐𝑒𝑠𝑠 𝑅𝑎𝑡𝑒) 100
( × 20 × 𝑅𝑠. 12)
120 140
( × 28 × 𝑅𝑠. 12)
168
Excess Wages Paid 1,400 1,960 3,360
(iii) Calculation of amount that could have been saved if Rowan Scheme were followed
M J Total (₹)
(₹) (₹)
Wages paid under Halsey Scheme 1,320 1,848 3,168
Wages paid under Rowan Scheme 1,400 1,960 3,360
Difference (loss) (80) (112) (192)
3.21
(iv) Rowan Scheme of incentive payment has the following benefits, which is suitable with the
nature of business in which JBL Sisters operates:
(a) Under Rowan Scheme of bonus payment, workers cannot increase their earnings or bonus by merely
increasing its work speed. Bonus under Rowan Scheme is maximum when the time taken by a worker
on a job is half of the time allowed. As this fact is known to the workers, therefore, they work at such
a speed which helps them to maintain the quality of output too.
(b) If the rate setting department commits any mistake in setting standards for time to be taken to
complete the works, the loss incurred will be relatively low.
Question 22
A total of 108 labour hours have been put in a particular job card for repair work engaging a semi-
skilled and skilled labour (Mr. Deep and Mr. Sam respectively). The hours devoted by both the
workers individually on daily basis for this particular job are given below:
Monday Tuesday Wednesday Thursday Friday
10.5 8.0 10.5 9.5 10.5
The skilled labour also worked on Saturday for 10 hours.
Sunday is a weekly holiday and each worker has to work for 8 hours on all week days and 5 hours on
Saturdays; the workers are however paid full wages for Saturday (8 hours for 5 hours worked).
Semi-skilled and skilled worker is paid ordinary wage @ ₹ 400 and ₹ 600 respectively per day of 8 hours
labour. Further, the workers are also paid dearness allowance @ 20%.
Extra hours worked over and above 8 hours are also paid at ordinary wage rate however, overtime
premium of 100% of ordinary wage rate is paid if a worker works for more than 9 hours in a day AND 48
hours in a week.
You are required to COMPUTE the wages payable to Mr. Deep (Semi-skilled) and Mr. Sam (Skilled). (RTP
May ’22)
Answer 22
Calculation of total normal hours to be paid for Mr. Deep (Semi-skilled):
Day Normal Extra Overtime Equivalent Total normal
hours hours hours normal hours for hours
overtime worked
A B C D = C×2 E = A+B+D
Monday 8 1 1½ 3 12
Tuesday 8 -- -- -- 8
Wednesday 8 1 1½ 3 12
Thursday 8 1 ½ 1 10
Friday 8 1 1½ 3 12
Saturday -- -- -- -- --
Total 40 4 5 10 54
Calculation of total normal hours to be paid for Mr. Sam (Skilled):

Day Normal Extra Overtime Equivalent normal hours Total normal
hours hours hours for overtime worked hours
A B C D = C×2 E = A+B+D
Monday 8 1 1½ 3 12
Tuesday 8 --- --- --- 8
Wednesday 8 1 1½ 3 12
Thursday 8 1 ½ 1 10
3.22
Friday 8 1 1½ 3 12
Saturday 5 3* + 1 1** 2 11
Total 45 8 6 12 65
*Mr. Sam will be paid for equivalent 8 normal working hours at ordinary wage rate, though 5 hours of
working is required on Saturday. Further, extra 9th hour worked will also be paid at ordinary wage rate.
** Overtime of 1 hour worked over and above 9 hours will be paid at overtime rate.
Wages payable:
Mr. Deep Mr. Sam
Basic Wages per hour (₹ 400/8, ₹ 600/8) (₹) 50 75
Dearness allowance per hour (@ 20%) (₹) 10 15
Hourly rate (₹) 60 90
Total equivalent normal hours 54 65
Total Wages payable (₹) 3,240 5,850
Question 23
HR Ltd. is progressing in its legal industry. One of its trainee executives, Mr. H, in the Personnel
department has calculated labour turnover rate 24.92% for the last year using Flux method.
Following is the data provided by the Personnel department for the last year:
Employees At the beginning Joined Left At the end

Records clerk 810 1,620 90 2,340
Human Resource Manager ? 30 90 60
Legal Secretary ? 90 --- ?
Staff Attorney ? 30 30 ?
Associate Attorney ? 30 --- 45
Senior Staff Attorney 6 --- --- 18
Senior Records clerk 12 --- --- 51
Litigation attorney ? --- --- ?
Employees transferred from the Subsidiary Company
Senior Staff Attorney --- 12 --- ---
Senior Records clerk --- 39 --- ---
Employees transferred to the Subsidiary Company
Litigation attorney --- --- 90 ---
Associate Attorney --- --- 15 ---
At the beginning of the year there were total 1,158 employees on the payroll of the company. The
opening strength of the Legal Secretary, Staff Attorney and Associate Attorney were in the ratio of 3 : 3
: 2.
The company has decided to abandon the post of Litigation attorney and consequently all the Litigation
attorneys were transferred to the subsidiary company.
The company and its subsidiary are maintaining separate set of books of account and separate
Personnel Department.
(a) CALCULATE Labour Turnover rate using Replacement method and Separation method.
(b) VERIFY the Labour turnover rate calculated under Flux method by Mr. H (RTP Nov’22)
Answer 23
Working Notes:
3.23
(i) Calculation of no. of employees at the beginning and end of the year
At the Beginning of the At the end of
year the year
Records clerk 810 2,340
Human Resource Manager [Left- 90 + Closing- 60 – 120 60
Joined- 30]
Legal Secretary* 45 135
Staff Attorney* 45 45
Associate Attorney* 30 45
Senior Staff Attorney 6 18
Senior Records clerk 12 51
Litigation attorney 90 0
Total 1,158 2,694
(*) At the beginning of the year:
Strength of Legal Secretary, Staff Attorney and Associate Attorney =
[1158 – {810 + 120 + 6 + 12 + 90} employees] or [1158 – 1038 = 120 employees]
3 3 3
[{Legal Secretary - 120 × = 45, Staff Attorney - 120 × = 45 & Associate Attorney - 120 × = 30}
8 8 8
employees]
At the end of the year:
[Legal Secretary -(Opening 45 + 90 Joining) = 135; Staff Attorney - (Opening 45 + 30 Joined – 30 Left) =
45]
(ii) No. of Employees Separated, Replaced and newly recruited during the year
Particulars Separations New Replacement Total
Recruitment Joining
Records clerk 90 1,530 90 1,620
Human Resource Manager 90 -- 30 30
Legal Secretary -- 90 -- 90
Staff Attorney 30 -- 30 30
Associate Attorney
15 15 15 30
Senior Staff Attorney -- 12 -- 12
Senior Records clerk -- 39 -- 39
Litigation attorney 90 -- -- --
Total 315 1,686 165 1,851
(Since, HR Ltd. and its subsidiary are maintaining separate Personnel Department, so transfer-in and
transfer-out are treated as recruitment and separation respectively.)
(a) Calculation of Labour Turnover rate:

Replacement Method=
No. of employeesreplacedduringthe yea
× 100
Averageno. of employeesonroll
165 165
(1,158+2,694)/2
× 100 = 1,926 × 100 = 8.57%
Separation Method=
No. of employees separatedduringthe yea
× 100
Averageno. of employeesonroll
3.24
315
× 100 =16.36%
1,926
(b) Labour Turnover rate under Flux Method:
No. of employees(Joined + Separated)duringthe year

× 10
Averageno. of employees on roll
No. of employees (Replaced + New recruited + Separated) during the year
× 100
Average no. of employees on roll
1,851+315
1,926
× 100 =112.46%
Labour Turnover rate calculated by Mr. H is incorrect as it seems he has not taken the No. of new
recruitment while calculating the labour turnover rate under Flux method.
Question 24
A skilled worker is paid a guaranteed wage rate of ` 120 per hour. The standard time allowed for a
job is 6 hour. He took 5 hours to complete the job. He is paid wages under Rowan Incentive Plan.
(i) Calculate his effective hourly rate of earnings under Rowan Incentive Plan.
(ii) If the worker is placed under Halsey Incentive Scheme (50%) and he wants to maintain the same
effective hourly rate of earnings, calculate the time in which he should complete the job.(RTP
Nov ’23)
Answer 24
(i) Effective hourly rate of earnings under Rowan Incentive Plan

Earnings under Rowan Incentive plan =
𝑇𝑖𝑚𝑒 𝑠𝑎𝑣𝑒𝑑
(Actual time taken X wage rate) + 𝑇𝑖𝑚𝑒 𝐴𝑙𝑙𝑜𝑤𝑒𝑑 × Time taken × Wage rate
1 ℎ𝑜𝑢𝑟
= (5 hours X Rs. 120) + (6 ℎ𝑜𝑢𝑟𝑠 × 5 ℎ𝑜𝑢𝑟𝑠 × 𝑅𝑠. 120)
= Rs. 600 +Rs. 100 = Rs. 700

(ii) Let time taken = X
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑢𝑛𝑑𝑒𝑟 𝐻𝑎𝑙𝑠𝑎𝑦 𝑆𝑐ℎ𝑒𝑚𝑒
∴ Effective hourly rate = 𝑇𝑖𝑚𝑒 𝑡𝑎𝑘𝑒𝑛
Or, Effective hourly rate under Halsey Incentive plan =

(𝑇𝑖𝑚𝑒 𝑡𝑎𝑘𝑒𝑛 ×𝑅𝑎𝑡𝑒)+50% 𝑜𝑓 𝑅𝑎𝑡𝑒×(𝑇𝑖𝑚𝑒 𝑎𝑙𝑙𝑜𝑤𝑒𝑑−𝑇𝑖𝑚𝑒 𝑡𝑎𝑘𝑒𝑛)
𝑇𝑖𝑚𝑒 𝑡𝑎𝑘𝑒𝑛
(𝑋 ×𝑅𝑠.120)+50% 𝑜𝑓 𝑅𝑠.120×(6−𝑋)
Or, Rs.140 = 𝑋
Or, 140X = 120X + 360 – 60X

Or, 80X = 360
360
Or, X = 80
= 4.5 hours
Therefore, to earn effective hourly rate of `140 under Halsey Incentive Scheme worker has to
complete the work in 4.5 hours.
Question 25
How would you account for idle capacity cost in Cost Accounting? (RTP Nov ’23)
Answer 25
Idle capacity costs are treated in the following ways in Cost Accounts:

3.25
(i) If the idle capacity cost is due to unavoidable reasons: A supplementary overhead rate may be
used to recover the idle capacity cost. In this case, the costs are charged to the production
capacity utilised.
(ii) If the idle capacity cost is due to avoidable reasons: Such as faulty planning, etc. the cost should
be charged to Costing Profit and Loss Account.
(iii) If the idle capacity cost is due to trade depression, etc.: Being abnormal in nature the cost should
also be charged to the Costing Profit and Loss Account.
(iv) If the idle capacity cost is due to seasonal factors, then the cost should be charged to cost of
production by inflating overhead rate.
Question 26
Explain the treatment of over and under absorption of overheads in cost accounts. (RTP Nov ’23)
Answer 26
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/ gain 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) Carry Forward to Subsequent Year: Difference should be carried forward in the expectation that
next year the position will be automatically corrected.
Question 27
Distinguish between cost allocation and cost absorption. (RTP Nov ’23)
Answer 27
Distinguish between Cost allocation and Cost absorption:
Cost allocation is the allotment of whole item of cost to a cost centre or a cost unit. In other words, it is
the process of identifying, assigning or allowing cost to a cost centre or a cost unit.
Cost absorption is the process of absorbing all indirect costs or overhead costs allocated or apportioned
over particular cost center or production department by the units produced.
Question 28
M/s Zeba Private Limited allotted a standard time of 40 hours for a job and the rate per hour is ₹ 75.
The actual time taken by a worker is 30 hours.
You are required to calculate the total earnings under the following plans:
(i) Halsey Premium Plan (Rate 50%) (ii) Rowan Plan
(iii) Time Wage System (iv) Piece Rate System
(v) Emerson Plan (PYP May ‘19, 5 Marks)
Answer 28
(i) Halsey Premium plan:
1
= (Time taken × Rate per hour) + (2 × Time saved × Rate per hour)
1
(30 hours × ₹ 75) + ( 2 × 10 hours × ₹ 75)
= ₹ 2,250 + ₹ 375 = ₹ 2,625

(ii) Rowan Premium plan :
= (Time taken × Rate per hour) + (𝑇𝑖𝑚𝑒 𝑎𝑙𝑙𝑜𝑤𝑒𝑑 × 𝑇𝑖𝑚𝑒 𝑠𝑎𝑣𝑒𝑑 × 𝑅𝑎𝑡𝑒 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟)
3.26
= (30 hours × ₹ 75) + ( 40 × 30 × ₹ 75)
= ₹ 2,250 + ₹ 375 = ₹ 2,625

= ₹ 2,250 + ₹ 562.5 = ₹ 2,812.5 or ₹ 2,813
(iii) Time wage system :

= Time taken × Rate per hour
= 30 × ₹ 75 = ₹ 2,250
(iv) Piece Rate System :
= Std. Time × Rate per hour
= 40 × ₹ 75 = ₹ 3,000
(v) Emerson plan :

Efficiency level = 40/30 = 133.33% Time taken × (120% + 33.33%) of Rate
= 30 hours × 153.33% of ₹ 75
= ₹ 3,450

In this numerical problem of ‘Employee Cost’ students were asked to calculate earnings
under various plans. Candidate failed to calculate earnings in job/piece rate system and
Emerson’s plan. Performance of the examinees was average.
Question 29
Following data have been extracted from the books of M/s. ABC Private Limited:
(i) Salary (each employee, per month) ₹ 30,000
(ii) Bonus 25% of salary
(iii) Employer's contribution to PF, ESI etc. 15% of salary
(iv) Total cost at employees' welfare activities ₹ 6,61,500 per annum
(v) Total leave permitted during the year 30 days
(vi) No. of employees 175
(vii) Normal idle time 70 hours per annum
(viii) Abnormal idle time (due to failure of power supply) 50 hours
(ix) Working days per annum 310 days of 8 hours
1. Annual cost of each employee
2. Employee cost per hour
3. Cost of abnormal idle time, per employee (PYP Nov ‘18, 5 Marks)
Answer 29
1.
Annual cost of each employee ₹
1. Salary (30,000×12) 3,60,000
2. Bonus (25% of Salary) 90,000
3. Employees Contribution to PF (15% of Salary) 54,000
4. Employers welfare (661500/175) 3,780
Total Annual Cost 5,07,780
2.
Effective Working hours (310 days × 8 hours) 2480 hours
Less: Leave days (30 days × 8 hours) 240 hours*
3.27
Available Working hours 2240 hours

Less: Normal Loss @ 70 hours
2170 hours
507780
Employee Cost per hour 2170
= Rs. 234
*It is assumed 310 working days are without taking leave permitted into consideration
3. Cost of abnormal idle time per employee = ₹ 234× 50 hours= ₹ 11700 Alternative solution
for Part (2) and (3)
(2) Calculation of Employee cost per hour:

Working hours per annum 2,480 *
Less: Normal Idle time hours 70
Effective hours 2,410
Employee cost 5,07,780
Employee cost per hour 210.70
*It is assumed 310 working days are after adjusting leave permitted during the year.
(3) Cost of Abnormal idle time per employee:
Abnormal Idle time hours 50
Employee cost per hour 210.70
Cost of Abnormal idle time (210.70 ×50) 10,534.85

The Sub part (i) was numerical question on employees cost. Most of the examinees did not
answer in the correct line.
Question 30
A worker takes 15 hours to complete a piece of work for which time allowed is 20 hours. His wage rate
is ₹ 5 per hour. Following additional information are also available:
Material cost of work ₹ 50
Factory overheads 100% of wages
Calculate the factory cost of work under the following methods of wage payments:
(i) Rowan Plan
(ii) Halsey Plan (PYP May ‘18, 5 Marks)
Answer 30
₹
(i) Rowan Plan: Normal time wage = 15 hours @ ₹ 5 = 75
Bonus = Time saved /Time allowed × (Time taken × Time rate)
= 5/20 x (15 x 5) 18.75

93.75
(ii) Halsey Plan: Normal time wage = 15 hours @ ₹ 5 = 75
Bonus = 50% of (Time saved x Time rate) = 50% of (5x5) = 12.5
87.5
Statement of Comparative Factory cost of work
Rowan Plan Halsey Plan
₹ ₹
Materials 50 50
Direct Wages 93.75 87.5
Prime Cost 143.75 137.5
3.28
Factory Overhead (100% of Direct wages) 93.75 87.5

Factory Cost 237.5 225
Question 31
Following are the particulars of two workers 'R' and 'S' for a month:
Particulars R S
(i) Basic Wages (₹) 15,000 30,000
(ii) Dearness Allowance 50% 50%
(iii) Contribution to EPF (on basic wages) 7% 7.5%
(iv) Contribution to ESI (on basic wages) 2% 2%
(v) Overtime (hours) 20 -
The normal working hours for the month are 200 hrs. Overtime is paid at double the total of normal
wages and dearness allowance. Employer's contribution to State Insurance and Provident Fund are
at equal rates with employees' contributions.
Both workers were employed on jobs A, B and C in the following proportions:
Jobs A B C
R 75% 10% 15%
S 40% 20% 40%
Overtime was done on job 'A'. You are required to :
(i) Calculate ordinary wage rate per hour of 'R' and ‘S’.
(ii) Allocate the worker's cost to each job 'A', 'B' and 'C'. (PYP 6 Marks Nov 20, Old & New SM)
Answer 31
(i) Calculation of Net Wages paid to Worker ‘R’ and ‘S’
Particulars R (₹) S (₹)
Basic Wages 15,000.00 30,000.00
Dearness Allowance (DA) (50% of Basic Wages) 7,500.00 15,000.00
Overtime Wages (Refer to Working Note 1) 4,500.00 ----
Gross Wages earned 27,000.00 45,000.00
Less: Provident Fund (7% × ₹ 15,000); (7.5% × ₹ 30,000) (1,050.00) (2,250.00)
Less: ESI (2% × ₹ 15,000); (2% × ₹ 30,000) (300.00) (600.00)
Net Wages paid 25,650.00 42,150.00
Calculation of ordinary wage rate per hour of Worker ‘R’ and ‘S’
R (₹) S (₹)
Gross Wages (Basic Wages + DA) 22,500.00 45,000.00
(excluding overtime)
Employer’s contribution to P.F. and E.S.I. 1,350.00 2,850.00
23,850.00 47,850.00
Ordinary wages Labour Rate per hour 119.25 239.25
(₹ 23,850 ÷ 200 hours); (₹ 47,850 ÷ 200 hours)
(ii) Statement Showing Allocation of workers cost to each Job
Total Jobs
Wages A B C
Worker R
Ordinary Wages (15:2:3) 23,850.00 17,887.50 2,385.00 3577.50
3.29
Overtime 4500.00 4500.00 - --

Worker S
Ordinary Wages (2:1:2) 47,850.00 19,140.00 9,570.00 19,140.00
76,200.00 41,527.50 11,955.00 22,717.50
Working Note:
Normal Wages are considered as basic wages.

2×(𝐵𝑎𝑠𝑖𝑐 𝑤𝑎𝑔𝑒+𝐷.𝐴.)×20ℎ𝑜𝑢𝑟𝑠 𝑅𝑠.22,500
Over Time = 200ℎ𝑜𝑢𝑟𝑠
= 2× 200
× 20ℎ𝑜𝑢𝑟𝑠 = Rs. 4,500
Question 32
Discuss any four objectives of 'Time keeping' in relation to attendance and payroll procedures. (PYP
4 Marks Nov 20)
Answer 32
The objectives of time-keeping in relation to attendance and payroll procedures are as follows:
(i) For the preparation of payrolls.
(ii) For calculating overtime.
(iii) For ascertaining and controlling employee cost.
(iv) For ascertaining idle time.
(v) For disciplinary purposes.
(vi) For overhead distribution
Question 33
Z Ltd is working by employing 50 skilled workers. It is considering the introduction of an incentive
scheme - either Halsey Scheme (with 50% Bonus) or Rowan Scheme - of wage payment for increasing
the labour productivity to adjust with the increasing demand for its products by 40%. The company
feels that if the proposed incentive scheme could bring about an average 20% increase over the
present earnings of the workers, it could act as sufficient incentive for them to produce more and
the company has accordingly given assurance to the workers. Because of this assurance, an increase
in productivity has been observed as revealed by the figures for the month of April, 2020:
Hourly rate of wages (guaranteed) ₹ 50
Average time for producing one unit by one worker at the 1.975 hours
previous
performance (this may be taken as time allowed)
Number of working days in a month 24
Number of working hours per day of each worker 8
Actual production during the month 6,120 units
Required:
(i) Calculate the effective increase in earnings of workers in percentage terms under Halsey and Rowan
scheme.
(ii) Calculate the savings to Z Ltd in terms of direct labour cost per unit under both the schemes.
(iii) Advise Z Ltd about the selection of the scheme that would fulfil its assurance of incentivizing workers
and also to adjust with the increase in demand. (PYP 10 Marks Jan 21) (Same concept different
figures Old & New SM)
Answer 33
Working Notes:
1. Total time wages of 50 workers per month:

3.30
= No. of working days in the month × No. of working hours per day of each worker × Hourly
rate of wages × No. of workers
= 24 days × 8 hrs. × ₹ 50 × 50 workers = ₹ 4,80,000
2. Time saved per month:

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

(Refer to Working Notes 1, 2 and 3)
𝑇𝑜𝑡𝑎𝑙 𝑡𝑖𝑚𝑒 𝑤𝑎𝑔𝑒𝑠 𝑜𝑓 50 𝑤𝑜𝑟𝑘𝑒𝑟𝑠+𝑇𝑜𝑡𝑎𝑙 𝑏𝑜𝑛𝑢𝑠 𝑢𝑛𝑑𝑒𝑟 𝐻𝑎𝑙𝑠𝑒𝑦 𝑠𝑐ℎ𝑒𝑚𝑒
=
𝑇𝑜𝑡𝑎𝑙 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑
𝑅𝑠.4,80,000+𝑅𝑠.62,175
= 9,600 ℎ𝑜𝑢𝑟𝑠
= Rs. 56.48
𝑅𝑠.56.48−𝑅𝑠.50
Effective increase in earnings of worker(in %) = × 100 = 2.96%
𝑅𝑠.50
(b) Effective hourly rate of earnings under Rowan scheme:

(Refer to Working Notes 1, 2 and 4)
𝑇𝑜𝑡𝑎𝑙 𝑡𝑖𝑚𝑒 𝑤𝑎𝑔𝑒𝑠 𝑜𝑓 50 𝑤𝑜𝑟𝑘𝑒𝑟𝑠+𝑇𝑜𝑡𝑎𝑙 𝑏𝑜𝑛𝑢𝑠 𝑢𝑛𝑑𝑒𝑟 𝐻𝑎𝑙𝑠𝑒𝑦 𝑠𝑐ℎ𝑒𝑚𝑒
= 𝑇𝑜𝑡𝑎𝑙 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑
𝑅𝑠.4,80,000+𝑅𝑠.96,875
= 9,600 ℎ𝑜𝑢𝑟𝑠
= Rs. 60.29
𝑅𝑠.60.29−𝑅𝑠.50
Effective increase in earnings of worker(in %) = 𝑅𝑠.50
× 100 = 20.58%
(ii) (a) Saving in terms of direct labour cost per unit under Halsey scheme: (Refer to
Working Note 3)
Labour cost per unit (under time wage scheme)
= 1.975 hours × ₹ 50 = ₹ 98.75
Labour cost per unit (under Halsey scheme)

𝑇𝑜𝑡𝑎𝑙 𝑤𝑎𝑔𝑒𝑠 𝑝𝑎𝑖𝑑 𝑢𝑛𝑑𝑒𝑟 𝑡ℎ𝑒 𝑠𝑐ℎ𝑒𝑚 𝑅𝑠.5,42,175
= = = Rs.88.60
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 6,120
3.31
Saving per unit = ₹ 98.75 – ₹ 88.60 = ₹ 10.15
(b) Saving in terms of direct worker cost per unit under Rowan Scheme: (Refer to
Working Note 4)
Labour cost per unit under Rowan scheme = ₹ 5,78,764/6,120 units= ₹ 94.57 Saving per
unit = ₹ 98.75 – ₹ 94.57 = ₹ 4.18
(iii) Calculation of Productivity:
Normal Production Hours worked/Unit per Hour 4,861
(9,600/1.975) Actual Production Units 6,120
Increase in labour productivity 1,259
% Productivity i.e. increase in production/Normal 25.9%
production
Advice: Rowan plan fulfils the company’s assurance of 20% increase over the present earnings of workers.
This would increase productivity by 25.9% only. It will not adjust with the increase in demand by 40%.
Question 34
Following information is given of a newly setup organization for the year ended on 31st March,
2021.
Number of workers replaced during the period 50
Number of workers left and discharged during the period 25
Average number of workers on the roll during the period 500
(i) Compute the Employee Turnover Rates using Separation Method and Flux Method.
(ii) Equivalent Employee Turnover Rates for (i) above, given that the organization was setup on 31st
January, 2021. (PYP 5 Marks July ‘21)
Answer 34
(i) Employee Turnover rate:
Using Separation method:

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑆𝑒𝑝𝑎𝑟𝑎𝑡𝑒𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
= 𝐴𝑣𝑒𝑟𝑎𝑛𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 𝑜𝑛 𝑟𝑜𝑙𝑙 × 100
25
= 500 × 100 = 5%
Using Flux method:

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑆𝑒𝑝𝑎𝑟𝑎𝑡𝑒𝑑+𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑅𝑒𝑝𝑙𝑎𝑐𝑒𝑑 𝐷𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑃𝑒𝑟𝑖𝑜𝑑
= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 𝑜𝑛 𝑟𝑜𝑙𝑙
× 100
50+25
= 500
× 100 = 15%
(ii) Equivalent Employee Turnover Rate:

𝑬𝒎𝒑𝒍𝒐𝒚𝒆𝒆 𝑻𝒖𝒓𝒏 𝒐𝒗𝒆𝒓 𝒓𝒂𝒕𝒆 𝒇𝒐𝒓 𝒕𝒉𝒆 𝒑𝒆𝒓𝒊𝒐𝒅
= 𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑫𝒂𝒚𝒔 𝒊𝒏 𝒕𝒉𝒆 𝒑𝒆𝒓𝒊𝒐𝒅
× 𝟑𝟔𝟓
Using Separation method = 5/60 X 365 = 30.42%
Or, = 5/60 X 360 = 30%
Or, 5/2 X 12 = 30%
Using Flux method = 15/60 × 365 =91.25%
Or, = 15/60 X 360 = 30%

3.32
Or, 15/2 X 12 = 30%

It was a practical problem requiring computation of Employee turnover rates and
Equivalent employee turnover rates by using separation method and flux method. Most of
the examinees were not well acquainted with the concept of equivalent employee turnover
rates. Performance of the examinees was below average.
Question 35
Rowan Premium Bonus system does not motivate a highly efficient worker as a less efficient worker
and a highly efficient worker can obtain same bonus under this system. Discuss with an example.
(PYP 5 Marks July 21)
Answer 35
Rowan Premium Plan: According to this system a standard time allowance is fixed for the performance
of a job and bonus is paid if time is saved.
Under Rowan System, the bonus is that proportion of the time wages as time saved bears to the
standard time.
Bonus = × 𝑇𝑖𝑚𝑒 𝑆𝑎𝑣𝑒𝑑 × ℎ𝑜𝑢𝑟𝑙𝑦 𝑟𝑎𝑡𝑒
Example explaining highly efficient worker and less efficient worker obtaining same bonus:
Time rate (per Hour) ₹ 60
Time allowed 8 hours.
Time taken by ‘X’ 6 hours.
Time taken by ‘Y’ 2 hours.

Bonus = × 𝑇𝑖𝑚𝑒 𝑆𝑎𝑣𝑒𝑑 × ℎ𝑜𝑢𝑟𝑙𝑦 𝑟𝑎𝑡𝑒
2 ℎ𝑜𝑢𝑟𝑠
For ‘X' = 8 ℎ𝑜𝑢𝑟𝑠 × 6 ℎ𝑜𝑢𝑟𝑠 × 𝑅𝑠. 60 = Rs. 90
6 ℎ𝑜𝑢𝑟𝑠
For ‘Y’ = 8 ℎ𝑜𝑢𝑟𝑠 × 2 ℎ𝑜𝑢𝑟𝑠 × 𝑅𝑠. 60 = Rs. 90
From the above example, it can be concluded that a highly efficient worker may obtain same bonus as
less efficient worker under this system.

It was a theoretical question on Rowan Premium Bonus Plan testing the knowledge of the
examinees that in what situation efficient and less efficient workers will get the same
bonus. Majority of examinees did not answer properly. Performance of the examinees was
below average.
Question 36
A skilled worker is paid a guaranteed wage rate of ₹ 150 per hour. The standard time allowed for a
job is 10 hours. He took 8 hours to complete the job. He has been paid the wages under Rowan
Incentive Plan.
(i) Calculate an effective hourly rate of earnings under Rowan Incentive Plan.
(ii) Calculate the time in which he should complete the job, if the worker is placed under Halsey Incentive
Scheme (50%) and he wants to maintain the same effective hourly rate of earnings. (PYP 5 Marks
3.33
Dec ’21)
Answer 36
(i) Calculation of Effective hourly rate of earnings under Rowan Incentive Plan:
Standard time allowed = 10 hours
Time taken = 8 hours; Time saved = 2 hours
A Basic guaranteed wages (₹150 × 8 hours) 1,200
B Add: Bonus for time saved (2 /10 × 8 × ₹ 150) 240
C Total earnings (A+B) 1,440

D Hours worked 8 hours
E Effective hourly rate (C÷D) 180
(ii) Let the time taken to complete the job is “T” and the time saved is 10-T Effective hourly rate under
the Halsey Incentive scheme
(𝑅𝑎𝑡𝑒 × 𝐻𝑜𝑢𝑟𝑠 𝑊𝑜𝑟𝑘𝑒𝑑)+(𝑅𝑎𝑡𝑒 × 50% 𝑜𝑓 𝑇𝑖𝑚𝑒 𝑆𝑎𝑣𝑒𝑑)
= 𝐻𝑜𝑢𝑟𝑠 𝑊𝑜𝑟𝑘𝑒𝑑
= ₹ 180
(𝑅𝑠.150 × 𝑇)+𝑅𝑠.150 × 50% (10−𝑇)

𝑇
= Rs. 180
150T + 750 -75T = 180T
180T-75T = 750
750
T = 105 = 7.14 hours

This Numerical question tested the conceptual knowledge of examinees under Rowan
incentive plan for the calculation of effective hourly rates. On the basis of calculated effective
hourly rate, examinees had to calculate time required to complete job under Halsey incentive
scheme. Most of the examinees did will in the first part but failed to equate with the effective
hourly rate in the second part of the question. The performance was above average.
Question 37
Discuss the steps involved in setting labour time standards. (PYP 5 Marks Dec ‘21)
Answer 37
Procedure of Setting Labour Time Standards
The following are the steps involved in setting labour standards:
(a) Standardization: Products to be produced are decided based on production plan and customer's order.
(b) Labour specification: Types of labour and labour time is specified. Labour time specification is based
on past records and it takes into account normal wastage of time.
(c) Standardization of methods: Selection of proper machines to use proper sequence and method of
operations.
(d) Manufacturing layout: A plan of operation for each product listing the operations to be performed is
prepared.
(e) Time and motion study: It is conducted for selecting the best way of completing the job or motions to
be performed by workers and the standard time which an average worker will take for each job. This
also takes into account the learning efficiency and learning effect.
(f) Training and trial: Workers are trained to do the work and time spent at the time of trial run is noted
3.34
down.

This theory question to discuss steps involved in setting Labour Time Standards. Majority
of the examinees were unable to answer it correct. Performance of the examinees was
poor.
Question 38
PQR Limited has replaced 72 workers during the quarter ended 31st March 2022. The labour rates
for the quarter are as follows:
Flux method 16%
Replacement method 8%
Separation method 5%
You are required to ascertain:
(i) Average number of workers on roll (for the quarter),
(ii) Number of workers left and discharged during the quarter,
(iii) Number of workers recruited and joined during the quarter,
(iv) Equivalent employee turnover rates for the year. (PYP 5 Marks May’22, Old & New SM)
Answer 38
Working Note:
(i) Average number of workers on roll (for the quarter):
Employee Turnover rate using Replacement method
No of replacements
= × 100
Average number of workers on roll ×
8 72
Or,10 = =Average number of workers on roll × × 100
72×100
Or, Average number of workers on roll=Average number of workers on roll × =900
(ii) Number of workers left and discharged:

Employee turnover rate (Separation method
No of Separations(S) 5 𝑆
=Average number of workers on roll ×
× 100=10 = 900 Or, S = 45 Hence, number of workers left and
discharged comes to 45
(iii) Number of workers recruited and joined:

Employee turnover rate (Flux method)
No. of Separations ∗ (S) + No. of Accessions(A)
Average number of workers on roll
16 45+𝐴 1,44,00
Or ,10 − 900
Or, [ 100
− 45]=99
16%
Using Flux method = × 4= 64%
1
8%
Using Replacement method= 1
× 4= 32%
5%
Using Separation method= 1
× 4= 20%

3.35
Question 39
Explain the treatment of Overtime Premium in following situations:
(i) SV & Co. wants to grab some special orders, and overtime is required to meet the same.
(ii) Dept. X has to work overtime to make up a shortfall in production due to some fault of
management in dept. Y.
(iii) S Ltd. has to work overtime regularly throughout the year as a policy due to the workers'
shortage.
(iv) Due to flood in Odisha, RS Ltd. has to work overtime to complete the job.
(v) A customer requested the company MN Ltd. to expedite the job because of his urgency of work.
(PYP 5 Marks May’22)
Answer 39
Treatment of Overtime premium in different situations
Situation Treatment
(i) SV & Co. wants to grab some special If overtime is required to cope with general production
orders, and overtime is required to meet programmes or for meeting urgent orders, the overtime
the same. premium should be treated as overhead cost of the
particular department or cost centre which works
overtime.
(ii) Dept. X has to work overtime to make up If overtime is worked in a department due to the fault of
a shortfall in production due to some another department, the overtime premium should be
fault of management in dept. Y. charged to the latter
department (Y).
(iii) S Ltd. has to work overtime regularly The overtime premium is treated as a part of employee
throughout the year as a policy due to cost and job is charged at an effective average wage rate.
the workers’ shortage.
(iv) Due to flood in Odisha, RS Ltd. has to Overtime worked on account of abnormal conditions
work overtime to complete the job. such as flood, earthquake etc., should not be charged to
cost, but to
Costing Profit and Loss Account.
(v) A customer requested the company MN Where overtime is worked at the request of the
Ltd. to expedite the job because of his customer, overtime premium is also charged to the job/
urgency of work. customer directly.
Question 40
A skilled worker, in PK Ltd., is paid a guaranteed wage rate of ₹ 15.00 per hour in a 48- hour week.
The standard time to produce a unit is 18 minutes. During a week, a skilled worker -Mr. ‘A’ has
produced 200 units of the product. The Company has taken a drive for cost reduction and wants to
reduce its labour cost.
(i) Calculate wages of Mr. ‘A’ under each of the following methods:
(A) Time rate,
(B) Piece -rete with a guaranteed weekly wage,
(C) Halsey Premium Plan
(D) Rowan Premium Plan
(ii) Suggest which bonus plan i.e. Halsey Premium Plan or Rowan Premium Plan, the
company should follow. (PYP 6 Marks Nov 22)
Answer 40
3.36
(i) Calculation of wages of Mr. ‘A’ under different wage schemes:

A. Time rate
Wages = Time Worked × Rate for the time
= 48 hours x ₹ 15
= ₹ 720
B. Piece rate with a guaranteed weekly wage

Wages = Number of units produced × Rate per unit
= 200 units x ₹ 4.50*
= ₹ 900
*(₹ 15 / 60 minutes) x 18 minutes = ₹ 4.50
C. Halsey Premium Plan

Wages = Time taken × Time rate + 50% of time saved × Time rate
Wages = Time taken × Time rate + 50% (Standard time – Actual time) × Time rate
= (48 hours x ₹ 15) + 50% of (60 hours# – 48 hours) x ₹ 15
= ₹ 720 + ₹ 90
= ₹ 810
#(200 units x 18 minutes) / 60 minutes = 60 hours
D. Rowan Premium Plan

Wages = Time taken X Rate per hour + X Time taken X Rate per hour
𝑇𝑖𝑚𝑒 𝐴𝑙𝑙𝑜𝑤𝑒𝑑
60−48 ℎ𝑜𝑢𝑟𝑠
=(48 hours X Rs. 15) + ( X 48 hours X Rs. 15)
60ℎ𝑜𝑢𝑟𝑠
= Rs. 720 + Rs. 144

= Rs. 864
(ii) The company may follow Halsey Premium Plan over Rowan Premium Bonus Plan as the total
wages paid is lower than that of Rowan Premium Bonus Plan.
Question 41
SMC Company Limited is producing a particular design of toys under the following existing incentive
system:
Normal working hours in the week 48 hours

Late shift hours in the week 12 hours
Rate of payment Normal working: ` 150 per hour
Late shift: ` 300 per hour
Average output per operator for 60 hours per week (including late shift hours): 80 toys.
The company's management has now decided to implement a system of labour cost payment with
either the Rowan Premium Plan or the Halsey Premium Plan in order to increase output, eliminate
late shift overtime, and reduce the labour cost.
The following information is obtained:
The standard time allotted for ten toys is seven and half hours.
3.37
Time rate: ` 150 per hour (as usual).

Assuming that the operator works for 48-hours in a week and produces 100 toys, you are required to
calculate the weekly earnings for one operator under-
(i) The existing Time Rate,
(ii) Rowan Premium Plan and,
(iii) Halsey Premium Plan (50%). (5 Marks, May ‘23)
Answer 41
Working Notes:
(1) Effective rate per hour:

Incentive for 60 hours = (` 150 × 48 hours + ` 300 × 12 hours)
= 7,200 + 3,600 = ` 10,800
= ` 10,800 ÷ 60 hours = ` 180 per hour
(2) Time taken/ Allowed to produce 100 toys:

= (60 hours ÷ 80 toys) × 100 toys = 75 hours
(3) Time saved = Time Allowed – Time Taken

= 75 hours – 48 hours = 27 hours
(i) Calculation of weekly earnings for one operator under the existing time rate:
= (48 hours x ` 150) + (12 hours x ` 300) = ` 10,800
Alternative solution
= Effective rate per hour (WN-1) × Time required for 100 toys (WN-2)
= ` 180 × 75 hours = ` 13,500
(ii) Calculation of weekly earnings for one operator under Rowan Premium plan:
(Time taken × Rate per hour) + (Time Saved/ Time Allowed × Time taken × Rate per hour)
= (48 hours × ` 150) + [(27 ÷ 75) × 48 × ` 150]
= 7,200 + 2,592 = ` 9,792
(iii) Calculation of weekly earnings for one operator under Halsey Premium plan:
(Time taken × Rate per hour) + (50% of Time Saved × Rate per hour)
= (48 hours × ` 150) + (50% of 27 hours × ` 150)
= ` 7,200 + ` 2,025 = ` 9,225
Question 42
How does the high employee turnover increase the cost of production? Explain. (5 Marks, May ‘23)
Answer 42
High Employee Turnover increases the cost of production
Replacement costs are the costs which arise due to employee turnover. If employees leave soon after
they acquire the necessary training and experience of good work, additional costs will have to be
incurred on new workers, i.e., cost of recruitment, training and induction, abnormal breakage and scrap
and extra wages and overheads due to the inefficiency of new workers.

3.38
It is obvious that a company will incur very high replacement costs if the rate of employee turnover is
high. Similarly, only adequate preventive costs can keep Employee turnover at a low level. Each
company must, therefore, work out the optimum level of Employee turnover keeping in view its
personnel policies and the behaviour of replacement cost and preventive costs at various levels of
Employee turnover rates.

4.1
Chapter 4
Overheads-Absorption Costing Method
Question 1
From the details furnished below you are required to COMPUTE a comprehensive machine -hour
rate:
Original purchase price of the machine (subject to depreciation at 10% per annum on original cost)
Rs. 6,48,000
Normal working hours for the month 200 hours
(The machine works for only 75% of normal capacity)
Wages to Machine-man Rs. 400 per day (of 8 hours)
Wages to Helper (machine attendant) Rs. 275 per day (of 8 hours)
Power cost for the month for the time worked Rs. 65,000
Supervision charges apportioned for the machine center for the month Rs.18,000
Electricity & Lighting for the month Rs. 9,500
Repairs & maintenance (machine) including Consumable stores per month Rs.17,500
Insurance of Plant & Building (apportioned) for the year Rs. 18,250
Other general expense per annum Rs. 17,500
The workers are paid a fixed Dearness allowance of Rs. 4,575 per month. Production bonus payable
to workers in terms of an award is equal to 33.33% of basic wages and dearness allowance. Add 10%
of the basic wage and dearness allowance against leave wages and holidays with pay to arrive at a
comprehensive labour-wage for debit to production. (MTP 10 Marks ,March ’19 & Sep ’23)
Answer 1
Effective machine hours = 200 hours × 75% = 150 hours
Computation of Comprehensive Machine Hour Rate
Fixed cost Per month Per hour
( Rs.) ( Rs.)
Supervision charges 18,000.00
Electricity and lighting 9,500.00
Insurance of Plant and building ( Rs.18,250 ÷12) 1,520. 83
Other General Expenses (Rs.17,500÷12) 1,458.33
Depreciation (Rs.64,800÷12) 5,400.00
Direct Cost 35,879.16 239.19
Repairs and maintenance 17,500.00 116.67
Power 65,000.00 433.33
Wages of machine man 139.27
Wages of Helper 109.41
Machine Hour rate (Comprehensive) 1,037.87
Wages per machine hour

Machine man Helper
Wages for 200 hours
Machine-man ( Rs.400 × 25) Rs.10,000.00 ---
Helper ( Rs.275 × 25) --- Rs.6,875.00
Dearness Allowance (DA) Rs.4,575.00 Rs.4,575.00
Rs. 14,575.00 Rs. 11,450.00
Production bonus (1/3 of Basic and DA) 4,858.33 3,816.67
Leave wages (10% of Basic and DA) 1,457.50 1,145.00

Prakshal Shah | 8779794646 Chapter 4 Overheads-Absorption Costing Method
4.2
20,890.83 16,411.67
Effective wage rate per machine hour Rs.139.27 Rs.109.41
Question 2
A machine shop cost centre contains three machines of equal capacities.
To operate these three machines nine operators are required i.e. three operators on each machine.
Operators are paid ₹ 20 per hour. The factory works for forty eight hours in a week which includes 4
hours set up time. The work is jointly done by operators. The operators are paid fully for the fourty eight
hours. In additions they are paid a bonus of 10 per cent of productive time. Costs are reported for this
company on the basis of thirteen four-weekly period. The company for the purpose of computing
machine hour rate includes the direct wages of the operator and also recoups the factory overheads
allocated to the machines. The following details of factory overheads applicable to the cost centre are
available:
• Depreciation 10% per annum on original cost of the machine. Original cost of the each machine is ₹
52,000.
• Maintenance and repairs per week per machine is ₹ 60.
• Consumable stores per week per machine are ₹ 75.
• Power : 20 units per hour per machine at the rate of 80 paise per unit.
• Apportionment to the cost centre : Rent per annum ₹ 5,400, Heat and Light per annum ₹ 9,720,
foreman¡’s salary per annum ₹ 12,960 and other miscellaneous expenditure per annum ₹ 18,000.
Required:
(i) CALCULATE the cost of running one machine for a four-week period.
(ii) CALCULATE machine hour rate. (MTP March ‘18,10 Marks)
Answer 2
Effective Machine hour for four-week period
= Total working hours – unproductive set-up time
= {(48 hours × 4 weeks) – {(4 hours × 4 weeks)} = (192 – 16) hours) = 176 hours.
(i) Computation of cost of running one machine for a four-week period
(₹ ) (₹ )
(A) Standing charges (per annum)
Rent 5,400.00
Heat and light 9,720.00
Forman’s salary 12,960.00
Other miscellaneous expenditure 18,000.00
Standing charges (per annum) 46,080.00
Total expenses for one machine for four week period 1,181.54
₹46,080
3 𝑚𝑎𝑐ℎ𝑖𝑛𝑒𝑠 ×13 𝑓𝑜𝑢𝑟−𝑤𝑒𝑒𝑘 𝑝𝑒𝑟𝑖𝑜𝑑
Wages (48 hours × 4 weeks × ₹ 20 × 3 operators) 11,520.00
Bonus {(176 hours × ₹ 20 × 3 operators) x 10%} 1,056.00
Total standing charges 13,757.54
(B) Machine Expenses
1 400.00
Depreciation = (52,000 × 10% × 13 𝑓𝑜𝑢𝑟−𝑤𝑒𝑒𝑘 𝑝𝑒𝑟𝑖𝑜𝑑)
Repairs and maintenance (₹ 60 x 4 weeks) 240.00
Consumable stores (₹ 75 x 4 weeks) 300.00
Power (176 hours x 20 units x ₹ 0 .80) 2,816.00
Total machine expenses 3,756.00
(C) Total expenses (A) + (B) 17,513.54
17,513.54
(ii) Machine hour rate = 176 ℎ𝑜𝑢𝑟𝑠 = 99.51
Question 3
Explain Single and Multiple Overhead Rates. (MTP March ‘18, 5 Marks, Old & New SM)
Answer 3
Single and Multiple Overhead Rates:
4.3
Single overhead rate: It is one single overhead absorption rate for the whole factory.
It may be computed a s follows:
𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑐𝑜𝑠𝑡𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑒𝑛𝑡𝑖𝑟𝑒 𝑓𝑎𝑐𝑡𝑜𝑟𝑦
Single overhead rate = 𝑇𝑜𝑡𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑡ℎ𝑒 𝑏𝑎𝑠𝑒 𝑠𝑒𝑙𝑒𝑐𝑡𝑒𝑑
The base can be total output, total labour hours, total machine hours, etc.
The single overhead rate may be applied in factories which produces only one major product on a
continuous basis. It may also be used in factories where the work performed in each department is fairly
uniform and standardized. Multiple overhead rate: It involves computation of separate rates for each
production department, service department, cost center and each product for both fixed and variable
overheads. It may be computed as follows:
𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑒𝑑 / 𝑎𝑝𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑒𝑑 𝑡𝑜 𝑒𝑎𝑐ℎ 𝑑𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 / 𝑐𝑜𝑠𝑡 𝑐𝑒𝑛𝑡𝑟𝑒 𝑜𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
Multiple overhead rate= 𝐶𝑜𝑟𝑟𝑒𝑠𝑝𝑜𝑛𝑑𝑖𝑛𝑔 𝑏𝑎𝑠𝑒
Under multiple overhead s rate, jobs or products are charged with varying amount of factory overheads
depending on the type and number of departments through which they pass.
However, the number of overheads rate which a firm may compute would depend upon two opposing
factors viz. the degree of accuracy desired and the clerical cost involved.
Question 4
In a factory, a machine is considered to work for 208 hours in a month. It includes maintenance time
of 8 hours and set up time of 20 hours. The expense data relating to the machine are as under:
Cost of the machine is Rs. 5,00,000. Life 10 years. Estimated scrap value at the end of life is Rs. 20,000.
(Rs.)
• Repairs and maintenance per annum 60,480
• Consumable stores per annum 47,520
• Rent of building per annum
(The machine under reference occupies 1/6 of the area) 72,000
• Supervisor's salary per month (Common to three machines) 6,000
• Wages of operator per month per machine 2,500
• General lighting charges per month allocated to the machine 1,000
• Power 25 units per hour at Rs. 2 per unit
Power is required for productive purposes only. Set up time, though productive, does not require power.
The Supervisor and Operator are permanent. Repairs and maintenance and consumable stores vary with
the running of the machine.
Required
COMPUTE a two-tier machine hour rate for (a) set up time, and (b) running time. (MTP Aug.’18, 10
Marks)
Answer 4
Working Notes:
1. (i) Effective hours for standing charges (208 hours – 8 hours) = 200 hours
(ii) Effective hours for variable costs (208 hours – 28 hours) = 180 hours
2. Standing Charges per hour
Cost per month Cost per hour (Rs.)
(Rs.) (Cost per month÷ 200
hours)
𝑅𝑠.6,000 2,000 10.00
Supervisor’s salary ( )
3 𝑚𝑎𝑐ℎ𝑖𝑛𝑒𝑠
1 𝑅𝑠.72,000 1,000 5.00
Rent of building (6 × 12 𝑚𝑜𝑛𝑡ℎ)
General lighting 1,000 5.00
Total Standing Charges 4,000 20.00
3. Machine running expenses per hour
Cost per month Cost per hour (Rs.)
(Rs.)
Depreciation 4,000 20.00
𝑅𝑠. (5,00,000 − 20,000) 1 𝑅𝑠. 4,000
( × ) ( )
10 𝑦𝑒𝑎𝑟𝑠 12 𝑚𝑜𝑛𝑡ℎ𝑠 200ℎ𝑜𝑢𝑟𝑠
Wages 2,500 12.50
4.4
𝑅𝑠. 2,500
( )
200ℎ𝑜𝑢𝑟𝑠
Repairs & Maintenance 5,040 28.00
𝑅𝑠. 60,480 𝑅𝑠. 5,040
( ) ( )
12 𝑀𝑜𝑛𝑡ℎ𝑠 180 ℎ𝑜𝑢𝑟𝑠
Consumable stores 3,960 22.00
𝑅𝑠. 47,520 𝑅𝑠. 3,960
( ) ( )
12 𝑀𝑜𝑛𝑡ℎ𝑠 180 ℎ𝑜𝑢𝑟𝑠
Power (25 units × Rs.2 × 180 hours) 9,000 50.00
Total Machine Expenses 24,500 132.50
Computation of Two – tier machine hour rate Set up time rate per Running time rate per
machine hour machine hour
(Rs.) (Rs.)
Standing Charges 20.00 20.00
Machine expenses :
Depreciation 20.00 20.00
Repair and maintenance – 28.00
Consumable stores – 22.00
Power – 50.00
Machine hour rate of overheads 40.00 140.00
Wages 12.50 12.50
Comprehensive machine hour rate 52.50 152.50
Question 5
V Ltd. manufactures luggage trolleys for airports. The factory, in which the company undertakes all of
its production, has two production departments- ‘Fabrication’ and ‘Assembly’, and two service
departments- ‘Stores’ and ‘Maintenance’.
The following information have been extracted from the company’s budget for the financial year ended
31st March, 2019:
Particulars Rs.
Allocated Overhead Costs
Fabrication Department 15,52,000
Assembly Department 7,44,000
Stores Department 2,36,000
Maintenance Department 1,96,000
Other Overheads
Factory rent 15,28,000
Factory building insurance 1,72,000
Plant & machinery insurance 1,96,000
Plant & Machinery Depreciation 2,65,000
Subsidy for staffs’ canteen 4,48,000
Direct Costs Rs. Rs.
Fabrication Department:
Material 63,26,000
Labour 8,62,000 71,88,000
Assembly Department:
Material 1,42,000
Labour 13,06,000 14,48,000
The following additional information is also provided:

Fabrication Assembly Stores Maintenance
Department Department Department Department

4.5
Floor area 24,000 10,000 2,500 3,500

(square meters)
Value of plant & 16,50,000 7,50,000 75,000 1,75,000
machinery (Rs.)
No. of stores 3,600 1,400 - -
requisitions
Maintenance 2,800 2,300 400 -
hours required
No. of employees 120 80 38 12
Machine hours 30,00,000 60,000
Labour hours 70,000 26,00,000
Required:
(i) PREPARE a table showing the distribution of overhead costs of the two service departments
to the two production departments using step method; and
(ii) Calculate the most appropriate overhead recovery rate for each department.
(iii) Using the rates calculated in part (ii) above, CALCULATE the full production costs of the
following job order:
Job number IGI2019
Direct Materials Rs. 2,30,400
Direct Labour:
Fabrication Department 240 hours @ Rs. 50 per hour
Assembly Department 180 hours @ Rs. 50 per hour
Machine hours required:
Fabrication Department 210 hours
Assembly Department 180 hours (MTP Oct. ’19 & April ’23 10 Marks)
Answer 5
(i) Table of Primary Distribution of Overheads
Particulars Basis of Total Production Department Service Departments
Apportionment Amount
Overheads 27,28,000 15,52,000 7,44,000 2,36,000 1,96,000
Allocated
Direct Costs Actual 86,36,000 71,88,000 14,48,000 — —
Other
Overheads:
Factory rent Floor Area 15,28,000 9,16,800 3,82,000 95,500 1,33,700
(48:20:5:7)
Factory Floor Area 1,72,000 1,03,200 43,000 10,750 15,050
building (48:20:5:7)
insurance
Plant & Value of
Machinery Plant & 1,96,000 1,22,038 55,472 5,547 12,943
insurance Machinery
(66:30:3:7)
Plant & Value of Plant & 75,000 7,500 17,500
Machinery Machinery
Depreciation (66:30:3:7) 2,65,000 1,65,000
Canteen No. of 68,096 21,504
Subsidy Employees 4,48,000 2,15,040 1,43,360
(60:40:19:6)
1,39,73,000 1,02,62,078 28,90,832 4,23,393 3,96,697
Re-distribution of Service Departments’ Expenses:
Particulars Basis of Production Service
Apportionment Department Departments
4.6

Overheads As per Primary 1,02,62,078 28,90,832 4,23,393 3,96,697
as per Primary distribution
distribution
Maintenance Maintenance 2,01,955 1,65,891 28,851 (3,96,697)
Department Hours
Cost (28:23:4:-)
1,04,64,033 30,56,723 4,52,244 —
Stores No. of Stores 3,25,616 1,26,628 (4,52,244)
Department Requisition
(18:7:-:-)
1,07,89,649 31,83,351 — —
(ii) Overhead Recovery Rate
Department Apportioned Basis of Overhead Overhead Recovery Rate (Rs.)
Overhead (Rs.) Recovery Rate
(I) (II) [(I) ÷ (II)]
Fabrication 1,07,89,649 30,00,000 Machine Hours 3.60 per Machine Hour
Assembly 31,83,351 26,00,000 Labour Hours 1.22 per Labour Hour
(iii)
Calculation of full production costs of Job no. IGI2019.
Direct Materials 2,30,400
Direct Labour:
Fabrication Deptt. (240 hours × Rs.50) 12,000
Assembly Deptt. (180 hours × Rs.50) 9,000
Production Overheads:
Fabrication Deptt. (210 hours × Rs. 3.60) 756
Assembly Deptt. (180 hours × Rs. 1.22) 220
Total Production Cost 2,52,376
Question 6
You are given the following information of the three machines of a manufacturing department of X
Ltd.:
Preliminary estimates of expenses (per annum)
Total (Rs.) Machines
A (Rs.) B (Rs.) C (Rs.)
Depreciation 20,000 7,500 7,500 5,000
Spare parts 10,000 4,000 4,000 2,000
Power 40,000
Consumable stores 8,000 3,000 2,500 2,500
Insurance of machinery 8,000
Indirect employee cost 20,000
Building maintenance expenses 20,000
Annual interest on capital outlay 50,000 20,000 20,000 10,000
Monthly charge for rent and rates 10,000
Salary of foreman (per month) 20,000
Salary of Attendant (per month) 5,000
(The foreman and attendant control all the three machines and spend equal time on each of them.)
The following additional information is also available:
4.7
Machines
A B C
Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000
Ratio of K.W. Rating 3 2 3
Floor space (sq. ft.) 40,000 40,000 20,000
There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The
manufacturing department works 8 hours in a day but Saturdays are half days. All machines work at
90% capacity throughout the year and 2% is reasonable for breakdown.
CALCULATE predetermined machine hour rates for the above machines after taking into
consideration the following factors:
• An increase of 15% in the price of spare parts.
• An increase of 25% in the consumption of spare parts for machine ‘B’ & ‘C’ only.
• 20% general increase in wages rates. (MTP Oct. ‘18, 10 Marks, RTP Nov 20)
Answer 6
Computation of Machine Hour Rate
Basis of Total (₹ ) Machines
(A) Standing Charges apportionment A (₹ ) B (₹ ) C (₹ )
Insurance Depreciation Basis

(3:3:2) 8,000 3,000 3,000 2,000
Indirect employee cost Direct Labour hours
(2:3:3) 24,000 6,000 9,000 9,000
Building maintenance Floor Space
expenses (2:2:1) 20,000 8,000 8,000 4,000
Rent and Rates Floor Space (2:2:1) 1,20,000 48,000 48,000 24,000
Salary of foreman Equal 2,40,000 80,000 80,000 80,000
Salary of attendant Equal 60,000 20,000 20,000 20,000
Total standing charges 4,72,000 1,65,000 1,68,000 1,39,000
Hourly rate for standing charges 84.70 86.24 71.36
(B) Machine Expenses:
Depreciation Direct 20,000 7,500 7,500 5,000
Spare parts Final estimates 13,225 4,600 5,750 2,875
Power K.W. rating (3:2:3) 40,000 15,000 10,000 15,000
Consumable Stores Direct 8,000 3,000 2,500 2,500
Total Machine expenses 81,225 30,100 25,750 25,375
Hourly Rate for Machine expenses 15.45 13.22 13.03
Total (A + B) 553,225 1,95,100 1,93,750 1,64,375
Machine Hour rate 100.15 99.46 84.38
Working Notes:
(i) Calculation of effective working hours:
No. of full off-days = No. of Sunday + No. of holidays
= 52 + 12 = 64 days
No. of half working days = 52 days – 2 holidays = 50 days
No. of full working days = 365 days – 64 days – 50 days = 251 days
Total working Hours = {(251 days × 8 hours) + (50 days × 4 hours)}
= 2,008 hours + 200 = 2,208 hours.
Total effective hours = Total working hours × 90% - 2% for break-down
= 2,208 hours × 90% - 2% (2,208 hours × 90%)
= 1,987.2 hours – 39.74 hours
= 1947.46 or Rounded up to 1948 hours.

4.8
(ii) Amount of spare parts is calculated as under:

A (₹ ) B (₹ ) C (₹ )
Preliminary estimates 4,000 4,000 2,000
Add: Increase in price @ 15% 600 600 300
4,600 4,600 2,300
Add: Increase in consumption @ 25% - 1,150 575
Estimated cost 4,600 5,750 2,875
(iii) Amount of Indirect employee cost is calculated as under:

(₹ )
Preliminary estimates 20,000
Add: Increase in wages @ 20% 4,000
24,000
(iv) Interest on capital outlay is a finance cost, therefore it has been excluded from the cost
accounts.
Question 7
EXPLAIN the difference between Allocation and Apportionment of expenses. (MTP Oct. ‘18, 5 Marks,
Old & New SM)
Answer 7
The difference between the allocation and apportionment is important to understand because the
purpose of these two methods is the identification of the items of cost to cost units or centers. However,
the main difference between the above methods is given below.
(1) Allocation deals with the whole items of cost, which are identifiable with any one department. For
example, indirect wages of three departments are separately obtained and hence each department will
be charged by the respective amount of wages individually.
On the other hand, apportionment deals with the proportions of an item of cost for example; the cost of
the benefit of a service department will be divided between those departments which has availed those
benefits.
(2) Allocation is a direct process of charging expenses to different cost centres whereas apportionment is an
indirect process because there is a need for the identification of the appropriate portion of an expense to
be borne by the different departments benefited.
(3) The allocation or apportionment of an expense is not dependent on its nature, but the relationship
between the expense and the cost centre decides that whether it is to be allocated or apportioned.
(4) Allocation is a much wider term than apportionment.
Question 8
A Ltd. manufactures two products- A and B. The manufacturing division consists of two production
departments P1 and P2 and two service departments S1 and S2. Budgeted overhead rates are used
in the production departments to absorb factory overheads to the products. The rate of Department
P1 is based on direct machine hours, while the rate of Department P2 is based on direct Labour
hours. In applying overheads, the pre-determined rates are multiplied by actual hours. (10
Marks, Oct.’2020)
For allocating the service department costs to production departments, the basis adopted is as follows:
(i) Cost of Department S1 to Department P1 and P2 equally, and
(ii) Cost of Department S2 to Department P1 and P2 in the ratio of 2:1 respectively. The following
budgeted and actual data are available:
Annual profit plan data:
Factory overheads budgeted for the year:
Departments P1 27,51,000 S1 8,00,000
P2 24,50,000 S2 6,00,000

4.9
Budgeted output in units: Product A 50,000; B 30,000.

Budgeted raw-material cost per unit: Product A ₹ 120; Product B ₹ 150.
Budgeted time required for production per unit:

Department P1 : Product A : 1.5 machine hours
Product B : 1.0 machine hour
Department P2 :
Product A : 2 Direct Labour hours
Product B : 2.5 Direct Labour hours
Average wage rates budgeted in Department P2 are:
Product A - ₹ 72 per hour and Product B – ₹ 75 per hour. All materials are used in Department P1
only.
Actual data (for the month of Jan, 2020):
Units actually produced: Product A : 4,000 units
Product B : 3,000 units
Actual direct machine hours worked in Department P1:
On Product A 6,100 hours, Product B 4,150 hours. Actual direct Labour hours worked in Department
P2:
On Product A 8,200 hours, Product B 7,400 hours.

Costs actually incurred: Product A Product B
Raw materials ₹ 4,89,000 ₹ 4,56,000
Wages 5,91,900 5,52,000
Overheads: Department P1 2,50,000 S1 80,000
P2 2,25,000 S2 60,000
(i) COMPUTE the pre-determined overhead rate for each production department.
(ii) PREPARE a performance report for Jan, 2020 that will reflect the budgeted costs and actual
costs. (MTP 10 Marks, Oct’20) (Same concept different
Answer 8
(i) Computation of pre-determined overhead rate for each production department from
budgeted data
Production Service Department
Department
P1 P2 S1 S2
Budgeted factory overheads for the 27,51,000 24,50,000 8,00,000 6,00,000
year (₹)
Allocation of service department S1’s 4,00,000 4,00,000 (8,00,000) --
costs to production departments P1
and P2 equally (₹)
Allocation of service department S2’s 4,00,000 2,00,000 – (6,00,000)
costs to production departments P1
and P2 in the ratio of 2:1 (₹)
Total 35,51,000 30,50,000 -- --
4.10
Budgeted machine hours in 1,05,000 --

department P1 (working note-1)
Budgeted labour hours in department -- 1,75,000
P2 (working note-1)
Budgeted machine/ labour hour rate 33.82 17.43
(ii) Performance report for Jan, 2020
(When 4,000 and 3,000 units of Products A and B respectively were actually produced)
Budgeted Actual (₹)
(₹)
Raw materials used in Dept. P1:
A : 4,000 units × Rs.120 4,80,000 4,89,000
B : 3,000 units × Rs.150 4,50,000 4,56,000
Direct Labour cost
(on the basis of Labour hours worked in department P2)
A : 4,000 units × 2 hrs. × Rs. 72 5,76,000 5,91,900
B : 3,000 units × 2.5 hrs. × Rs. 75 5,62,500 5,52,000
Overhead absorbed on machine hour basis in Dept. P1:
A : 4,000 units × 1.5 hrs. × Rs.33.82 2,02,920 1,96,420*
B : 3,000 units × 1 hr. × Rs.33.82 1,01,460 1,33,630*
Overhead absorbed on Labour hour basis in Dept. P2:
A : 4,000 units × 2 hrs. × Rs.17.43 1,39,440 1,49,814**
B : 3,000 units × 2.5 hrs. × Rs.17.43 1,30,725 1,35,198**
26,43,045 27,03,962
* (Refer to working note 4) ** (Refer to working note 5)
Working notes
1.
Product A Product B Total
Budgeted output (units) 50,000 30,000
Budgeted machine hours in Dept. 75,000 30,000 1,05,000
P1 (50,000×1.5 hrs.) (30,000×1 hr.)
Budgeted Labour hours in Dept. P2 1,00,000 75,000 1,75,000

(50,000×2 hrs.) (30,000×2.5 hrs.)
2.
Product A Product B Total
Actual output (units) 4,000 3,000
Actual machine hours utilized in Dept. P1 6,100 4,150 10,250
Actual labour hours utilised in Dept. P2 8,200 7,400 15,600
3. Computation of actual overhead rates for each production department from

actual data
Production Service Department
Department
P1 P2 S1 S2
Actual factory overheads for the month of Jan, 2020 (₹) 2,50,000 2,25,000 80,000 60,000
Allocation of service Dept. S1’s costs to production 40,000 40,000 (80,000)
Dept. P1 and P2 equally (₹)
4.11
Allocation of service Dept. S2’s costs to production 40,000 20,000 (60,000)

Dept. P1 and P2 in the ratio of 2:1 (₹)
Total 3,30,000 2,85,000 -- --
Actual machine hours in Dept. P1 (working note 2) 10,250 --
Actual labour hours in Dept. P2 (working note 2) -- 15,600
Actual machine/ labour hour rate (₹) 32.20 18.27
4. Actual overheads absorbed (based on machine hours)
A : 6,100 hrs × Rs.32.20 = 1,96,420
B : 4,150 hrs ×R s . 32.20=1,33,630
5. Actual overheads absorbed (based on labour hours)

A: 8,200 hrs × Rs.18.27 = 1,49,814
B: 7,400 hrs × Rs.18.27 =1,35,198

Question 9
The following account balances and distribution of indirect charges are taken from the accounts of a
manufacturing concern for the year ending on 31st March 2021
Total Amount Production Departments Service Departments

Item
(Rs.) X (Rs.) Y (Rs.) Z (Rs.) A (Rs.) B (Rs.)
Indirect Material 2,50,000 40,000 60,000 90,000 50,000 10,000
Indirect Labour 5,20,000 90,000 1,00,000 1,40,000 1,20,000 70,000
Supervisor's Salary 1,92,000 - - 1,92,000 - -
Fuel & Heat 30,000
Power 3,60,000
Rent & Rates 3,00,000
Insurance 36,000
Canteen Charges 1,20,000
Depreciation 5,40,000
The following departmental data are also available:
Production Departments Service Departments
X Y Z A B
Area (Sq. ft.) 4,400 4,000 3,000 2,400 1,200
Capital Value of Assets
(Rs.) 40,00,000 60,00,000 50,00,000 10,00,000 20,00,000
Kilowatt Hours 3,500 4,000 3,000 1,500 -
Radiator Sections 20 40 60 50 30
No. of Employees 60 70 120 30 20
Expenses charged to the service departments are to be distributed to other departments by the
following percentages:
X Y Z A B
Department A (%) 30 30 20 - 20
Department B (%) 25 40 25 10 -
PREPARE an overhead distribution statement to show the total overheads of production
departments after re-apportioning service departments' overhead by using simultaneous equation
method. Show all the calculations to the nearest rupee. (MTP 10 Marks, Mar 21)(Same concept
4.12
different figures MTP 10 Marks Nov’21)

Answer 9
Primary Distribution of Overheads
Item Basis Total Production Departments Service

Amount Departments
(Rs.) X (Rs.) Y (Rs.) Z (Rs.) A (Rs.) B (Rs.)
Indirect Material Actual 2,50,000 40,000 60,000 90,000 50,000 10,000
Indirect Labour Actual 5,20,000 90,000 1,00,000 1,40,000 1,20,000 70,000
Supervisor’s Salary Actual 1,92,000 - - 1,92,000 - -
Fuel & Heat Radiator 30,000 3,000 6,000 9,000 7,500 4,500
Sections
{2:4:6:5:3}
Power Kilowatt Hours 3,60,000 1,05,000 1,20,000 90,000 45,000 -
{7:8:6:3:-}
Rent & Rates Area (Sq. ft.) 3,00,000 88,000 80,000 60,000 48,000 24,000
{22:20:15:12:6}
Insurance Capital Value of 36,000 8,000 12,000 10,000 2,000 4,000
Assets
{4:6:5:1:2}
Canteen Charges No. of 1,20,000 24,000 28,000 48,000 12,000 8,000
Employees
{6:7:12:3:2}
Depreciation Capital Value of 5,40,000 1,20,000 1,80,000 1,50,000 30,000 60,000
Assets
{4:6:5:1:2}
Total overheads 23,48,000 4,78,000 5,86,000 7,89,000 3,14,500 1,80,500
Re-distribution of Overheads of Service Department A and B

Total overheads of Service Departments may be distributed by simultaneous equation.
Let, the total overheads of A = a and the total overheads of B = b a = 3,14,500 + 0.10 b
(i) or, 10a - b = 31,45,000 [(i)x10]
b = 1,80,500 + 0.20 a
or, -0.20a + b = 1,80,500
Solving equation (i) & (ii) 10a - b = 31,45,000
-0.20a + b = 1,80,500
9.8a=33,25,500
a = Rs. 3,39,337
Putting the value of ‘a’ in equation (ii), we get b =
1,80,500 + 0.20 × 3,39,337
b = Rs. 2,48,367
Secondary Distribution of Overheads
Production Departments
X (Rs.) Y (Rs.) Z (Rs.)
Total overhead as per primary distribution 4,78,000 5,86,000 7,89,000
Service Department A (80% of Rs.3,39,337) 1,01,801 1,01,801 67,867
4.13
Service Department B (90% of Rs.2,48,367) 62,092 99,347 62,092

Total 6,41,893 7,87,148 9,18,959
Question 10
The following particulars refer to process used in the treatment of material subsequently,
incorporated in a component forming part of an electrical appliance:
(i) The original cost of the machine used (Purchased in June 2013) was Rs. 1,00,000. Its estimated life is
10 years, the estimated scrap value at the end of its life is Rs. 10,000, and the estimated working time
per year (50 weeks of 44 hours) is 2,200 hours of which machine maintenance etc., is estimated to
take up 200 hours.
No other loss of working time expected, setting up time, estimated at 100 hours, is regarded as
productive time. (Holiday to be ignored).
(ii) Electricity used by the machine during production is 16 units per hour at cost of a 90 paisa per unit.
No current is taken during maintenance or setting up.
(iii) The machine required a chemical solution which is replaced at the end of week at a cost of Rs. 200
each time.
(iv) The estimated cost of maintenance per year is Rs. 12,000.
(v) Two attendants control the operation of machine together with five other identical machines. Their
combined weekly wages, insurance and the employer's contribution to holiday pay amount Rs.
1,200.
(vi) Departmental and general works overhead allocated to this machine for the current year amount to
Rs. 20,000.
You are required to CALCULATE the machine hour rate of operating the machine. (MTP 5 Marks,
Apr.’2021)(RTP Nov ’23)
Answer 10
Working Notes:
(i) Total Productive hours = Estimated Working hours – Machine Maintenance hours
= 2,200 hours – 200 hours = 2,000 hours
(ii) Depreciation per annum = Rs. 1,00,000 – Rs. 10,000 / 10years = Rs. 9000
(iii) Chemical solution cost per annum = Rs. 200 × 50 weeks = Rs.10,000
(iv) Wages of attendants (per annum)= Rs. 1,200 × 50 weeks / 6 machines = Rs.10,000
Calculation of Machine hour rate
Particulars Amount (Rs.) Amount (Rs.)

(per annum) (per hour)
A. Standing Charge
(i) Wages of attendants 10,000
(ii) Departmental and general works overheads 20,000
Total Standing Charge 30,000
Standing Charges per hour (30,000/2,000) 15.00
B. Machine Expense
(iii) Depreciation 9,000 4.50
𝑅𝑠.0.9×16𝑢𝑛𝑖𝑡𝑠×1,900ℎ𝑜𝑢𝑟𝑠 - 13.68
(iv) Electricity( 2,000ℎ𝑜𝑢𝑟𝑠
)

4.14
(v) Chemical solution 10,000 5.00

(vi) Maintenance cost 12,000 6.00
Machine operating cost per hour (A + B) 44.18
Question 11
Mix Soap Pvt. Ltd., manufactures three brands of soap – Luxury, Herbal and Beauty. The following
information has been obtained for the period from June 1 to June 30, 2021 relating to three brands:
(10 Marks, Apr.’2021)
Luxury Herbal Beauty

Actual Production (units) 6,750 14,000 77,500
Wages paid (Rs.) 7,500 18,750 1,15,000
Raw materials consumed (Rs.) 20,000 47,000 2,40,000
Selling price per unit (Rs.) 25 15 8
Other data are:
Factory overheads Rs. 80,000
General & administration overheads (equal for all) Rs. 48,000
Selling overheads 20% of Works cost

If the company limits the manufacture to just one brand of soap adopting a single brand
production, then monthly production will be:
Units
Luxury 5,000
Herbal 15,000
Beauty 30,000
Further, factory overheads are to be allocated to each brand on the basis of the units which could
have been produced when single brand production was in operation.
(i) FIND out the Factory overhead rate for all the brands.
(ii) PREPARE a cost statement for the month of June showing the various elements of cost and also the
profit earned. (MTP 10 Marks, Apr.’21)
Answer 11
(i) Calculation of Factory overhead rate.
If the single brand production was in operation, then 1 unit of Luxury = 3 units of Herbal = 6 units of
Beauty. Therefore, the factory overhead ratio in the reverse order would be 5,000:15,000: 30,000 or
1:3:6.
The overhead rate will be lowest in case of brand which will be produced in high number. Therefore, in
case of Beauty soap brand, the overhead rate will be:
80,000
= 6×6,750+3×14,000+1×77,500
80,000
= 40,500+42,000+77,500
=80,000 / 1,60,000 =0.5

So, the overhead rate will be:
Luxury = 0.5 x 6 = Rs. 3
Herbal = 0.5 x 3 = Rs. 1.5
Beauty = 0.5 x 1 = Rs. 0.5
(ii) Statement of Cost of Mix Soap Pvt. Ltd. for the month of June 2021:
4.15
Luxury (Rs.) Herbal (Rs.) Beauty (Rs.) Total (Rs.)

Raw material 20,000 47,000 2,40,000 3,07,000
consumed
Add: Wages paid 7,500 18,750 1,15,000 1,41,250
Prime cost 27,500 65,750 3,55,000 4,48,250
Add: Factory 20,250 21,000 38,750 80,000
overheads
(Rs.3 x 6,750) (Rs.1.5 x 14,000) (Rs.0.5 x 77,500)
Works cost 47,750 86,750 3,93,750 5,28,250
Add: General & 16,000 16,000 16,000 48,000
administration
overheads
(1:1:1)
Add: Selling expenses 9,550 17,350 78,750 1,05,650
(Rs.47,750 x (Rs.86,750 x (Rs. 3,93,750 x
0.20) 0.20) 0.20)
Cost of sales 73,300 1,20,100 4,88,500 6,81,900
Profit (Balancing 95,450 89,900 1,31,500 3,16,850
figure)
Sales 1,68,750 2,10,000 6,20,000 9,98,750
(Rs.25 x 6,750) (Rs.15 x 14,000) (Rs.8 x 77,500)
Question 12
A machine costing ₹ 10 lakhs, was purchased on 01-04-2021. The expected life of the machine is 10
years. At the end of this period its scrap value is likely to be ₹ 10,000. The total cost of all the machines
including new one was ₹ 90 lakhs.
The other information is given as follows:
(i) Working hours of the machine for the year was 4,200 including 200 non-productive hours.
(ii) Repairs and maintenance for the new machine during the year was ₹ 6,000.
(iii)Insurance Premium was paid for all the machine ₹ 9,000.
(iv) New machine consumes 8 units of electricity per hour, the rate per unit being ₹ 3.75
(v) The new machine occupies 1/10th area of the department. Rent of the department is Rs.2,400 per
month.
(vi) Depreciation is charged on straight line basis.
COMPUTE machine hour rate for the new machine. (MTP 5 Marks, Oct.’21)
Answer 12
Computation of machine hour rate of new Machine
Total Per hour (₹)
(₹)
A. Standing Charges
1/9 1,000
I. Insurance Premium ₹ 9,000 *
II. Rent 1/10 × ₹2,400 ×12 months 2,880
B. Machine expenses 3,880 0.97*
I. Repairs and Maintenance (₹ 6,000 ÷ 4,000 hours) 1.50
Depreciation =10,00,000-10,000/ 10 years* 4000 hr 24.75

III. Electricity (8 units x ₹ 3.75) 30.00
Machine hour rate 57.22

4.16
Working Note
Calculation of productive Machine hour rate
Total hours 4,200
Less: Non-Productive hours 200
Effective machine hours 4,000
* ₹ 3,880 ÷ 4,000 hours = ₹ 0.97
Question 13
M/s Avyukt Automobile Parts has four identical machines in its factory. Cost of each machine is ₹
5,00,000 with expected scrap value of 10% at the end of its effective life (9 years). The expected annual
running hours of machine is expected to run for 2,200 hours. The other details in respect of the
machine shop are:
(I) Factory Rent ₹ 5,000 per month

(II) Lighting of Factory ₹ 3,000 per month
(III) Operator Wages (Two operators and each operator is in charge of two machines) ₹10,000 per
month (per Operator)
(IV) Fixed repairs and maintenance charges per machine 2,000 per quarter
(V) Insurance premium for the machine (Annual) 3% of cost
(VI) Forman’s salary (Devoted 1/6th of his time to this factory)₹ 2,500 per month
(VII) Other factory overhead (Annual) ₹40,000
(VIII) Power Consumption per machine per hour 80 units
(IX) Rate of Power ₹ 150 for 100 units
(X) Unproductive Hours lost during repairs 50 per annum
(XI) Unproductive Hours Lost while Job Setting 650 per annum
You are required to COMPUTE a comprehensive machine hour rate assuming power is used during
operating time only. (MTP 10 Marks April ’22)
Answer 13
Computation of Comprehensive Machine Hour Rate per Machine
Particulars Per Annum (₹) Per Hour (₹)

Standing Charges:
Depreciation (Working Note 2) 50,000
Factory Rent (₹ 5,000 x 12 months / 4) 15,000
Lighting of Factory (₹ 3,000 x 12 months / 4) 9,000
Operator Wages (₹ 10,000 x 12 months / 2) 60,000
Repairs and maintenance (₹ 2,000 x 4) 8,000
Insurance premium (₹ 5,00,000 x 3%) 15,000
Forman’s salary (₹ 2,500 x 12 x ⅙ / 4) 1,250
Other factory overhead (₹ 40,000 / 4) 10,000
1,68,250
Standing Charges per hour (₹ 1,68,250 / 1,500 hours) 112.17

4.17
Running Charges:
Power (80 units x ₹ 150 / 100) 120.00
Comprehensive Machine Hour Rate 232.17
Working Notes:
1. Computation of Total Operative Hours

Total Running Hours: 2,200
Less: Unproductive hours lost during repairs 50
Less: Unproductive hours Lost while Job Setting 650
Total Operative Hours 1,500 per annum
2. Calculation of Annual Depreciation
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝐶𝑜𝑠𝑡−𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒
Annual Depreciation =
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑙𝑖𝑓𝑒 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠
𝑅𝑠.5,00,000−𝑅𝑠.50,000
= = Rs. 50,000
9 𝑌𝑒𝑎𝑟𝑠
Question 14
PM Ltd. has three Production Departments P1, P2, P3 and two Service Departments S1 and S2 details
pertaining to which are as under:
P1 P2 P3 S1 S2
Direct wages (₹) 60,000 40,000 60,000 30,000 3,900

Working hours 3,070 4,475 2,419 - -
Value of machines (₹) 12,00,000 16,00,000 20,00,000 1,00,000 1,00,000
H.P. of machines 60 30 50 10 -
Light points 10 15 20 10 5
Floor space (sq. ft.) 2,000 2,500 3,000 2,000 500
The following figures extracted from the accounting records are relevant:
(₹)
Rent and Rates 1,00,000
General Lighting 12,000
Indirect Wages 38,780
Power 30,000
Depreciation on Machines 2,00,000
Sundries 1,93,900
The expenses of the service departments are allocated as under:
P1 P2 P3 S1 S2
S1 20% 30% 40% - 10%
S2 40% 20% 30% 10% -
DETERMINE the total cost of product X which is processed for manufacture in Departments P 1, P2 and
P3 for 4, 5 and 3 hours respectively, given that its Direct Material Cost is ₹ 1,000 and Direct Labour Cost
is ₹ 600. (MTP 10 Marks March ‘22) (Same concept different figures PYP 10 Marks Nov’20 & Old & New
SM)
Answer 14
Statement Showing Distribution of Overheads of PM Ltd.

4.18
Particulars Basis Total Production Departments Service

Departments
P1 P2 P3 S1 S2
(₹) (₹) (₹) (₹) (₹) (₹)
Direct wages Actual 33,900 - - - 30,000 3,900
Rent & rates Area 1,00,000 20,000 25,000 30,000 20,000 5,000
General lighting Light points 12,000 2,000 3,000 4,000 2,000 1,000
Indirect wages Direct wages 38,780 12,000 8,000 12,000 6,000 780
Power H.P. 30,000 12,000 6,000 10,000 2,000 -
Depreciation of Value of 2,00,000 48,000 64,000 80,000 4,000 4,000
machines machines
Sundries Direct wages 1,93,900 60,000 40,000 60,000 30,000 3,900
6,08,580 1,54,000 1,46,000 1,96,000 94,000 18,580
Redistribution of Service Department’s Expenses over Production Departments
P1 P2 P3 S1 S2
(₹) (₹) (₹) (₹) (₹)
Total overhead distributed as above 1,54,000 1,46,000 1,96,000 94,000 18,580
Dept. S1 Overheads apportioned 18,800 28,200 37,600 (94,000) 9,400
(20:30:40:—:10)
Dept. S2 overheads apportioned 11,192 5,596 8,394 2,798 (27,980)
(40:20:30:10:—)
Dept. S1 Overheads apportioned 560 839 1,119 (2,798) 280
(20:30:40:—:10)
Dept. S2 overheads apportioned 124 63 93 - (280)
(40:20:30:10:—)
1,84,676 1,80,698 2,43,206 - -
Working hours 3,070 4,475 2,419
Rate per hour 60.16 40.38 100.54
Determination of total cost of Product ‘X’
(₹)
Direct material cost 1,000.00
Direct labour cost 600.00
Overhead cost (See working note) 744.14
2,344.14
Working Note:
Overhead cost = (₹ 60.16 × 4 hrs.) + (₹ 40.38 × 5 hrs.) + (₹ 100.54 × 3 hrs.) = ₹ 240.62 + ₹ 201.90 +
₹ 301.62 = ₹ 744.14
Question 15
A work-shop has 8 identical machines operated by 6 operators. The machine cannot work without an
operator wholly engaged on it. The original cost of all the 8 machines works out to ₹ 64,00,000. The
following particulars are furnished for a six months’ period:
Normal available hours per operator 1,248
Absenteeism (without pay) hours per operator 18
Leave (with pay) hours per operator 20
Normal unavoidable idle time-hours per operator 10
Production bonus estimated 10% on wages
4.19
Power consumed ₹ 80,500

Supervision and Indirect Labour ₹ 33,000
Lighting and Electricity ₹ 12,000
Average rate of wages per day of 8 hours per operator ₹ 200
The following particulars are given for a year:
Insurance ₹ 7,20,000
Sundry work Expenses ₹ 1,00,000
Management Expenses allocated ₹ 10,00,000
Depreciation 10% on the original cost
Repairs and Maintenance (including consumables): 5% of the value of all the machines. Prepare a
statement showing the comprehensive machine hour rate for the machine shop.
(MTP 10 Marks Sep’22)
Answer 15
Workings:
Particulars Six months 6
operators (Hours)
Normal available hours half yearly (1,248 x 6 operators) 7,488
Less: Absenteeism hours (18 x 6 operators) (108)
Paid hours (A) 7,380
Less: Leave hours (20 x 6 operators) (120)
Less: Normal idle time (10 x 6 operators) (60)
Effective working hours 7,200
Computation of Comprehensive Machine Hour Rate
Particulars Amount for six

months (₹)
Operators' wages (7,380/8 x200) 1,84,500
Production bonus (10% on wages) 18,450
Power consumed 80,500
Supervision and indirect labour 33,000
Lighting and Electricity 12,000
Repair and maintenance {(5% × ₹ 64,00,000)/2} 1,60,000
Insurance (₹ 7,20,000/2) 3,60,000
Depreciation {(₹ 64,00,000 × 10%)/2} 3,20,000
Sundry Work expenses (₹ 1,00,000/2) 50,000
Management expenses (₹ 10,00,000/2) 5,00,000
Total Overheads for 6 months 17,18,450
Comprehensive Machine Hour Rate = ₹ 17,18,450/7,200 hours ₹ 238.67
Question 16
Madhu Ltd has calculated a predetermined overhead rate of ₹22 per machine hour for its Quality Check
(QC) department. This rate has been calculated for the budgeted level of activity and is considered as
appropriate for absorbing overheads. The following overhead expenditures at various activity levels had
been estimated.
Total Number of machine
overheads hours
₹3,38,875 14,500
₹3,47,625 15,500
₹3,56,375 16,500

4.20
(i) COMPUTE the variable overhead absorption rate per machine hour.
(ii) COMPUTE the estimated total fixed overheads.
(iii) CALCULATE the budgeted level of activity in machine hours.
CALCULATE the amount of under/over absorption of overheads if the actual machine hours were 14,970
and actual overheads were ₹3,22,000. (MTP Oct’22, MTP May’20, April ‘19, 5 Marks)
Answer 16
(i) Computation of variable overhead absorption rate:
Variable overhead absorption rate =
𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑖𝑛 𝑇𝑜𝑡𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠
𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑖𝑛 𝑙𝑒𝑣𝑒𝑙𝑠 𝑖𝑛 𝑡𝑒𝑟𝑚𝑠 𝑜𝑓 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 ℎ𝑜𝑢𝑟𝑠
𝑅𝑠. 3,47,625 − 𝑅𝑠. 3,38,875

=
15,500ℎ𝑜𝑢𝑟𝑠 − 14 ℎ𝑜𝑢𝑟𝑠
= ₹ 8.75 per Machine hour.
(ii) Computation of Total fixed overheads

Total overheads at 14,500 hours 3,38,875
Less: Variable overheads (Rs. 8.75 × 14,500) (1,26,875)
Total fixed overheads 2,12,000
(iii) Calculation of Budgeted level of activity in machine hours: Let budgeted level of activity = X
Then,
(𝑅𝑠.8.75𝑋+𝑅𝑠.2,12,000)
𝑋
=Rs.22
8.75X + Rs.2,12,000 = 22X
13.25X = 2,12,000
X =16,000
Thus, budgeted level of activity = 16,000 machine hours.
(iv) Calculation of Under / Over absorption of overheads:
(Rs.)
Actual overheads 3,22,000
Absorbed overheads (14,970 hours × Rs. 22 per 3,29,340
hour)
Over-absorption (3,29,340 – 3,22,000) 7,340
Question 17
STATE Direct Expenses with examples. (MTP 5 Marks Oct’22)
Answer 17
Expenses other than direct material cost and direct employee cost, which are incurred to manufacture a
product or for provision of service and can be directly traced in an economically feasible manner to a cost
object. The following costs are examples for direct expenses:
(a) Royalty paid/ payable for production or provision of service;
(b) Hire charges paid for hiring specific equipment;
(c) Cost for product/ service specific design or drawing;
(d) Cost of product/ service specific software;
(e) Other expenses which are directly related with the production of goods or provision of service.
Question 18
PLR Ltd. manufacturers a single product and recovers the overheads by adopting a single blanket rate
based on machine hours. The budgeted production overheads of the factory for the FY 2019-20 are Rs.
4.21
50,40,000 and budgeted machine hours are 6,000.

For a period of first six months of the financial year 2019?20, following information were extracted from
the books:
Actual production overheads Rs. 34,08,000
Amount included in the production overheads:
Paid as per court’s order Rs. 4,50,000
Expenses of previous year booked in current year Rs. 1,00,000
Paid to workers for strike period under an award Rs. 4,20,000
Obsolete stores written off Rs. 36,000
Production and sales data of the concern for the first six months are as under:
Production:
Finished goods 1,10,000 units
Works-in-progress
80,000 units
(50% complete in every respect)
Sale:
Finished goods 90,000 units
The actual machine hours worked during the period were 3,000 hours. It is revealed from the analysis
of information that 40% of the over/under-absorption was due to defective production policies and
the balance was attributable to increase in costs.
You are required:
(i) to determine the amount of over/ under absorption of production overheads for the period,
(ii) to show the accounting treatment of over/ under-absorption of production overheads, and
(iii) to apportion the over/ under-absorbed overheads over the items. (RTP Nov’19, PYP 10 Marks Nov’19)
(Same concept different figures RTP May’18)
Answer 18
(i) Amount of over/ under absorption of production overheads during the period of first six months of the
year 2019-20:
Amount (Rs. ) Amount (Rs. )
Total production overheads actually incurred during the period 34,08,000
4,50,000
Less: Amount paid to worker as per court order
Expenses of previous year booked in the current year 1,00,000
Wages paid for the strike period under an award 4,20,000
Obsolete stores written off 36,000 10,06,000
24,02,000
Less: Production overheads absorbed as per machine hour rate
25,20,000
(3,000 hours × Rs. 840*)
Amount of over absorbed production overheads 1,18,000
*BudgetedMachine hour rate (Blanket rate) = 50,40,000 / 6,000hours = Rs. 840 per hour
(ii) Accounting treatment of over absorbed production overheads: As, 40% of the over absorbed overheads
were due to defective production policies, this being abnormal, hence should be credited to Costing
Profit and Loss Account.
Amount to be credited to Costing Profit and Loss Account = Rs. 1,18,000× 40% = Rs. 47,200.
Balance of over absorbed production overheads should be distributed over Works in progress, Finished
goods and Cost of sales by applying supplementary rate*. Amount to be distributed = Rs. 1,18,000× 60%
4.22
= Rs. 70,800
𝑅𝑠.70,800
Supplementary rate = 1,50,000𝑢𝑛𝑖𝑡𝑠
= Rs. 0.472 per unit
(iii) Apportionment of over absorbed production overheads over WIP, Finished goods and Cost of sales:
Equivalent Amount
completed units (Rs. )
Work-in-Progress (80,000 units × 50% 40,000 18,880
×0.472)
Finished goods (20,000 units × 0.472) 20,000 9,440
Cost of sales (90,000 units × 0.472) 90,000 42,480
Total 1,50,000 70,800
This was a numerical problem from the topic ‘Overhead’. The question required to
ascertain under absorbed production overhead, treatment and apportionment of the
same. Performance of the examinees was above average.
Question 19
The Union Ltd. has the following account balances and distribution of direct charges on 31st March,
2019.
Production Depts. Service Depts.

Total Machine Shop Packing General Stores
Plant
Allocated Overheads: (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Indirect labour 29,000 8,000 6,000 4,000 11,000
Maintenance Material 9,900 3,400 1,600 2,100 2,800
Misc. supplies 5,900 1,500 2,900 900 600
Supervisor’s salary 16,000 -- -- 16,000 --
Cost & payroll salary 80,000 -- -- 80,000 --
Overheads to be apportioned:
Power 78,000
Rent 72,000
Fuel and Heat 60,000
Insurance 12,000
Taxes 8,400
The following data were compiled by means of the factory survey made in the previous year:
Floor Space Radiator No. of Investment H.P.
Section employees hours
Machine Shop 2,000 Sq. ft. 45 20 8,00,000 3,500
Packing 800 Sq. ft. 90 12 2,40,000 500
General Plant 400 Sq. ft. 30 4 80,000 -
Stores & 1,600 Sq. ft. 60 8 1,60,000 1,000
maintenance
Expenses charged to the stores departments are to be distributed to the other departments by the
following percentages:

4.23
Machine shop 50%; Packing 20%; General Plant 30%;

General Plant overheads is distributed on the basis of number of employees.
(a) PREPARE an overhead distribution statement with supporting schedules to show computations and
basis of distribution.
(b) DETERMINE the service department distribution by simultaneous equation method.(RTP May ’19)
(Same concept different figures Old & New SM)
Answer 19
(a) Overhead Distribution Statement
Production Departments Service Departments
Machine Packing General Stores
Shops Plant
Allocated Overheads: (Rs. ) (Rs. ) (Rs. ) (Rs. )

Indirect labour 8,000 6,000 4,000 11,000
Maintenance Material 3,400 1,600 2,100 2,800
Misc. supplies 1,500 2,900 900 600
Supervisor’s salary — — 16,000 —
Cost & payroll salary — — 80,000 —
Total allocated overheads 12,900 10,500 1,03,000 14,400
Add: Apportioned Overheads (As
per Schedule below) 1,84,350 70,125 22,775 73,150
1,97,250 80,625 1,25,775 87,550
Schedule of Apportionment of Overheads
Production Service Departments
Departments
Item of Cost Basis
Machine Packing General Stores
Shops (Rs.) (Rs.) Plant (Rs.) (Rs.)
Power HP hours 54,600 7,800 -- 15,600
(7 : 1 : - : 2)
Rent Floor space 30,000 12,000 6,000 24,000
(5 : 2 : 1 : 4)
Fuel & Heat Radiator sec. 12,000 24,000 8,000 16,000
(3 : 6 : 2 : 4)
Insurance Investment 7,500 2,250 750 1,500
(10 : 3 : 1 : 2)
Taxes Investment 5,250 1,575 525 1,050
(10 : 3 : 1 : 2)
Depreciation Investment 75,000 22,500 7,500 15,000
(10 : 3 : 1 : 2)
1,84,350 70,125 22,775 73,150
(b) Re-distribution of Overheads of Service Departments to Production Departments:
Let, the total overheads of General Plant = ‘ a’ and the total overheads of Stores = ‘b’
a = 1,25,775 + 0.3b................................................... (i)
b = 87,550 + 0.2a .................................................. (ii)
Putting the value of ‘b’ in equation no. (i) a = 1,25,775 + 0.3 (87,550 + 0.2a)
Or a = 1,25,775 + 26,265 + 0.06a
Or 0.94a = 1,52,040 Or a = 1,61,745 (appx.)

4.24
Putting the value of a = 1,61,745 in equation no. (ii) to get the value of ‘b’
b = 87,550 + 0.2 × 1,61,745 = 1,19,899
Secondary Distribution Summary
Particulars Total (Rs.) Machine Shops (Rs.) Packing (Rs.)

Allocated and Apportioned 2,77,875 1,97,250.00 80,625.00
overheads as per Primary
distribution
- General Plant 1,61,745 80,872.50 48,523.50
5 3
(1,61,745 × ) (1,61,745 × )
10 10
- Stores 1,19,899 59,949.50 23,979.80

(1,19,899 × 50%) (1,19,899 ×
20%)
3,38,072.00 1,53,128.30
Question 20
SreeAjeet Ltd. having fifteen different types of automatic machines furnishes information as under
for 20X8-20X9
(i) Overhead expenses: Factory rent Rs. 1,80,000 (Floor area 1,00,000 sq. ft.), Heat and gas Rs. 60,000 and
supervision Rs. 1,50,000.
(ii) Wages of the operator are Rs. 200 per day of 8 hours. Operator attends to one machine when it is
under set up and two machines while they are under operation.
In respect of machine B (one of the above machines) the following particulars are furnished:
(i) Cost of machine Rs. 1,80,000, Life of machine- 10 years and scrap value at the end of its life Rs. 10,000
(ii) Annual expenses on special equipment attached to the machine are estimated as Rs. 12,000
(iii) Estimated operation time of the machine is 3,600 hours while set up time is 400 hours per annum
(iv) The machine occupies 5,000 sq. ft. of floor area.
(v) Power costs Rs. 5 per hour while machine is in operation.
ESTIMATE the comprehensive machine hour rate of machine B. Also find out machine costs to be
absorbed in respect of use of machine B on the following two work orders
Work order- 1 Work order-2
Machine set up time (Hours) 15 30
Machine operationtime (Hours) 100 190
(RTP Nov.’18)
Answer 20
Sree Ajeet Ltd.
Statement showing comprehensive machine hour rate of Machine B
(Rs. )
Standing Charges:
Factory rent {(Rs. 1,80,000/1,00,000 sq. ft.) × 5,000 Sq. ft.} 9,000
Heat and Gas (Rs. 60,000/15 machines) 4,000
Supervision (Rs. 1,50,000/ 15 machines) 10,000
Depreciation [(Rs. 1,80,000 – Rs. 10,000)/ 10 years] 17,000
Annual expenses on special equipment 12,000
52,000
Fixed cost per hour (Rs. 52,000/ 4,000 hrs.) 13/-
Set up rate Operational rate
4.25
Per hour (Rs. ) Per hour (Rs. )

Fixed cost 13.00 13.00
Power — 5.00
Wages 25.00 12.50
Comprehensive machine hour rate per hr. 38.00 30.50
Statement of ‘B’ machine costs
to be absorbed on the two work orders
Work order-1 Work order-2

Hours Rate Amount Hours Rate Amount
Rs. Rs. Rs. Rs. Rs.
Set up time cost 15 38 570 30 38 1,140
Operation time cost 100 30.5 3,050 190 30.5 5,795
Total cost 3,620 6,935
Question 21
A manufacturing unit has purchased and installed a new machine at a cost of Rs. 24,90,000 to its fleet
of 5 existing machines. The new machine has an estimated life of 12 years and is expected to realise
Rs. 90,000 as scrap value at the end of its working life.
Other relevant data are as follows:
(i) Budgeted working hours are 2,496 based on 8 hours per day for 312 days. Plant maintenance work
is carried out on weekends when production is totally halted. The estimated maintenance hours are
416. During the production hours machine set -up and change over works are carried out. During the
set-up hours no production is done. A total 312 hours are required for machine set-ups and change
overs.
(ii) An estimated cost of maintenance of the machine is Rs. 2,40,000 p.a.
(iii) The machine requires a component to be replaced every week at a cost of Rs. 2,400.
(iv) There are three operators to control the operations of all the 6 machines. Each operator is paid Rs.
30,000 per month plus 20% fringe benefits.
(v) Electricity: During the production hours including set-up hours, the machine consumes 60 units per
hour. During the maintenance the machine consumes only 10 units per hour. Rate of electricity per
unit of consumption is Rs. 6.
(vi) Departmental and general works overhead allocated to the operation during last year was Rs.
5,00,000. During the current year it is estimated to increase by 10%.
Required:
COMPUTE the machine hour rate. (RTP May ’21)
Answer 21
Working Note:
1. Effective machine hour:
= Budgeted working hours – Machine Set-up time
= 2,496 hours – 312 hours = 2,184 hours.
2. Operators’ salary per annum:
Salary (3 operators × Rs.30,000 × 12 months) Rs. 10,80,000
Add: Fringe benefits (20% of Rs.10,80,000) Rs. 2,16,000
Rs. 12,96,000
3. Depreciation per annum
𝑅𝑠.24,90,000−𝑅𝑠.90,000
= Rs. 2,00,000
12 𝑌𝑒𝑎𝑟𝑠

4.26
Computation of Machine hour Rate

Amount Amount per
p.a. (Rs.) hour (Rs.)
Standing charges
Operators’ Salary 12,96,000 98.90
𝑅𝑠. 12,96,000 1
( × )
6 𝑚𝑎𝑐ℎ𝑖𝑛𝑒𝑠 2,184 ℎ𝑜𝑢𝑟𝑠
Departmental and general overheads:

(Rs. 5,00,000 × 110%) 5,50,000 41.97
𝑅𝑠. 5,50,000 1
( × )
6 𝑚𝑎𝑐ℎ𝑖𝑛𝑒𝑠 2,184 ℎ𝑜𝑢𝑟𝑠
(A) 18,46,000 140.87

Machine Expenses
Depreciation 2,00,000 91.58
𝑅𝑠. 2,00,000
( )
Electricity:
During working hours (2,496 hours × 60 units ×Rs.6) 8,98,560 411.43
During maintenance hours (416 hours × 10 units ×Rs.6) 24,960 11.43
Component replacement cost (2,400 × 52 weeks) 1,24,800 57.14
Machine maintenance cost 2,40,000 109.89
(B) 14,88,320 681.47
Machine Hour Rate (A + B) 822.34
Question 22
PL Ltd. has three production departments P1, P2 and P3 and two service departments S1 and S2.
The following data are extracted from the records of the company for the month of October, 2020:
(Rs.)
Rent and rates 12,50,000
General lighting 1,50,000
Indirect Wages 3,75,000
Power 5,00,000
Depreciation on machinery 10,00,000
Insurance of machinery 4,00,000
Other Information:
P1 P2 P3 S1 S2
Direct wages (Rs.) 7,50,000 5,00,000 7,50,000 3,75,000 1,25,000
Horse Power of 60 30 50 10 -
Machines used
Cost of machinery 60,00,000 80,00,000 1,00,00,000 5,00,000 5,00,000
(Rs.)
Floor space (Sq. ft) 2,000 2,500 3,000 2,000 500
Number of light 10 15 20 10 5
points

4.27
Production hours 6,225 4,050 4,100 - -

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

P1 P2 P3 S1 S2
S1 20% 30% 40% - 10%
S2 40% 20% 30% 10% -
Required:
(i) COMPUTE overhead absorption rate per production hour of each production department.
(ii) DETERMINE the total cost of product X which is processed for manufacture in department P1, P2
and P3 for 5 hours, 3 hours and 4 hours respectively, given that its direct material cost is Rs. 12,500
and direct labour cost is Rs. 7,500. (RTP Nov ’21)(Same concepts different figures RTP May’20)
Answer 22
Primary Distribution Summary
Item of cost Basis of Total P1 P2 P3 S1 S2
apportionment (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Direct wages Actual 5,00,000 -- -- -- 3,75,00 1,25,000
0
Rent and Floor area 12,50,000 2,50,000 3,12,500 3,75,000 2,50,00 62,500
Rates (4 : 5 : 6 : 4 : 1) 0
General Light points 1,50,000 25,000 37,500 50,000 25,000 12,500
lighting (2 : 3 : 4 : 2 : 1)
Indirect Direct wages (6 3,75,000 1,12,500 75,000 1,12,500 56,250 18,750
wages : 4 : 6 : 3 : 1)
Power Horse Power of 5,00,000 2,00,000 1,00,000 1,66,667 33,333 -
machines used
(6 : 3 : 5 : 1)
Depreciation Value of 10,00,000 2,40,000 3,20,000 4,00,000 20,000 20,000
of machinery machinery (12 :
16 : 20 : 1 : 1)
Insurance of Value of 4,00,000 96,000 1,28,000 1,60,000 8,000 8,000
machinery machinery (12 :
16 : 20 : 1 : 1)
41,75,000 9,23,500 9,73,000 12,64,167 7,67,58 2,46,750
3
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 = 7,67,583 + 0.10 S2
S2 = 2,46,750 + 0.10 S1
Substituting the value of S2 in S1 we get S1 = 7,67,583 + 0.10 (2,46,750 + 0.10 S1)
S1 = 7,67,583 + 24,675 + 0.01 S1
0.99 S1 = 7,92,258
S1 = Rs. 8,00,260
S2 = 2,46,750 + 0.10 X 8,00,260
= Rs. 3,26,776
Secondary Distribution Summary
Particulars Total (Rs.) 𝑷𝟏 (𝒓𝒔. ) 𝑷𝟐 (𝒓𝒔. ) 𝑷𝟑 (𝒓𝒔. )
Allocated and Apportioned 31,60,667 9,23,500 9,73,000 12,64,167
4.28
over-heads as per primary

distribution
𝑆1 8,00,260 1,60,052 2,40,078 3,20,104
𝑆2 3,26,776 1,30,710 65,355 98,033
12,14,262 12,78,433 16,82,304
(i) Overhead rate per hour
P1 P2 P3
Total overheads cost (Rs.) 12,14,262 12,78,433 16,82,304
Production hours worked 6,225 4,050 4,100
Rate per hour (Rs.) 195.06 315.67 410.32
(ii) Cost of Product X
(Rs.)
Direct material 12,500.00
Direct labour 7,500.00
Prime cost 20,000.00
Production on overheads
P1 5 hours X Rs. 195.06 = 975.30
P2 3 hours X Rs. 315.67 = 947.01
P3 4 hours X Rs. 410.32 = 1,641.28 3,563.59
Factory cost 23,563.59
Question 23
Pretz Ltd. is a manufacturing company having two production departments, ‘A’ & ‘B’ and two service
departments ‘X’ & ‘Y’. The following is the budget for March, 2022:
Total (₹) A (₹) B (₹) X (₹) Y (₹)
Direct material 2,00,000 4,00,000 4,00,000 2,00,000
Direct wages 10,00,000 4,00,000 2,00,000 4,00,000
Power (Machine) 5,10,000
General Lighting 3,00,000
Perquisites 4,00,000
Additional information:
Area (Sq. ft.) 500 250 250 500
Capital value of assets (₹ lakhs) 40 80 20 20
Light Points 10 20 10 10
Machine hours 1,000 2,000 1,000 1,000
Horse power of machines 50 40 15 25
A technical assessment of the apportionment of expenses of service departments is as under:
A B X Y
Service Dept. ‘X’ (%) 55 25 – 20
Service Dept. ‘Y’ (%) 60 35 5 –
(a) PREPARE a statement showing distribution of overheads to various departments.
(b) PREPARE a statement showing re-distribution of service departments expenses to production
departments using-
(i) Simultaneous equation method
(ii) Trial and error method
4.29
(iii) Repeated Distribution Method. (RTP May ’22)

Answer 23
(a) Primary Distribution of Overheads
Basis Total (₹) A (₹) B (₹) X (₹) Y (₹)
Direct materials Direct 6,00,000 – – 4,00,000 2,00,000
Direct wages Direct 6,00,000 – – 2,00,000 4,00,000
Factory rent Area 9,00,000 3,00,000 1,50,000 1,50,000 3,00,000
(2:1:1:2)
Power H.P. × Machine 5,10,000 1,50,000 2,40,000 45,000 75,000
(Machine) Hrs.
(10:16:3:5)*
Depreciation Capital value 2,00,000 50,000 1,00,000 25,000 25,000
(2:4:1:1)
General Light Points 3,00,000 60,000 1,20,000 60,000 60,000
Lighting
(1:2:1:1)
Perquisites Direct Wages 4,00,000 2,00,000 80,000 40,000 80,000
(5:2:1:2)
35,10,000 7,60,000 6,90,000 9,20,000 11,40,000
*{(1000×50) : (2000×40) : (1000×15) : (1000×25)}
(50000 : 80000 : 15000 : 25000)
(10 : 16 : 3 : 5)
(b) (i) Redistribution of Service Department’s expenses using ‘Simultaneous equation method’
X = 9,20,000 + 0.05 Y
Y = 11,40,000 + 0.20 X
Substituting the value of X,
Y = 11,40,000 + 0.20 (9,20,000 + 0.05 Y)
= 13,24,000 + 0.01 Y
Y - 0.01Y = 13,24,000
Y = 13,24,000 / 0.99
Y = ₹ 13,37,374
The total expense of Y is ₹ 13,37,374 and that of X is ₹ 9,86,869 i.e.,₹ 9,20,000 + (0.05 × ₹ 13,37,374).
Distribution of Service departments’ overheads to Production departments

Production
Departments
A (₹) B (₹)
Overhead as per primary distribution 7,60,000 6,90,000
Dept- X (55% and 25% of ₹ 9,86,869) 5,42,778 2,46,717
Dept- Y (60% and 35% of ₹ 13,37,374) 8,02,424 4,68,081
21,05,202 14,04,798
(ii) Redistribution of Service Department’s expenses using ‘Trial and Error Method’:
Service
Departments
X (₹) Y (₹)
Overheads as per primary distribution 9,20,000 11,40,000

4.30
(i) Apportionment of Dept-X expenses to Dept-Y (20% of ₹

9,20,000) --- 1,84,000
--- 13,24,000
(ii) Apportionment of Dept-Y expenses to Dept-X (5% of ₹
13,24,000) 66,200 ---
66,200) --- 13,240
662 ---
13,240)
662) 132

7
132)
Total 9,86,869 13,37,372
Distribution of Service departments’ overheads to Production departments
Production Departments
A (₹) B (₹)
Overhead as per primary distribution 7,60,000 6,90,000
Dept- X (55% and 25% of ₹ 9,86,869) 5,42,778 2,46,717
Dept- Y (60% and 35% of ₹ 13,37,372) 8,02,423 4,68,080
21,05,201 14,04,797
(iii) Redistribution of Service Department’s expenses using ‘repeated distribution method’:
A (₹) B (₹) X (₹) Y (₹)
Overhead as per primary 7,60,000 6,90,000 9,20,000 11,40,000
distribution
Dept. X overhead 5,06,000 2,30,000 (9,20,000) 1,84,000
apportioned in the ratio
(55:25:—:20)
Dept. Y overhead 7,94,400 4,63,400 66,200 (13,24,000)
(60:35:5: —)
Dept. X overhead apportioned in 36,410 16,550 (66,200) 13,240
the ratio (55:25:—:20)
Dept. Y overhead 7,944 4,634 662 (13,240)
(60:35:5: —)
Dept. X overhead 364 166 (662) 132
(55:25:—:20)
Dept. Y overhead 79 46 7 (132)
(60:35:5: —)
Dept. X overhead 4 3 (7) -
(55:25:—:20)

4.31
21,05,201 14,04,799 - -
Question 24
SE Limited manufactures two products- A and B. The company had budgeted factory overheads
amounting to ` 36,72,000 and budgeted direct labour hour of 1,80,000 hours. The company uses pre-
determined overhead recovery rate for product costing purposes.
The department-wise break-up of the overheads and direct labour hours were as follows:
Particulars Budgeted Budgeted direct Rate per direct

overheads labour hours labour hour
Department Pie ` 25,92,000 90,000 hours ` 28.80
Department Qui ` 10,80,000 90,000 hours ` 12.00
Total ` 36,72,000 1,80,000 hours
Additional Information:
Each unit of product A requires 4 hours in department Pie and 1 hour in department Qui. Also, each
unit of product B requires 1 hour in department Pie and 4 hours in department Qui.
This was the first year of the company's operation. There was no WIP at the end of the year. However,
1,800 and 5,400 units of Products A and B were on hand at the end of the year.
The budgeted activity has been attained by the company. You are required to:
(i) DETERMINE the production and sales quantities of both products 'A' and 'B' for the above year.
(ii) ASCERTAIN the effect of using a pre-determined overhead rate instead of department-wise overhead
rates on the company's income due to its effect on stock value.
(iii) CALCULATE the difference in the selling price due to the use of pre-determined overhead rate instead
of using department-wise overhead rates. Assume that the direct costs (material and labour costs) per
unit of products A and B were ` 25 and ` 40 respectively and the selling price is fixed by adding 40%
over and above these costs to cover profit and selling and administration overhead. (RTP Nov’22)
Answer 24
i. Computation of production and sales quantities:
The products processing times are as under –
Product A B Total
Department Pie 4 hours 1 hour 90,000 hours
Department Qui 1 hour 4 hours 90,000 hours
Let X and Y be the number of units (production quantities) of the two products. Converting these into
equations, we have –
4X + Y = 90,000 & X + 4Y = 90,000
Solving the above, we get X = 18,000; Y = 18,000
Hence, the Production and Sales Quantities are determined as under –
Product Production Quantity Closing Stock (Given) Sales Quantity
(Balancing Figure)
A 18,000 units 1,800 units 16,200 units
B 18,000 units 5,400 units 12,600 units
ii. Effect of using pre-determined rate of overheads on the company's profit

Produc Closing Overhead included Overhead included using Difference in
t Stock using pre- department rate overhead in

4.32
Quantity detesrmined rate closing stock value

/ Effect on closing
stock value
A 1,800 1,800 x 5 hours Pie = 1,800 units x 4 hours x ` (-) ` 45,360
units x ` 20.40 28.80
= ` 1,83,600 = ` 2,07,360
Qui = 1,800 units x 1 hour x ` 12
= ` 21,600
B 5,400 5,400 x 5 hours Pie = 5,400 units x 1 hour x ` (+) ` 1,36,080
units x ` 20.40 28.80
= ` 5,50,800 = ` 1,55,520
Qui = 5,400 units x 4 hours x `12
= ` 2,59,200
Total ` 7,34,400 ` 6,43,680 (+) ` 90,720
Use of pre-determined overhead rate has resulted in over valuation of stock by ` 90,720 due to which
the company's income would be affected (increase) by ` 90,720. Profit would be affected only to the
extent of Overhead contained in closing finished goods and closing WIP, if any.
iii. Effect of using pre-determined on the products' selling prices

Particulars Product A Product B
Selling Price per unit if pre-determined overhead rate is used `177.80 ` 198.80
Selling Price per unit if department wise rate is used ` 213.08 `163.52
Difference ` 35.28 ` 35.28
Under-Priced Over-Priced
Workings:
1. Pre-determined overhead recovery rate

`36,72,,000
= =` 20.40 per direct labour
1,80,000 ℎ𝑜𝑢𝑟𝑠
2. If pre-determined recovery rate is used
Particulars Product A in ` Product B in `

Materials & Labour 25.00 40.00
Add: Production Overhead 102.00 102.00
A = 5 hours x ` 20.40 per hour B = 5 hours x ` 20.40 per hour
Cost of production 127.00 142.00
Add: 40% of margin 50.80 56.80
177.80 198.50
(1) If department-wise recovery rate is used
Particulars Product A in ` Product B in `
Materials & Labour 25.00 40.00
Add: Production Overhead 127.20 76.80
A = Pie = 4 hours x ` 28.80 Qui = 1 hour x ` 12
B = Pie = 1 hour x ` 28.80
Qui = 4 hours x ` 12
Cost of production 152.20 116.80
Add: 40% of margin 60.88 46.72
Selling Price per unit 213.08 163.52

4.33
Question 25
SANDY Ltd. is a manufacturing company having three production departments, ‘A’, ‘B’ and ‘C’ and
two service departments ‘X’ and ‘Y’. The following is the budget for December 2022:
Total (`) A (`) B (`) C (`) X (`) Y (`)

Direct material 1,60,000 3,20,000 6,40,000 3,20,000 1,60,000
Direct wages 8,00,000 3,20,000 12,80,000 1,60,000 3,20,000
Power 4,00,000
Other overheads 14,40,000
Additional
information:
Area (Sq. ft.) 800 400 800 400 800
Capital value of 32 64 32 16 16
assets (`) lakhs)
Machine hours 1,600 3,200 6,400 1,600 1,600
Horsepower of 80 64 32 24 40
machines
Apportionment of expenses of service departments is as under:
A B C X Y
Service Dept. ‘X’ 72 24 48 – 16
Service Dept. ‘Y’ 96 56 – 8 –
Required:
(i) PREPARE a statement showing distribution of overheads to various departments.
(ii) PREPARE a statement showing re-distribution of service departments expenses to production
departments using Repeated Distribution method. Also CALCULATE machine hour rate of the
production departments 'A', 'B', 'C'. (RTP May 23)
Answer 25
(i) Overhead Distribution Summary
Basis Total (`) A (`) B (`) C (`) X (`) Y (`)
Direct materials Direct – – – – 3,20,000 1,60,000

Direct wages Direct – – – – 1,60,000 3,20,000
Factory rent Area 6,40,000 1,60,000 80,000 1,60,000 80,000 1,60,000
(2:1:2:1:2)
Power H.P. × 4,00,000 80,000 1,28,000 1,28,000 24,000 40,000

(10:16:16:3:5)* Machine
Hrs.
Depreciation Capital 1,60,000 32,000 64,000 32,000 16,000 16,000

(2:4:2:1:1) value of
assets
Other overheads Machine 14,40,000 1,60,000 3,20,000 6,40,000 1,60,000 1,60,000

(1:2:4:1:1) hrs.

4.34
Total 26,40,000 4,32,000 5,92,000 9,60,000 7,60,000 8,56,000
*{(1600×80) : (3200×64) : (6400×32) : (1600×24) : (1600×40)}

(1,28,000 : 2,04,800 : 2,04,800 : 38,400 : 64,000)
(10:16:16:3:5)
(ii) Redistribution of service department’s expense using repeated distribution Method:
A (`) B (`) C (`) X (`) Y (`)
Total overheads 4,32,000 5,92,000 9,60,000 7,60,000 8,56,000
Dept. X overhead 3,42,000 1,14,000 2,28,000 -7,60,000 76,000
(72:24:48: —:16)
Dept. Y overhead 5,59,200 3,26,200 - 46,600 -9,32,000
(96:56: —:8: —)
Dept. X overhead 20,970 6,990 13,980 -46,600 4,660
(72:24:48: —:16)
Dept. Y overhead 2,796 1,631 - 233 -4,660
(96:56: —:8: —)
Dept. X overhead 105 35 70 -233 23
(72:24:48: —:16)
Dept. Y overhead 15 8 - - -23
(96:56: —:8: —)
13,57,086 10,40,864 12,02,050 - -
Calculation of machine hour rate
A B C
A Total overheads (`) 13,57,086 10,40,864 12,02,050
B Machine hours 1,600 3,200 6,400
C Machine hour rate (`) [A ÷ B] 848.18 325.27 187.82
Question 26
M/s. NOP Limited has its own power plant and generates its own power. Information regarding power
requirements and power used are as follows:
Production Dept. Service Dept.
A B X Y
(Horse power hours)
Needed capacity production 20,000 25,000 15,000 10,000
Used during the quarter ended September 16,000 20,000 12,000 8,000
2018
During the quarter ended September 2018, costs for generating power amounted to ₹ 12.60 lakhs out
of which ₹ 4.20 lakhs was considered as fixed cost.
Service department X renders services to departments A, B, and Y in the ratio of 6:4:2 whereas
department Y renders services to department A and B in the ratio of 4: 1.
4.35
The direct labour hours of department A and B are 67500 hours and 48750 hours respectively.
Required:
1 Prepare overheads distribution sheet.
2 Calculate factory overhead per labour hour for the dept. A and dept. B. (PYP Nov ‘18, 5 Marks)
Answer 26
(1) Overheads distribution Sheet
Item Basis Total Amount Production Departments Service Departments
(₹ )
A (₹ ) B (₹) X (₹ ) Y (₹ )
Variable overheads Horse Power 8,40,000 2,40,000 3,00,000 1,80,000 1,20,000
(₹ 12.60 lakhs-₹ 4.20 hours used
lakhs)
Fixed Overheads Horse power
for Capacity 4,20,000 1,20,000 1,50,000 90,000 60,000
production
Total Overheads 12,60,000 3,60,000 4,50,000 2,70,000 1,80,000
Service dept X As per the (2,70,000) 1,35,000 90,000 45,000
allocated to A, B & Y ratio given 6:4:2
Service dept Y As per the (1,80,000+4 1,80,000 45,000
allocated to A & B ratio of 4:1 5000=2,25,000)
Total Overheads of 6,75,000 5,85,000
Production
departments
(2) Calculation of Factory overhead per labour hour Item Production Departments
A (₹ ) B (₹ )
Total overheads 6,75,000 5, 85,000
Direct labour hours 67,500 48,750
Factory overheads per hour 10 12
Question 27
State the bases of apportionment of following overhead costs:
(i) Air-conditioning
(ii) Time keeping

(iii) Depreciation of plant and machinery
(iv) Power/steam consumption
(v) Electric power (Machine operation) (PYP Nov ‘18, 5 Marks)
Answer 27
Overhead Cost Bases of Apportionment
(i) Air- conditioning Floor area, or volume of department
(ii) Time keeping Number of workers
(iii) Depreciation of plant and Capital values
machinery
(iv) Power/steam consumption Technical estimates
(v) Electric power (machine Horse power of machines, or Number of machine
operation) hour, or value of machines or units consumed.
Kilo-watt hours.

4.36
Question 28
Explain Blanket Overhead Rate and Departmental Overhead Rate. How they are calculated? State the
conditions required for the application of Blanket Overhead Rate. (PYP 5 Marks Jan 21, Old & New
SM)
Answer 28
Blanket Overhead Rate: Blanket overhead rate refers to the computation of one single overhead rate
for the whole factory.
This overhead rate is computed as follows:
Blanket Rate = Total overheads for the factory / Total number of units of base for the factory
Departmental Overhead Rate: It refers to the computation of one single overhead rate for a particular
production unit or department.
This overhead rate is determined by the following formula:
Departmental overhead Rate = Overheads of department or cost centre / Corresponding base

Conditions required for the Application of Blanket Overhead:
A blanket rate should be applied in the following cases:
(1) Where only one major product is being produced.

(2) Where several products are produced, but
(a) All products pass through all departments; and
(b) All products are processed for the same length of time in each department.
Question 29
SNS Trading Company has three Main Departments and two Service Departments. The data for each
department is given below:
Departments Expenses (in ₹) Area in (Sq. Mtr) Number of

Main Department: Employees
Purchase Department 5,00,000 12 800
Packing Department 8,00,000 15 1700
Distribution Department 3,50,000 7 700
Service Departments:
Maintenance Department 6,40,000 4 200
Personnel Department 3,20,000 6 250
The cost of Maintenance Department and Personnel Department is distributed on the basis of ‘Area in
Square Metres’ and 'Number of Employees' respectively.
(i) Prepare a Statement showing the distribution of expenses of Service Departments to the Main
Departments using the "Step Ladder method" of Overhead Distribution.
(ii) Compute the Rate per hour of each Main Department, given that, the Purchase Department,
Packing Department and Distribution Department works for 12 hours a day, 24 hours a day and 8
hours a day respectively. Assume that there are 365 days in a year and there are no holidays. (PYP
5 Marks July 21)
Answer 29
(i) Schedule Showing the Distribution of Expenses of Service Departments using Step ladder method.
Main Department Service Department

4.37
Purchase Packing (₹) Distribution (₹) Maintenance (₹) Personnel (₹)

(₹)
Expenses 5,00,000 8,00,000 3,50,000 6,40,000 3,20,000
Distribution of
Maintenance Department
(12:15:7:-:6)
1,92,000 2,40,000 1,12,000 (6,40,000) 96,000
Distribution of Personnel
Department
(800:1700:700:-:-)
1,04,000 2,21,000 91,000 - (4,16,000)
Total 7,96,000 12,61,000 5,53,000 - -
(ii) Calculation of Expenses rate per hour of Main Department
Purchase Packing Distribution
Total apportioned expenses (₹) 7,96,000 12,61,000 5,53,000
Total Hours worked 4,380 8,760 2,920
(12 x 365) (24 x 365) (8 x 365)
Expenses rate per hour (₹) 181.74 143.95 189.38
This practical problem was based on distribution of overheads by using step ladder method
and calculation of rate per hour. Many examinees faced hardship to understand the concept
of step ladder method; hence the overhead distribution was not done correctly leading to
wrong calculation of overhead rate per hour. Performance of the examinees was below
average.
Question 30
XYZ Ltd. manufactures a single product. It recovers factory overheads at a pre - determined rate of ₹
20 per man-day.
During the year 2020-21, the total factory overheads incurred and the man-days actually worked were
₹ 35.50 lakhs and 1.50 lakh days respectively. Out of the amount of ₹ 35.50 lakhs, ₹ 2.00 lakhs were in
respect of wages for stick period and ₹ 1.00 lakh was in respect of expenses of previous year booked
in this current year. During the period, 50,000 units were sold. At the end of the period, 12,000
completed units were held in stock but there was no opening stock of finished goods. Similarly, there
was no stock of uncompleted units at the beginning of the period but at the end of the period there
were 20,000 uncompleted units which may be treated as 65% complete in all respects.
On investigation, it was found that 40% of the unabsorbed overheads were due to factory inefficiency
and the rest were attributable to increase in the cost of indirect materials and indirect labour. You are
required to:
(i) Calculate the amount of unabsorbed overheads during the year 2020 -21.
(ii) Show the accounting treatment of unabsorbed overheads in cost accounts and pass journal entry.
(PYP 10 Marks Dec ‘21)
Answer 30
(i) Amount of under-absorption of overheads during the year 2020-21
(₹)
Total production overheads actually incurred during the year 2020-21 35,50,000
Less: Wages paid during strike period ₹2,00,000

Wages of previous year booked in current year ₹ 1,00,000 3,00,000
4.38
Net production overheads actually incurred: (A) 32,50,000

Production overheads absorbed by 1.50 lakh man-days @ ₹ 20 per 30,00,000
man-day: (B)
Amount of under-absorption of production overheads: [(A)–(B)] 2,50,000
(ii) Accounting treatment of under absorption of production overheads: It is given in the statement of
the question that 62,000 units (50,000 sold + 12,000 closing stock – 0 opening stock) were completely
finished and 20,000 units were 65% complete, 40% of the under-absorbed overheads were due to
factory inefficiency and the rest were attributable to increase in cost of indirect materials and indirect
labour.
(₹)
1. (40% of ₹2,50,000) i.e. ₹ 1,00,000 of under – absorbed overheads were due 1,00,000
to factory inefficiency. This being abnormal, should be debited to the
Costing Profit and Loss A/c
2. Balance (60% of ₹ 2,50,000) i.e. ₹ 1,50,000 of under – absorbed overheads 1,50,000
should be distributed over work-in- progress, finished goods and cost of
sales by using supplementary rate
Total under-absorbed overheads 2,50,000
Apportionment of unabsorbed overheads of ₹1,50,000 over work-in-progress, finished goods and
cost of sales.
Equivalent (₹)
Completed units
Work-in-progress (13,000 units × ₹ 2) (Refer to 20000 * 65% = 13,000 26,000
Working Note)
Finished goods (12,000 units × ₹ 2) 12,000 24,000
Cost of sales (50,000 units × ₹ 2) 50,000 1,00,000
75,000 1,50,000
Journal entry:
Work-in-progress control A/c Dr. ₹ 26,000
Finished goods control A/c Dr. ₹ 24,000
Cost of Sales A/c Dr. ₹ 1,00,000
Costing Profit & Loss A/c Dr. ₹ 1,00,000
To Overhead control A/c ₹ 2,50,000
Working Note:
𝑅𝑠.1,50,000
Supplementary overhead absorption rate = 75,000 𝑢𝑛𝑖𝑡𝑠 = Rs. 2 per unit
The question tested the knowledge of examinees on the treatment of unabsorbed

Overheads in cost accounting. Examinees had to calculate unabsorbed overheads and pass
journal entry after allocating them to Cost of Sales, WIP, and Finished stock by using
supplementary rate. Performance of the examinees was above average.
Question 31
In a manufacturing company, the overhead is recovered as follows: Factory Overheads: a fixed
percentage basis on direct wages and Administrative overheads: a fixed percentage basis on factory
cost.
The company has furnished the following data relating to two jobs undertaken by it in a period.

4.39
Job 1(₹) Job 2(₹)
Direct materials 1,08,000 75,000
Direct wages 84,000 60,000
Selling price 3,33,312 2,52,000
Profit percentage on total cost 12% 20%
(i) Compute the percentage recovery rates of factory overheads and administrative overheads.
(ii) Calculate the amount of factory overheads, administrative overheads and profit for each of
the two jobs.
(iii) Using the above recovery rates, determine the selling price to be quoted for job 3. Additional
data pertaining to Job 3 is as follows:
Direct materials ₹ 68,750
Direct wages ₹ 22,500
Profit percentage on selling price 15%
(PYP 10 Marks May’22) (Same concept different figures Old & New SM) (MTP 10 Marks Oct ’23)
Answer 31
Computation of percentage recovery rates of factory overheads and administrative overheads.
Let the factory overhead recovery rate as percentage of direct wages be F and administrative
overheads recovery rate as percentage of factory cost be A.
Factory Cost of Jobs:
Direct materials + Direct wages + Factory overhead For Job 1 = ₹ 1,08,000 +₹ 84,000 + ₹ 84,000F
For Job 2 = ₹ 75,000 +₹ 60,000 + ₹ 60,000F
Total Cost of Jobs:
Factory cost + Administrative overhead
For Job 1 = (₹ 1,92,000 + ₹ 84,000F) + (₹ 1,92,000 + ₹ 84,000F) A = ₹ 2,97,600* For Job-2 = (₹ 1,35,000
+ ₹ 60,000F) + (₹1,35,000+ ₹ 60,000F) A = ₹ 2,10,000**
The value of F & A can be found using following equations

1,92,000 + 84,000F + 1,92,000A + 84,000AF = ₹ 2,97,600 …………eqn (i)
1,35,000 + 60,000F + 1,35,000A + 60,000AF = ₹ 2,10,000 …..……eqn (ii)
Multiply equation (i) by 5 and equation (ii) by 7

9,60,000 + 4,20,000F + 9,60,000A + 4,20,000AF = ₹14,88,000 ...eqn (iii)
9,45,000 + 4,20,000F + 9,45,000A + 4,20,000AF = ₹ 14,70,000 ...eqn (iv)
- - - - -
15,000 + 15,000A = ₹18,000
15,000 A = 18,000 – 15,000

A = 0.20
Now putting the value of A in equation (i) to find the value of F

4.40
1,92,000 + 84,000F + (1,92,000 × 0.20) + (84,000 F × 0.20)= ₹ 2,97,600
Or
1,92,000 + 84,000F+38,400+16,800 F = ₹2,97,600
1,00,800 F = 67,200
F = 0.667
On solving the above relations: F = 0.667 and A = 0.20 Hence, percentage recovery rates of:
Factory overheads = 66.7% or 2/3rd of wages and Administrative overheads = 20% of factory cost.
Working note:
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒
Total Cost = (100% + 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑝𝑟𝑜𝑓𝑖𝑡)
*For Job 1 =
₹ 3,33,312
(100% + 12%)
= ₹ 2,97,600
**For Job 2
₹2,52,000
(100% + 10%)
== ₹ 2,10,000
(ii) Statement of jobs, showing amount of factory overheads, administrative overheads and profit:
Job 1 Job 2
(₹) (₹)
Direct materials 1,08,000 75,000
Direct wages 84,000 60,000
Prime cost 1,92,000 1,35,000
Factory overheads
2/3rd of direct wages 56,000 40,000
Factory cost 2,48,000 1,75,000
Administrative overheads
20% of factory cost 49,600 35,000
Total cost 2,97,600 2,10,000
Profit (12% & 20% respectively) 35,712 42,000
Selling price 3,33,312 2,52,000
(iii) Selling price of Job 3
(₹)
Direct materials 68,750
Direct wages 22,500
Prime cost 91,250
Factory overheads (2/3rd of Direct Wages) 15,000
Factory cost 1,06,250
Administrative overheads (20% of factory cost) 21,250
Total cost 1,27,500
Profit margin (balancing figure) 22,500
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
Selling price( 85%
)
1,50,000
Question 32

4.41
USP Ltd. is the manufacturer of ‘double grip motorcycle tyres’. In the manufacturing process, it
undertakes three different jobs namely, Vulcanising, Brushing and Striping. All of these jobs require
the use of a special machine and also the aid of a robot when necessary. The robot is hired from
outside and the hire charges paid for every six months is₹ 2,70,000. An estimate of overhead
expenses relating to the special machine is given below:
• Rent for a quarter is ₹ 18,000.
• The cost of the special machine is ₹ 19,20,000 and depreciation is charged @10% per
annum on straight line basis.
• Other indirect expenses are recovered at 20% of direct wages.
The factory manager has informed that in the coming year, the total direct wages will be ₹ 12,00,000
which will be incurred evenly throughout the year.
During the first month of operation, the following details are available from the job book: Number of
hours the special machine was used
Jobs Without the aid of the With the of the
robot robot
Vulcanising 500 400
Brushing 1000 400
Striping - 1200

(i) Compute the Machine Hour Rate for the company as a whole for a month (A) when
the robot is used and (B) when the robot is not used.
(ii) Compute the Machine Hour Rate for the individual jobs i.e. Vulcanising, Brushing and
Striping. (PYP 10 Marks Nov 22, Old & New SM)
Answer 32
Working notes:
(I) Total machine hours use 3,500
(500 + 1,000 + 400 + 400 + 1,200)

(II) Total machine hours without the use of robot 1,500
(500 + 1,000)
(III) Total machine hours with the use of robot 2,000
(400 + 400 + 1,200)
(IV) Total overheads of the machine per month
Rent (₹ 18,000 ÷ 3 months) 6,000
Depreciation [(₹ 19,20,000 x 10%) ÷ 12 months] 16,000
Indirect expenses [(₹ 12,00,000 x 20%) ÷ 12 months] 20,000
Total 42,000
(V) Robot hire charges for a month ₹ 45,000
(₹ 2,70,000 ÷ 6 months)
(VI) Overheads for using machines without robot

𝑅𝑠.42,000
= 3,500 ℎ𝑟𝑠. X 1,500 hrs. = Rs. 18,000
(VII) Overheads for using machines with robot

𝑅𝑠.42,000
= 3,500 ℎ𝑟𝑠. X 1,500 hrs. = Rs. 18,000
(i) Computation of Machine hour rate for the individual job

4.42
𝑅𝑠.69,000
(A) When the robot was used : = Rs. 34.50 per hour
𝑅𝑠.18,000
(B) When the robot was not used : 1500 ℎ𝑜𝑢𝑟𝑠
= Rs. 12 Per hour
(ii)
Rate per Job
hour Vulcanising Brushing Striping
(₹) Hrs. (₹) Hrs. (₹) Hrs. (₹)
Overheads
Without robot 12.00 500 6,000 1,000 12,000 - -
With robot 34.50 400 13,800 400 13,800 1,200 41,400
Total 900 19,800 1,400 25,800 1,200 41,400
Machine hour rate 22 18.43 34.50

5.1
Chapter 5
Activity Based Costing
Question 1
RST Limited specializes in the distribution of pharmaceutical products. It buys from the
pharmaceutical companies and resells to each of the three different markets.
(i) General Supermarket Chains
(ii) Drugstore Chains
(iii) Chemist Shops
The following data for the month of April in respect of RST Limited has beenreported:
General Drugstore Chemist
Supermarket Chains Shops
Chains
(`) (`) (`)
Average revenue per delivery 84,975 28,875 5,445
Average cost of goods sold perdelivery 82,500 27,500 4,950
Number of deliveries 330 825 2,750
In the past, RST Limited has used gross margin percentage to evaluate therelative profitability
of its distribution channels. The company plans to use activity –based costing for analysing the
profitability of its distribution channels.
The Activity analysis of RST Limited is as under:
Activity Area Cost Driver
Customer purchase order processing Purchase orders by customers
Line-item ordering Line-items per purchase order
Store delivery Store deliveries
Cartons dispatched to stores Cartons dispatched to a store perdelivery
Shelf-stocking at customer store Hours of shelf-stocking
The April month’s operating costs (other than cost of goods sold) of RST Limited are ` 8,27,970. These
operating costs are assigned to five activity areas. The cost in each area and the quantity of the
cost allocation basis usedin that area for the month of April are as follows:
Activity Area Total costs (`) Total Units of CostAllocation
Base
Customer purchase orderprocessing 2,20,000 5,500 orders
Line-item ordering 1,75,560 58,520 line items
Store delivery 1,95,250 3,905 store deliveries
Cartons dispatched tostore 2,09,000 2,09,000 cartons
Shelf-stocking at 28,160 1,760 hours
customer store
Other data for the month of April include the following:
Supermarket Chains Shops
Chains
Total number of orders 385 990 4,125
Average number of line itemsper 14 12 10
order
Total number of store deliveries 330 825 2,750
Average number of cartons 300 80 16
Chapter 5 Activity Based Costing
5.2
shipped per store delivery

Average number of hours of shelf- 3 0.6 0.1
stocking per storedelivery
Required:
(i) COMPUTE gross-margin percentage for each of its three distribution channels and compute RST
Limited’s operating income.
(ii) COMPUTE the rate per unit of the cost-allocation base for each of thefive activity areas.
(iii) COMPUTE the operating income of each distribution channel using the activity-based costing
information. Comment on the results. What new insights are available with the activity-based cost
information?
(iv) DESCRIBE four challenges one would face in assigning the total operating costs of ` 8,27,970 to five
activity areas. (Old & New SM) (Same concept different figures RTP May’22) (MTP 10 Marks Sep ’23)
Answer 1
(i) RST Limited’s
Statement of operating income and gross margin percentagefor each of its
three distribution channel
Particulars General Super DrugstoreChains Chemist Shops Total
Market
Chains
Revenues: (`) 2,80,41,750 2,38,21,875 1,49,73,750 6,68,37,375
(330 × ` 84,975) (825 × ` 28,875) (2,750 × ` 5,445)
Less: Cost of 2,72,25,000 2,26,87,500 1,36,12,500 635,25,000
goods sold: (`) (330 × ` 82,500) (825 × ` 27,500) (2,750 × ` 4,950)
Gross Margin:(`) 8,16,750 11,34,375 13,61,250 33,12,375
Less: Other
operating costs:
(`) 8,27,970
Operating 24,84,405
income: (`)
Gross Margin 2.91% 4.76 % 9.09% 4.96%
Operatingincome 3.72
%
(ii) Computation of rate per unit of the cost allocation base foreach of the five activity areas
for the month of April
(`)
Customer purchase order processing(` 2,20,000/ 5,500 orders) 40 per order
Line item ordering 3 per line item order
(` 1,75,560/ 58,520 line items)
Store delivery 50 per delivery
(` 1,95,250/ 3,905 store deliveries)
Cartons dispatched 1 per dispatch
(` 2,09,000/ 2,09,000 dispatches)
Shelf-stocking at customer store (`)(` 28,160/ 1,760 hours) 16 Per hour
(iii) Operating Income Statement of each distribution channel in April (Using the Activity based
Costing information)
Super Chains Shops
Market
5.3
Chains
Gross margin (`) : (A) 8,16,750 11,34,375 13,61,250

(Refer to (i) part of the answer)
Operating cost (`): (B) (Refer 1,62,910 1,90,410 4,74,650
to working note)
Operating income (`): (A–B) 6,53,840 9,43,965 8,86,600
Operating income (in %) (Operating 2.33 3.96 5.92
income/Revenue) ×100
Comments and new insights: The activity-based cost information highlights, how the ‘Chemist Shops’
uses a larger amount of RST Ltd.’s resources per revenue than do the other two distribution
channels. Ratio of operating costs to revenues, across these markets is:
General supermarket chains 0.58%
(` 1,62,910/ ` 2,80,41,750) × 100
Drug store chains 0.80%
(` 1,90,410/ ` 2,38,21,875) × 100
Chemist shops 3.17%
(` 4,74,650/ ` 1,49,73,750) ×100
Working note:
Computation of operating cost of each distribution channel:
General Drugstore Chemist Shops
Super Market Chains
Chains (`) (`) (`)
Customer purchase 15,400 39,600 1,65,000
orderprocessing (` 40 × 385 (` 40 × 990 (` 40 ×4125
orders) orders) orders)
Line item 16,170 35,640 1,23,750
ordering (` 3 × 14 x (` 3 × 12 x (` 3 × 10 ×
385) 990) 4125)
Store delivery 16,500 41,250 1,37,500
(` 50 × 330 (` 50 × 825 (` 50 × 2750
deliveries) deliveries) deliveries)
Cartons dispatched 99,000 66,000 44,000
(`1× 300 (`1 × 80 (`1 × 16
cartons × 300 cartons × 825 cartons × 2,750
deliveries) deliveries) deliveries)
Shelf stocking 15,840 7,920 4,400
(` 16 × 330 (` 16 × 825 (` 16 × 2,750
deliveries × 3 deliveries × deliveries × 0.1
Av. hrs.) 0.6 Av. hrs) Av. hrs)
Operating cost 1,62,910 1,90,410 4,74,650
(iv) Challenges faced in assigning total operating cost of ` 8,27,970:
- Choosing an appropriate cost driver for activity area.
- Developing a reliable data base for the chosen cost driver.
- Deciding, how to handle costs that may be common acrossseveral activities.
- Choice of the time period to compute cost rates per costdriver.
5.4
- Behavioral factors.
Question 2
Linex Limited manufactures three products P, Q and R which are similar in nature and are usually
produced in production runs of 100 units. Product P and R require both machine hours and
assembly hours, whereas product Q requires only machine hours. The overheads incurred by the
company during the first quarter are as under:
Machine Department expense 18,48,000
Assembly Department expenses 6,72,000
Setup costs 90,000
Stores receiving cost 1,20,000
Order processing and dispatch 1,80,000
Inspect and Quality control cost 36,000
The date related to the three products during the period are as under:
P Q R
Units produced and sold 15,000 12,000 18,000
Machine hours worked 30,000 hrs. 48,000 hrs. 54,000 hrs.
Assembly hours worked (direct labour hours) 15,000 hrs. - 27,000 hrs.
Customers’ orders executed (in numbers) 1,250 1,000 1,500
Number of requisitions raised on the stores 40
Required
PREPARE a statement showing details of overhead costs allocated to each product type using activity
based costing. (MTP March ‘19, 10 Marks)
Answer 2
Calculation of “Activity Rate”
Cost Pool Cost Cost Driver Cost Driver
(Rs.) Rate (Rs.)
[A] [B]
[C] = [A]÷[B]
Machine Department 18,48,000 Machine Hours 14.00
Expenses (1,32,000 hrs.)
Assembly Department 6,72,000 Assembly Hours 16.00
Expenses (42,000 hrs.)
Setup Cost 90,000 No. of Production Runs (450*) 200.00
Stores Receiving Cost 1,20,000 No. of Requisitions Raised 1,000.00
on the Stores (120)
Order Processing and 1,80,000 No. of Customers Orders 48.00
Dispatch Executed (3,750)
Inspection and Quality 36,000 No. of Production Runs (450*) 80.00
Control Cost
Total (Rs.) 29,46,000
*Number of Production Run is 450 (150 + 120 + 180)
Statement Showing “Overheads Allocation”
Particulars of Cost Cost Driver P Q R Total
Machine Machine 4,20,000 6,72,000 7,56,000 18,48,000
Department Hours (30,000 × (48,000 × (54,000 ×
Expenses Rs.14) Rs.14) Rs.14)
Assembly Assembly 2,40,000 --- 4,32,000 6,72,000
Hours
5.5
Department (15,000 × (27,000 ×

Expenses Rs.16) Rs.16)
Setup Cost No. of 30,000 24,000 36,000 90,000
Production (150 × Rs.200) (120 × Rs.200) (180 × Rs.200)
Runs
Stores No. of 40,000 30,000 50,000 1,20,000
Receiving Cost Requisitions (40 × Rs.1,000) (30 × Rs.1,000) (50 × Rs.1,000)
Raised on
the Stores
Order Processing No. of 60,000 48,000 72,000 1,80,000
and Dispatch Customers (1,250 × (1,000 × Rs.48) (1,500 × Rs.48)
Orders Rs.48)
Executed
Inspection and No. of 12,000 9,600 14,400 36,000
Quality Control Production
Runs (150 × Rs.80) (120 × Rs.80) (180 × Rs.80)
Cost
Overhead (Rs.) 8,02,000 7,83,600 13,60,400 29,46,000
Question 3
Bank of Surat operated for years under the assumption that profitability can be increased by
increasing Rupee volume. But that has not been the case. Cost analysis has revealed the following:
Activity Activity Cost (₹ ) Activity Driver Activity
Capacity
Providing ATM Service 1,00,000 No. of Transactions 2,00,000
Computer Processing 10,00,000 No. of Transactions 25,00,000
Issuing Statements 8,00,000 No. of Statements 5,00,000
Customer Inquiries 3,60,000 Telephone Minutes 6,00,000
The following annual information on three products was also made available:
Activity Driver Checking Personal Loans Gold Visa
Accounts
Units of Product 30,000 5,000 10,000
ATM Transactions 1,80,000 0 20,000
Computer 20,00,000 2,00,000 3,00,000
Transactions
Number of 3,00,000 50,000 1,50,000
Statements
Telephone Minutes 3,50,000 90,000 1,60,000
Required
(i) CALCULATE rates for each activity.
(ii) Using the rates computed in requirement (i), Calculate the cost of each product. (MTP March ‘18, 5
Marks)
Answer 3
(i) Statement Showing “Activity Rate”
Activity Activity Activity Driver No. of Units Activity
Cost [a] of Activity Rate
(₹ ) Driver [b] [a] / [b]
(₹ )
Providing ATM Service 1,00,000 No. of ATM Transactions 2,00,000 0.50
5.6
Computer 10,00,000 No. of Computer 25,00,000 0.40

Processing Transactions
Issuing Statements 8,00,000 No. of Statements 5,00,000 1.60
Customer Inquiries 3,60,000 Telephone Minutes 6,00,000 0.60
(ii) Statement Showing “Cost of Product”
Activity Checking Accounts (₹) Personal Loans (₹) Gold Visa (₹)
Providing ATM 90,000 --- 10,000
Service (1,80,000 tr.× ₹ 0.50) (20,000 tr. × ₹ 0.50)
Computer 8,00,000 80,000 1,20,000
Processing (20,00,000 tr. × ₹ 0.40) (2,00,000 tr. × ₹ 0.40) (3,00,000 tr. × ₹ 0.40)
Issuing Statements 4,80,000 80,000 2,40,000
(3,00,000 st. × ₹ 1.60) (50,000 st. × ₹1.60) (1,50,000 st. × ₹ 1.60)
Customer Inquiries 2,10,000 54,000 96,000
(3,50,000 min. × ₹ 0.60) (90,000 min. × ₹ 0.60) (1,60,000 min. × ₹ 0.60)
Total Cost [a] ₹ 15,80,000 ₹ 2,14,000 ₹ 4,66,000
Units of Product [b] 30,000 5,000 10,000
Cost of each 52.67 42.80 46.60

Product [a] / [b]
Question 4
Asian Mfg. Co. has decided to increase the size of the store. It wants the information about the
probability of the individual product lines: Lemon, Grapes and Papaya. It provides the following data
for the 2018 for each product line:
Particulars Lemon Grapes Papaya
Revenues (Rs.) 79,350 2,10,060 1,20,990
Cost of goods sold (Rs.) 60,000 1,50,000 90,000
Cost of bottles returned (Rs.) 1,200 0 0
Number of purchase orders placed 36 84 36
Number of deliveries received 30 219 66
Hours of shelf stocking time 54 540 270
Items sold 12,600 1,10,400 30,600
Asian Mfg. Co. also provides the following information for the year 2018:
Activity Description of Activity Total Costs Cost Allocation Basis
(Rs.)
Bottle returns Returning of empty bottles to 1,200 Direct tracing to
the store product line
Ordering Placing of orders of purchases 15,600 156 purchase orders
Delivery Physical delivery and the 25,200 315 deliveries
receipts of merchandise
Self- stocking Stocking of merchandise on 17,280 864 hours of time
store shelves and ongoing
restocking
Customer Assistance provided to 30,720 1,53,600 items sold
support customers including bagging
and checkout
Required
(i) Asian Mfg. Co. currently allocates store support costs (all costs other than the cost of goods
sold) to the product line on the basis of the cost of goods sold of each product line. CALCULATE
the operating income and operating income as the percentage of revenue of each product line.
(ii) If Asian Mfg. Co. allocates store support costs (all costs other than the cost of goods sold) to
the product lines on the basis of ABC system, CALCULATE the operating income and operating
5.7
income as the percentage of revenue of each product line.

(iii) SHOW a comparison statement. (MTP Oct. ‘19, 10 Marks)
Answer 4
(i) Absorption Costing System Operating Income-
Particulars Lemon Grapes Papaya Total
Revenue 79,350 2,10,060 1,20,990 4,10,400
Less: Cost of Goods Sold 60,000 1,50,000 90,000 3,00,000
Less: Store Support Cost 18,000 45,000 27,000 90,000
Operating Income 1,350 15,060 3,990 20,400
Operating Income (%) 1.70 7.17 3.30 4.97
(ii) ABC System Overhead Allocation Rate-
Activity Total Costs (Rs.) Quantity of Cost Overhead
Allocation Base Allocation Rate
(Rs.)
Ordering 15,600 156 Purchase Orders 100.00
Delivery 25,200 315 Delivering Orders 80.00
Shelf Stocking 17,280 864 Self Stocking Hours 20.00
Customer Support 30,720 1,53,600 Items Sold 0.20
Store Support Cost-
Particulars Cost Driver Lemon Grapes Papaya Total
Bottle Returns Direct 1,200 0 0 1,200
Ordering Purchase Orders 3,600 8,400 3,600 15,600
Delivery Deliveries 2,400 17,520 5,280 25,200
Self -Stocking Hours of time 1,080 10,800 5,400 17,280
Customer Support Items Sold 2,520 22,080 6,120 30,720
Grand Total 10,800 58,800 20,400 90,000
Operating Income-
Revenue 79,350 2,10,060 1,20,990 410,400
Less: Cost of Goods Sold 60,000 1,50,000 90,000 300,000
Less: Store Support Cost 10,800 58,800 20,400 90,000
Operating Income 8,550 1,260 10,590 20,400
Operating Income (%) 10.78 0.60 8.75 4.97
(iii) Comparison
Under Traditional Costing System 1.70% 7.17% 3.30% 4.97%
Under ABC System 10.78% 0.60% 8.75% 4.97%
Question 5
Wool mark Ltd. manufactures three types of products namely P, Q and R. The data relating to a
period are as under:
Particulars P Q R
5.8
Machine hours per unit 10 18 14

Direct Labour hours per unit @ Rs. 20 4 12 8
Direct Material per unit (Rs.) 90 80 120
Production (units) 3,000 5,000 20,000
Currently the company uses traditional costing method and absorbs all production overheads on
the basis of machine hours. The machine hour rate of overheads is Rs. 6 per hour. The company
proposes to use activity based costing system and the activity analysis is as under:
Particulars P Q R
Batch size (units) 150 500 1,000
Number of purchase orders per batch 3 10 8
Number of inspections per batch 5 4 3
The total production overheads are
analyzed as under:
Machine set up costs 20%
Machine operation costs 30%
Inspection costs 40%
Material procurement related costs 10%
Required:
(i) Calculate the cost per unit of each product using traditional method of absorbing all production
overheads on the basis of machine hours.
(ii) Calculate the cost per unit of each product using activity based costing principles. (MTP Oct.’18,
10 Marks, Old & New SM)(Same concept different figures MTP 10 Marks Mar’22)
Answer 5
(i) Statement Showing “Cost per unit - Traditional Method”
Particulars of Costs P Q R
(Rs.) (Rs.) (Rs.)
Direct Materials 90 80 120
Direct Labour [(4, 12, 8 hours) X Rs.20] 80 240 160
Production Overheads [(10, 18, 14 hours) X Rs.6] 60 108 84
Cost per unit 230 428 364
(ii) Statement Showing “Cost per unit - Activity Based Costing”
Products P Q R
(Rs.) (Rs.) (Rs.)
Direct Materials (90, 80, 120) 2,70,000 4,00,000 24,00,000
Direct Labour (80, 240, 160) 2,40,000 12,00,000 32,00,000
Machine Related Costs @ Rs.1.80 per hour
(30,000, 90,000, 2,80,000) 54,000 1,62,000 5,04,000
Setup Costs @ Rs.9,600 per setup (20, 10, 20) 1,92,000 96,000 1,92,000
Inspection Costs @ Rs.4,800 per inspection
(100, 40, 60) 4,80,000 1,92,000 2,88,000
Purchase Related Costs @ Rs.750 per purchase
(60, 100, 160) 45,000 75,000 1,20,000
Total Costs 12,81,000 21,25,000 67,04,000
Cost per unit(Total Cost Units) 427.00 425.00 335.20
Workings
5.9
Number of Batches, Purchase Orders, and Inspections-

Particulars P Q R Total
A. Production (units) 3,000 5,000 20,000
B. Batch Size (units) 150 500 1,000
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 D] 60 100 160 320
F. Number of Inspections per batch 5 4 3
G. Total Inspections [C F] 100 40 60 200
Total Machine Hours-

Particulars P Q R
A. Machine Hours per unit 10 18 14
B. Production (units) 3,000 5,000 20,000
C. Total Machine Hours [A  B] 30,000 90,000 2,80,000
Total Machine Hours = 4,00,000
Total Production Overheads-
= 4,00,000 hrs. X Rs. 6= Rs. 24,00,000
Cost Driver Rates-
Cost Pool % Overheads Cost Driver Cost Driver Rate
(Rs.) (Units) (Rs.)
Setup 20% 4,80,000 50 9,600 per Setup
Inspection 40% 9,60,000 200 4,800 per Inspection
Purchases 10% 2,40,000 320 750 per Purchase
Machine Hours 30% 7,20,000 4,00,000 1.80 per Machine Hour
Question 6
ZA Ltd. is a manufacturer of a range of goods. The cost structure of its different products is as
follows:
Product Product Product
Particulars A B C
Direct Materials 100 80 80 Rs./u
Direct Labour @Rs.10/ hour 30 40 50 Rs./u
Production Overheads 30 40 50 Rs./u
Total Cost 160 160 180 Rs./u
Quantity Produced 20,000 40,000 60,000 Units
ZA Ltd. was absorbing overheads on the basis of direct labour hours. A newly appointed
management accountant has suggested that the company should introduce ABC system and has
identified cost drivers and cost pools as follows:
Activity Cost Pool Cost Driver Associated Cost (Rs.)
Stores Receiving Purchase Requisitions 5,92,000
Inspection Number of Production Runs 17,88,000
Dispatch Orders Executed 4,20,000
Machine Setup Number of Setups 24,00,000
The following information is also supplied:
5.10
Details Product A Product B Product C

No. of Setups 360 390 450
No. of Orders Executed 180 270 300
No. of Production Runs 750 1,050 1,200
No. of Purchase Requisitions 300 450 500
Required:
CALCULATE activity based production cost of all the three products. (MTP 10 Marks May ’20, RTP
May 18)
Answer 6
The total production overheads are Rs.52,00,000: Product A: 20,000 ×
Rs.30 = Rs.6,00,000 Product B: 40,000 ×
Rs.40 = Rs.16,00,000 Product C: 60,000 ×
Rs.50 = Rs.30,00,000
On the basis of ABC analysis this amount will be apportioned as follows: Statement Showing
“Activity Based Production Cost”
Activity Cost Pool Cost Driver Ratio Total Amount A (Rs.) B (Rs.) C (Rs.)
(Rs.)
Stores Receiving Purchase 6:9:10 5,92,000 1,42,080 2,13,120 2,36,800
Requisition
Inspection Production 5:7:8 17,88,000 4,47,000 6,25,800 7,15,200
Runs
Dispatch Orders 6:9:10 4,20,000 1,00,800 1,51,200 1,68,000
Executed
Machine Setups Setups 12:13:15 24,00,000 7,20,000 7,80,000 9,00,000
Total Activity Cost 14,09,880 17,70,120 20,20,000
Quantity Produces 20,000 40,000 60,000
Unit Cost (Overheads) 70.49 44.25 33.67
Add: Conversion Cost (Material + Labour) 130 120 130
Total 200.49 164.25 163.67
Question 7
BABYSOFT is a global brand created by Bio-organic Ltd. The company manufactures three range
of beauty soaps i.e. BABYSOFT- Gold, BABYSOFT- Pearl, and BABYSOFT- Diamond. The budgeted
costs and production for the month of December, 2019 are as follows:
BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Diamond
Production of 4,000 3,000 2,000
soaps (Units)
Resources per Qty Rate Qty Rate Qty Rate
Unit:
- Essential Oils 60 ml ₹ 200 / 100 ml 55 ml ₹ 300 / 100 ml 65 ml ₹ 300 / 100 ml
- Cocoa Butter 20 g ₹ 200 / 100 g 20 g ₹ 200 / 100 g 20 g ₹ 200 / 100 g
- Filtered Water 30 ml ₹ 15 / 100 ml 30 ml ₹ 15 / 100 ml 30 ml ₹ 15 / 100 ml
- Chemicals 10 g ₹ 30 / 100 g 12 g ₹ 50 / 100 g 15 g ₹ 60 / 100 g
- Direct Labour 30 ₹ 10 / hour 40 ₹ 10 / hour 60 ₹ 10 / hour
minutes minutes minutes
Bio-organic Ltd. followed an Absorption Costing System and absorbed its production overheads, to
its products using direct Labour hour rate, which were budgeted at ₹ 1,98,000.
5.11
Now, Bio-organic Ltd. is considering adopting an Activity Based Costing system. For this, additional
information regarding budgeted overheads and their cost drivers is provided below:
Particulars (₹) Cost drivers
Forklifting cost 58,000 Weight of material lifted
Supervising cost 60,000 Direct labour hours
Utilities 80,000 Number of Machine operations
The number of machine operators per unit of production are 5, 5, and 6 for BABYSOFT- Gold,
BABYSOFT- Pearl, and BABYSOFT- Diamond respectively.
(Consider (i) Mass of 1 litre of Essential Oils and Filtered Water equivalent to 0.8 kg and 1 kg
respectively (ii) Mass of output produced is equivalent to the mass of input materials taken
together.) You are requested to:
(i) PREPARE a statement showing the unit costs and total costs of each product using the absorption
costing method.
(ii) PREPARE a statement showing the product costs of each product using the ABC approach.
(iii) STATE what are the reasons for the different product costs under the two approaches? (MTP 10
Marks, Oct.’2020, Old & New SM)
Answer 7
Traditional Absorption Costing
BABYSOFT BABYSOFT- BABYSOFT- Total
- Gold Pearl Diamond
(a)Production of soaps (Units) 4,000 3,000 2,000 9,000
(b) Direct Labour (minutes) 30 40 60 -
(c)Direct Labour hours (a × b)/60 2,000 2,000 2,000 6,000
minutes
Overhead rate per direct Labour hour:
= Budgeted overheads / Budgeted Labour hours
= Rs.1,98,000 / 6,000 hours
= Rs.33 per direct Labour hour
Unit Costs:
BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Diamond
(Rs.) (Rs.) (Rs.)
Direct costs 5.00 6.67 10.00
Direct Labour ∗ ∗ ∗
( ) ( ) ( )
Direct Material 167.50 251.50 248.50
(refer working note 1)
Production overhead 16.50 22.00 33.00
∗ ∗ ∗
( ) ( ) ( )
Total unit costs 189.00 244.17 291.50
Number of units 4,000 3,000 2,000
Total costs 7,56,000 7,32,510 5,83,000
Working note-1
Calculation of Direct material cost
BABYSOFT- Gold BABYSOFT- Pearl (₹) BABYSOFT- Diamond
(₹) (₹)
120.00 165.00 195.00
5.12
Essential oils (200 * 60) /100 (300 * 55)/100 (300 * 65)/100

40.00 40.00 40.00
Cocoa Butter (200 * 20)/100 (200 * 20)/100 (200 * 20)/100
Filtered water 4.50 4.50 4.50

(15 * 30) /100 (15 * 30)/100 (15 *30) /100
Chemicals 3.00 6.00 9.00

(30 *10)/100 (50 *12)/100 60 *15/100
Total costs 167.50 215.50 248.50
BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Total
Diamond
Quantity (units) 4,000 3,000 2,000 -
Weight per unit 108 106 117 -
(grams) {(60×0.8)+20+30+10} {(55×0.8)+20+30+12} {(65×0.8)+20+30+15}
Total weight 4,32,000 3,18,000 2,34,000 9,84,000
(grams)
Direct Labour 30 40 60 -
(minutes)
Direct Labour 2,000 2,000 2,000 6,000
hours (4,000* 30)/60 (3,000 *40)/60 (2,000 *60)/60
Machine operations 5 5 6 -
per unit
Total operations 20,000 15,000 12,000 47,000
Forklifting rate per gram = Rs. 58,000/9,84,000 grams = Rs.0.06 per

gram
Supervising rate per direct Labour hour = Rs. 60,000 / 6,000 hours
Labour hour = Rs.10 per
Utilities rate per machine operations = Rs. 80,000/ 47,000 machine operations
= Rs. 1.70 per machine operations
Unit Costs Under ABC:
BABYSOFT- Gold BABYSOFT- BABYSOFT-
(Rs.) Pearl (Rs.) Diamond (Rs.)
Direct Costs:
- Direct Labour 5.00 6.67 10.00
- Direct material 167.50 215.50 248.50
Production Overheads:
Forklifting cost 6.48 6.36 7.02
(0.06* 108) (0.06 *106) (0.06* 117)
Supervising cost 5.00 6.67 10.00
(10* 30)/60 (10 *40 )/60 (10 * 60)/60
Utilities 8.50 8.50 10.20

(1.70 * 5) (1.70 * 5) (1.70 * 6)
5.13
Total unit costs 192.48 243.70 285.72

Number of units 4,000 3,000 2,000
Total costs 7,69,920 7,31,100 5,71,440
(ii) Comments: The difference in the total costs under the two systems is due to the differences in the
overheads borne by each of the products. The Activity Based Costs appear to be more precise.
Question 8
ABY Ltd. manufactures four products, namely A, B, C and D using the same plant and process. The
following information relates to production period December, 2020:
Product A B C D
Output in units 1,440 1,200 960 1,008
Cost per unit:
Direct Materials Rs. 84 Rs. 90 Rs. 80 Rs. 96
Direct Labour Rs. 20 Rs. 18 Rs. 14 Rs. 16
Machine hours per unit 4 3 2 1
The four products are similar and are usually produced in production runs of 48 units per batch and
are sold in batches of 24 units. Currently, the production overheads are absorbed using machine
hour rate. The production overheads incurred by the company for the period December, 2020 are
as follows:
(Rs.)
Machine department costs:
Rent, deprecation and supervision 2,52,000
Set-up Costs 80,000
Store receiving costs 60,000
Inspection 40,000
Material handling and dispatch 10,368
During the period December, 2020, the following cost drivers are to be used for allocation of
overheads cost:
Cost Cost driver
Set-up Costs Number of production runs (batches)
Stores receiving Requisition raised
Inspection Number of production runs (batches)
Material handling and Orders executed
dispatch
It is also determined that:
(i) Machine department costs should be apportioned among set-up, stores receiving and inspection
activities in proportion of 4 : 3 : 2.
(ii) The number of requisitions raised on stores is 50 for each product. The total number of material
handling and dispatch orders executed during the period are 192 and each order being for a batch
size of 24 units of product.
Required:
i. CALCULATE the total cost of each product, if all overhead costs are absorbed on machine- hour
rate basis.
ii. CALCULATE the total cost of each product using activity-based costing (MTP 10 Marks, Mar
2021)
5.14
Answer 8
(i) Total Overhead Rs. 2,52,000 80,000 60,000 40,000 10,368#
Rs. 4,42,368
Total machine hours 1,440 ) 4 1,200 ) 3 960 ) 2 1,008 ) 1
5,760 3,600 1,920 1,008 12,288 M. Hrs
/0. , 1, 2
∴ Overhead recovery rate/M.H.= Rs. 36
1,113 4./67890
Cost Statement when overheads are absorbed on machine hours rate basis
Product A B C D
Output in units 1,440 1,200 960 1,008
(Rs.) (Rs.) (Rs.) (Rs.)
Cost per unit:
Direct material 84 90 80 96
Direct labour 20 18 14 16
Overhead (@ Rs. 36) 144 108 72 36
(4 ) Rs.36) (3 ) Rs.36) (2 )Rs.36) (1)Rs.36)
Total cost per unit 248 216 166 148
Total cost 3,57,120 2,59,200 1,59,360 1,49,184
(ii) (1) Machine department costs of Rs. 2,52,000 to be apportioned to set-up cost, store
receiving and inspection in 4: 3: 2 i.e. Rs. 1,12,000, Rs. 84,000 and Rs. 56,000
respectively.
(2) One production run = 48 units. Hence, the number of production runs of different
products:
1,440 1,200 960 1,008
A 30, B 25, C 20, D 21, OR TOTAL RUN 96
48 48 48 48
(3) One batch order is of 24 units. So the number of batches of different products:
1,440 1,200 960 1,008
A 60 , B 50 , C 40 , D 42
24 24 24 24
Or total 192 batches.
(4) Computation of Cost driver rates
Activity Activity Cost (Rs.) Cost driver Quantity Cost driver rate
Set-up 80,000 + 1,12,000 No. of 96 Rs. 2,000 per
= 1,92,000 production run production run
Store- 60,000 + 84,000 Requisition raised 50 * 4 = 200 Rs. 720 per
receiving = 1,44,000 requisition
Inspection 40,000 + 56,000 No. of 96 Rs. 1,000 per
= 96,000 production run production run
Material 10,368 Orders executed (No. 192 Rs. 54 per batch
handling of batches)
(5) Cost statement under Activity Based Costing:
Product A B C D
Output in units 1,440 1,200 960 1,008
(Rs.) (Rs.) (Rs.) (Rs.)
Material 1,440 * 84 1,200 * 90 960 *80 1,008 * 96
= 1,20,960 = 1,08,000 = 76,800 = 96,768

5.15
Labour 1,440 * 20 1,200 * 18 960 * 14 1,008 * 16

= 28,800 = 21,600 = 13,440 = 16,128
1,49,760 1,29,600 90,240 1,12,896
Overhead cost:
Set up 2,000 * 30 2,000 * 25 2,000 * 20 2,000 * 21
= 60,000 = 50,000 = 40,000 = 42,000
Store receiving 720 * 50 720 * 50 720 * 50 720 * 50
= 36,000 = 36,000 = 36,000 = 36,000
Inspection 1,000 * 30 1,000 *25 1,000 * 20 1,000 * 21
= 30,000 = 25,000 = 20,000 = 21,000
Material handling 54 * 60 54 * 50 54 * 40 54 * 42
= 3,240 = 2,700 = 2,160 = 2,268
Total overhead cost 1,29,240 1,13,700 98,160 1,01,268
Total cost 2,79,000 2,43,300 1,88,400 2,14,164
Total cost per unit 193.75 202.75 196.25 212.46
(Total cost /
Output)
Question 9
RVP Cinema provides the following data for the year 2020-21:
Particulars Premium Recliner 7D Cafeteria
Hall Hall Hall
(Rs.) (Rs.) (Rs.) (Rs.)
Revenue 11,55,000 18,75,000 9,30,000 5,25,000
Cost of Goods sold - - - 4,51,125
Digital media cost 6,19,800 9,46,875 4,02,900 -
Number of Credit Card 75,000 90,000 60,000 45,000
transactions
Number of Tests 12,000 18,000 15,000 7,500
Number of Setups 225 450 150 75
Area in Square feet 3,000 4,500 2,250 750
Number of Customer contacts 2,62,500 3,00,000 1,50,000 37,500
Number of Customer online 2,10,000 2,47,500 1,20,000 22,500
orders
Cost analysis has revealed the following:
Activity Activity Activity Driver Activity
Cost (Rs.) Capacity
Marketing Expenses 2,25,000 Number of Customer contacts 7,50,000
Website Maintenance 1,50,000 Number of Customer online 6,00,000
Expenses orders
Credit Card Processing Fees 1,35,000 Number of Credit Card 2,70,000
transactions
Cleaning Equipment Cost 3,15,000 Number of square feet 10,500
Inspecting and testing costs 2,62,500 Number of tests 52,500
Setting up machine's costs 4,50,000 Number of set-ups 900
5.16
Required:
(i) If RVP Cinema allocates all costs (other than Cost of Goods sold and Digital Media costs) to the
departments on the basis of Activity Based Costing system, CALCULATE the operating income and
percentage of operating income of each department.
(ii) RVP Cinema operated for years under the assumption that profitability can be increased by
increasing net revenue from Cafeteria. However, the Supervisor of RVP Cinema wants to shut down
Cafeteria. On the basis of (i) above, STATE whether the contention of the Supervisor is valid or not.
(MTP 10 Marks, Apr.’2021)
Answer 9
Computation showing Rates for each Activity
Activity Activity Cost (Rs.) Activity Activity Activity
driver Capacity Rate
(A)
(B) (A/B)
Marketing Expenses 2,25,000 Number of 7,50,000 0.30

Customer Contacts
Website Maintenance 1,50,000 Number of 6,00,000 0.25
Expenses Customer Online
orders
Credit Card Processing 1,35,000 Number of Credit 2,70,000 0.50
Fees card
transactions
Cleaning Equipment 3,15,000 Number of Square 10,500 30.00
Cost Feet
Inspecting and Testing 2,62,500 Number of Tests 52,500 5.00
Cost
Setting up machine's 4,50,000 Number of set-ups 900 500.00
cost
Activity based Cost for each Department
Activity Premium Hall Recliner Hall 7D Hall (Rs.) Cafeteria (Rs.)
(Rs.) (Rs.)
Marketing Expenses 78,750 90,000 45,000 11,250
(2,62,500 x 0.3) (3,00,000 x 0.3) (1,50,000 x 0.3) (37,500 x 0.3)
Website 52,500 61,875 30,000 5,625
Maintenance (2,10,000 x 0.25) (2,47,500 x 0.25) (1,20,000 x 0.25) (22,500 x 0.25)
Expenses
Credit 37,500 45,000 30,000 22,500
(75,000 x 0.5) (90,000 x 0.5) (60,000 x 0.5) (45,000 x 0.5)
Card
Processing Fees
Cleaning Equipment 90,000 1,35,000 67,500 22,500
Cost (3,000 x 30) (4,500 x 30) (2,250 x 30) (750 x 30)
Inspecting 60,000 90,000 75,000 37,500

(12,000 x 5) (18,000 x 5) (15,000 x 5) (7,500 x 5)
and
5.17
Testing Cost
Setting 1,12,500 2,25,000 75,000 37,500

(225 x 500) (450 x 500) (150 x 500) (75 x 500)
up
machine's cost
Total 4,31,250 6,46,875 3,22,500 1,36,875
(i) Statement of Operating Income and Operating Income percentage for each Department
Particulars
Premium Recliner 7D Cafeteria
Hall Hall Hall (Rs.)
(Rs.) (Rs.) (Rs.)
Revenues (Given) (A) 11,55,000 18,75,000 9,30,000 5,25,000
Cost of Goods Sold (given) (B1) - - - 4,51,125
Digital Media Cost (given) (B2) 6,19,800 9,46,875 4,02,900 -
Activity Based Cost (as per Workings) (B3) 4,31,250 6,46,875 3,22,500 1,36,875
Operating Cost (B) (B1+ B2 + B3) 10,51,050 15,93,750 7,25,400 5,88,000
Operating Income/(Loss) (C = A – B) 1,03,950 2,81,250 2,04,600 (63,000)
Percentage of profit/(loss) on sales 9% 15% 22% (12%)
(ii) Contention of Supervisor is valid as operating income of Cafeteria is negative i.e. (Rs.
63,000) or percentage of profit/loss is (12%).
Question 10
Breeze Ltd has decided to analyses the profitability of its five new customers. It buys soft drink
bottles in cases at ₹ 54 per case and sells them to retail customers at a list price of ₹ 64.80 per case.
The data pertaining to five customers are given below:
Particulars Customers
Aey Bee Cee Dee Eey
Number of Cases Sold 9,360 14,200 62,000 38,000 9,800
List Selling Price (₹) 64.80 64.80 64.80 64.80 64.80
Actual Selling Price (₹) 64.80 64.08 58.80 60.24 58.32
Number of Purchase Orders 30 50 60 50 60
Number of Customers visits 4 6 12 4 6
Number of Deliveries 20 60 120 80 40
Kilometers travelled per delivery 40 12 10 20 60
Number of expedite Deliveries 0 0 0 0 2
Its five activities and their cost drivers are:
Activity Cost Driver
Order taking ₹ 240 per purchase order
Customer visits ₹ 360 per each visit
Deliveries ₹ 4.80 per delivery km travelled
Product Handling ₹ 2.40 per case sold
Expedited deliveries ₹ 120 per such delivery
You are REQUIRED to:
(i) Compute the customer level operating income of each of five retail customers by using the Cost
Driver rates.
5.18
(ii) Examine the results to give your comments on Customer 'Dee' in comparison with Customer 'Cee'
and on Customer 'Eye' in comparison with Customer 'Aye'. (MTP 10 Marks, Oct.’2021, PYP Nov
’19, 10 Marks)
Answer 10
Working note: Computation of revenues (at listed price), discount, cost of goods sold and customer
level operating activities costs:
Customers
Particulars Aye Bee Cee Dee Eye
Cases sold: (a) 9,360 14,200 62,000 38,000 9,800
Revenues (at listed price) (₹): 6,06,528 9,20,160 40,17,600 24,62,400 6,35,040
(b) {(a) × ₹ 64.80)}
Discount (₹): (c) {(a) × - 10,224 3,72,000 1,73,280 63,504
Discount per case} (14,200 (62,000 cases × (38,000 (9,800 cases
cases × ₹ 6) cases × ×
₹ 0.72) ₹ 4.56) ₹ 6.48)
Cost of goods sold (₹): (d) 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
{(a) × ₹ 54}
Customer level operating activities costs
Order taking costs (₹): (No. 7,200 12,000 14,400 12,000 14,400
of purchase × ₹ 240)
Customer visits costs 1,440 2,160 4,320 1,440 2,160
(₹) (No. of customer visits
× ₹ 360)
Delivery vehicles travel 3,840 3,456 5,760 7,680 11,520
costs (₹) (Kms travelled by
delivery vehicles × ₹
4.80 per km.)
Product handling costs (₹) 22,464 34,080 1,48,800 91,200 23,520
{(a) ×₹ 2.40}
Cost of expediting - - - - 240
deliveries (₹)
{No. of expedited
deliveries × ₹ 120}
Total cost of customer level 34,944 51,696 1,73,280 1,12,320 51,840
operating activities (₹)
I. Computation of Customer level operating income

Customers
Particulars Aey (₹) Bee (₹) Cee (₹) Dee (₹) Eey (₹)
Revenues (At list 6,06,528 9,20,160 40,17,600 24,62,400 6,35,040
price)
(Refer to working note)
Less: Discount - 10,224 3,72,000 1,73,280 63,504
Revenue 6,06,528 9,09,936 36,45,600 22,89,120 5,71,536
(At actual price)
Less: Cost of goods sold (Refer to 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
working note)
Gross margin 1,01,088 1,43,136 2,97,600 2,37,120 42,336
Less: Customer level operating activities 34,944 51,696 1,73,280 1,12,320 51,840
costs
5.19
Customer level operating income 66,144 91,440 1,24,320 1,24,800 (9,504)

II. Comments
Customer Dee in comparison with Customer Cee: Operating income of Customer Dee is more than that
of Customer Cee, despite having only 61.29% (38,000 units) of the units’ volume sold in comparison to
Customer Cee (62,000 units). Customer Cee receives a higher percent of discount i.e. 9.26% (₹ 6) while
Customer Dee receive a discount of 7.04% (₹ 4.56). Though the gross margin of customer Cee (₹
2,97,600) is more than that of Customer Dee (₹ 2,37,120) but total cost of customer level operating
activities of Cee (₹ 1,73,280) is more in comparison to Customer Dee (₹ 1,12,320). As a result, operating
income is more in case of Customer Dee.
Customer Eey in comparison with Customer Aey: Customer Eey is not profitable while Customer Aey is
profitable. Customer Eey receives a discount of 10% (₹ 6.48) while Customer Aey doesn’t receive any
discount. Sales Volume of Customer Aey and Eey is almost same. However, total cost of customer level
operating activities of Eey is far more (₹ 51,840) in comparison to Customer Aey (₹ 34,944). This has
resulted in occurrence of loss in case of Customer Eey.

This was a numerical problem from the topic ‘Concepts of Activity Based Costing (ABC)’
which required preparing customer level operating income using cost driver rates and
examining the result and commenting on the customer by comparison of result/ other
parameters. Performance of the examinees was above average.
Question 11
The following budgeted information relates to B Ltd. for the year 2021:
Products
X Y Z
Production and Sales (units) 1,00,000 80,000 60,000
(₹) (₹) (₹)
Selling price per unit 45 90 70
Direct cost per unit 25 45 50
Hours Hours Hours
Machine department (machine hours per 3 4 5
unit)
Assembly department (direct labour hours 6 4 3
per unit)
The estimated overhead expenses for the year 2021 will be as below:
Machine Department ₹ 36,80,000 Assembly
Department 27,50,000
Overhead expenses are apportioned to the products on the following basis: Machine
Department On the basis of machine hours
Assembly Department On the basis of labour hours
After a detailed study of the activities the following cost pools and their respective cost drivers
are found:
Cost Pool Amount (₹) Cost Driver Quantity
Machining services 32,20,000 Machine hours 9,20,000 hours
Assembly services 22,00,000 Direct labour hours 11,00,000 hours
Set-up costs 4,50,000 Machine set-ups 9,000 set-ups

5.20
Order processing 3,60,000 Customer orders 7,200 orders
Purchasing 2,00,000 Purchase orders 800 orders
As per an estimate the activities will be used by the three products:

Products
X Y Z
Machine set-ups 4,500 3,000 1,500
Customer orders 2,200 2,400 2,600
Purchase orders 300 350 150
You are required to PREPARE a product-wise profit statement using:

(i) Absorption costing method;
(ii) Activity-based method. (MTP 10 Marks Nov ’21) (RTP May ’21)
Answer 11
(i) Profit Statement using Absorption costing method:
Particulars Product Total
X Y Z
A. Sales Quantity 1,00,000 80,000 60,000 2,40,000
B. Selling price per unit (₹) 45 90 70
C. Sales Value (₹) [A×B] 45,00,000 72,00,000 42,00,000 1,59,00,000
D. Direct cost per unit (₹) 25 45 50
E. Direct Cost (₹) [A×D] 25,00,000 36,00,000 30,00,000 91,00,000
F. Overheads:
(i) Machine department (₹) 12,00,000 12,80,000 12,00,000 36,80,000
(Working note-1)
(ii) Assembly department (₹) 15,00,000 8,00,000 4,50,000 27,50,000
(Working note-1)
G. Total Cost (₹) [E+F] 52,00,000 56,80,000 46,50,000 1,55,30,000
H. Profit (C-G) (7,00,000) 15,20,000 (4,50,000) 3,70,000
(ii) Profit Statement using Activity based costing (ABC) method:
Particulars Product Total
X Y Z
A. Sales Quantity 1,00,000 80,000 60,000
B. Selling price per unit (₹) 45 90 70
C. Sales Value (₹) [A×B] 45,00,000 72,00,000 42,00,000 1,59,00,000
D. Direct cost per unit (₹) 25 45 50
E. Direct Cost (₹) [A×D] 25,00,000 36,00,000 30,00,000 91,00,000
F. Overheads: (Refer
working note-3)
(i) Machining services (₹) 10,50,000 11,20,000 10,50,000 32,20,000
(ii) Assembly services (₹) 12,00,000 6,40,000 3,60,000 22,00,000
(iii) Set-up costs (₹) 2,25,000 1,50,000 75,000 4,50,000
(iv) Order processing (₹) 1,10,000 1,20,000 1,30,000 3,60,000
(v) Purchasing (₹) 75,000 87,500 37,500 2,00,000
G. Total Cost (₹) [E+F] 51,60,000 57,17,500 46,52,500 1,55,30,000
H. Profit (₹) (C-G) (6,60,000) 14,82,500 (4,52,500) 3,70,000
Working Notes:
5.21
1.
Products
X Y Z Total
A. Production (units) 1,00,000 80,000 60,000
B. Machine hours per unit 3 4 5
C. Total Machine hours [A×B] 3,00,000 3,20,000 3,00,000
D. Rate per hour (₹) 4 4 4 9,20,000
E. Machine Dept. cost [C×D] 12,00,000 12,80,000 12,00,000 36,80,000
F. Labour hours per unit 6 4 3
G. Total labour hours [A×F] 6,00,000 3,20,000 1,80,000 11,00,000
H. Rate per hour (₹) 2.5 2.5 2.5
I Assembly Dept. cost 15,00,000 8,00,000 4,50,000 27,50,000
[G×H]
Machine hour rate = Rs. 36,80,000 / 9,20,000 hours = ₹ 4
Labour hour rate = Rs. 27,50,000 / 11,00,000 hours = ₹ 2.5
2. Calculation of cost driver rate
Cost Pool Amount (₹) Cost Driver Quantity Driver
rate (₹)
Machining services 32,20,000 Machine hours 9,20,000 hours 3.50
Assembly services 22,00,000 Direct labour 11,00,000 2.00
hours
hours
Set-up costs 4,50,000 Machine set- 9,000 set-ups 50.00
ups
Order processing 3,60,000 Customer 7,200 orders 50.00
orders
Purchasing 2,00,000 Purchase 800 orders 250.00
orders
3. Calculation of activity-wise cost
Products
X Y Z Total
A. Machining hours (Refer Working 3,00,000 3,20,000 3,00,000 9,20,000
note-1)
B. Machine hour rate (₹) (Refer 3.5 3.5 3.5
Working note-2)
C. Machining services cost (₹) [A×B] 10,50,000 11,20,000 10,50,000 32,20,000
D. Labour hours (Refer Working 6,00,000 3,20,000 1,80,000 11,00,000

note-1)
E. Labour hour rate (₹) (Refer 2 2 2
Working note-2)
F. Assembly services cost (₹) [D×E] 12,00,000 6,40,000 3,60,000 22,00,000
G. Machine set-ups 4,500 3,000 1,500 9,000
H. Rate per set-up (₹) (Refer 50 50 50
Working note-2)
I. Set-up cost (₹) [G×H] 2,25,000 1,50,000 75,000 4,50,000
J. Customer orders 2,200 2,400 2,600 7,200

5.22
K. Rate per order (₹) (Refer 50 50 50

Working note-2)
L. Order processing cost (₹) 1,10,000 1,20,000 1,30,000 3,60,000
[J×K]
M. Purchase orders 300 350 150 800
N. Rate per order (₹) (Refer 250 250 250
Working note-2)
O. Purchasing cost (₹) [M×N] 75,000 87,500 37,500 2,00,000
Question 12
Discuss with example the level of activity method of segregating semi-variable costs into fixed and
variable costs. (MTP Oct. ‘18, 5 Marks)
Answer 12
Level of activity method: Under this method, the variable overhead may be determined by comparing
two levels of output with the amount of expenses at those levels. Since the fixed element does not
change, the variable element may be ascertained with the help of the following formula.
AℎCDEF GD HℎF CIJKDH JL FMNFDOF
AℎCDEF GD HℎF PKCDHGHQ JL JKHNKH
Suppose the following information is available:

Production Units Semi-variable expenses (₹ )
January 100 260
February 140 300
Difference 40 40
R6STUV WT 0VXWYZS9WS[\V V]^VT0V
The variable cost : = = Re. 1/unit
R6STUV WT ^97_8àW7T Z7\8XV 8TWa0
Thus, in January, the variable cost will be 100 × Re. 1 = ₹ 100 and the fixed cost element will be ( ₹ 260
– ₹ 100) or ₹ 160. In February, the variable cost will be 140 × Re. 1 = ₹ 140 whereas the fixed cost
element will remain the same, i.e., ₹ 160.
Question 13
‘Humara - Apna’ bank offers three products, viz., deposits, Loans and Credit Cards. The bank
has selected 4 activities for a detailed budgeting exercise, following activity based costing
methods.
The bank wants to know the product wise total cost per unit for the selected activities, so that
prices may be fixed accordingly.
The following information is made available to formulate the budget:
Activity Present Cost Estimation for the budget period
(Rs.)
ATM Services:
(a) Machine 4,00,000 All fixed, no change.
Maintenance
(b) Rents 2,00,000 Fully fixed, no change.
(c) Currency 1,00,000 Expected to double during budget
period.
Replenishment Cost 7,00,000 (This activity is driven by no. of ATM
transactions)

5.23
Computer Processing 5,00,000 Half this amount is fixed and no change

is expected.
The variable portion is expected to
increase to three times the current level.
(This activity is driven by the number of
computer transactions)
Issuing Statements 18,00,000 Presently, 3 lakh statements are made.
In the budget period, 5 lakh statements
are expected.
For every increase of one lakh
statement, one lakh rupees is the
budgeted increase.
(This activity is driven by the number of
statements)
Computer Inquiries 2,00,000 Estimated to increase by 80% during the
budget period.
(This activity is driven by telephone
minutes)
The activity drivers and their budgeted quantifies are given below:
Activity Drivers Deposits Loans Credit
Cards
No. of ATM Transactions 1,50,000 --- 50,000
No. of Computer Processing 15,00,000 2,00,000 3,00,000
Transactions
No. of Statements to be issued 3,50,000 50,000 1,00,000
Telephone Minutes 3,60,000 1,80,000 1,80,000
The bank budgets a volume of 58,600 deposit accounts, 13,000 loan accounts, and 14,000 Credit
Card Accounts.
Required
(i) CALCULATE the budgeted rate for each activity.
(ii) PREPARE the budgeted cost statement activity wise.
(iii) COMPUTE the budgeted product cost per account for each product using (i) and (ii) above.
(MTP 10 Marks April ’19 & Oct ‘23, Old & New SM) (Same concepts different figures MTP 10
Marks Apr’22)
Answer 13
Statement Showing “Budgeted Cost per unit of the Product”
Activity Activity Activity No. of Activity Deposits Loans Credit
Cost Driver Units of Rate Cards
(Budgeted Activity (Rs.)
(Rs.) Driver
(Budget)
ATM 8,00,000 No. of ATM 2,00,000 4.00 6,00,000 --- 2,00,000
Services Transaction
Computer 10,00,000 No. of 20,00,000 0.50 7,50,000 1,00,000 1,50,000
Processing Computer
Transaction
Issuing 20,00,000 No. of 5,00,000 4.00 14,00,000 2,00,000 4,00,000
Statements Statements
5.24
Customer 3,60,000 Telephone 7,20,000 0.50 1,80,000 90,000 90,000

Inquiries Minutes
Budgeted 41,60,000 29,30,000 3,90,000 8,40,000
Cost
Units of Product (as estimated in the budget period) 58,600 13,000 14,000
Budgeted Cost per unit of the product 50 30 60
Working Note
Activity Budgeted Cost (Rs.) Remark
ATM Services:
(a) Machine Maintenance 4,00,000 − All fixed, no change.
(b) Rents 2,00,000 − Fully fixed, no change.
(c) Currency 2,00,000 − Doubled during budget period.

Replenishment Cost
Total 8,00,000
Computer Processing 2,50,000 − Rs.2,50,000 (half of
Rs.5,00,000) is fixed and no
change is expected.
7,50,000 − Rs.2,50,000 (variable portion)
is expected to increase to three
times the current level.
Total 10,00,000
Issuing Statements 18,00,000 − Existing.
2,00,000 − 2 lakh statements are expected
to be increased in budgeted
period. For every increase of
one lakh statement, one lakh
rupees is the budgeted
increase.
20,00,000
Total
Computer Inquiries 3,60,000 - Estimated to increase by 80%
during the budget period.
(Rs.2,00,000 x 180%)
Total 3,60,000
Question 14
SMD Limited manufactures four products namely A, B, C and D using the same production and process
facilities. The company has been following conventional method of costing and wishes to shift to
activity-based costing system.
The data pertaining to four products are:
Product Units Material per unit Labour hours per unit Machine hours per
produce (₹) unit
d
A 1,500 140 1 3
B 2,500 90 3 2
C 10,000 180 2 6
D 6,000 150 1.5 4
The following activity volumes are associated to the production process for the relevant period -
Number of Number of Material Number of set-ups
Inspections Movements
A 200 15 100
5.25
B 250 20 125
C 900 100 600
D 650 85 400
The cost data also states that:

 Direct Labour cost: ₹ 60 per hour
 Machine hour rate: ₹ 280 per hour
 Production overheads are absorbed on machine hour basis.
 For activity-based costing, a thorough, analysis of the production process revealed that:
Costs relating to set-ups and inspection bears the equal percentage while costs relating to machinery
accounts for 20% of the production overhead.
Costs relating to material handling stands at 50% of costs relating to machinery. You are required to:
(i) Prepare a statement showing the unit costs and total costs of each product using the absorption
costing method.
(ii) Prepare a statement showing the unit costs and total costs of each product using activity - based
costing system.
(MTP 10 Marks Sep’22)
Answer 14
(i) Cost per unit - Conventional Costing: Absorption rate method
Particulars A (₹) B (₹) C (₹) D (₹)
Material 140 90 180 150
Labour @ ₹ 60 per labour hour 60 180 120 90
Overheads @ ₹ 280 per machine hour 840 560 1680 1120
Cost per unit (in ₹) 1,040 830 1,980 1,360
No of units 1,500 2,500 10,000 6,000
Total cost (₹) 15,60,000 20,75,000 1,98,00,000 81,60,000
(ii) Statement of apportionment of overheads:

Amount (₹)
Type of Cost Cost Driver A B C D
Setups No of 7,48,000 9,35,000 44,88,000 29,92,000
Setups (100 x 7,480) (125x7,480) (600 x 7,480) (400 x7,480)
Machinery Machine 2,52,000 2,80,000 33,60,000 13,44,000
hours (4,500 x 56) (5,000 x 56) (60,000 x 56) (24,000 x 56)
Material Handling No. of 1,78,500 2,38,000 11,90,000 10,11,500
Movements (15 x 11,900) (20 x 11,900) (100 x 11,900) (85 x 11,900)
of material
Inspection No. of 9,16,300 11,45,375 41,23,350 29,77,975
Inspections (200x4,581.50) (250x4,581.50) (900x4,581.50) (650x4,581.50)
Total 20,94,800 25,98,375 1,31,61,350 83,25,475
Output Units 1,500 2,500 10,000 6,000
Overhead/ unit 1,396.53 1,039.35 1,316.14 1,387.58
Statement showing Cost per unit and Total cost using Activity Based Costing
Particulars A (₹) B (₹) C (₹) D (₹)
Material 140.00 90.00 180.00 150.00
Labour 60.00 180.00 120.00 90.00
Total 200.00 270.00 300.00 240.00
No. of units 1,500 2,500 10,000 6,000
Total cost (excluding overheads) 3,00,000 6,75,000 30,00,000 14,40,000
5.26
Add: Overheads (as calculated) 20,94,800 25,98,375 1,31,61,350 83,25,475

Total cost 23,94,800 32,73,375 1,61,61,350 97,65,475
Cost per unit 1,596.53 1,309.35 1,616.14 1,627.58
Working Notes:
1. Calculation of Total machine hours
Particulars A B C D
(a) Machine hours per unit 3 2 6 4
(b) Production(units) 1,500 2,500 10,000 6,000
(c) Total machine hours (a) x(b) 4,500 5,000 60,000 24,000
Total Machine hours = 93,500

Total production overheads= 93,500 x 280 = ₹ 2,61,80,000
2. Calculation of cost driver rate
Cost pool Amount of Cost Driver Cost Driver Cost Driver Rate (₹)
cost (₹) (basis) (units)
Setups 91,63,000 No. of Setups 1,225 7,480 per set up
Machinery 52,36,000 Machine Hrs. 93,500 56 per machine hour
Material 26,18,000 No. of Material 220 11,900 per material
Handlings Movements movement
Inspection 91,63,000 No. of Inspections 2,000 4,581.50 per
inspection
2,61,80,000
Question 15
WRITE DOWN the corresponding cost drivers related to the following activity cost pools:
Inspecting and testing costs, Setting-up machines cost, Machining costs, Supervising Costs,
Ordering and Receiving Materials cost (MTP 5 Marks Sep’22)
Answer 15
Activity Cost Pools Related Cost Drivers
Inspecting and testing costs Number of tests
Setting up machines cost Number of set-ups
Machining costs Machine hours
Supervising Costs Direct labour hours
Ordering and Receiving Materials cost Number of purchase orders
Question 16
ANI Limited is a trader of a Product Z. It has decided to analyse the profitability of its five new
customers. It buys Z article at ₹5,400 per unit and sells to retail customers at a listed price of ₹6,480
per unit. The data pertaining to five customers are:
Customers
A B C D E
Units sold 4,500 6,000 9,500 7,500 12,750
Listed Selling Price ₹6,480 ₹6,480 ₹6,480 ₹6,480 ₹6,480
Actual Selling Price ₹6,480 ₹6,372 ₹5,940 ₹6,264 ₹5,832
Number of Purchase orders 15 25 30 25 30
Number of Customer visits 2 3 6 2 3
Number of deliveries 10 30 60 40 20
Kilometers travelled per delivery 20 6 5 10 30

5.27
Number of expedited deliveries 0 0 0 0 1
Its five activities and their cost drivers are:

Activity Cost Driver Rate
Order taking ₹4,500 per purchase order
Customer visits ₹3,600 per customer visit
Deliveries ₹7.50 per delivery Km travelled
Product handling ₹22.50 per case sold
Expedited deliveries ₹13,500 per expedited delivery
Required:
(i) COMPUTE the customer-level operating income of each of five retail customers (A, B, C, D and
E).
(ii) STATE the factors ANI Limited should consider in deciding whether to drop a customer.
(MTP 10 Marks Oct’22)
Answer 16
Working note:
Computation of revenues (at listed price), discount, cost of goods sold and customer level operating
activities costs:
Customers
A B C D E
Units sold: (a) 4,500 6,000 9,500 7,500 12,750
Revenues (at listed 2,91,60,000 3,88,80,000 6,15,60,000 4,86,00,000 8,26,20,000
price) (Rs.): (b)
{(a) ×Rs.6,480)}
Revenues (at listed 2,91,60,000 3,82,32,000 5,64,30,000 4,69,80,000 7,43,58,000
price) (Rs.): (c) (4,500×6,480) (6,000×6,372) (9,500×5,940) (7,500×6,264) (12,750×5,832)
{(a) ×Actual selling
price)}
Discount (Rs.) (d) 0 6,48,000 51,30,000 16,20,000 82,62,000
{(b) – (c)}
Cost of goods sold 2,43,00,000 3,24,00,000 5,13,00,000 4,05,00,000 6,88,50,000
(Rs.) : (d)
{(a) x Rs.5,400}
Customer level operating activities costs
Order taking costs 67,500 1,12,500 1,35,000 1,12,500 1,35,000
(Rs.):
(No. of purchase
orders × Rs. 4,500)
Customer visits 7,200 10,800 21,600 7,200 10,800
costs (Rs.)
(No. of customer
visits x Rs. 3,600)
Delivery vehicles 1,500 1,350 2,250 3,000 4,500
travel costs (Rs.)
(Kms travelled by
delivery vehicles x Rs.
7.50 per km.)
Product handling 1,01,250 1,35,000 2,13,750 1,68,750 2,86,875
costs (Rs.)
{(a) x Rs. 22.50}

5.28
Cost of expediting - - - - 13,500

deliveries (Rs.)
{No. of expedited
deliveries x Rs.
13,500}
Total cost of
customer level
operating activities
(Rs.) 1,77,450 2,59,650 3,72,600 2,91,450 4,50,675
(i) Computation of Customer level operating income

Customers
A B C D E
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Revenues (At 2,91,60,000 3,82,32,000 5,64,30,000 4,69,80,000 7,43,58,000
list price)
(Refer to working
note)
Less: Cost of (2,43,00,000) (3,24,00,000) (5,13,00,000) (4,05,00,000) (6,88,50,000)
goods sold
(Refer to working
note)
Gross margin 48,60,000 58,32,000 51,30,000 64,80,000 55,08,000
Less: Customer
level operating
activities costs
(Refer to working
note) (1,77,450) (2,59,650) (3,72,600) (2,91,450) (4,50,675)
Customer level 46,82,550 55,72,350 47,57,400 61,88,550 50,57,325
operating income
(ii) Factors to be considered for dropping a customer:

Dropping customers should be the last resort to be taken by an entity. Factors to be considered
should include:
- What is the expected future profitability of each customer?
- Are the currently least profitable or low profitable customers are likely to be highly profitable in
the future?
- What costs are avoidable if one or more customers are dropped?
- Can the relationship with the “problem” customers be restructured so that there is at “win- win”
situation
Question 17
Bopanna Ltd. produces three products Zm, Rm and Pm using the same plant and resources. It has
given the following information for the year ended on 31st March 2022:
Zm Rm Pm
Production Quantity (units) 6000 7200 9840
Cost per unit:
Direct Material (₹) 450 420 880
Direct Labour (₹) 80 150 200
Budgeted direct labour rate was ₹40 per hour and the production overheads, shown in table
below, were absorbed to products using direct labour hour rate.
5.29
Company followed Absorption Costing Method. However, the company is now considering
adopting Activity Based Costing Method.
Budgeted Cost Driver Remarks
Overheads (₹)
Material Procurement 2,50,000 No. of orders No. of orders was 30 units
for each product.
Set-up 1,50,000 No. of production All the three products are
Runs produced in production
runs of 50 units.
Quality Control 1,00,000 No. of Done for each production
Inspections run.
Maintenance 3,00,000 Maintenance Total maintenance hours
hours were 10,000 and was
allocated in the ratio of
2:1:2 between X, Y & Z.
Required:
(i) CALCULATE the total cost per unit of each product using the Absorption Costing Method.
(ii) CALCULATE the total cost per unit of each product using the Activity Based Costing
Method. (MTP 10 Marks March ‘23)(Same concept different figures PYP 10 Marks Jan’21)
Answer 17
(i) Traditional Absorption Costing
Zm Rm Pm Total
(a) Quantity (units) 6,000 7,200 9,840 23,040
(b) Direct labour per unit (₹) 80 150 200 -
(c) Direct labour hours (a × b)/₹ 40 12,000 27,000 49,200 88,200
Overhead rate per direct labour hour = Budgeted overheads / Budgeted labour hours
= (₹2,50,000 + ₹1,50,000 + ₹ 1,00,000 + ₹3,00,000) / 88,200 hours
= ₹8,00,000 / 88,200 hours
= ₹9 per direct labour hour(approx.)
Calculation of Cost per Unit
Zm Rm Pm
Direct Costs:
Direct Material 450 420 880
Direct Labour (₹) 80 150 200
Production Overhead: (₹) 18 33.75 45
(80× (150× (200×
9/40) 9/40) 9/40)
Total cost per unit (₹) 548 603.75 1125
(ii) Calculation of Cost-Driver level under Activity Based Costing
Zm Rm Pm Total
Quantity (units) 6,000 7,200 9,840 -

No. of orders (to be 200 240 328
768
rounded off for fraction) (6,000 / (7,200 / (9,840 / 30)
30) 30)
120 144 197
No. of production runs 461
(6,000 / (7,200 / (9,840 / 50)
50) 50)
5.30
No. of Inspections (done

for each production run) 120 144 197 461
Maintenance hours 4,000 2,000 4,000 10,000
Calculation of Cost-Driver rate

Budgeted Cost Cost-driver Cost Driver rate
Activity (₹) level (₹)
(a) (b) (c) = (a) / (b)
Material 2,50,000 768 325.5
procurement
Set-up 1,50,000 461 325.5
Quality control 1,00,000 461 217.0
Maintenance 3,00,000 10,000 30.0
Calculation of total cost of products using Activity Based Costing
Particulars Product
Zm (₹) Rm (₹) Pm (₹)
Direct Labour 80 150 200
Prime Cost per unit (A) 530 570 1080
Material procurement 10.85 10.85 10.85
(325.5×200/6000) (325.5×240/7200) (325.5×328/9840)
Set-up 6.51 6.51 6.51
(325.5×120/6000) (325.5×144/7200) (325.5×196.8/9840)
Quality control 4.34 4.34 4.34
(217×120/6000) (217×144/7200) (217×196.8/9840)
Maintenance 20.0 8.3 12.2
(4000×30/6000) (2000×30/7200) (4000×30/9840)
Overhead Cost per unit 41.7 30.0 33.9
(B)
Total Cost per unit (A + B) 571.7 600.0 1113.9
Question 18
KD Ltd. is following Activity based costing. Budgeted overheads, cost drivers and volume are as
follows:
Cost pool Budgeted Cost driver Budgeted
overheads (₹) volume
Material procurement 18,42,000 No. of orders 1,200
Material handling 8,50,000 No. of movement 1,240
Maintenance 24,56,000 Maintenance hours 17,550
Set-up 9,12,000 No. of set-ups 1,450
Quality control 4,42,000 No. of inspection 1,820
The company has produced a batch of 7,600 units, its material cost was ₹24,62,000 and wages
₹4,68,500. Usage activities of the said batch are as follows:
Material orders 56
Material movements 84
Maintenance hours 1,420 hours
5.31
Set-ups 60
No. of inspections 18
Required:
(i) CALCULATE cost driver rates.
(ii) CALCULATE the total and unit cost for the batch. (MTP 5 Marks April ’23) (Same
concept different figures RTP Nov’20)
Answer 18
(i) Calculation of cost driver rate:
Cost pool Budgeted Cost driver Cost driver rate
overheads (₹) (₹)
Material procurement 18,42,000 1,200 1,535.00
Material handling 8,50,000 1,240 685.48
Maintenance 24,56,000 17,550 139.94
Set-up 9,12,000 1,450 628.97
Quality control 4,42,000 1,820 242.86
(ii) Calculation of cost for the batch:
Particulars Amount (₹) Amount (₹)
Material cost 24,62,000.00
Wages 4,68,500.00
Overheads:
- Material procurement (₹1,535×56 orders) 85,960.00
- Material handling (₹685.48×84 movements) 57,580.32
- Maintenance (₹139.94×1,420 hours) 1,98,714.80
- Set-up (₹628.97×60 set-ups) 37,738.20
- Quality control (₹242.86×18 inspections) 4,371.48 3,84,364.80
Total Cost 33,14,864.80
No. of units 7,600
Cost per units 436.17
Question 19
Family Store wants information about the profitability of individual product lines: Soft drinks, Fresh
produce and Packaged food. Family store provides the following data for the year 20X7-X8 for each
product line:
Soft drinks Fresh produce Packaged food
Revenues ₹ 39,67,500 ₹ 1,05,03,000 ₹ 60,49,500
Cost of goods sold ₹ 30,00,000 ₹ 75,00,000 ₹ 45,00,000
Cost of bottles returned ₹ 60,000 ₹0 ₹0
Number of purchase orders placed 360 840 360
Number of deliveries received 300 2,190 660
Hours of shelf-stocking time 540 5,400 2,700
Items sold 1,26,000 11,04,000 3,06,000
Family store also provides the following information for the year 20X7-X8:
Activity Description of activity Total Cost Cost-allocation base
5.32
Bottles returns Returning of empty bottles ₹ 60,000 Direct tracing to soft

drink line
Ordering Placing of orders for purchases ₹ 7,80,000 1,560 purchase orders
Delivery Physical delivery and receipt of goods ₹ 12,60,000 3,150 deliveries
Shelf stocking Stocking of goods on store shelves ₹ 8,64,000 8,640 hours of shelf-
and on-going restocking stocking time
Customer ₹ 15,36,000
Assistance provided to 15,36,000 items sold
Support customers including check-out
Required:
(i) Family store currently allocates support cost (all cost other than cost of goods sold) to product lines
on the basis of cost of goods sold of each product line. CALCULATE the operating income and
operating income as a % of revenues for each product line.
(ii)If Family Store allocates support costs (all costs other than cost of goods sold) to product lines using
and activity based costing system, Calculate the operating income and operating income as a % of
revenues for each product line. (RTP Nov’18, RTP May’20, Nov’21, Old & New SM)
Answer 19
Statement of Operating income and Operating income as a percentage of revenues for each product
line (When support costs are allocated to product lines on the basis of cost of goods sold of each
product)
Soft Fresh Packaged Total
Drinks Produce Foods
(₹ ) (₹ ) (₹ ) (₹ )
Revenues: (A) 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost of Goods sold (COGS): (B) 30,00,000 75,00,000 45,00,000 1,50,00,000
Support cost (30% of COGS): (C)
(Refer working notes) 9,00,000 22,50,000 13,50,000 45,00,000
Total cost: (D) = {(B) + (C)} 39,00,000 97,50,000 58,50,000 1,95,00,000
Operating income: E= {(A)-(D)} 67,500 7,53,000 1,99,500 10,20,000
Operating income as a percentage
of revenues: (E/A) × 100) 1.70% 7.17% 3.30% 4.97%
Working Notes
1. Total support cost:
(₹ )
Bottles returns 60,000
Ordering 7,80,000
Delivery 12,60,000
Shelf stocking 8,64,000
Customer support 15,36,000
Total support cost 45,00,000
2. Percentage of support cost to cost of goods sold (COGS):
bcdef ghiicjd kcgd
= ) 100
bcdef lcgd cm nccog gcfo
pg.qr,ss,sss
= pg.t,rs,ss,sss ) tss = 30%
3. Cost for each activity cost driver:

5.33
Activity Total cost Cost allocation base Cost driver rate

(1) (₹ )
(2) (3) (4) = [(2) ÷ (3)]
Ordering 7,80,000 1,560 purchase orders ₹500 per purchase order
Delivery 12,60,000 3,150 deliveries ₹ 400 per delivery
Shelf-stocking 8,64,000 8,640 hours ₹ 100 per stocking hour
Customer support 15,36,000 15,36,000 items sold ₹ 1 per item sold
(i) Statement of Operating income and Operating income as a percentage of revenues for each product line
(When support costs are allocated to product lines using an activity-based costing system)
Soft Fresh Packaged Total
drinks (₹ ) Produce (₹ ) Food (₹ ) (₹ )
Revenues: (A) 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost & Goods sold 30,00,000 75,00,000 45,00,000 1,50,00,000
Bottle return costs 60,000 0 0 60,000
Ordering cost* 1,80,000 4,20,000 1,80,000 7,80,000
(360:840:360)
Delivery cost* 1,20,000 8,76,000 2,64,000 12,60,000
(300:2190:660)
Shelf stocking cost* 54,000 5,40,000 2,70,000 8,64,000
(540:5400:2700)
Customer Support cost* 1,26,000 11,04,000 3,06,000 15,36,000
(1,26,000:11,04,000:3,06,000)
Total cost: (B) 35,40,000 1,04,40,000 55,20,000 1,95,00,000
Operating income C: {(A)- (B)} 4,27,500 63,000 5,29,500 10,20,000
Operating income as a % of revenues 10.78% 0.60% 8.75% 4.97%
* Refer to working note 3
Question 20
SMP Pvt. Ltd. manufactures three products using three different machines. At present the overheads
are charged to products using labour hours. The following statement for the month of September
2019, using the absorption costing method has been prepared:
Particulars Product X Product Y Product Z
(using machine A) (using machine B) (using machine C)
Production units 45,000 52,500 30,000
Material cost per unit (‘) 350 460 410
Wages per unit @ ‘80 per hour 240 400 560
Overhead cost per unit (‘) 240 400 560
Total cost per unit (‘) 830 1,260 1,530
Selling price (‘) 1,037.50 1,575 1,912.50
The following additional information is available relating to overhead cost drivers.
Cost driver Product X Product Y Product Z Total
No. of machine set-ups 40 160 400 600
No. of purchase orders 400 800 1,200 2,400
No. of customers 1,000 2,200 4,800 8,000
Actual production and budgeted production for the month is same. Workers are paid at standard rate.
Out of total overhead costs, 30% related to machine set-ups, 30% related to customer order
processing and customer complaint management, while the balance proportion related to material
5.34
ordering.
Required:
(i) COMPUTE overhead cost per unit using activity based costing method.
(ii) DETERMINE the selling price of each product based on activity-based costing with the same profit
mark-up on cost. (RTP Nov’19)
Answer 20
Workings:
Total labour hours and overhead cost:
Particulars Product X Product Y Product Z Total
Production units 45,000 52,500 30,000 1,27,500
Hour per unit 3 5 7
Total hours 1,35,000 2,62,500 2,10,000 6,07,500
Rate per hour ₹80.00
Total overhead ₹4,86,00,000
Cost per activity and driver
Activity Machine Customer Customer Total
Set-up order complaint
processing management
Total overhead (₹) 1,45,80,000 1,45,80,000 1,94,40,000 4,86,00,000
No. of drivers 600 2,400 8,000
Cost per driver (₹) 24,300 6,075 2,430
(i) Computation of Overhead cost per unit:
No. of machine set-ups 40 160 400
Cost per driver (₹) 24,300 24,300 24,300
Total Machine set-up cost (₹) [A] 9,72,000 38,88,000 97,20,000
No. of purchase orders 400 800 1,200
Cost per driver (₹) 6,075 6,075 6,075
Total order processing cost (₹) [B] 24,30,000 48,60,000 72,90,000
No. of customers 1,000 2,200 4,800
Cost per driver (₹) 2,430 2,430 2,430
Total customer complaint management cost 24,30,000 53,46,000 1,16,64,000
(₹) [C]
Total Overhead cost (₹) [A+B+C] 58,32,000 1,40,94,000 2,86,74,000
Production units 45,000 52,500 30,000
Cost per unit (₹) 129.60 268.46 955.80
Determination of Selling price per unit
(using machine A) (using machine B) (using machine C)
Material cost per unit (‘) 350.00 460.00 410.00
Wages per unit @ ‘80 per hour 240.00 400.00 560.00
Overhead cost per unit (‘) 129.60 268.46 955.80
Total cost per unit (‘) 719.60 1,128.46 1,925.80
Profit (25% profit mark-up)(‘) 179.90 282.11 481.45
Selling price (‘) 899.50 1,410.57 2,407.25

5.35
Question 21
MST Limited has collected the following data for its two activities. It calculates activity cost rates
based on cost driver capacity.
Activity Cost Driver Capacity Cost (Rs.)
Power Kilowatt hours 50,000 kilowatt hours 40,00,000
Quality Inspections Number of Inspections 10,000 Inspections 60,00,000
The company makes three products M, S and T. For the year ended March 31, 20X 9, the following
consumption of cost drivers was reported:
Product Kilowatt hours Quality Inspections
M 10,000 3,500
S 20,000 2,500
T 15,000 3,000
Required:
(i) PREPARE a statement showing cost allocation to each product from each activity.
(ii) CALCULATE the cost of unused capacity for each activity.
(iii) STATE the factors the management considers in choosing a capacity level to compute the
budgeted fixed overhead cost rate. (RTP May’19) (Same concept different figures Old & New
SM)
Answer 21
Statement of cost allocation to each product from each activity
Product
M (Rs.) S (Rs.) T (Rs.) Total (Rs.)
Power 8,00,000 16,00,000 12,00,000 36,00,000
(Refer to (10,000 kWh × (20,000 kWh × Rs.80) (15,000 kWh ×
working note) Rs.80) Rs.80)
Quality 21,00,000 15,00,000 18,00,000 54,00,000
Inspections
(Refer to (3,500 (2,500 inspections × (3,000 inspections
inspections
working note) Rs.600) × Rs.600) × Rs.600)
Working Note:
Rate per unit of cost driver:
Power : (Rs.40,00,000 ÷ 50,000 kWh) = Rs.80/kWh
Quality Inspection : (Rs.60,00,000 ÷ 10,000 inspections) = Rs.600 per inspection
(ii) Calculation of cost of unused capacity for each activity:
(Rs.)
Power 4,00,000
(Rs.40,00,000 – Rs.36,00,000)
Quality Inspections 6,00,000
(Rs.60,00,000 – Rs.54,00,000)
Total cost of unused capacity 10,00,000
(ii) Factors management consider in choosing a capacity level to compute the budgeted fixed overhead
cost rate:
- Effect on product costing & capacity management
- Effect on pricing decisions.
- Effect on performance evaluation
5.36
- Effect on financial statements

- Regulatory requirements.
- Difficulties in forecasting for any capacity level.
Question 22
The profit margin of BABY Hairclips Company were over 20% of sales producing BROWN and BLACK
hairclips.
During the last year, GREEN hairclips had been introduced at 10% premium in selling price after the
introduction of YELLOW hairclips earlier five years back at 10/3% premium. However, the manager
of the company is disheartened with the sales figure for the current financial year as follows:
Traditional Income Statement
(in `)
Brown Black Yellow Green Total
Sales 1,50,00,000 1,20,00,000 27,90,000 3,30,000 3,01,20,000
Material Costs 50,00,000 40,00,000 9,36,000 1,10,000 1,00,46,000
Direct Labour 20,00,000 16,00,000 3,60,000 40,000 40,00,000
Overhead (3 times of direct 60,00,000 48,00,000 10,80,000 1,20,000 1,20,00,000
labour)
Total Operating Income 20,00,000 16,00,000 4,14,000 60,000 40,74,000
Return on Sales (in%) 13.3% 13.3% 14.8% 18.2% 13.5%
It is a known fact that customers are ready to pay premium amount for YELLOW and GREEN hairclips
for their attractiveness; and the percentage returns are also high on new products.
At present, all of the Plant’s indirect expenses are allocated to the products at 3 times of the direct
labour expenses. However, the manager is interested in allocating indirect expenses on the basis
of activity cost to reveal real earner.
He provides support expenses category-wise as follows:
Support Expenses (`)
Indirect Labour 40,00,000
Labour Incentives 32,00,000
Computer Systems 20,00,000
Machinery depreciation 16,00,000
Machine maintenance 8,00,000
Energy for machinery 4,00,000
Total 1,20,00,000
He provides following additional information for accomplishment of his interest: Incentives to be
allocated @ 40% of labour expenses (both direct and indirect).
Indirect labours are involved mainly in three activities. About half of indirect labour is involved in
handling production runs. Another 40% is required just for the physical changeover from one color
hairclip to another because YELLOW hairclips require substantial labour for preparing the machine
as compared to other colour hairclips. Remaining 10% of the time is spend for maintaining records
of the products in four parts.
Another amount spent on computer system of ` 20,00,000 is for maintenance of documents relating
to production runs and record keeping of the four products. In aggregate, approx.. 80% of the
amount expend is involved in the production run activity and approx.. 20% is used to keep records
of the products in four parts. Other overhead expenses i.e. machinery depreciation, machine
maintenance and energy for machinery are incurred to supply machine capacity to produce all the
hairclips (practical capability of 20,000 hours).
Activity Cost Drivers:
Particulars Brown Black Yellow Green Total
Sales Volume (units) 1,00,000 80,000 18,000 2,000 2,00,000
5.37
Selling Price (`) 150 150 155 165

Material cost (`) 50 50 52 55
Machine hours per unit (Hrs) 0.10 0.10 0.10 0.10 20,000
Production runs 100 100 76 24 300
Setup time per run (Hrs) 4 1 6 4
You are required to –
(i) CALCULATE operating income and operating income as per percentage of sales using activity-
based costing system.
(i) STATE the reasons for different operating income under traditional income system and
activity-based costing system. (RTP Nov’22)
Answer 22
Calculation of operating income using Activity Based Costing Calculation of Cost-Driver rate
Overhead Allocation Overhead cost Cost-driver Cost driver rate
Activity cost level
(`) (`) (`)
Indirect labour 56,00,000 50% 28,00,000 300 9,333.33
+ 40% for Production runs
incentives 40% 22,40,000 1052* 2,129.28
Setup hours
10% 5,60,000 4 1,40,000
Number of parts
Computer Systems 20,00,000 80% 16,00,000 300 5,333.33
Production runs
20% 4,00,000 4 1,00,000
Number of parts
Machinery 100% 16,00,000 20,000 80
depreciation 16,00,000 Machine hours
Machine 8,00,000 100% 8,00,000 20,000 40
Maintenance Machine hours
Energy for 4,00,000 100% 4,00,000 20,000 20
Machinery Machine hours
* (100 x 4) + (100 x 1) + (76 x 6) + (24 x 4)
= (400 + 100 + 456 + 96) = 1052 setup hours
Brown Black Red Green Total
Quantity (units) 1,00,000 80,000 18,000 2,000 2,00,000
(`) (`) (`) (`) (`)
Sales 1,50,00,000 1,20,00,000 27,90,000 3,30,000 3,01,20,000
Less: Material 50,00,000 40,00,000 9,36,000 1,10,000 1,00,46,000
Costs
Less: Direct 20,00,000 16,00,000 3,60,000 40,000 40,00,000
labour
Less: 40% 8,00,000 6,40,000 1,44,000 16,000 16,00,000
incentives on
direct labour
(A) 72,00,000 57,60,000 13,50,000 1,64,000 1,44,74,000
Overheads
Indirect labour +
incentives
5.38
- 50% based 9,33,333 9,33,333 7,09,334 2,24,000 28,00,000

on Production (9,333.33 x 100) (9,333.33 x (9,333.33 x (9,333.33
runs 100) 76) x 24)
- 40% based 8,51,711 2,12,928 9,70,951 2,04,410 22,40,000
on Setup (2,129.28 x 400) (2,129.28 x (2,129.28 x (2,129.28
hours 100) 456) x 96)
- 10% based 1,40,000 1,40,000 1,40,000 1,40,000 5,60,000
on number of (1,40,000 x 1)
parts
Computer Systems
- 80% based 5,33,333 5,33,333 4,05,334 1,28,000 16,00,000

on Production (5,333.33 x 100) (5,333.33 x (5,333.33 x (5,333.33
runs 100) 76) x 24)
- 20% based 1,00,000 1,00,000 1,00,000 1,00,000 4,00,000
on number of (1,00,000 x 1)
parts
Machinery 8,00,000 6,40,000 1,44,000 16,000 16,00,000
depreciation (80 x 0.1 x (80 x 0.1 x (80 x 0.1 x (80 x 0.1 x
1,00,000) 80,000) 18,000) 2,000)
Machine 4,00,000 3,20,000 72,000 8,000 8,00,000
Maintenance (40 x 0.1 x (40 x 0.1 x (40 x 0.1 x (40 x 0.1 x
1,00,000) 80,000) 18,000) 2,000)
Energy 2,00,000 1,60,000 36,000 4,000 4,00,000
(20 x 0.1 x (20 x 0.1 x (20 x 0.1 x (20 x 0.1 x
for Machinery
1,00,000) 80,000) 18,000) 2,000)
Total Overheads (B) 39,58,377 30,39,594 25,77,619 8,24,410 1,04,00,000
Operating Income 32,41,623 27,20,406 (12,27,619) (6,60,410) 40,74,000

(A-B)
Return on Sales (%) 21.61 22.67 (44.00) (200.12) 13.53
The difference in the operating income under the two systems is due to the differences in the
overheads borne by each of the products. The Activity Based Costs appear to be more accurate.
Question 23
Hygiene Care Ltd. is a manufacturer of a range of goods. The cost structure of its different products is
as follows:
Particulars Hand Detergent Dishwasher
Wash Powder
Direct Materials (` / Pu) 150 120 120
Direct Labour @`10/ hour (` / 45 60 75
Pu)
Production Overheads (` / Pu) 40 50 40
Total Cost (` / Pu) 235 230 235
Quantity Produced (Units) 30,000 60,000 90,000
Hygiene Care Ltd. was absorbing overheads on the basis of direct labour hours. Management
accountant has suggested that the company should introduce ABC system and has identified cost
drivers and cost pools as follows:
5.39
Activity Cost Pool Cost Driver Associated Cost

(`)
Goods Receiving Number of Dispatch Order 8,88,000
Inspecting and Testing Number of Production Runs 26,82,000
costs
Dispatching Number of dispatch order 6,30,000
Storage Cost Number of Batches of 36,00,000
material
The following information is also supplied:
Details Hand Wash Detergent Dishwasher
Powder
Batches of material 720 780 900
Number of dispatch order 360 540 600
No. of Production Runs 1,500 2,100 2,400
Number of Dispatch Orders 600 900 1,000
Required:
CALCULATE activity-based production cost of all the three products. (RTP May 23)
Answer 23
1. The Total Production Overhead are 78,00,000
Items Labour Hour Overheads allocation on the basis of
direct Labour Hour (`)
Labour Hour Ratio (4.5:6:7.5)
Hand Wash 1,35,000 9,00,000
Detergent Powder 3,60,000 24,00,000
Dishwasher 6,75,000 45,00,000
Total 11,70,000 78,00,000
2. On the basis of ABC analysis this amount will be apportioned as follows: Statement Showing
"Activity Based Production Cost"
Activity Cost Cost Driver Ratio Total Hand Detergent Dishwasher
Pool Amount Wash (`) Powder (`)
(`) (`)
Goods Receiving Dispatch order 06:09:10 8,88,000 2,13,120 3,19,680 3,55,200
Inspecting and Production Runs 05:07:08 26,82,000 6,70,500 9,38,700 10,72,800
Testing costs
Dispatching Dispatch Order 06:09:10 6,30,000 1,51,200 2,26,800 2,52,000
Storage Cost Batches of 12:13:15 36,00,000 10,80,000 11,70,000 13,50,000
material
Total Activity Cost 21,14,820 26,55,180 30,30,000
Quantity 30,000 60,000 90,000
Produces
Unit Cost
(Overheads) 70.49 44.25 33.67
Add: Conversion
Cost (Material +
Labour) 195 180 195
Total 265.49 224.25 228.67
Note: This question can also be solved by using cost driver rate
5.40
Question 24
L Limited manufactures three products P, Q and R which are similar in nature and are usually
produced in production runs of 100 units. Product P and R require both machine hours and
assembly hours, whereas product Q requires only machine hours. The overheads incurred by the
company during the first quarter are as under:
`
Machine Department expenses 18,48,000
Assembly Department expenses 6,72,000
Setup costs 90,000
Stores receiving cost 1,20,000
Order processing and dispatch 1,80,000
Inspect and Quality control cost 36,000
The data related to the three products during the period are as under:
P Q R
Machine hours worked 30,000 48,000 54,000
hrs. hrs. hrs.
Assembly hours worked (direct labour 15,000 - 27,000
hours) hrs. hrs.
Customers’ orders executed (in 1,250 1,000 1,500
numbers)
Number of requisitions raised on the 40 30 50
stores
Prepare a statement showing details of overhead costs allocated to each product type using
activity-based costing. (RTP Nov ’23)
Answer 24
Calculation of “Activity Rate”
Cost Pool Cost (`) Cost Driver Cost Driver
Rate (`)
[A] [B] [C] = [A]÷[B]
Machine Department Expenses 18,48,000 Machine Hours 14.00
(1,32,000 hrs.)
Assembly Department Expenses 6,72,000 Assembly Hours 16.00
(42,000 hrs.)
Setup Cost 90,000 No. of Production Runs 200.00
(450*)
Stores Receiving Cost 1,20,000 No. of Requisitions Raised 1,000.00
on the Stores (120)
Order Processing and Dispatch 1,80,000 No. of Customers Orders 48.00
Executed (3,750)
Inspection and Quality Control 36,000 No. of Production Runs 80.00
Cost (450*)
Total (`) 29,46,000
*Number of Production Run is 450 (150 + 120 + 180)
Statement Showing “Overheads Allocation”
Particulars of Cost Cost P Q R Total
Driver

5.41
Machine Machine Hours 4,20,000 6,72,000 7,56,000 18,48,000

Department (30,000 × (48,000 × (54,000 ×
Expenses `14) `14) `14)
Assembly Assembly Hours 2,40,000 --- 4,32,000 6,72,000
Department (15,000 × (27,000 ×
Expenses `16) `16)
Setup Cost No. of Production 30,000 24,000 36,000 90,000

Runs (150 × (120 × (180 ×
`200) `200) `200)
Stores Receiving No. of Requisitions 40,000 30,000 50,000 1,20,000
Cost Raised on the (40 × (30 × (50 ×
Stores `1,000) `1,000) `1,000)
Order Processing No. of Customers 60,000 48,000 72,000 1,80,000

and Dispatch Orders Executed (1,250 × (1,000 × (1,500 ×
`48) `48) `48)
Inspection and No. of Production 12,000 9,600 14,400 36,000

Quality Control Cost Runs (150 × (120 × (180 ×
`80) `80) `80)
Overhead (`) 8,02,000 7,83,600 13,60,400 29,46,000
Question 25
MNO Ltd. manufactures two types of equipment A and B and absorbs overheads on the basis of
direct labour hours. The budgeted overheads and direct labour hours for the month of March 2019
are ₹ 15,00,000 and 25,000 hours respectively. The information about the company’s products is as
follows:
Equipment
A B
Budgeted Production Volume 3,200 units 3,850 units
Direct Material Cost ₹ 350 per unit ₹ 400 per unit
Direct Labour Cost
A: 3 hours @ ₹ 120 per hour ₹ 360
B: 4 hours @ ₹ 120 per hour ₹ 480
Overheads of ₹ 15,00,000 can be identified with the following three major activities:
Order Processing: ₹ 3,00,000

Machine Processing: ₹ 10,00,000
Product Inspection: ₹ 2,00,000
These activities are driven by the number of orders processed, machine hours worked and inspection
hours respectively. The data relevant to these activities is as follows:
Orders processed Machine hours worked Inspection hours
A 400 22,500 5,000
B 200 27,500 15,000
Total 600 50,000 20,000
Required:
(i) Prepare a statement showing the manufacturing cost per unit of each product using the absorption
5.42
costing method assuming the budgeted manufacturing volume is attained.

(ii) Determine cost driver rates and prepare a statement showing the manufacturing cost per unit of
each product using activity based costing, assuming the budgeted manufacturing volume is attained.
(iii) MNO Ltd.’s selling prices are based heavily on cost. By using direct labour hours as an application
base, calculate the amount of cost distortion (under costed or over costed) for each equipment. (PYP
May ‘19, 10 Marks) (Same concept different figures Old & New SM)
Answer 25
(i) Overheads application base: Direct labour hours Equipment Equipment
A (₹ ) B (₹ )
Direct material cost 350 400
Direct labour cost 360 480
Overheads* 180 240
890 1120
u8_UVaV_ 7ZV96VS_0 /0. w, ,
*Pre-determined rate = u8_UVaV_ vW9Và \S[789 67890 = 1w, 67890
= Rs. 60
(ii) Estimation of Cost-Driver rate

Activity Overhead cost Cost-driver level Cost driver rate
(₹) (₹)
Order processing 600
3,00,000 Orders processed 500
Machine processing 50,000
10,00,000 Machine hours 20
Inspection 15,000
2,00,000 Inspection hours 10
Equipment Equipment
A (₹) B (₹)
Direct material cost 350 400
Direct labour cost 360 480
Prime Cost(A) 710 880
Overhead Cost
Order processing 400: 200 2,00,000 1,00,000
Machine processing 22,500: 27,500 4,50,000 5,50,000
Inspection 5,000: 15,000 50,000 1,50,000
Total overhead cost 7,00,000 8,00,000
(Overheads cost per unit for each overhead can also be calculated)
Per unit cost A (₹) B (₹)
7,00,000 /3,200 (B)-A 218.75
8,00,000/ 3,850 (B)-B 207.79
Unit manufacturing cost (A+B) 928.75 1,087.79
(iii) Calculation of Cost Distortion

5.43
Equipment Equipment
A (₹) B (₹)
Unit manufacturing cost–using direct labour
hours as an application base 890.00 1,120.00
Unit manufacturing cost-using activity based
costing 928.75 1,087.79
Cost distortion -38.75 32.21

In this numerical question related to ‘Activity Based Costing’, students were asked to
calculate cost per unit based on absorption costing & Activity based costing method, cost
distortion and cost driver. Performance of the students was above average in this question.
Overall performance in this question was average
Question 26
M/s. HMB Limited is producing a product in 10 batches each of 15000 units in a year and incurring
following overheads their on:
Amount (₹ )
Material procurement 22,50,000
Maintenance 17,30,000
Set-up 6,84,500
Quality control 5,14,800
The prime costs for the year amounted to ₹ 3,01,39,000.
The company is using currently the method of absorbing overheads on the basis of prime cost. Now
it wants to shift to activity-based costing. Information relevant to Activity drivers for a year are as
under:
Activity Driver Activity Volume
No. of purchase orders 1500
Maintenance hours 9080
No. of set-ups 2250
The company has produced a batch of 15000 units and has incurred ₹ 26,38,700 and ₹ 3,75,200 on
materials and wages respectively.
The usage of activities of the said batch are as follows:
Materials orders 48 orders
Maintenance hours 810 hours
No. of set-ups 40
(i) find out cost of product per unit on absorption costing basis for the said batch.
(ii) determine cost driver rate, total cost and cost per unit of output of the said batch on the basis
of activity based costing. (PYP Nov ‘18, 10 Marks)
Answer 26
Working Note:
w ,x2,
Overhead Absorption Rate = , , 2,
×100 = 17.18%
(i) Cost of Product Under Absorption Costing
Item of Cost Amount (₹ )
5.44
Material 26,38,700
Wages 3,75,200
Prime Cost 30,13,900
w ,x2,
Overheads: , , 2,
x 30,13,900 5,17,930

Units 15,000
Cost per unit 235.46
(ii) Cost driver rate, total cost and cost per unit on the basis of activity-based costing method
Absorption Costing
Calculation of Cost Driver rate:
Activity ₹. Activity Cost Driver
Volume Rate
Material Procurement 22,50,000 1500 1500
Maintenance 17,30,000 9080 190.53
Setup 6,84,500 2250 304.22
Quality Control 5,14,800 2710 189.96
Calculation of total Cost and cost per unit:
Item of Cost Amount (₹ )
Material 26,38,700
Wages 3,75,200
Material Purchase 22,50,000 / 1,500 ) 48 72,000
Maintenance 17,30,000 / 9,080 )810 1,54,328
Setup 6,84,500 / 2,250 ) 40 12,169
Quality Control 5,14,800 / 2,710 ) 25 4,749
Unit 15,000
Cost per unit 217.14

In this question, Part (i) was related to the calculation of cost per unit on absorption costing
basis, in which most of the examinees did not understand the concept of calculation of
absorption rate. Part (ii) is related to the Activity based costing and significant number of
examinees answered in correct line and obtained 4 to 6 marks.
Question 27
Explain 'Activity Based Budgeting'. (PYP Nov ‘18, 5 Marks)
Answer 27
Activity Based Budgeting (ABB)
• Activity based budgeting analyse the resource input or cost for each activity.
• It provides a framework for estimating the amount of resources required in accordance with the
budgeted level of activity.
• Actual results can be compared with budgeted results to highlight both in financial and non- financial
terms those activities with major discrepancies from budget for potential reduction in supply of
resources.
5.45
• It is a planning and control system which seeks to support the objectives of continuous improvement.
• It means planning and controlling the expected activities of the organization to derive a cost- effective
budget that meet forecast workload and agreed strategic goals.
• ABB is the reversing of the ABC process to produce financial plans and budgets.
Question 28
PQR Pens Ltd. manufactures two products - ‘Gel Pen’ and ‘Ball Pen’. It furnishes the following data
for the year 2017:
Product Annual Output Total Machine Total number of Total number of
(Units) Hours Purchase orders set-ups
Gel Pen 5,500 24,000 240 30
Ball Pen 24,000 54,000 448 56
The annual overheads are as under:
Particulars ₹
Volume related activity costs 4,75,020
Set up related costs 5,79,988
Purchase related costs 5,04,992
Calculate the overhead cost per unit of each Product - Gel Pen and Ball Pen on the basis of: (i)
Traditional method of charging overheads (ii) Activity based costing method and (iii) Find out the
difference in cost per unit between both the methods. (PYP May ‘18, 10 Marks)
Answer 28
(i) Statement Showing Overhead Cost per unit “Traditional Method”
Gel Pen (₹ ) Ball Pen (₹ )
Units Overheads (₹ ) 5,500 24,000
(Refer to W.N.) 4,80,000 10,80,000
(20 x 24,000 hrs.) (20 x 54,000 hrs.)
Overhead Rate per 87.27 45
unit (₹ ) (₹ 4,80,000 / 5,500 units) (₹ 10,80,000 /24,000 units)
Working Notes:
Overhead Rate per Machine Hour
y7aS\ zZV96VS_ WT`899V_ [{ a6V R7X^ST{
= y7aS\ 4S`6WTV |7890
,xw, 1 }w,x2,333}w, ,221
=
1 , 67890}w , 67890
w, ,
= x3, 67890
= ₹ 20 per machine hour

(ii) Statement Showing “Activity Based Overhead Cost”
Activity Cost Pool Cost Driver Ratio Total Gel Pen (`) Ball Pen (`)
Amount (`)
Volume Related Machine hours 24:54 4,75,020 1,46,160 3,28,860
Activity Costs
Setup Related No. of Setups 30:56 5,79,988 2,02,321 3,77,667
Costs
Purchase Related No. of Purchase 240:448 5,04,992 1,76,160 3,28,832
Costs Orders
Total Cost 5,24,641 10,35,359
Output (units) 5,500 24,000
Unit Cost (Overheads) 95.39 43.13
5.46
(iii)
Gel Pen (`) Ball Pen (`)
Overheads Cost per unit (`) (Traditional Method) 87.27 45

Overheads Cost per unit (`) (ABC) 95.39 43.13
Difference per unit -8.12 +1.87
(Volume related activity cost, set up related costs and purchase related cost can also be calculated
under Activity Base Costing using Cost driver rate. However, there will be no changes in the final
answer.)
Question 29
ABC Ltd. is engaged in production of three types of Fruit Juices: Apple, Orange and Mixed Fruit.
The following cost data for the month of March 2020 are as under:
Particulars Apple Orange Mixed Fruit
Material per unit (₹) 8 6 5
Direct Labour per unit (₹) 5 4 3
No. of Purchase Orders 34 32 14
No. of Deliveries 110 64 52
Shelf Stocking Hours 110 160 170
Overheads incurred by the company during the month are as under:
(₹)
Ordering costs 64,000
Delivery costs 1,58,200
Shelf Stocking costs 87,560
Required:
• Calculate cost driver's rate.
• Calculate total cost of each product using Activity Based Costing. (PYP 6 Marks Nov 20)
Answer 29
(i) Calculation Cost-Driver’s rate
Overhead cost (₹) Cost-driver level Cost driver rate (₹)
Activity (A) (B) (C) = (A)/(B)
Ordering 64,000 34 + 32 + 14 800
= 80 no. of purchase orders
Delivery 1,58,200 110 + 64 + 52 700
= 226 no. of deliveries
Shelf stocking 87,560 110 + 160 + 170 199
= 440 shelf stocking hours
(ii) Calculation of total cost of products using Activity Based Costing
Particulars Fruit Juices
Apple (₹) Orange (₹) Mixed Fruit (₹)
Material cost 80,000 90,000 1,00,000
(10,000 x ₹ 8) (15,000 x ₹ 6) (20,000 x ₹ 5)
Direct labour cost 50,000 60,000 60,000
(10,000 x ₹ 5) (15,000 x ₹ 4) (20,000 x ₹ 3)
5.47
Prime Cost (A) 1,30,000 1,50,000 1,60,000

Ordering cost 27,200 25,600 11,200
(800 x 34) (800 x 32) (800 x 14)
Delivery cost 77,000 44,800 36,400
(700 x 110) (700 x 64) (700 x 52)
Shelf stocking cost 21,890 31,840 33,830
(199 x 110) (199 x 160) (199 x 170)
Overhead Cost (B) 1,26,090 1,02,240 81,430
Total Cost (A + B) 2,56,090 2,52,240 2,41,430
Question 30
Describe the various levels of activities under 'ABC' methodology. (PYP 4 Marks Nov 20, Old &
New SM)
Answer 30
Various Level of Activities under ABC Methodology
Level of Activities Meaning
1. Unit level activities These are those activities for which the consumption of
resources can be identified with the number of units produced.
2. Batch level activities The activities such as setting up of a machine or processing a
purchase order are performed each time a batch of goods is
produced. The cost of batch related
activities varies with number of batches made, but is common (or
fixed) for all units within the batch.
3. Product level activities These are the activities which are performed to support different
products in product line.
4. Facilities level activities These are the activities which cannot be directly attributed to
individual products. These activities are necessary to sustain the
manufacturing process and
are common and joint to all products manufactured.
Question 31
PQR Ltd. is engaged in the production of three products P, Q and R. The company calculates Activity
Cost Rates on the basis of Cost Driver capacity which is provided as below:
Activity Cost Driver Cost Driver Capacity Cost (₹)
Direct Labour Labour hours 30,000 Labour hours 3,00,000
hours
Production runs No. of Production runs 600 Production runs 1,80,000
Quality Inspections No. of Inspection 8000 Inspections 2,40,000
The consumption of activities during the period is as under:
Activity / Products P Q R
Direct Labour hours 10,000 8,000 6,000
Production runs 200 180 160
Quality Inspection 3,000 2,500 1,500
(i) Compute the costs allocated to each Product from each Activity.
(ii) Calculate the cost of unused capacity for each Activity.
(iii) A potential customer has approached the company for supply of 12,000 units of a new product.
'S' to be delivered in lots of 1500 units per quarter. This will involve an initial design cost of ₹
5.48
30,000 and per quarter production will involve the following:

Direct Material ₹ 18,000
Direct Labour hours 1,500 hours
No. of Production runs 15
No. of Quality Inspection 250
Prepare cost sheet segregating Direct and Indirect costs and compute the Sales value per quarter
of product 'S' using ABC system considering a markup of 20% on cost. (PYP 10 Marks July 21)
Answer 31
(i) Statement of cost allocation to each product from each activity
Product
P (₹) Q (₹) R (₹) Total (₹)
Direct Labour hours 1,00,000 80,000 60,000 2,40,000
(Refer to working (10,000 Labour (8,000 Labour (6,000 Labour
note) hours × ₹10) hours × ₹10) hours × ₹10)
Production runs 60,000 54,000 48,000 1,62,000
(Refer to working (200 Production (180 Production (160 Production
note) runs × ₹ 300) runs × ₹ 300) runs × ₹ 300)
Quality Inspections 90,000 75,000 45,000 2,10,000
(Refer to (3,000 (2,500 (1,500
working note) Inspections × ₹30) Inspections × ₹ 30) Inspections × ₹ 30)
Working note:
Rate per unit of cost driver
Direct Labour hours (₹ 3,00,000/30,000 Labour hours) ₹ 10 per Labour hour
Production runs (₹ 1,80,000/600 Production runs) ₹ 300 per Production run
Quality Inspection (₹ 2,40,000/8,000 Inspections) ₹ 30 per Inspection
(ii) Computation of cost of unused capacity for each activity
Particulars (₹)
Direct Labour hours [(₹ 3,00,000 – ₹ 2,40,000) or (6,000 x ₹ 10)] 60,000
Production runs [(₹ 1,80,000 – ₹ 1,62,000) or (60 x ₹ 300)] 18,000
Quality Inspection [(₹ 2,40,000 – ₹ 2,10,000) or (1,000 x ₹ 30)] 30,000
Total cost of unused capacity 1,08,000
(iii) Cost sheet and Computation of Sales value per quarter of product ‘S’ using ABC system
Particulars (₹)
1500 units of product ‘S’ to be delivered per quarter
Initial design cost per quarter (₹ 30,000 / 8 quarters) 3,750
Direct Material Cost 18,000
Direct Labour Cost (1,500 Labour hours x ₹ 10) 15,000
Direct Costs (A) 36,750
Set up Cost (15 Production runs × ₹ 300) 4,500
Inspection Cost (250 Inspections × ₹ 30) 7,500
Indirect Costs (B) 12,000
Total Cost (A + B) 48,750
Add: Mark-up (20% on cost) 9,750
Sale Value 58,500
5.49
Selling Price per unit ‘S’ (₹ 58,500/1500 units) 39

It was a practical problem testing the knowledge of examinees on the topic Activity Based
Costing, requiring examinees to identify cost of allocated capacity and unused capacity on
three products. It also required examinees to find out sales value of the offered new
product by segregating cost into direct and indirect cost. First two sub parts i.e. allocation
of cost and determination of cost of unused capacity were answered well, but examinees
failed to segregate cost into direct and indirect in the third sub part. Performance of the
examinees was above average.
Question 32
A Drug Store is presently selling three types of drugs namely ‘Drug A’, ‘Drug B’ and ‘Drug C’. Due to
some constraints, it has decided to go for only one product line of drugs. It has provided the
following data for year 2020-21 for each product line:
Drugs Types
A B C
Revenues (in ₹) 74,50,000 1,11,75,000 1,86,25,000
Cost of goods sold (in ₹) 41,44,500 68,16,750 1,20,63,750
Number of purchase orders placed (in nos.) 560 810 630
Number of deliveries received 950 1,000 850
Hours of shelf-stocking time 900 1,250 2,350
Units sold (in Nos.) 1,75,200 1,50,300 1,44,500
Following additional information is also provided:
Activity Description of activity Total Cost Cost-allocation base
(₹)
Drug License fee Drug License fee 5,00,000 To be distributed in
ratio 2:3:5 between A, B
and C
Ordering Placing of orders for 8,30,000 2,000 purchase orders
purchases
Delivery Physical delivery and 18,20,000 2,800 deliveries
receipt of foods
Shelf stocking Stocking of goods 32,40,000 4,500 hours of shelf-
stocking time
Customer Support Assistance provided 28,20,000 4,70,000 units sold
to customers
(i) Calculate the operating income and operating income as a percentage (%) of revenue of each
product line if:
(a) All the support costs (Other than cost of goods sold) are allocated in the ratio of cost of
goods sold.
(b) All the support costs (Other than cost of goods sold) are allocated using activity-based
costing system.
5.50
(ii) Give your opinion about choosing the product line on the basis of operating income as a
percentage (%) of revenue of each product line under both the situations as above. (PYP 10
Marks Dec ‘21)
Answer 32
(i)
(a) Statement of Operating income and Operating income as a percentage of revenues for each
product line
(When support costs are allocated to product lines on the basis of cost of goods sold of each
product)
Drug A (₹) Drug B (₹) Drug C (₹) Total (₹)
Revenues: (A) 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
Cost of Goods sold (COGS): 41,44,500 68,16,750 1,20,63,750 2,30,25,000
(B)
Support cost (40% of 16,57,800 27,26,700 48,25,500 92,10,000
COGS): (C)
(Refer working notes)
Total cost: (D) = {(B) + (C)} 58,02,300 95,43,450 1,68,89,250 3,22,35,000
Operating income: E = 16,47,700 16,31,550 17,35,750 50,15,000
{(A)-(D)}
Operating income as a 22.12% 14.60% 9.32% 13.46%
% of revenues: (E/A) × 100)
Working notes:
1. Total support cost:
(₹)
Drug Licence Fee 5,00,000
Ordering 8,30,000
Delivery 18,20,000
Shelf stocking 32,40,000
Customer support 28,20,000
Total support cost 92,10,000
2. Percentage of support cost to cost of goods sold (COGS):
y7aS\ 08^^79a `70a
= y7aS\ `70a 7~ U77_0 07\_ X 100
/0.21, ,
= /0.1, ,1w,
X 100 = 40%
3. Cost for each activity cost driver:

Activity Total cost Cost allocation base Cost driver rate
(₹) (3)
(1) (2) (4) = [(2) ÷ (3)]
Ordering 8,30,000 2,000 purchase orders ₹ 415 per purchase order
Delivery 18,20,000 2,800 deliveries ₹ 650 per delivery
Shelf-stocking 32,40,000 4,500 hours ₹ 720 per stocking hour
Customer support 28,20,000 4,70,000 units sold ₹ 6 per unit sold
(b) Statement of Operating income and Operating income as a percentage of revenues for each
product line
(When support costs are allocated to product lines using an activity-based costing system)
Revenues: (A) 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
Cost & Goods sold 41,44,500 68,16,750 1,20,63,750 2,30,25,000
Drug Licence Fee 1,00,000 1,50,000 2,50,000 5,00,000
5.51
Ordering cost* (560:810:630) 2,32,400 3,36,150 2,61,450 8,30,000

Delivery cost* 6,17,500 6,50,000 5,52,500 18,20,000
(950:1000:850)
Shelf stocking cost* 6,48,000 9,00,000 16,92,000 32,40,000
(900:1250:2350)
Customer Support cost* 10,51,200 9,01,800 8,67,000 28,20,000
(175200:150300:144500)
Total cost: (B) 67,93,600 97,54,700 1,56,86,700 3,22,35,000
Operating income C: {(A) - 6,56,400 14,20,300 29,38,300 50,15,000
(B)}
Operating income as a % of 8.81% 12.71% 15.78% 13.46%
revenues
* Refer to working note 3
(i) Comparison on the basis of operating income as per the percentage (%) of revenue:
(a) When support costs are allocated to product lines on the basis of cost of goods sold of
each product
Operating income 22.12% 14.60% 9.32% 13.46%
as a % of revenues
On comparing the operating income as a % of revenue of each product, Drug A is the most
profitable product line, though its revenue is least but with highest units sold.
(b) When support costs are allocated to product lines using an activity -based costing
system
Operating income 8.81% 12.71% 15.78% 13.46%
as a % of revenues
On comparing the operating income as a % of revenue of each product, Drug C is the most
profitable product line, though its unit sold is least but with highest revenue.

This Numerical Question tested the knowledge of examinees on the topic Activity Based
Costing. The first part of the question required apportionment of overheads cost on the
basis of cost of goods sold ratio and to calculate income as percentage of revenue for three
products. In the second part, allocation of overheads based on activity based cost drivers
and to calculate income as percentage of revenue for three products. Finally choose the
best product in both methods on the basis of income as percentage of revenue. Most of
the students answered will in the second part of the question. Performance of the
examinees was good.
Question 33
Star Limited manufacture three products using the same production methods. A conventional product
costing system is being used currently. Details of the three products for a typical period are:
Product Labour Hrs. Machine Hrs. per Materials per Volume in
per unit unit Unit1 Units
AX 1.00 2.00 35 7,500
BX 0.90 1.50 25 12,500
CX 1.50 2.50 45 25,000
Direct Labour costs ₹ 20 per hour and production overheads are absorbed on a machine hour basis.
The overhead absorption rate for the period is ₹ 30 per machine hour.
5.52
1 Material cost per unit

Management is considering using Activity Based Costing system to ascertain the cost of the products.
Further analysis shows that the total production overheads can be divided as follows:
Particulars %
Cost relating to set-ups 40
Cost relating to machinery 10
Cost relating to material handling 30
Costs relating to inspection 20
Total production overhead 100
The following activity volumes are associated with the product line for the period as a whole. Total
activities for the period:
Product No. of set-ups No. of movements of Materials No. of inspections
AX 350 200 200
BX 450 280 400
CX 740 675 900
Total 1,540 1,155 1,500
Required:
(i) Calculate the cost per unit for each product using the conventional method.
(ii)
Calculate the cost per unit for each product using activity based costing method. (PYP 10 Marks
May’22)
Answer 33
I. Statement showing “Cost per unit” using “conventional method”
Particulars of Costs AX BX CX
(₹) (₹) (₹)
Direct Materials 35 25 45
Production Overheads 60 45 75
Cost per unit 115 88 150
II. Statement Showing “Cost per unit using “Activity Based Costing”
Products AX BX CX
(₹) (₹) (₹)
Direct Materials 2,62,500 3,12,500 11,25,000
Direct Labour 1,50,000 2,25,000 7,50,000
Machine Related Costs 45,000 56,250 1,87,500
Products AX BX CX
Setup Costs 2,62,500 3,37,500 5,55,000
Material handling Cost 1,50,000 2,10,000 5,06,250
Inspection Costs 77,000 1,54,000 3,46,500
Total Costs 9,47,000 12,95,250 34,70,250
Cost per unit (Total Cost Units) 126.267 103.62 138.81
Working Notes:
Calculation of Total Machine hours
Particulars AX BX CX
5.53
(A) Machine hours per unit 2 1.5 2.5

(B) Production (units) 7,500 12,500 25,000
(C) Total Machine hours (A× B) 15,000 18,750 62,500
Total Machine hours = 96,250
Total Production overheads = 96,250 × 30 = ₹ 28,87,500
Calculation of Cost Driver Rate
Cost Pool % Overheads Cost Driver Cost Driver Cost Driver Rate (₹)
(₹) (Basis) (Units)
Set up 40 11,55,000 No of set ups 1,540 750 per set up
Machine 10 2,88,750 Machine hours 96,250 3 per machine
Operation hour
Material 30 8,66,250 No of material 1,155 750 per material
Handling movement movement
Inspection 20 5,77,500 No of inspection 1,500 385 per
inspection
Question 34
XYZ Ltd. is engaged in manufacturing two products- Express Coffee and Instant Coffee. It
furnishes the following data for a year:
Product Actual Output Total Total Number Total Number
(units) Machine of Purchase of
hours orders set ups
Express Coffee 5,000 20,000 160 20
Instant Coffee 60,000 1,20,000 384 44
The annual overheads are as under:
Particulars ₹
Machine Processing 7,00,000
costs Set up related 7,68,000
costs 6,80,000
Purchase related costs
(i) Compute the costs allocated to each product – Express Coffee and Instant Coffee
from each activity on the basis of Activity- Based Costing (ABC) method.
(ii) Find out the overhead cost per unit of each product – Express coffee and Instant
coffee based on (i) above. (PYP 4 Marks Nov 22)
Answer 34
(i) Estimation of Cost-Driver rate
Overhead cost Cost-driver level Cost driver rate
Activity
(₹) (₹)
Machine processing 7,00,000 1,40,000 5
Machine hours
Set up Costs 7,68,000 64 12,000
Number of set
up
Purchase related Costs 6,80,000 544 1250
Number of
purchase
order
5.54
Cost Allocation under Activity based Costing

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

Per unit Overhead cost (₹) (₹)
5,40,000 /5,000 108
16,08,000/60,000 26.80
Question 35
PP Limited is in the process of implementation of Activity Based Costing System in the organisation. For
this purpose, it has identified the following Business Functions in its organisation:
(i) Research and Development
(ii) Design of Products, Services and Procedures
(iii) Customer Service
(iv) Marketing
(v) Distribution
You are required to specify two cost drivers for each Business Function Identified above.
(PYP 5 Marks Nov 22)
Answer 35
Business functions Cost Driver
Research and Development  Number of research projects
 Personnel hours on a project
 Technical complexities of the project
Design of products, services and  Number of products in design
procedures  Number of parts per product
 Number of engineering hours
Customer Service  Number of service calls
 Number of products serviced
 Hours spent on servicing products
Marketing  Number of advertisements
 Number of sales personnel
 Sales revenue
Distribution  Number of units distributed
 Number of customers
 Weight of items distributed
(Any two cost drivers of each business function)

6.1
Chapter 6
Cost Sheet
Question 1
From the following figures, Calculate cost of production and profit for the month of March 20X9.
Amount (Rs.) Amount (Rs.)
Stock on 1st March, 20X9 Purchase of raw materials 28,57,000
- Raw materials 6,06,000 Sale of finished goods 1,34,00,000
- Finished goods 3,59,000 Direct wages 37,50,000
Stock on 31st March, 20X9 Factory expenses 21,25,000
- Raw materials 7,50,000 Office and administration expenses 10,34,000
- Finished goods 3,09,000 Selling and distribution expenses 7,50,000
Work-in-process: Sale of scrap 26,000
- On 1st March, 20X9 12,56,000
- On 31st March, 20X9 14,22,000
(MTP March ‘19,5 Marks, RTP May’18)
Answer 1
Calculation of Cost of Production and Profit for the month ended March, 20X9:
Materials consumed:
- Opening stock 6,06,000
- Add: Purchases 28,57,000
34,63,000
- Less: Closing stock (7,50,000) 27,13,000
Direct wages 37,50,000
Prime cost 64,63,000
Factory expenses 21,25,000
85,88,000
Add: Opening W-I-P 12,56,000
Less: Closing W-I-P (14,22,000)
Less: Sale of scrap (26,000)
Cost of Production 83,96,000
Add: Opening stock of finished goods 3,59,000
Less: Closing stock of finished goods (3,09,000)
Cost of Goods Sold 84,46,000
Office and administration expenses 10,34,000
Selling and distribution expenses 7,50,000
Cost of Sales 1,02,30,000
Profit (balancing figure) 31,70,000
Sales 1,34,00,000
Question 2
From the following data of A Ltd., Calculate
(i) Material Consumed; (ii) Prime Cost and (iii)Cost of production.
Amount (Rs.)
(i) Repair & maintenance paid for plant & machinery 9,80,500

Chapter 6 Cost Sheet
6.2
(ii) Insurance premium paid for inventories 26,000

(iii) Insurance premium paid for plant & machinery 96,000
(iv) Raw materials purchased 64,00,000
(v) Opening stock of raw materials 2,88,000
(vi) Closing stock of raw materials 4,46,000
(vii) Wages paid 23,20,000
(viii) Value of opening Work-in-process 4,06,000
(ix) Value of closing Work-in-process 6,02,100
(x) Quality control cost for the products in manufacturing process 86,000
(xi) Research & development cost for improvement in production process 92,600
(xii) Administrative cost for:
- Factory & production 9,00,000
- Others 11,60,000
(xiii) Amount realized by selling scrap generated during the manufacturing process 9,200
(xiv) Packing cost necessary to preserve the goods for further processing 10,200
(xv)Salary paid to Director (Technical) 8,90,000
(MTP Oct. ‘19, 10 Marks, RTP May 20, Nov 18)
Answer 2
Calculation of Cost of Production of A Ltd. for the period…..
Raw materials purchased 64,00,000
Add: Opening stock 2,88,000
Less: Closing stock (4,46,000)
Material consumed 62,42,000
Wages paid 23,20,000
Repair and maintenance cost of plant & machinery 9,80,500
Insurance premium paid for inventories 26,000
Insurance premium paid for plant & machinery 96,000
Quality control cost 86,000
Research & development cost 92,600
Administrative overheads related with factory and production 9,00,000
1,07,43,100
Add: Opening value of W-I-P 4,06,000
Less: Closing value of W-I-P (6,02,100)
1,05,47,000
Less: Amount realised by selling scrap (9,200)
Add: Primary packing cost 10,200
Cost of Production 1,05,48,000
Notes:
(i) Other administrative overhead does not form part of cost of production.
(ii) Salary paid to Director (Technical) is an administrative cost.
Question 3
State the advantages of Cost-Sheets. (MTP Oct. ‘18, 5 Marks)
Answer 3
Advantages of Cost sheet or Cost Statements
6.3
The main advantages of a Cost Sheet are as follows:

(i) It provides the total cost figure as well as cost per unit of production.
(ii) It helps in cost comparison.
(iii) It facilitates the preparation of cost estimates required for submitting tenders.
(iv) It provides sufficient help in arriving at the figure of selling price.
(v) It facilitates cost control by disclosing operational efficiency.
Question 4
Following figures has been extracted from the books of M/s A&R Brothers:
Amount (Rs.)
Stock on 1st March, 2020
- Raw materials 6,06,000
- Finished goods 3,59,000
Stock on 31st March, 2020
Work-in-process:
- On 1st March, 2020 12,56,000
- On 31st March, 2020 14,22,000
Purchase of raw materials 28,57,000
Sale of finished goods 1,34,00,000
Sale of scrap 26,000
You are required to COMPUTE:
(i) Value of material consumed
(ii) Prime cost
(iii) Cost of production
(iv) Cost of goods sold
(v) Cost of sales
(vi) Profit/ loss (MTP 10 Marks May 20 & Oct ‘23)
Answer 4
Cost Sheet of M/s A&R Brothers for the month ended March 2020:
(i) Materials consumed:
- Opening stock 6,06,000
- Add: Purchases 28,57,000
34,63,000
- Less: Closing stock (7,50,000) 27,13,000
(ii) Prime cost 64,63,000
85,88,000
Add: Opening W-I-P 12,56,000
Less: Closing W-I-P (14,22,000)
6.4

Less: Sale of scrap (26,000)
(iii) Cost of Production 83,96,000
(iv) Cost of Goods Sold 84,46,000
(v) Cost of Sales 1,02,30,000
(vi) Profit (balancing figure) 31,70,000
Sales 1,34,00,000
Question 5
Aloe Ltd. has the capacity to produce 2,00,000 units of a product every month. Its works cost at
varying levels of production is as under: (10 Marks,Oct.’2020)
Level Works cost per unit (Rs.)
10% 400
20% 390
30% 380
40% 370
50% 360
60% 350
70% 340
80% 330
90% 320
100% 310
Its fixed administration expenses amount to Rs 3,60,000 and fixed marketing expenses amount to Rs
4,80,000 per month respectively. The variable distribution cost amounts to ₹ 30 per unit.
It can sell 100% of its output at ₹ 500 per unit provided it incurs the following further expenditure:
(i) It gives gift items costing ₹ 30 per unit of sale;
(ii) It has lucky draws every month giving the first prize of Rs. 60,000; 2ND prize of Rs. 50,000, 3rd. prize
of Rs. 40,000 and ten consolation prizes of Rs. 5,000 each to customers buying the product.
(iii) It spends Rs.2,00,000 on refreshments served every month to its customers;
(iv) It sponsors a television programmer every week at a cost of Rs.20,00,000 per month.
It can market 50% of its output at ₹ 560 by incurring expenses referred from (ii) to (iv) above and 30%
of its output at ₹ 600 per unit without incurring any of the expenses referred from (i) to (iv) above.
PREPARE a cost sheet for the month showing total cost and profit at 30%, 50% and 100% capacity
level & COMPARE its profit. (MTP 10 Marks,Oct.’2020) (Same concept different figures MTP 10 Marks
Apr’22, Old & New SM)
Answer 5
Cost Sheet (For the month)
Level of Capacity 30% 50% 100%
60,000 units 1,00,000 units 2,00,000 units
Per unit Total (₹) Per unit Total (₹) Per unit Total
(₹) (₹) (₹) (₹)
Works Cost 380.00 2,28,00,000 360.00 3,60,00,000 310.00 6,20,00,000
6.5
Add: Fixed administration 6.00 3,60,000 3.60 3,60,000 1.80 3,60,000

expenses
Add: Fixed marketing 8.00 4,80,000 4.80 4,80,000 2.40 4,80,000
expenses
Add: Variable distribution 30.00 18,00,000 30.00 30,00,000 30.00 60,00,000
cost
Add: Special Costs:
- Gift items costs - - - - 30.00 60,00,000
- Customers’ prizes* - - 2.00 2,00,000 1.00 2,00,000
- Refreshments - - 2.00 2,00,000 1.00 2,00,000
- Television
programme - - 20.00 20,00,000 10.00 20,00,000
sponsorship
cost
Cost of sales 424.00 2,54,40,000 422.40 4,22,40,000 386.20 7,72,40,000
Profit (Bal. fig.) 176.00 1,05,60,000 137.60 1,37,60,000 113.80 2,27,60,000
Sales revenue 600.00 3,60,00,000 560.00 5,60,00,000 500.00 10,00,00,000
* Customers’ prize cost:

1st Prize 60,000
2nd Prize 50,000
3rd Prize 40,000

Consolation Prizes (10 × ₹ 5,000) 50,000
Total 2,00,000
Comparison of Profit
30% capacity 50% capacity 100% capacity

Rs. 176/Rs. 600 Rs. 137.6 / Rs. 560 Rs.113.8 / Rs.500
100 100 100
29.33 % 24.57% 22.76%
Profit (in value as well as in percentage) is higher at 30% level of capacity than that at 50% and 100%
level of capacity.
Question 6
A Ltd. has the following expenditures for the year ended 31st March 2021:
Sl. Amount Amount (Rs.)
No. (Rs.)
(i) Raw materials purchased 10,00,00,000
(ii) Freight inward 11,20,600
(iii) Wages paid to factory workers 29,20,000
(iv) Royalty paid for production 1,72,600
(v) Amount paid for power & fuel 4,62,000
(vi) Job charges paid to job workers 8,12,000
(vii) Stores and spares consumed 1,12,000
(viii) Depreciation on office building 56,000
6.6
(ix) Repairs & Maintenance paid for:

- Plant & Machinery 48,000
- Sales office building 18,000 66,000
(x) Insurance premium paid for:
- Plant & Machinery 31,200
- Factory building 18,100 49,300
(xi) Expenses paid for quality control check activities 19,600
(xii) Research & development cost paid for 18,200
improvement in production process
(xiii) Expenses paid for pollution control and engineering 26,600
& maintenance
(xiv) Salary paid to Sales & Marketing mangers: 10,12,000
(xv) Salary paid to General Manager 12,56,000
(xvi) Packing cost paid for:
- Primary packing necessary to maintain 96,000
quality
- For re-distribution of finished goods 1,12,000 2,08,000
(xvii) Fee paid to independent directors 2,20,000
(xviii) Performance bonus paid to sales staffs 1,80,000
(xix) Value of stock as on 1st April, 2020:
- Work-in-process 9,20,000
- Finished goods 11,00,000 38,20,000
(xx) Value of stock as on 31st March, 2021:
- Work-in-process 8,70,000
- Finished goods 18,20,000 36,50,000
Amount realized by selling of scrap and waste generated during manufacturing process –
Rs. 86,000/-
From the above data you are requested to PREPARE Statement of cost for A Ltd. for the year ended
31st March, 2021, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of Production, (iv) Cost of goods
sold and (v) Cost of sales. (MTP 10 Marks, March ’21 & Sep ‘23, RTP May’21)(Same concept different
figures MTP 10 Marks Nov’21 & April ‘23)
Answer 6
Statement of Cost of A Ltd. for the year ended 31st March, 2021:
Sl. No. Particulars Amount (Rs.) Amount (Rs.)
(i) Material Consumed:
- Raw materials purchased 10,00,00,000
- Freight inward 11,20,600
Add: Opening stock of raw materials 18,00,000
Less: Closing stock of raw materials (9,60,000) 10,19,60,600
(ii) Direct employee (labour) cost:
- Wages paid to factory workers 29,20,000
(iii) Direct expenses:
- Royalty paid for production 1,72,600
- Amount paid for power & fuel 4,62,000
6.7
- Job charges paid to job workers 8,12,000 14,46,600

Prime Cost 10,63,27,200
(iv) Works/ Factory overheads:
- Stores and spares consumed 1,12,000
- Repairs & Maintenance paid for plant & 48,000
machinery
- Insurance premium paid for plant & 31,200
machinery
- Insurance premium paid for factory 18,100
building
- Expenses paid for pollution control and
engineering & maintenance 26,600 2,35,900
Gross factory cost 10,65,63,100
Factory Cost 10,66,13,100
(v) Quality control cost:
- Expenses paid for quality control check 19,600
activities
(vi) Research & development cost paid for 18,200
improvement in production process
(vii) Less: Realisable value on sale of scrap and (86,000)
waste
(viii) Add: Primary packing cost 96,000
Cost of Goods Sold 10,59,40,900
(ix) Administrative overheads:
- Depreciation on office building 56,000
- Salary paid to General Manager 12,56,000
- Fee paid to independent directors 2,20,000 15,32,000
(x) Selling overheads:
- Repairs & Maintenance paid for sales 18,000
office building
- Salary paid to Manager- Sales & 10,12,000
Marketing
- Performance bonus paid to sales staffs 1,80,000 12,10,000
(xi) Distribution overheads:
- Packing cost paid for re-distribution of
finished goods 1,12,000
Question 7
Xim Ltd. manufactures two types of boxes 'Super' and 'Normal'. The cost data for the year ended
31st March, 2021 is as follows:
(₹)
Direct Wages 6,72,000
Production Overhead 2,88,000
Total 21,60,000
6.8
There was no work-in-progress at the beginning or at the end of year. It is further ascertained that:
1. Direct materials cost per unit in ‘Super’ was twice as much of direct material in ‘Normal’.
2. 2% cash discount was received for payment made within 30 days to the creditors of Direct
materials.
3. Direct wages per unit for ‘Normal’ were 60% of those of ‘Super’.
4. Production overhead per unit was at same rate for both the types of boxes.
5. Administration overhead was 200% of direct labour for each type.
6. Selling cost was ₹ 1 per ‘Super’ type.
7. Production and sales during the year were as follows:
Production Sales
Type No. of units Type No. of units
Super 60,000 Super 54,000
Normal 1,80,000
8. Selling price was ₹ 30 per unit for ‘Super’.

9. Company was also involved in a copyright infringement case related to the manufacturing process
of ‘Super’ production. As per the verdict, it had to pay penalty of ₹ 50,000.
PREPARE Cost Sheet of Xim Ltd. for ‘Super’ showing:
(i) Cost per unit and Total Cost
(ii) Profit per unit and Total Profit (MTP 10 Marks Oct 21, PYP 10 Marks Nov 20)
Answer 7
Particulars Per unit Total (₹)
(₹)
Direct materials (Working note- (i)) 8.00 4,80,000
Direct wages (Working note- (ii)) 4.00 2,40,000
Prime cost 12.00 7,20,000
Production overhead (Working note- (iii)) 1.20 72,000
Factory Cost 13.20 7,92,000
Administration Overhead (200% of direct wages) 8.00 4,80,000
Cost of production 21.20 12,72,000
Less: Closing stock (60,000 units – 54,000 units) - 1,27,200
Cost of goods sold i.e. 54,000 units 21.20 11,44,800
Selling cost 1.00 54,000
Cost of sales/ Total cost 22.20 11,98,800
Profit 7.80 4,21,200
Sales value (₹ 30 × 54,000 units) 30.00 16,20,000
Working Notes:
(i) Direct material cost per unit of ‘Normal’ = M Direct material cost per unit of ‘Super’ = 2M
Total Direct Material cost = 2M × 60,000 units + M × 1,80,000 units
Or, Rs. 12,00,000 = 1,20,000 M + 1,80,000 M
. , ,
Or, M = , ,
= Rs. 4
Therefore, Direct material Cost per unit of ‘Super’ = 2 × ₹ 4 = ₹ 8

6.9
(ii) Direct wages per unit for ‘Super’ = W Direct

wages per unit for ‘Normal’ = 0.6W
So, (W x 60,000) + (0.6W x 1,80,000) = ₹ 6,72,000
W = ₹ 4 per unit
(iii) Production overhead per unit = ₹ 2,88,000 (60,000 + 1,80,000) = Rs. 1.20
Production overhead for ‘Super’ = ₹ 1.20 × 60,000 units = ₹ 72,000
Notes:
1. Administration overhead is specific to the product as it is directly related to direct
labour as mentioned in the Question and hence to be considered in cost of production
only.
2. Cash discount is treated as interest and finance charges; hence, it is ignored.
3. Penalty paid against the copyright infringement case is an abnormal cost; hence, not
included
Question 8
The following data relates to manufacturing of a standard product during the month of February,
2022:
Particulars Amount (in ₹)
Stock of Raw material as on 01-02-2022 1,20,000
Work in Progress as on 01-02-2022 75,000
Purchase of Raw material 3,00,000
Carriage Inwards 30,000
Cost of special drawing 45,000
Hire charges paid for Plant (Direct) 36,000
Return of Raw Material 60,000
Carriage on return 9,000
Expenses for participation in Industrial exhibition 12,000
Maintenance of office building 3,000
Salary to office staff 37,500
Legal charges 3,750
Depreciation on Delivery van 9,000
Warehousing charges 2,250
Stock of Raw material as on 28-02-2022 45,000
Stock of Work in Progress as on 28-02-2022 36,000
 Store overheads on materials are 10% of material consumed.

 Factory overheads are 20% of the Prime cost.
 10% of the output was rejected and a sum of ₹ 7,500 was realized on sale of scrap.
 10% of the finished product was found to be defective and the defective products were rectified
at an additional expenditure which is equivalent to 20% of proportionate direct wages.
 The total output was 8,000 units during the month.
You are required to PREPARE a Cost Sheet for the above period showing the:
(i) Cost of Raw Material consumed.
(ii) Prime Cost
6.10
(iii) Work Cost

(iv) Cost of Production
(v) Cost of Sales (MTP 10 Marks March ’22, PYP 10 Marks July ’21)
Answer 8
Statement of Cost for the month of February, 2022
(i) Cost of Material Consumed:
Raw materials purchased (₹ 3,00,000 – ₹ 2,40,000
60,000)
Carriage inwards 30,000
Less: Closing stock of raw materials (45,000) 3,45,000
Direct expenses:
Cost of special drawing 45,000
Hire charges paid for Plant (Direct) 36,000 81,000
(ii) Prime Cost 6,06,000
Carriage on return 9,000
Store overheads (10% of material consumed) 34,500
Factory overheads (20% of Prime cost) 1,21,200
Additional expenditure for rectification of 3,240 1,67,940
defective products (refer working note)
Gross factory cost 7,73,940
Add: Opening value of W-I-P 75,000
Less: Closing value of W-I-P (36,000)
(iii) Works/ Factory Cost 8,12,940
Less: Realisable value on sale of scrap (7,500)
(iv) Cost of Production 8,05,440
Add: Opening stock of finished goods -
Less: Closing stock of finished goods -
Administrative overheads:
Maintenance of office building 3,000
Salary paid to Office staff 37,500
Legal Charges 3,750 44,250
Selling overheads:
Expenses for participation in Industrial 12,000 12,000
exhibition
Distribution overheads:
Depreciation on delivery van 9,000
Warehousing charges 2,250 11,250
(v) Cost of Sales 8,72,940
Working Notes:
1. Number of Rectified units
Total Output 8,000 units
Less: Rejected 10% 800 units
Finished product 7,200 units

6.11
Rectified units (10% of finished product) 720 units

2. Proportionate additional expenditure on 720 units
= 20% of proportionate direct wages
= 0.20 x (₹ 1,80,000/8,000) x 720
= ₹ 3,240

This practical problem required preparation of cost sheet. Various items were given for
adjustment. Most of the examinees were confused about the treatment of some items like
cost of special drawing, hire charges paid for plant, carriage on return and general
overheads. Overall performance of the examinees was poor.
Question 9
The following data relates to the manufacturing project received for the budgeted output of 19,600
units. You are required to CALCULATE the selling price per unit covering a profit of 25% on the selling
price.
Direct materials: 40 sq. m. per unit @ ₹ 10.60 per sq. m.
Direct wages: Bonding department 48 hours per unit @ ₹ 25 per hour Finishing
department 30 hours per unit @ ₹ 19 per hour
Budgeted costs and hours per annum- Variable overhead:
(₹) Total hours

Bonding department 15,00,000 10,00,000
Finishing department 6,00,000 6,00,000
Fixed overhead-
(₹)
Production 15,68,000
Selling and distribution 7,84,000
Administration (General) 3,92,000
(10 Marks, March ‘22)
Answer 9
Decision making Cost Sheet (per unit)
Particulars (Amount in ₹) (Amount in ₹)
Direct materials 40 m2 at ₹ 10.60 per m2 424
Direct wages:
Bonding department- 48 hours at ₹ 25 per hour 1,200
Finishing department- 30 hours at ₹ 19 per hour 570 1,770
Prime Cost 2,194
Variable overhead:*
Bonding department- 48 hours at ₹ 1.50 per hour 72
Finishing department- 30 hours at ₹ 1.00 per hour 30 102
Variable production cost 2,296
Fixed production overhead# 80
Total production cost 2,376
Selling and distribution cost$ 40
6.12
Administration cost$ 20 60
Total Cost 2,436
Selling price per unit = Rs. 2,436 X = Rs. 3,248

Working Notes:
* Variable overhead rates –
, ,
Bonding : = Rs. 1.50
, ,
, ,
Finishing : = Rs. 1.00
, ,
, ,
# Fixed production overhead rate per unit of output = = Rs. 80
,
, ,
$ Selling and production cost per unit of output = = Rs. 40
,
, ,
Administration cost per unit of output = = Rs. 20
,
Question 10
The following information pertains to A Limited for the year 1st April 2021 to 31st March 2022:
Sales 50,00,000
Direct labour 10,50,000
Administrative overheads (relating to production activity) 1,50,000
Selling expenses 2,50,000
Inventory details are as follows:
As on 1st April 2021 As on 31st March 2022
(Amount in ₹) (Amount in ₹)
Raw materials 5,00,000 6,30,000
Finished goods 9,80,000 10,50,000
Work in Progress 6,00,000 8,00,000
 Direct labour would be 175% of works overheads.
 Cost of goods sold would be ₹ 6,900 per unit
 Selling expenses would be ₹ 500 per unit.
You are required to PREPARE a cost sheet for the year ended 31st March, 2022 showing:
(i) Value of material purchased
(ii) Prime cost
(iii) Works cost
(iv) Cost of production
(v) Cost of goods sold
(vi) Cost of Sales
(vii) Profit earned
(viii) Profit as a percentage of sales (MTP 10 Marks Sep’22)
Answer 10
6.13
Cost Sheet of A Limited for the year ended 31st March 2022
Opening Stock of Raw materials 5,00,000
Add: Purchases (balancing figure) 20,50,000
Less: Closing stock of raw materials 6,30,000
Direct material consumed (balancing figure) 19,20,000
Add: Factory Overheads (10,50,000 / 175%) 6,00,000
Add: Opening Stock of Work in Progress 6,00,000
41,70,000
Less: Closing Stock of Work in Progress 8,00,000
Works Cost 33,70,000
Add: Administrative Overheads (relating to production 1,50,000
activity)
COST OF PRODUCTION 35,20,000
Cost of Goods available for sale 45,00,000
Less: Closing Stock of finished goods 10,50,000
COST OF GOODS SOLD 34,50,000
(Working Note: (iv))
Add: Selling and Distribution Overhead 2,50,000
COST OF SALES 37,00,000
Add: Profit (Balancing figure) [ Sales - Cost of Sales] 13,00,000
SALES 50,00,000
Profit as a % of sales
= 100 26%
Working Notes:
(i) The cost sheet is completed by Reverse Working. Purchases amount is the balancing figure.
(ii) Direct labour = 175% of factory overhead (given). Hence, if direct labour = 10,50,000, then
Factory Overhead = 10,50,000 / 175% = ₹ 6,00,000
(iii) Selling Overhead ₹ 2,50,000 (total), selling per unit ₹ 500.
Number of units sold = ₹ 2,50,000/ ₹ 500 = 500 units
(iv) Cost of goods sold = 500 units x ₹ 6,900 = ₹ 34,50,000
Question 11
A factory can produce 1,80,000 units per annum at its 60% capacity. The estimated costs of production
are as under:
Direct material ₹300 per unit
Direct employee cost ₹160 per unit
Indirect expenses:
- Fixed ₹32,50,000 per annum
- Variable ₹50 per unit

6.14
-Semi- ₹20,000 per month up to 50% capacity and ₹2,500 for every
variable 20% increase in the capacity or part thereof.
If production program of the factory is as indicated below and the management desires to ensure a
profit of ₹1,00,00,000 for the year, DETERMINE the average selling price at which each unit should be
quoted:
First three months of the year- 50% of capacity;
Remaining nine months of the year- 75% of capacity. (MTP 10 Marks Oct’22)
Answer 11
Statement of Cost
First three Remaining nine Total (Rs.)
months (Rs.) months (Rs.)
37,500 units 1,68,750 units 2,06,250 units
Direct material 1,12,50,000 5,06,25,000 6,18,75,000
Direct employee cost 60,00,000 2,70,00,000 3,30,00,000
Indirect- variable expenses 18,75,000 84,37,500 1,03,12,500
Indirect – fixed expenses 8,12,500 24,37,500 32,50,000
Indirect- semi-variable expenses
- For first three months @ 60,000
Rs.20,000 p.m.
- For remaining nine months @ 2,25,000 2,85,000
Rs.25,000 p.m.
Total cost 1,99,97,500 8,87,25,000 10,87,22,500
Desired profit - - 1,00,00,000
Sales value - - 11,87,22,500
Average selling price per unit 575.62
Question 12
Following information obtained from the records of a Manufacturing Company for the month of
March:
Direct labour cost ₹ 25,000 being 150% of works overheads.
Cost of goods sold excluding administrative expenses ₹ 75,000.
Inventory accounts showed the following opening and closing balances:
March 1 (₹) March 31 (₹)
Raw materials 11,600 15,370
Work-in-progress 15,225 21,025
Finished goods 25,520 27,550
Other information is as follows:

(₹)
Selling expenses 6,125
General and administration expenses 4,375
Sales for the month 1,05,250
Required to:
(i) FIND out the value of materials purchased.
(ii) PREPARE a cost statement showing the various elements of cost and also the profit earned.
(MTP 10 Marks March ’23, Old & New SM)
Answer 12
6.15
(i) Computation of the value of materials purchased

To find out the value of materials purchased, reverse calculations from the given data can be
presented as below:
Particulars (₹)
Cost of goods sold 75,000
Add: Closing stock of finished goods 27,550
Less: Opening stock of finished goods (25,520)
Cost of production 77,030
Add: Closing stock of work-in-progress 21,025
Less: Opening stock of work-in-progress (15,225)
Works cost 82,830
Less: Factory overheads: (16,667)
[₹25,000×100/150]
Prime cost 66,163
Less: Direct labour (25,000)
Raw material consumed 41,163
Add: Closing stock of raw materials 15,370
Raw materials available 56,533
Less: Opening stock of raw materials (11,600)
Value of materials purchased 44,933
(ii) Cost statement
(₹)
Raw material consumed [Refer to statement (i) above] 41,163
Add: Direct labour cost 25,000
Prime cost 66,163
Add: Factory overheads 16,667
Works cost 82,830
Add: Opening work-in-progress 15,225
Less: Closing work-in-progress (21,025)
Cost of production 77,030
Add: Opening stock of finished goods 25,520
Less: Closing stock of finished goods (27,550)
Cost of goods sold 75,000
Add: General and administration expenses 4,375
Add: Selling expenses 6,125
Cost of sales 85,500
Profit (sales i.e ₹1,05,250 – Cost of sales i.e ₹ 85,500) 19,750
Sales 1,05,250
Question 13
Following information relate to a manufacturing concern for the year ended 31st March, 2019:
(₹ )
Raw Material (opening) 2,28,000
Raw Material (closing) 3,05,000
Purchases of Raw Material 42,25,000
Freight Inwards 1,00,000
Direct wages paid 12,56,000
6.16
Direct wages-outstanding at the end of the year 1,50,000

Factory Overheads 20% of prime cost
Work-in-progress (opening) 1,92,500
Work-in-progress (closing) 1,40,700
Administrative Overheads (related to production) 1,73,000
Distribution Expenses ₹ 16 per unit
Finished Stock (opening)- 1,217 Units 6,08,500
Sale of scrap of material 8,000
The firm produced 14,000 units of output during the year. The stock of finished goods at the end of the
year is valued at cost of production. The firm sold 14,153 units at a price of ₹ 618 per unit during the
year. PREPARE cost sheet of the firm. (RTP May ’19, PYP May ‘18, 10 Marks)
Answer 13
Cost sheet for the year ended 31st March, 2019.
Units produced - 14,000 units Units sold - 14,153 units
Add: Freight Inward 1,00,000
Add: Opening value of raw materials 2,28,000
Less: Closing value of raw materials (3,05,000)
42,48,000
Less: Sale of scrap of material (8,000)
Materials consumed 42,40,000
Direct Wages (12,56,000 + 1,50,000) 14,06,000
Factory overheads (20% of Prime Cost) 11,29,200
Factory Cost 68,27,000
Add: Administrative overheads 1,73,000
Add: Value of opening finished stock 6,08,500
Less: Value of closing finished stock (5,32,000)
[Rs. 500(70,00,000/14,000) × 1,064]
(1,217+ 14,000 – 14,153 = 1,064 units)
Distribution expenses (Rs.16 × 14,153 units) 2,26,448
Cost of Sales 73,02,948
Profit (Balancing figure) 14,43,606
Sales (Rs. 618 × 14,153 units) 87,46,554
Question 14
The following details are available from the books of R Ltd. for the year ending 31st March 2020:
Purchase of raw materials 84,00,000
Consumable materials 4,80,000
Carriage inward 1,72,600
6.17
Wages to foreman and store keeper 8,40,000

Other indirect wages to factory staffs 1,35,000
Expenditure on research and development on new production technology 9,60,000
Salary to accountants 7,20,000

Employer’s contribution to EPF & ESI 7,20,000
Cost of power & fuel 28,00,000
Production planning office expenses 12,60,000
Salary to delivery staffs 14,30,000
Income tax for the assessment year 2019-20 2,80,000
Fees to statutory auditor 1,80,000
Fees to cost auditor 80,000
Fees to independent directors 9,40,000
Donation to PM-national relief fund 1,10,000
Value of sales 2,82,60,000
Position of inventories as on 01-04-2019:
- Raw Material 6,20,000
- W-I-P 7,84,000
Position of inventories as on 31-03-2020:
- Raw Material 4,60,000
- W-I-P 6,64,000
From the above information PREPARE a cost sheet for the year ended 31 st March 2020. (RTP Nov ’20)
Answer 14
Statement of Cost of R Ltd. for the year ended 31st March, 2020:
Sl. Particulars Amount (₹) Amount (₹)
No.
- Raw materials purchased 84,00,000
- Carriage inward 1,72,600
Less: Closing stock of raw materials (4,60,000) 87,32,600
- Direct wages 60,00,000
- Employer’s Contribution towards PF 7,20,000 67,20,000
& ESIS
- Consumable materials 4,80,000
- Cost of power & fuel 28,00,000 32,80,000
Prime Cost 1,87,32,600
- Wages to foreman and store keeper 8,40,000
- Other indirect wages to factory staffs
1,35,000 9,75,000
6.18

(v) Research & development cost paid for improvement 9,60,000
in production process
(vi) Production planning office expenses 12,60,000
(vii) Administrative overheads:
- Salary to accountants 7,20,000
- Fees to statutory auditor 1,80,000
- Fees to cost auditor 80,000
- Fee paid to independent directors 9,40,000 19,20,000
(viii) Selling overheads& Distribution overheads:
- Salary to delivery staffs 14,30,000
Sales 2,82,60,000
Note: Income tax and Donation to PM National Relief Fund is avoided in the cost sheet.
Question 15
Impact Ltd. provides you the following details of its expenditures for the year ended 31st March,
2021:
S. Particulars Amount (₹) Amount (₹)
No.
(i) Raw materials purchased 5,00,00,000
(ii) GST paid under Composition scheme 10,00,000
(iii) Freight inwards 5,20,600
(iv) Trade discounts received 10,00,000
(v) Wages paid to factory workers 15,20,000
(vi) Contribution made towards employees’ PF &
ESIS 1,90,000
(vii) Production bonus paid to factory workers 1,50,000
(viii) Fee for technical assistance 1,12,000
(ix) Amount paid for power & fuel 2,62,000
(x) Job charges paid to job workers 4,50,000
(xi) Stores and spares consumed 1,10,000
(xii) Depreciation on:
Factory building 64,000
Office building 46,000
Plant & Machinery 86,000 1,96,000
(xiii) Salary paid to supervisors 1,20,000
(xiv) Repairs & Maintenance paid for:
6.19
Plant & Machinery 58,000

Sales office building 50,000
Vehicles used by directors 20,600 1,28,600
(xv) Insurance premium paid for:
Plant & Machinery 31,200
Factory building 28,100 59,300
(xvi) Expenses paid for quality control check activities
25,000
(xvii) Research & development cost paid for
improvement in production process 48,200
(xviii) Expenses paid for administration of factory work
1,38,000
(xix) Salary paid to functional mangers:
Production control 4,80,000
Finance & Accounts 9,60,000
Sales & Marketing 12,00,000 26,40,000
(xx) Salary paid to General Manager 13,20,000
(xxi) Packing cost paid for:
Primary packing necessary to maintain quality
1,06,000
For re-distribution of finished goods 1,12,000 2,18,000
(xxii) Interest and finance charges paid (for usage of
non- equity fund) 3,50,000
(xxiii) Fee paid to auditors 1,80,000
(xxiv) Fee paid to legal advisors 1,20,000
(xxv) Fee paid to independent directors 2,40,000
(xxvi) Payment for maintenance of website for online 1,80,000
sales
(xxvii) Performance bonus paid to sales staffs 2,40,000
(xxviii) Value of stock as on 1st April, 2020:
Raw materials 9,00,000
Work-in-process 4,00,000
Finished goods 7,00,000 20,00,000
(xxix) Value of stock as on 31st March, 2021:
Raw materials 5,60,000
Work-in-process 2,50,000
Finished goods 11,90,000 20,00,000
Amount realized by selling of waste generated during manufacturing process – ₹ 66,000/-

From the above data, you are required to PREPARE Statement of cost of Impact Ltd. for the year ended
31st March, 2021, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of Production, (iv) Cost of goods sold
and (v) Cost of sales. (RTP Nov ’21)
Answer 15
Statement of Cost of Impact Ltd. for the year ended 31st March, 2021:
Sl. Particulars Amount (₹) Amount (₹)
No.

6.20
Raw materials purchased 5,00,00,000

GST paid under Composition scheme* 10,00,000
Freight inwards 5,20,600
Less: Trade discounts received (10,00,000)
Less: Closing stock of raw materials (5,60,000) 5,08,60,600
Wages paid to factory workers 15,20,000
Contribution made towards employees’ PF &
ESIS 1,90,000
Production bonus paid to factory workers 1,50,000 18,60,000
Fee for technical assistance 1,12,000
Amount paid for power & fuel 2,62,000
Job charges paid to job workers 4,50,000 8,24,000
Stores and spares consumed 1,10,000
Depreciation on factory building 64,000
Depreciation on plant & machinery 86,000
Repairs & Maintenance paid for plant & machinery 58,000
Insurance premium paid for factory building 28,100
Salary paid to supervisors 1,20,000 4,97,300
(v) Quality control cost:
Expenses paid for quality control check activities 25,000
(vi) Research & development cost paid for
improvement in production process 48,200
(vii) Administration cost related with production:
-Expenses paid for administration of factory work 1,38,000
-Salary paid to Production control manager 4,80,000 6,18,000
(viii) Less: Realisable value on sale of scrap and waste (66,000)
(ix) Add: Primary packing cost 1,06,000
(x) Administrative overheads:
Depreciation on office building 46,000
Repairs & Maintenance paid for vehicles used by
directors 20,600
Salary paid to Manager- Finance & Accounts 9,60,000
6.21
Salary paid to General Manager 13,20,000

Fee paid to auditors 1,80,000
Fee paid to legal advisors 1,20,000
Fee paid to independent directors 2,40,000 28,86,600
(xi) Selling overheads:
Repairs & Maintenance paid for sales office building 50,000
Salary paid to Manager- Sales & Marketing 12,00,000
Payment for maintenance of website for online sales 1,80,000
Performance bonus paid to sales staffs 2,40,000 16,70,000
(xii) Packing cost paid for re-distribution of finished goods 1,12,000
(xiii) Interest and finance charges paid 3,50,000
* GST paid under Composition scheme would be included under cost of material as it is not eligible
for input tax credit.
Question 16
A Ltd. produces a single product X. During the month of December 2021, the company has produced
14,560 tonnes of X. The details for the month of December 2021 are as follows:
(i) Materials consumed ₹ 15,00,000
(ii) Power consumed 13,000 Kwh @ ₹ 7 per Kwh
(iii) Diesels consumed 1,000 litres @ ₹ 93 per litre
(iv) Wages & salary paid – ₹ 64,00,000
(v) Gratuity & leave encashment paid – ₹ 44,20,000
(vi) Hiring charges paid for HEMM- ₹ 13,00,000
(vii) Hiring charges paid for cars used for official purpose – ₹ 80,000
(viii)Reimbursement of diesel cost for the cars – ₹ 20,000
(ix) The hiring of cars attracts GST under RCM @5% without credit.
(x) Maintenance cost paid for weighing bridge (used for weighing of final goods at the time of
despatch) – ₹ 7,000
(xi) AMC cost of CCTV installed at weighing bridge (used for weighing of final goods at the time of
despatch) and factory premises is ₹ 6,000 and ₹ 18,000 per month respectively.
(xii) TA/ DA and hotel bill paid for sales manager- ₹ 16,000
(xiii) The company has 180 employees works for 26 days in a month.
Required:
(a) PREPARE a Cost sheet for the month of December 2021.
(b) COMPUTE Earnings per manshift (EMS) and Output per manshift (OMS) for the month of
December 2021. (RTP May ’22)
Answer 16
(a) Cost Sheet of A Ltd. for the month of December 2021
Wages & Salary 64,00,000
Gratuity & leave encashment 44,20,000 1,08,20,000
Power cost (13,000 kwh × ₹ 7) 91,000
Diesel cost (1,000 ltr × ₹ 93) 93,000 1,84,000
6.22
HEMM hiring charges 13,00,000

AMC cost of CCTV installed at factory premises 18,000
Cost of Production/ Cost of Goods Sold 1,38,22,000
Hiring charges of cars 80,000
Reimbursement of diesel cost 20,000
1,00,000
Add: GST @5% on RCM basis 5,000 1,05,000
Maintenance cost for weighing bridge 7,000
AMC cost of CCTV installed at weigh bridge 6,000 13,000
TA/ DA & hotel bill of sales manager 16,000
(b) Man shift = 180 employees × 26 days = 4,680 man shifts
Computation of earnings per man shift (EMS):
!"# $!! %!&!'( # ()
EMS =
* & ('
. , , ,
= ,
= Rs. 2,312
Computation of Output per man shift (OMS):
+ # /- ) . ( &
OMS =
* & ('
, &&!
= ,
= 3.11 tonne
Question 17
CT Limited is engaged in producing medical equipment. It has furnished following details related
to its products produced during a month:
Units Amount (₹)
Raw materials
Opening stock 1,000 90,00,000
Purchases 49,000 44,10,00,000
Closing stock 1,750 1,57,50,000
Works-in-progress
Opening 2,000 1,75,50,000
Closing 1,000 94,50,000
Direct employees' wages, allowances etc. 6,88,50,000
Primary packaging cost (per unit) 1,440
R&D expenses & Quality control expenses 2,10,60,000
Consumable stores, depreciation on plant 3,42,00,000
Administrative overheads related to production 3,15,00,000
Selling expenses 4,84,30,800
Royalty paid for production 3,64,50,000
Cost of web-site (for online sale) maintenance 60,75,000
Secondary packaging cost (per unit) 225
There was a normal scrap of 250 units of direct material which realized ₹ 5,400 per unit. The entire
finished product was sold at a profit margin of 20% on sales. You are required to PREPARE a cost sheet
showing:
(i) Prime cost
(ii) Gross works cost
(iii) Factory costs
6.23
(iv) Cost of production

(v) Profit
(vi) Sales. (RTP Nov’22)
Answer 17
Cost Sheet
Particulars Units Amount (₹)
Material
Opening stock 1,000 90,00,000
Add: Purchases 49,000 44,10,00,000
Less: Closing stock (1,750) (1,57,50,000)
48,250 43,42,50,000
Less: Normal wastage of materials realized @ ₹ 5,400 per unit (250) (13,50,000)
Material consumed 43,29,00,000
Direct employee's wages and allowances 6,88,50,000
Direct expenses- Royalty paid for production 3,64,50,000
Prime cost 48,000 53,82,00,000
Factory overheads - Consumable stores, depreciation etc. 3,42,00,000
Gross Works Cost 48,000 57,24,00,000
Add: Opening WIP 2,000 1,75,50,000
Less: Closing WIP (1,000) (94,50,000)
Factory/Works Cost 49,000 58,05,00,000
Administration Overheads related to production 3,15,00,000
R&D expenses and Quality control cost 2,10,60,000
Add: Primary packaging cost @ ₹ 1,440 per unit 7,05,60,000
Cost of production 49,000 70,36,20,000
Selling expenses 4,84,30,800
Cost of maintaining website for online sale 60,75,000
Secondary packaging cost @ ₹ 225 per unit 49,000 1,10,25,000
Cost of sales 76,91,50,800
Add: Profit @ 20% on sales or 25% of cost 19,22,87,700
Sales value 96,14,38,500
Question 18
From the following data of Motilal Ltd., CALCULATE Cost of production:
(`)
(i) Repair & maintenance paid for plant & machinery 9,80,500
(ii) Insurance premium paid for inventories 26,000
(iii) Insurance premium paid for plant & machinery 96,000
(iv) Raw materials purchased 64,00,000
(v) Opening stock of raw materials 2,88,000
(vi) Closing stock of raw materials 4,46,000
(vii) Wages paid 23,20,000
(viii) Value of opening Work-in-process 4,06,000
(ix) Value of closing Work-in-process 6,02,100
(x) Quality control cost for the products in manufacturing 86,000
process
(xi) Research & development cost for improvement in 92,600
production process
(xii) Administrative cost for:
- Factory & production 9,00,000
- Others 11,60,000
6.24
(xiii) Amount realised by selling scrap generated during the 9,200

manufacturing process
(xiv) Packing cost necessary to preserve the goods for further 10,200
processing
(xv) Salary paid to Director (Technical) 8,90,000
(RTP May 23)

Answer 18
Calculation of Cost of Production of Motilal Ltd for the period…..
Particulars (`)
Add: Opening stock 2,88,000
Wages paid 23,20,000
Repair and maintenance cost of plant & machinery 9,80,500
Insurance premium paid for inventories 26,000
Quality control cost 86,000
Research & development cost 92,600
Administrative overheads related with factory and production 9,00,000
1,07,43,100
1,05,47,000
Less: Amount realized by selling scrap (9,200)
Add: Primary packing cost 10,200
Notes:
(i) Other administrative overhead does not form part of cost of production.
(ii) Salary paid to Director (Technical) is an administrative cost.
Question 19
A Ltd. produces a single product X. During the month of July 2023, the company has produced 14,560
tonnes of X. The details for the month of July 2023 are as follows:
(i) Materials consumed ` 15,00,000
(ii) Power consumed in operating production machinery 13,000 Kwh @ ` 7 per Kwh
(iii) Diesels consumed in operating production machinery 1,000 litres @ ` 93 per litre
(iv) Wages & salary paid – ` 64,00,000
(v) Gratuity & leave encashment paid – ` 44,20,000
(vi) Hiring charges paid for Heavy Earth Moving machines (HEMM) engaged in production
- ` 13,00,000. Hiring charges is paid on the basis of production.
(vii) Hiring charges paid for cars used for official purpose – ` 80,000
6.25
(viii) Reimbursement of diesel cost for the cars – ` 20,000

(ix) The hiring of cars attracts GST under RCM @5% without credit.
(x) Maintenance cost paid for weighing bridge (used for weighing of final goods at the
time of despatch) – ` 7,000
(xi) AMC cost of CCTV installed at weighing bridge (used for weighing of final goods at the
time of despatch) and factory premises is ` 6,000 and ` 18,000 per month respectively.
(xii) TA/ DA and hotel bill paid for sales manager- ` 16,000
(xiii) The company has 180 employees works for 26 days in a month. Required:
PREPARE a Cost sheet for the month of July 2023. (RTP Nov 23)
Answer 19
Cost Sheet of A Ltd. for the month of July 2023
Particulars Amount (`) Amount (`)
Wages & Salary 64,00,000
Gratuity & leave encashment 44,20,000 1,08,20,000
Power cost (13,000 kwh × ` 7) 91,000
Diesel cost (1,000 ltr × ` 93) 93,000 1,84,000
HEMM hiring charges 13,00,000
AMC cost of CCTV installed at factory premises 18,000
Cost of Production/ Cost of Goods Sold 1,38,22,000
Hiring charges of cars 80,000
Reimbursement of diesel cost 20,000
1,00,000
Add: GST @5% on RCM basis 5,000 1,05,000
Maintenance cost for weighing bridge 7,000
AMC cost of CCTV installed at weigh bridge 6,000 13,000
TA/ DA & hotel bill of sales manager 16,000
Question 20
M/s Areeba Private Limited has a normal production capacity of 36,000 units of toys perannum. The
estimated costs of production are as under:
(i) Direct Material ₹ 40 per unit
(ii) Direct Labour ₹ 30 per unit (subject to a minimum of ₹ 48,000 p.m.)
(iii) Factory Overheads:
(a) Fixed ₹ 3,60,000 per annum
(b) Variable ₹ 10 per unit
(c) Semi-variable ₹ 1,08,000 per annum up to 50% capacity and additional ₹ 46,800 for every 20%
increase in capacity or any part there of.
(iv) Administrative Overheads ₹ 5, 18,400 per annum (fixed)
(v) Selling overheads are incurred at ₹ 8 per unit.
(vi) Each unit of raw material yields scrap which is sold at the rate of ₹ 5 per unit.
(vii) In year 2019, the factory worked at 50% capacity for the first three months but it was expected that it
6.26
would work at 80% capacity for the remaining nine months.

(viii) During the first three months, the selling price per unit was ₹ 145.
You are required to :
(i) Prepare a cost sheet showing Prime Cost, Works Cost, Cost of Production and Cost of Sales.
(ii) Calculate the selling price per unit for remaining nine months to achieve the total annual
profit of ₹ 8,76,600. (PYP May ‘19, 10 Marks)
Answer 20
(i) Cost Sheet of M/s Areeba Pvt. Ltd. for the year 2019.
Normal Capacity: 36,000 units p.a.
Particulars 3 Months 4,500 Units 9 Months 21,600 units
Amount(₹ ) Cost per unit (₹ ) Amount(₹ ) Cost per unit (₹ )
Direct material 1,80,000 8,64,000
Less: Scrap (22,500) (1,08,000)
Materials consumed 1,57,500 35 7,56,000 35
Direct Wages 1,44,000 32 6,48,000 30
Prime Cost 3,01,500 67 14,04,000 65
Factory overheads:
- Fixed 90,000 2,70,000
- Variable 45,000 2,16,000
- Semi variable 27,000 36 1,51,200 29.50
Works Cost 4,63,500 103 20,41,200 94.50
Add: Administrative overheads 1,29,600 28.80 3,88,800 18
Cost of Production 5,93,100 131.80 24,30,000 112.5
Selling Overheads 36,000 8 1,72,800 8
Cost of Sales 6,29,100 139.80 26,02,800 120.5
Working Notes:
1. Calculation of Costs
Particulars 4,500 units 21,600 units
Amount (₹ ) Amount (₹ )
Material 1,80,000 (₹ 40 × 4,500 units) 8,64,000 (₹ 40 × 21,600 units)
Wages 1,44,000 (Max. of ₹ 30 × 4,500units 6,48,000(21600Units×30)
= ₹ 1,35,000 and ₹ 48,000× 3 months
= ₹ 1,44,000)
Variable Cost 45,000 (₹ 10 × 4,500 units) 2,16,000 (₹ 10 × 21,600 units)
Semi-variable 27,000 (Rs. 1,08,000 /12 Months 1,51,200 (Rs. 1,08,000/ 12
Cost 3 0123ℎ5) Months 9 7123ℎ5)
+46,800 (For 20% increase)
+23,400 (For 10% increase)
Selling Overhead 36,000 (Rs. 8 X 4,500 units) 1,72,800(Rs. 8 X 21,600 units)
Notes:
1. Alternatively scrap of raw material can also be reduced from Work cost.
2. Administrative overhead may be treated alternatively as a part of general overhead.
In that case, Works Cost as well as Cost of Production will be same i.e. ₹ 4,63,500 and Cost of
Sales will remain same as ₹ 6,29,100.
(ii) Calculation of Selling price for nine months period
Particulars Amount (₹ )
Total Cost of sales ₹ (6,29,100 +26,02,800) 32,31,900
6.27
Add: Desired profit 8,76,600

Total sales value 41,08,500
Less: Sales value realised in first three months ( ₹ 145 × 4,500 units) (6,52,500)
Sales Value to be realised in next nine months 34,56,000
No. of units to be sold in next nine months 21,600
Selling price per unit (₹ 34,56,000 ÷ 21,600 units) 160

This was a numerical question on preparation of ‘Cost Sheet’. Many examinees made
mistake in calculation of number of units to be produced at different capacity levels. The
performance of the candidate in this sub part of the question is below Average.
Question 21
Following details are provided by M/s ZIA Private limited for the quarter ending 30 September 2018:
(i) Direct expenses ₹ 1,80,000
(ii) Direct wages being 175% of factory overheads ₹ 2,57,250
(iii) Cost of goods sold ₹ 18,75,000
(iv) Selling & distribution overheads ₹ 60,000
(v) Sales ₹ 22,10,000
(vi) Administration overheads are 10% of factory overheads
Stock details as per Stock Register:
Particulars 30.06.2018 ₹ 30.09.2018 ₹

Raw material
2,45,600 2,08,000
Work-in-progress
1,70,800 1,90,000
Finished goods
3,10,000 2,75,000
You are required to prepare a cost sheet
showing:
(i) Raw material consumed
(ii) Prime cost
(iii) Factory cost
(iv) Cost of goods sold
(v) Cost of sales and profit (PYP Nov ‘18, 10 Marks)
Answer 21
Cost Sheet
(for the quarter ending 30 September 2018) Amount (₹ )
(i) Raw materials consumed
Opening stock of raw materials 2,45,600
Add: Purchase of materials 12,22,650*
Less: Closing stock of raw materials (2,08,000)
Raw materials consumed 12,60,250
Add: Direct wages (1,47,000×175%) 2,57,250
Direct Expenses 1,80,000
Add: Factory overheads (2,57,250/175%) 1,47,000
6.28
Gross Factory cost 18,44,500

Add: Opening work-in-process 1,70,800
Less: Closing work-in-process (1,90,000)
(iii) Factory cost 18,25,300
Add: Administration overheads (10% of factory overheads) 14,700
(iv) Cost of goods sold 18,75,000
Add: Selling & distribution overheads 60,000
Cost of sales 19,35,000
(v) Net Profit 2,75,000
Sales 22,10,000
*(18,75,000 + 2,75,000 – 3,10,000– (1,47,000× 10%)+ 1,90,000–1,70,800– (2,57,250× 100/175%) - 1,80,000
– 2,57,250 + 2,08,000 – 2,45,600)= 12,22,650
Working notes:
Purchase of raw materials = Raw material consumed + Closing stock - opening stock of raw material Raw
material consumed = Prime cost - Direct wages - Direct expenses
Factory Overheads = 2,57,250*100/175
Prime cost = Factory cost + Closing WIP – Opening WIP – Factory overheads
Factory Cost = Cost of Production goods sold + Closing stock of Finished goods – Opening stock of finished goods
– Administrative overheads
Net Profit = Sales - Cost of sales
Alternative solution
Cost Sheet
(forthe quarter ending 30September 2018)
(i) Raw materials consumed
Raw materials consumed Amount (₹ )
Opening stock of raw materials 2,45,600
Add: Purchase of materials 12,37,350*
Less: Closing stock of raw materials (2,08,000)
Add: Direct wages (1,47,000×175%) 2,57,250
Direct Expenses 1,80,000

Add: Factory overheads (2,57,250/175%) 1,47,000
Gross Factory cost 18,59,200
Add: Opening work-in-process 1,70,800
Less: Closing work-in-process (1,90,000)
(iii) Factory cost/work cost /Cost of production 18,40,000
Add : Opening stock of finished goods 3,10,000
(iv) Cost of goods sold 18,75,000
Add: Administration overheads (10% of factory overheads) 14,700
6.29
Add: Selling & distribution overheads 60,000

(v) Net Profit 2,60,300
Sales 22,10,000
*(18,75,000 + 2,75,000 – 3,10,000+ 1,90,000–1,70,800–1,47,500- 1,80,000– 2,57,250 + 2,08,000 –
2,45,600)= 12,37,350
Working notes:
Purchase of raw materials = Raw material consumed + Closing stock - opening stock of raw material
Raw material consumed = Prime cost - Direct wages - Direct expenses
Factory Overheads = 2,57,250*100/175
Prime cost = Factory cost + Closing WIP – Opening WIP – Factory overheads
Factory Cost = Cost of Production goods sold + Closing stock of Finished goods – Opening stock of
finished goods – Administrative overheads
Net Profit = Sales - Cost of sales

This question was related to preparation of Cost Sheet. The performance of the examinees in
this sub part of the question is very good and many secured 9 to 10 marks out of 10 marks.
Question 22
The following data are available from the books and records of Q Ltd. for the month of April 2020:
Direct Labour Cost = ₹ 1,20,000 (120% of Factory Overheads)
Cost of Sales = ₹ 4,00,000
Sales = ₹ 5,00,000
Accounts show the following figures:
1st April, 2020 30th April, 2020
(₹) (₹)
Inventory:
Raw material 20,000 25,000
Work-in-progress 20,000 30,000
Finished goods 50,000 60,000
Other details:
Selling expenses 22,000
General & Admin. expenses 18,000
You are required to prepare a cost sheet for the month of April 2020 showing:
(i) Prime Cost
(ii) Works Cost
(iii) Cost of Production
(iv) Cost of Goods sold
(v) Cost of Sales and Profit earned. (PYP 10 Marks Jan 21)
Answer 22
Cost Sheet for the Month of April 2020
Particulars (₹)
Opening stock of Raw Material 20,000
Add: Purchases [Refer Working Note-2] 1,65,000
6.30
Less: Closing stock of Raw Material (25,000)

Raw material consumed 1,60,000
Add: Direct labour cost 1,20,000
Prime cost 2,80,000
Add: Factory overheads 1,00,000
Gross Works cost 3,80,000
Add: Opening work-in-progress 20,000
Less: Closing work-in-progress (30,000)
Works Cost 3,70,000
Cost of goods sold 3,60,000
Add: General and administration expenses* 18,000
Add: Selling expenses 22,000
Profit {Balancing figure (₹ 5,00,000 – ₹ 4,00,000)} 1,00,000
Sales 5,00,000
*General and administration expenses have been assumed as not relating to the production
activity.
Working Note:
1. Computation of the raw material consumed
Particulars (₹)
Less: General and administration expenses (18,000)
Less: Selling expenses (22,000)
Add: Closing stock of finished goods 60,000
Less: Opening stock of finished goods (50,000)
Cost of production/Gross works cost 3,70,000
Add: Closing stock of work-in-progress 30,000
Less: Opening stock of work-in- progress (20,000)
Works cost 3,80,000
. , , (1,00,000)
Less: Factory overheads ( 8100)
Prime cost 2,80,000
Less: Direct labour (1,20,000)
2. Computation of the raw material purchased

Particulars (₹)
Closing stock of Raw Material 25,000
Add: Raw Material consumed 1,60,000
Less: Opening stock of Raw Material (20,000)
Raw Material purchased 1,65,000
Question 23
XYZ a manufacturing firm, has revealed following information for September ,2019:
6.31
1st September 30th September

(₹) (₹)
Raw Materials 2,42,000 2,92,000
Works-in-progress 2,00,000 5,00,000
The firm incurred following expenses for a targeted production of 1,00,000 units during the month:
(₹)
Consumable Stores and spares of factory 3,50,000
Research and development cost for process
2,50,000
improvements
Quality control cost 2,00,000
Packing cost (secondary) per unit of goods sold 2
Lease rent of production asset 2,00,000
Administrative Expenses (General) 2,24,000
Selling and distribution Expenses 4,13,000
Finished goods (opening) Nil
Finished goods (closing) 5000 units
Defective output which is 4% of targeted production, realizes ₹ 61 per unit. Closing stock is valued at
cost of production (excluding administrative expenses) Cost of goods sold, excluding administrative
expenses amounts to ₹ 78,26,000. Direct employees cost is 1/2 of the cost of material consumed.
Selling price of the output is ₹ 110 per unit. You are required to :
(i) Calculate the Value of material purchased
(ii) Prepare cost sheet showing the profit earned by the firm. (PYP 10 Marks Nov ‘19)
Answer 23
Workings:
1. Calculation of Sales Quantity:
Particular Units
Production units 1,00,000
Less: Defectives (4%×1,00,000 units) 4,000
Less: Closing stock of finished goods 5,000
No. of units sold 91,000
2. Calculation of Cost of Production
Particular Amount (₹)
Cost of Goods sold (given) 78,26,000
Add: Value of Closing finished goods 4,30,000
. , ,
( , &(
5,000 :2;35)

3. Calculation of Factory Cost
Less: Quality Control Cost (2,00,000)
Less: Research and Development Cost (2,50,000)
Add: Credit for Recoveries/Scrap/By- 2,44,000
Products/ misc. income (1,00,000 units × 4% ×
₹ 61)
6.32

4. Calculation of Gross Factory Cost
Cost of Factory Cost 80,50,000
Less: Opening Work in Process (2,00,000)
Add: Closing Work in Process 5,00,000
Cost of Gross Factory Cost 83,50,000
5. Calculation of Prime Cost
Cost of Gross Factory Cost 83,50,000
Less: Consumable stores & spares (3,50,000)
Less: Lease rental of production assets (2,00,000)
6. Calculation of Cost of Materials Consumed & Labour cost
Let Cost of Material Consumed = M and Labour cost = 0.5M
Prime Cost = Cost of Material Consumed + Labour Cost 78,00,000 = M + 0.5M
M = 52,00,000
Therefore, Cost of Material Consumed = ₹ 52,00,000 and Labour Cost = ₹ 26,00,000
(i) Calculation of Value of Materials Purchased
Cost of Material Consumed 52,00,000
Add: Value of Closing stock 2,92,000
Less: Value of Opening stock (2,42,000)
Value of Materials Purchased 52,50,000
Cost Sheet
Sl. Particulars Total Cost
(₹)
1. Direct materials consumed:
Opening Stock of Raw Material 2,42,000
Add: Additions/ Purchases [balancing figure as per requirement 52,50,000
(i)]
Less: Closing stock of Raw Material (2,92,000)
Material Consumed 52,00,000
2. Direct employee (labour) cost 26,00,000
3. Prime Cost (1+2) 78,00,000
4. Add: Works/ Factory Overheads
Consumable stores and spares 3,50,000
Lease rent of production asset 2,00,000
5. Gross Works Cost (3+4) 83,50,000
6. Add: Opening Work in Process 2,00,000
7. Less: Closing Work in Process (5,00,000)
8. Works/ Factory Cost (5+6-7) 80,50,000
6.33
9. Add: Quality Control Cost 2,00,000

10. Add: Research and Development Cost 2,50,000
11. Less: Credit for Recoveries/Scrap/By-Products/misc. income (2,44,000)
12. Cost of Production (8+9+10-11) 82,56,000

13. Add: Opening stock of finished goods -
14. Less: Closing stock of finished goods (5000 Units) (4,30,000)
15. Cost of Goods Sold (12+13-14) 78,26,000
16. Add: Administrative Overheads (General) 2,24,000
17. Add: Secondary packing 1,82,000
18. Add: Selling Overheads& Distribution Overheads 4,13,000
19. Cost of Sales (15+16+17+18) 86,45,000
20. Profit 13,65,000
21. Sales 91,000 units@ ₹ 110 per unit 1,00,10,000

This was a numerical problem from the topic ‘Elements of Cost and Preparation of Cost
Sheet’. This question required to calculate value of material purchased, prepare cost sheet
and calculate profit of the firm based on information provided. Most of the examinees
were unable to calculate value of material purchased using reverse calculation. Poor
performance was observed.
Question 24
G Ltd. manufactures leather bags for office and school purposes. The following information is related
with the production of leather bags for the month of September, 2021.
(1) Leather sheets and cotton clothes are the main inputs and the estimated requirement per bag is
two metres of leather sheets and one metre of cotton cloth. 2,000 metre of leather sheets and
1,000 metre of cotton cloths are purchased at ₹ 3,20,000 and ₹ 15,000 respectively. Freight paid on
purchases is ₹ 8,500.
(2) Stitching and finishing need 2,000 man hours at ₹ 80 per hour.
(3) Other direct costs of ₹ 10 per labour hour is incurred.
(4) G Ltd. have 4 machines at a total cost of ₹ 22,00,000. Machines have a life of 10 years with a scrap
value of 10% of the original cost. Depreciation is charged on a straight-line method.
(5) The monthly cost of administration and sales office staffs are ₹ 45,000 and ₹ 72,000 respectively.
G Ltd. pays ₹ 1,20,000 per month as rent for a 2,400 sq. feet factory premises. The administrative
and sales office occupies 240 sq. feet and 200 sq. feet respectively of factory space.
(6) Freight paid on delivery of finished bags is ₹ 18,000.
(7) During the month, 35 kgs of scrap (cuttings of leather and cotton) are sold at ₹ 150 per kg.
(8) There are no opening and closing stocks of input materials. There is a finished stock of 100 bags
in stock at the end of the month.
You are required to prepare a cost sheet in respect of above for the month of September 2021
showing:
(i) Cost of Raw Material Consumed
(ii) Prime Cost
(iii) Works/Factory Cost
(v) Cost of Goods Sold
6.34
(vi) Cost of Sales (10 Marks Dec ’21, RTP Nov’19)

Answer 24
No. of bags manufactured = 1,000 units
Cost sheet for the month of September 2021
Particulars Total Cost Cost per unit
(₹) (₹)
1. Direct materials consumed:
- Leather sheets 3,20,000 320.00
- Cotton cloths 15,000 15.00
Add: Freight paid on purchase 8,500 8.50
(i) Cost of material consumed 3,43,500 343.50
2. Direct wages (₹80 × 2,000 hours) 1,60,000 160.00
3. Direct expenses (₹10 × 2,000 hours) 20,000 20.00
4. (ii) Prime Cost 5,23,500 523.50
5. Factory Overheads: Depreciation on machines 16,500 16.50
{(₹ 22,00,000 × 90%) ÷ 120 months}
Apportioned cost of factory rent 98,000 98.00
6. (iii) Works/ Factory Cost 6,38,000 638.00
7. Less: Realisable value of cuttings (₹150×35 kg.) (5,250) (5.25)
8. (iv) Cost of Production 6,32,750 632.75
9. Add: Opening stock of bags 0
10. Less: Closing stock of bags (100 bags × ₹632.75) (63,275)
11. (v) Cost of Goods Sold 5,69,475 632.75
12. Add: Administrative Overheads:
- Staff salary 45,000 50.00
- Apportioned rent for administrative office 12,000 13.33
13. Add: Selling and Distribution Overheads
- Staff salary 72,000 80.00
- Apportioned rent for sales office 10,000 11.11
- Freight paid on delivery of bags 18,000 20.00
14. (vi) Cost of Sales 7,26,475 807.19
Apportionment of Factory rent:

To factory building {(₹ 1,20,000 ÷ 2400 sq. feet) × 1,960 sq. feet} = ₹ 98,000
To administrative office {(₹ 1,20,000 ÷ 2400 sq. feet) × 240 sq. feet} = ₹ 12,000
To sale office {(₹ 1,20,000 ÷ 2400 sq. feet) × 200 sq. feet} = ₹ 10,000

This Numerical problem on preparation of Cost Sheet; Cost of raw material consumed,
Prime Cost, Works cost, Production Cost, Cost of Goods Sold and Cost of sales were
required to be calculated after making adjustments for given relevant items. Most of the
examinees were not well versed about the treatment of some items like sale of scrap, office
rent and valuation of closing stock. Overall performance of the examinees was poor.

6.35
Question 25
The following data are available from the books and records of A Ltd. for the month of April 2022:
Stock of raw materials on 1st April 2022 10,000
Manufacturing wages 70,000
Depreciation on plant 15,000
Expenses paid for quality control check activities 4,000
Lease Rent of Production Assets 10,000
Administrative Overheads (Production) 15,000
Expenses paid for pollution control and engineering & 1,000
maintenance
Stock of raw materials on 30th April 2022 40,000
Primary packing cost 8,000
Research & development cost (Process related) 5,000
Packing cost for redistribution of finished goods 1,500
Advertisement expenses 1,300
Stock of finished goods as on 1st April 2022 was 200 units having a total cost of ₹ 28,000. The entire
opening stock of finished goods has been sold during the month Production during the month of April,
2022 was 3,000 units. Closing stock of finished goods as on 30th April, 2022 was 400 units.
I. Prepare a Cost Sheet for the above period showing the:
(i) Cost of Raw Material consumed
(ii) Prime Cost
(iii) Factory Cost
(v) Cost of goods sold
(vi) Cost of Sales
II. Calculate selling price per unit, if sale is made at a profit of 20% on sales. (PYP 10 Marks May’22)
Answer 25
Statement of Cost (for the month of April, 2022)
S. No. Particulars Amount (₹) Amount (₹)
Opening stock of Raw material 10,000
Add: Purchase of Raw material 2,80,000
Less: Closing stock of raw materials (40,000)
(i)
Manufacturing wages 70,000
(ii) Prime Cost 3,20,000
Factory/work overheads:
Depreciation on plant 15,000
Lease rent of production Asset 10,000
Expenses paid for pollution control and
engineering & Maintenance 1,000 26,000
(iii) Factory/Work Cost 3,46,000
Expenses paid for quality control check
activity 4,000
6.36
Research and Development Cost 5,000

Administration Overheads (Production) 15,000
Primary Packing Cost 8,000
(iv) Cost of Production 3,78,000
(v) Cost of Goods Sold 3,55,600
Advertisement expenses 1,300
Packing cost for re-
distribution of finished goods sold 1,500
(vi) Cost of Sales 3,58,400
Note: Valuation of Closing stock of finished goods

₹ , ,
&(
400 units
= ₹50,400
₹ , ,
Cost per unit sold= = , ,=
= ₹ 128 per unit
∴Selling Price=
%
= ₹160 per unit
Question 26
PNME Ltd. manufactures two types of masks- 'Disposable Masks' and ‘Cloth Masks'. The cost data
for the year ended 31stMarch, 2022 is as follows:
₹
Production 4,00,000
Overhead
Total 23,50,000
It is further ascertained that:

 Direct material cost per unit of Cloth Mask was twice as much of Direct material cost per
unit of Disposable Mask.
 Direct wages per unit for Disposable Mask were 60% of those for Cloth Mask.
 Production overhead per unit was at same rate for both the types of the masks.
 Administration overhead was 50% of Production overhead for each type of mask.
 Selling cost was ₹ 2 per Cloth Mask.
 Selling Price was ₹ 35 per unit of Cloth Mask.
 No. of units of Cloth Masks sold- 45,000
 No. of units of Production of
Cloth Masks: 50,000
Disposable Masks: 1,50,000
You are required to prepare a cost sheet for Cloth Masks showing:
(i) Cost per unit and Total Cost.
(ii) Profit per unit and Total Profit. (PYP 10 Marks Nov 22)
Answer 26
Preparation of Cost Sheet for Cloth Masks
6.37
No. of units produced = 50,000 units No. of

units sold = 45,000 units
Particulars Per unit (₹) Total (₹)
Direct materials (Working note- (i)) 10.00 5,00,000
Direct wages (Working note- (ii)) 5.00 2,50,000
Prime cost 15.00 7,50,000
Production overhead (Working note- (iii)) 2.00 1,00,000
Factory Cost 17.00 8,50,000
Administration Overhead* (50% of Production 1.00 50,000
Overhead)
Cost of production 18.00 9,00,000
Less: Closing stock (50,000 units – 45,000 units) - (90,000)
Cost of goods sold i.e. 45,000 units 18.00 8,10,000
Selling cost 2.00 90,000
Cost of sales/ Total cost 20.00 9,00,000
Profit 15.00 6,75,000
Sales value (₹ 35 × 45,000 units) 35.00 15,75,000
Working Notes:
(i) Direct material cost per unit of Disposable Mask = M Direct
material cost per unit of Cloth Mask = 2M
Total Direct Material cost = 2M × 50,000 units + M × 1,50,000
units Or, ₹ 12,50,000 = 1,00,000 M + 1,50,000 M
. , ,
Or, M = = Rs. 5
, ,
Therefore, Direct material Cost per unit of Cloth Mask = 2 × ₹ 5 = ₹ 10

(ii) Direct wages per unit for Cloth Mask =W
Direct wages per unit for Disposable Mask=

0.6W
So, (W x 50,000) + (0.6W x 1,50,000) = ₹ 7,00,000
W = ₹5 per unit
Therefore, Direct material Cost per unit of Cloth Mask = ₹ 5
. , ,
(iii) Production overhead per unit = = Rs. 2
? , = , , @
Production overhead for Cloth Mask = ₹ 2 × 50,000 units = ₹ 1,00,000

* Administration overhead is related to production overhead in the question and hence
to be considered in cost of production only.
Question 27
The following information is available from SN Manufacturing Limited's for the month of April 2023.
April 1 April 30
Opening and closing inventories data:
Stock of finished goods 2,500 units ?
Stock of raw materials ` 42,500 ` 38,600
6.38
Work-in progress ` 42,500 ` 42,800

Other data are:
Raw materials Purchased ` 6,95,000
Carriage inward ` 36,200
Direct wages paid ` 3,22,800
Royalty paid for production ` 35,800
Purchases of special designs, moulds and patterns ` 1,53,600
(estimated life 12 Production cycles)
Power, fuel and haulage (factory) ` 70,600
Research and development costs for improving the ` 31,680
production process (amortized)
Primary packing cost (necessary to maintain quality) ` 6920
Administrative Overhead ` 46,765
Salary and wages for supervisor and foremen ` 28,000
Other information:
• Opening stock of finished goods is to be valued at ` 8.05 per unit.
• During the month of April, 1,52,000 units were produced and 1,52,600 units were sold. The
closing stock of finished goods is to be valued at the relevant month's cost of production. The
company follows the FIFO method.
• Selling and distribution expenses are to be charged at 20 paisa per unit.

• Assume that one production cycle is completed in one month.
Required:
(i) Prepare a cost sheet for the month ended on April 30, 2023, showing the various elements of
cost (raw material consumed, prime cost, factory cost, cost of production, cost of goods sold,
and cost of sales).
(ii) Calculate the selling price per unit if profit is charged at 20 percent on sales. (10 Marks, May
‘23)
Answer 27
Cost Sheet for the month of April 2023
Particulars Amount Amount
(`) (`)
Raw materials consumed:
Add: Carriage inward 36,200
Add: Value of opening stock of raw materials 42,500
Less: Value of closing stock of raw materials (38,600) 7,35,100
Royalty paid for production 35,800
Amortised cost of special designs, moulds and patterns (`153,600 ÷ 12,800
12)
Power, fuel and haulage (factory)* 70,600
Prime Cost* 11,77,100
Salary and wages of supervisor and foremen 28,000
Gross Works Cost 12,05,100
Add: Opening stock of WIP 42,500
(42,800)
6.39
Less: Closing stock of WIP 12,04,800

Factory/ Works Cost
Research and development cost 31,680
Primary packing cost 6,920 38,600
Add: Opening stock of finished goods (` 8.05 × 2,500 units) 20,125
Less: Value of closing stock [(2,500+152,000 -1,52,600) × (15,542)
(12,43,400÷152000)
12,47,983
Cost of Goods Sold
Add: Administrative overheads 46,765
Add: Selling and distribution expenses (` 0.20 × 1,52,600) 30,520
Add: Profit (20% on Sales or 25% on cost of sales) 3,31,317
Sales value 16,56,585
Selling price per unit (` 16,56,585 ÷ 1,52,600 units) 10.86
*May be taken as part of Factory / Works cost, however Total Factory Cost will remain the same. If
taken as part of factory cost then prime cost will be ` 11,06,500.
Alternative Solution (Based on work-in-progress figure of ` 45,500 as on 1st April 2023 as per Hindi
part of Question paper)

(`) (`)
Raw materials consumed:
Add: Carriage inward 36,200
Add: Value of opening stock of raw materials 42,500
Less: Value of closing stock of raw materials (38,600) 7,35,100
Royalty paid for production 35,800
Amortised cost of special designs, moulds and patterns (` 153,600 ÷ 12,800
12)
Power, fuel and haulage (factory)* 70,600
Salary and wages of supervisor and foremen 28,000
Gross Works Cost 12,05,100
Add: Opening stock of WIP 45,500
Less: Closing stock of WIP (42,800)
Factory/ Works Cost 12,07,800
Research and development cost 31,680
Primary packing cost 6,920 38,600
Add: Opening stock of finished goods (` 8.05 × 2,500 units) 20,125
Less: Value of closing stock [(2,500+1,52,000 -1,52,600) × (15,580)
(12,46,400÷1,52,000)
12,50,945
Cost of Goods Sold
Add: Administrative overheads 46,765
30,520
6.40
Add: Selling and distribution expenses (` 0.20 × 1,52,600) 13,28,230

Cost of Sales
Add: Profit (20% on Sales or 25% on cost of sales) 3,32,058
Selling price per unit (` 16,60,288 ÷ 1,52,600 units) 10.88
*May be taken as part of Factory / Works cost, however Total Factory Cost will remain the same. If
taken as part of factory cost then prime cost will be ` 11,06,500.

7.1
Chapter 7
Cost Accounting System
Question 1
A manufacturing company disclosed a net loss of Rs.3,47,000 as per their cost accounts for the year
ended March 31,20X8. The financial accounts however disclosed a net loss of Rs. 5,10,000 for the
same period. The following information was revealed because of scrutiny of the figures of both the
sets of accounts.
(Rs.)
(i) Factory Overheads under-absorbed 40,000
(ii) Administration Overheads over-absorbed 60,000
(iii) Depreciation charged in Financial Accounts 3,25,000
(iv) Depreciation charged in Cost Accounts 2,75,000
(v) Interest on investments not included in Cost Accounts 96,000
(vi) Income-tax provided 54,000
(vii) Interest on loan funds in Financial Accounts 2,45,000
(viii) Transfer fees (credit in financial books) 24,000
(ix) Stores adjustment (credit in financial books) 14,000
(x) Dividend received 32,000
PREPARE a memorandum Reconciliation Account.
(MTP March ‘19, 5 Marks, RTP Nov 20) (Same concept different figures MTP 5 Marks Mar 21, Old &
New SM, MTP Oct’19 5 Marks)
Answer 1
Memorandum Reconciliation Accounts
Dr. Cr.
(Rs.) (Rs.)
To Net Loss as per Costing 3,47,000 By Administration overheads over 60,000
books Recovered in cost accounts
To Factory overheads 40,000 By Interest on investment not 96,000
under absorbed in Cost included in Cost Accounts
Accounts
To Depreciation 50,000 By Transfer fees in Financial books 24,000
under charged in Cost
Accounts
To Income- Tax not 54,000 By Stores adjustment(Credit in 14,000

provided in Cost Accounts financial books)
To Income- Tax not 54,000 By Dividend received in financial books 32,000

provided in Cost Account
To Interest on Loan 2,45,000
Funds in Financial Accounts
By Net loss as per Financial books 5,10,000
7,36,000 7,36,000
Question 2
“Is reconciliation of cost accounts and financial accounts necessary in case of integrated accounting
system?” EXPLAIN. (MTP 5 Marks ,March ’19 , March ’23 , April ‘23 & Sep ’23 )(RTP May ’22)
Answer 2
Chapter 7 Cost Accounting System
7.2
In integrated accounting system cost and financial accounts are kept in the same set of books.
Such a system will have to afford full information required for Costing as well as for Financial Accounts. In
other words, information and data should be recorded in such a way so as to enable the firm to ascertain
the cost (together with the necessary analysis) of each product, job, process, operation or any other
identifiable activity. It also ensures the ascertainment of marginal cost, variances, abnormal losses and
gains. In fact all information that management requires from a system of Costing for doing its work
properly is made available. T he integrated accounts give full information in such a manner so that the
profit and loss account and the balance sheet can be prepared according to the requirements of law and
the management maintains full control over the liabilities and assets of its business.
Since, only one set of books are kept for both cost accounting and financial accounting purpose so there
is no necessity of reconciliation of cost and financial accounts.
Question 3
Following information have been extracted from the cost records of XYZ Pvt. Ltd.
Stores: (₹ )
Opening balance 1,08,000
Purchases 5,76,000
Transfer from WIP 2,88,000
Issue to WIP 5,76,000
Issue for repairs 72,000
Deficiency found in stock 21,600
Work-in-process: (₹ )
Opening balance 2,16,000
Direct wages applied 2,16,000
Overheads charged 8,64,000
Closing balance 1,44,000
Finished Production: (₹ )
Entire production is sold at a profit of 15% on cost of WIP
Wages paid 2,52,000
Overheads incurred 9,00,000
PREPARE Stores Ledger Control Account, Work-in-Process Control Account, Overheads Control Account
and Costing Profit and Loss Account. (MTP March ‘18, 10 Marks) (Same concept but different figures MTP
Oct’18 10 Marks)
Answer 3
Stores Ledger Control A/c
Particulars (₹ ) Particulars (₹ )
To Balance b/d 1,08,000 By Work in Process A/c 5,76,000
To General Ledger
Adjustment A/c 5,76,000 By Overhead Control A/c 72,000
To Work in Process A/c 2,88,000 By Overhead Control A/c 21,600*
(Deficiency)
By Balance c/d 3,02,400
9,72,000 9,72,000
*Deficiency assumed as normal (alternatively can be treated as abnormal loss)
Work in Process Control A/c
To Balance b/d 2,16,000 By Stores Ledger Control a/c 2,88,000
To Stores Ledger Control A/c 5,76,000 By Costing P/L A/c 14,40,000
7.3
(Balancing figures being Cost of

finished goods)
To Wages Control A/c 2,16,000 By Balance c/d 1,44,000
To Overheads Control A/c 8,64,000
18,72,000 18,72,000
Overheads Control A/c
To Stores Ledger Control A/c 72,000 By Work in Process A/c 8,64,000
To Stores Ledger Control A/c 21,600 By Balance c/d 1,65,600
(Under absorption)
To Wages Control A/c
(₹ 2,52,000- ₹ 2,16,000) 36,000
To Gen. Ledger Adjust. A/c 9,00,000
10,29,600 10,29,600
Costing Profit & Loss A/c
To Work in process 14,40,000 By Gen. ledger Adjust. A/c 16,56,000
(Sales) ( ₹ 14,40,000 × 115%)
To Gen. Ledger Adjust. A/c (Profit) 2,16,000
16,56,000 16,56,000
Question 4
The Trading and Profit and Loss Account of a company for the year ended 31-03-2020 is as under:
Trading and Profit and Loss Account
Particulars Rs. Particulars Rs.
To Materials 26,80,000 By Sales (50,000 units) 62,00,000
To Wages 17,80,000 By Closing stock 1,50,000
(2,000 units)
To Factory 9,50,000 By Dividend 80,000
expenses received
To General administrative 4,80,200
expenses
To Selling Expenses 2,50,000
To Preliminary expenses 70,000
written off
To Net profit 2,19,800
64,30,000 64,30,000
In the Cost Accounts:

(i) Factory expenses have been allocated to production at 20% of Prime Cost.
(ii) General administrative expenses absorbed at 10% of factory cost.
(iii) Selling expenses charged at Rs.10 per unit sold. Required:
PREPARE the Costing Profit and Loss Account of the company and RECONCILE the Profit/Loss with
the profit as shown in the Financial Accounts. (MTP 10 Marks May 20, Aug 18)
Answer 4
Workings:
Preparation of Cost Sheet/ Cost Statement
7.4

Materials 26,80,000
Wages 17,80,000
Add: Factory expenses (20% of Rs. 44,60,000) 8,92,000

Factory Cost / Cost of Production 53,52,000
(2,05,846)
Less: Closing Stock . 53,52,000 / 52,000
2,000
Add: General administrative expenses (10% of Rs.53,52,000) 5,35,200
Add: Selling expenses (Rs.10 × 50,000 units) 5,00,000

Profit (Balancing figure) 18,646
Sales Value 62,00,000

Costing Profit and Loss Account
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Materials 26,80,000 By Sales 62,00,000
To Wages 17,80,000 By Closing stock 2,05,846
To Factory expenses 8,92,000
To General administrative expenses 5,35,200
To Selling expenses 5,00,000
To Profit (Balancing figure) 18,646
64,05,846 64,05,846
Reconciliation of profit as per Cost Accounts and as per Financial Accounts

Profit as per Cost Accounts Additions: 18,646
Additions:
General administrative expenses (Over-absorbed) (Rs. 5,35,200 – Rs.4,80,200) 55,000
Selling expenses (Overcharged) (Rs. 5,00,000 – Rs. 2,50,000) 2,50,000
Dividend received 80,000
4,03,646
Deductions:
Factory expenses (Under -absorbed) (Rs.9,50,000 – 8,92,000) 58,000
Closing stock (Over-valued) (Rs.2,05,846 – Rs. 1,50,000) 55,846
Preliminary expenses written off 70,000
Profit as per Financial Accounts 1,83,846
2,19,800
Question 5
LIST five financial expenses that causes differences in Financial and Cost Accounts. (MTP 5 Marks,
Oct.’20, MTP 5 Marks Sep’22)
Answer 5
Financial expenses causing differences in Financial and Cost Accounts:

7.5
(i) Interest on loans or bank mortgages.

(ii) Expenses and discounts on issue of shares, debentures etc.
(iii) Other capital losses i.e., loss by fire not covered by insurance etc.
(iv) Losses on the sales of fixed assets and investments.
(v) Goodwill written off.
(vi) Preliminary expenses written off.
(vii) Income tax, donations, subscriptions.
(viii) Expenses of the company’s share transfer office, if any.
Question 6
A manufacturing company disclosed a net profit ₹10,20,000 as per their cost accounts for the year
ended 31st March, 2023. The financial accounts however disclosed a net profit of ₹ 6,94,000 for the
same period. The following information was revealed as a result of scrutiny of the figures of both the
sets of accounts.
(₹)
(i) Factory Overheads under-absorbed 80,000
(ii) Administration Overheads over-absorbed 1,20,000
(iii) Depreciation charged in Financial Accounts 6,50,000
(iv) Depreciation charged in Cost Accounts 5,50,000
(v) Interest on investments not included in Cost Accounts 1,92,000
(vi) Income-tax provided 1,08,000
(vii) Interest on loan funds in Financial Accounts 4,90,000
(viii) Transfer fees (credit in financial books) 48,000
(ix) Stores adjustment (credit in financial books) 28,000
(x) Dividend received 64,000
PREPARE a Reconciliation statement. (MTP 5 Marks April 23, March ’21 & March ‘19)
Answer 6
Statement of Reconciliation
Net profit as per Cost accounts 10,20,000
Add:
Administration Overheads over-absorbed 1,20,000
Interest on investments 1,92,000
Transfer fees 48,000
Stores adjustment 28,000
Dividend received 64,000 4,52,000
Less:
Factory Overheads under-absorbed 80,000
Depreciation under charged 1,00,000
Income-tax provided 1,08,000
Interest on loan funds 4,90,000 (7,78,000)
Net profit as per Financial accounts 6,94,000
Question 7
7.6
The following figures have been taken from the financial accounts of a manufacturing firm for the
year ended 31st March, 2021:
(Rs.)
Direct material consumption 20,00,000
Factory overheads 6,40,000
Administrative overheads 2,80,000
Selling and distribution overheads 3,84,000
Bad debts 32,000
Legal charges 4,000
Interest on fixed deposit 8,000
Sales - 48,000 units 48,00,000
Closing stock:
- Finished stock - 4,000 units 3,20,000
- Work-in-process 96,000
The cost accounts for the same period reveal that the Direct Material consumption was Rs.
22,40,000; Factory overhead is recovered at 20% on prime cost; Administration overhead is
recovered @ Rs. 4.8 per unit of production; and Selling and Distribution overheads are recovered at
Rs. 6.40 per unit sold.
Required:
PREPARE Costing and Financial Profit & Loss Accounts and RECONCILE the difference in the profit as
arrived at in the two sets of accounts. (MTP 10 Marks, Apr.’21) (Same concept different figures Old &
New SM)
Answer 7
Costing Profit and Loss Account
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Direct Material consumed 22,40,000 By Sales 48,00,000
To Direct Wages 12,00,000 By Closing Work-in-process 96,000
Prime Cost 34,40,000 By Closing Finished stock 3,10,154
. 41,28,000 . 96,000
4,000
52,000
To Factory overheads 6,88,000

(20% of prime cost)
41,28,000
To Administrative overheads 2,49,600
(Rs. 4.80 × 52,000* units)
To Selling & 3,07,200
distribution overheads
(Rs.6.40 × 48,000 units)
To Net profit (balancing 5,21,354
figure)
52,06,154 52,06,154
* Units produced = Units sold + Closing stock - Opening stock
= 48,000 + 4,000 - 0 = 52,000 units
Financial Profit and Loss Account
7.7
Particulars Amount Particulars Amount

(Rs.) (Rs.)
To Direct Material consumed 20,00,000 By Sales 48,00,000
To Direct Wages 12,00,000 By Dividend received 40,000
To Factory overheads 6,40,000 By Interest on fixed deposit 8,000
To Administrative overheads 2,80,000 By Closing Work-in-process 96,000
To Selling & distribution overheads 3,84,000 By Closing Finished stock 3,20,000
To Bad debts 32,000
To Preliminary expenses 16,000
To Legal charges 4,000
To Net profit (balancing figure) 7,08,000
52,64,000 52,64,000
Reconciliation Statement
(Rs.) (Rs.)
Net profit as per Financial Profit & Loss A/c 7,08,000
Add: Administrative overheads (2,80,000 - 2,49,600) 30,400
Selling & Distribution overheads (3,84,000 - 3,07,200) 76,800
Bad debts 32,000
Preliminary expenses 16,000
Legal charges 4,000 1,59,200
8,67,200
Less: Difference in value of materials consumed (22,40,000 - 2,40,000
20,00,000)
Factory overheads (6,88,000 - 6,40,000) 48,000
Interest on fixed deposit 8,000
Closing stock (3,20,000 - 3,10,154) 9,846 (3,45,846)
Profit as per Costing Profit & Loss A/c 5,21,354
Question 8
XYZ Ltd. maintains a non-integrated accounting system for the purpose of management information.
The following are the data related with year 2020-21:
Particulars Amount (‘000)
Opening balances:
- Stores ledger control A/c 48,000
- Work-in-process control A/c 12,000
- Finished goods control A/c 2,58,000
- Building construction A/c 6,000
- Cost ledger control A/c 3,24,000
During the year following transactions took place:
Materials:
- Purchased 24,000
- Issued to production 30,000
- Issued to general maintenance 3,600
- Issued to building construction 2,400
Wages:
7.8
- Gross wages paid 90,000

- Indirect wages paid 24,000
- For building construction 6,000
Factory overheads:
- Actual amount incurred (excluding items shown above) 96,000
- Absorbed in building construction 12,000
- Under-absorbed 4,800
Royalty paid 3,000
Selling distribution and administration overheads 15,000
Sales 2,70,000
At the end of the year, the stock of raw material and work-in-process was ₹ 33,00,000, and ₹15,00,000
respectively. The loss arising in the raw material account is treated as factory overheads. The building
under construction was completed during the year. Gross profit margin is 20% on sales.
Required: PREPARE the relevant control accounts to record the above transactions in the cost ledger
of the company. (MTP 10 Marks Nov ’21) (RTP Nov ’21 & May 22) (Same concept different figures
Old & New SM)
Answer 8
Cost Ledger Control Account
Particulars (₹in Particulars (₹in
‘000) ‘000)
To Costing P&L A/c 2,70,000 By Balance b/d 3,24,000
To Building Construction A/c 26,400 By Stores Ledger control A/c 24,000
To Balance c/d 2,89,800 By Wages Control A/c 90,000
By Factory overhead control A/c 96,000
By Royalty A/c 3,000

By Selling. Distribution and 15,000
Administration overheads
By Costing P&L A/c 34,200
5,86,200 5,86,200
Stores Ledger Control Account
Particulars (₹ in ‘000) Particulars (₹ in ‘000)
To Balance b/d 48,000 By WIP control A/c 30,000
To Cost Ledger control A/c 24,000 By Factory overheads 3,600
control A/c
By Building construction A/c 2,400
By Factory overhead control 3,000
A/c (loss) (bal. fig.)
By Balance c/d 33,000
72,000 72,000
Wages Control Account
To Cost Ledger control A/c 90,000 By Factory overhead control 24,000
A/c
By Building Construction A/c 6,000
By WIP Control A/c (bal. fig.) 60,000
90,000 90,000
7.9
Factory Overhead Control Account

To Stores Ledger control A/c 3,600 By Building Construction A/c 12,000
To Wages Control A/c 24,000 By Costing P&L A/c 4,800
To Cost Ledger control A/c 96,000 By WIP Control A/c (bal. fig) 1,09,800
To Stores Ledger control A/c 3,000
(loss)
1,26,600 1,26,600
Royalty Account
To Cost Ledger control A/c 3,000 By WIP Control A/c 3,000
3,000 3,000
Work-in-process Control Account

To Balance b/d 12,000 By Finished goods control 1,99,800
A/c (bal. fig)
To Wages Control A/c 60,000
To Factory overhead control 1,09,800
A/c
To Royalty A/c 3,000 By Balance c/d 15,000
2,14,800 2,14,800
Finished Goods Control Account

To Balance b/d 2,58,000 By Cost of Goods Sold A/c 2,16,000
(Refer working note)
To WIP control A/c 1,99,800 By Balance c/d 2,41,800
4,57,800 4,57,800
Cost of Goods Sold Account
To Finished Goods control A/c 2,16,000 By Cost of sales A/c 2,16,000
2,16,000 2,16,000
Selling, Distribution and Administration Overhead Control Account
To Cost Ledger control A/c 15,000 By Cost of sales A/c 15,000
15,000 15,000
Cost of Sales Account
To Cost of Goods Sold A/c 2,16,000 By Costing P&L A/c 2,31,000
To Selling, Distribution 15,000
and Administration A/c
2,31,000 2,31,000
Costing P&L Account
7.10

To Cost of Sales A/c 2,31,000 By Cost Ledger control A/c 2,70,000
To Factory overhead control 4,800
A/c
To Cost Ledger control A/c 34,200
2,70,000 2,70,000
Building Construction Account
To Balance b/d 6,000 By Cost Ledger control A/c 26,400
To Factory overhead control 12,000
A/c
26,400 26,400
Trial Balance
Particulars Dr. Cr.
(₹ in ‘000) (₹ in ‘000)
Stores Ledger Control A/c 33,000
WIP Control A/c 15,000
Finished Goods Control A/c 2,41,800
Cost Ledger Control A/c 2,89,800
2,89,800 2,89,800
Working Note:
. , ,
Cost of Goods sold = = Rs. 2,16,000
Question 9
BRIEF OUT advantages of Integrated Accounts. (MTP 5 Marks April ’22, Old & New SM)
Answer 9
Advantages of Integrated Accounts are as follows:
(i) No need for Reconciliation- The Question of reconciling costing profit and financial profit does not
arise, as there is only one figure of profit.
(ii) Less efforts- Due to use of one set of books, there is a significant saving in efforts made.
(iii) Less time consuming- No delay is caused in obtaining information as it is provided from books of
original entry.
(iv) Economical process- It is economical also as it is based on the concept of “Centralisation of Accounting
function”.
Question 10
SHOW Journal entries for the following transactions assuming cost and financial accounts are
integrated:
(1) Materials issued:

Direct Rs. 6,50,000
Indirect (to factory) Rs. 2,30,000
7.11
(2) Allocation of wages (25% indirect) Rs. 9,00,000

(3) Under/Over absorbed overheads:
Factory (Over) Rs. 60,000
Administration (Under) Rs. 50,000
(4) Payment to Creditors (Trade payables) Rs. 9,00,000
(5) Collection from Debtors (Trade receivables) Rs. 8,00,000
(MTP 5 Marks May 20)
Answer 10
Journal Entries under Integrated system of accounting
Particulars Rs. Rs.
(i) Work-in-Progress Control A/c Dr. 6,50,000
Factory Overhead Control A/c Dr. 2,30,000

To Stores Ledger Control A/c 8,80,000
(Being issue of Direct and Indirect materials)
(ii) Work-in Progress Ledger Control A/c Factory Dr. 6,75,000
Overhead control A/c Dr. 2,25,000
To Wages Control A/c 9,00,000
(Being allocation of Direct and Indirect wages)
(iii) Factory Overhead Control A/c Dr. 60,000
To Costing Profit & Loss A/c 60,000
(Being transfer of over absorption of Factory
overhead)
Costing Profit & Loss A/c Dr. 50,000
To Administration Overhead Control A/c 50,000
(Being transfer of under absorption of
Administration overhead)
(iv) Trade Payables A/c Dr. 9,00,000
To Cash/ Bank A/c 9,00,000
(Being payment made to creditors)
v) Cash/ Bank A/c Dr. 8,00,000
To Trade receivables A/c 8,00,000
(Being payment received from debtors)
Question 11
The following are the balances existed in the books of JPG Ltd. for the year ended, 31st March, 2019:
Particulars Dr. Cr.
(₹ ) (₹ )
Stores Ledger Control A/c 30,00,000
WIP Control A/c 15,00,000
Manufacturing Overheads Control A/c 1,50,000
During the year 2019-20, the following transactions took place:
Finished product (at cost) 22,50,000
Manufacturing Overhead incurred 8,50,000
7.12
Raw material purchased 12,50,000

Factory wages 4,00,000
Indirect labour 2,00,000
Materials issued to production 13,50,000
Sales returned (at cost) 90,000
Material returned to suppliers 1,30,000
Manufacturing overhead charged to production 8,50,000
Required:
PREPARE the following control accounts and Trial balance at the end of the year:
Cost Ledger, Stores Ledger, Work-in-process, Finished Stock, Manufacturing Overhead, Wages and Cost
of Sales. (RTP May’20) (Same concepts but different figures to RTP Nov 19, RTP May 18, MTP Oct’22 10
Marks, Old & New SM)
Answer 11
Cost Ledger Control Account
Particulars (₹ ) Particulars (₹)
To Stores Ledger control A/c 1,30,000 By Balance b/d 68,50,000
To Costing Profit & Loss A/c 17,10,000 By Stores Ledger control A/c 12,50,000
By Wages Control A/c 6,00,000
To Balance c/d 77,10,000 By Manufacturing overhead control A/c 8,50,000
95,50,000 95,50,000
Store Ledger Control Account
Particulars (₹) Particulars (₹)
To Balance b/d 30,00,000 By WIP Control A/c 13,50,000
To Cost Ledger control A/c 12,50,000 By Cost Ledger control A/c (return) 1,30,000
By Balance c/d 27,70,000

42,50,000 42,50,000
WIP Control Account

To Balance b/d 15,00,000 By Finished Stock Control A/c 22,50,000

To Stores Ledger control A/c 13,50,000
To Manufacturing overhead control 8,50,000 By Balance c/d 18,50,000
A/c
41,00,000 41,00,000
Finished Stock Control Account
To Balance b/d 25,00,000 By Cost of Sales A/c 17,50,000
To WIP Control A/c 22,50,000
To Cost of Sales A/c (sales return) 90,000 By Balance c/d 30,90,000
48,40,000 48,40,000
Manufacturing Overhead Control Account
To Cost Ledger Control A/c 8,50,000 By Balance b/d 1,50,000
To Wages Control A/c 2,00,000 By WIP Control A/c 8,50,000
7.13
By Costing P&L A/c (under 50,000

recovery)
10,50,000 10,50,000
Wages Control Account
To Cost Ledger Control A/c 6,00,000 By WIP Control A/c 4,00,000
By Manufacturing overhead 2,00,000
control A/c
6,00,000 6,00,000
Cost of Sales Account
To Finished Stock Control A/c 17,50,000 By Finished Stock Control A/c 90,000
(sales return)
By Costing Profit & Loss A/c 16,60,000
17,50,000 17,50,000
Trial Balance
Particulars Dr. Cr.
(₹) (₹)
Stores Ledger Control A/c 27,70,000
WIP Control A/c 18,50,000
77,10,000 77,10,000
Working:
Costing P&L Account
To Cost of Sales A/c 16,60,000 By Cost Ledger control A/c 17,10,000
To Manufacturing overhead control 50,000
A/c
17,10,000 17,10,000
Question 12
The following is the summarized Trading and Profit and Loss Account of XYZ Ltd. for the year ended 31st
March 2019:
Particulars Amount (₹) Particulars Amount (₹)
Direct Material 14,16,000 Sales (30,000 units) 30,00,000
Direct wages 7,42,000 Finished stock (2,000 units) 1,67,500
Works overheads 4,26,000 Work-in-progress:
Administration overheads 1,50,000 - Materials 34,000
Selling and distribution overheads 1,65,000 - Wages 16,000
Net profit for the year 3,22,500 - Works overhead 4,000 54,000
32,21,500 32,21,500
The company’s cost records show that in course of manufacturing a standard unit (i) works overheads
have been charged @ 20% on prime cost, (ii) administration overheads are related with production
activities and are recovered at ₹ 5 per finished unit, and (iii) selling and distribution overheads are
recovered at ₹ 6 per unit sold.
You are required to PREPARE:
(i) Costing Profit and Loss Account indicating the net profits,
(ii) A Statement showing reconciliation between profit as disclosed by the Cost Accounts and
7.14
Financial Accounts. (RTP May’19)

Answer 12
(i) Costing Profit and Loss Account for the year ended 31st March 2019:
Particulars Amount (₹) Particulars Amount (₹)
Material consumed 14,16,000 Sales (30,000 units) 30,00,000
Works overheads 4,31,600
(20% of Prime cost) 25,89,600
Less: Work in progress (54,000)
Administration overheads 1,60,000
(₹ 5 × 32,000 units)
Cost of production 26,95,600
Less: Finished stock (1,68,475)
Selling and distribution 1,80,000
overheads (₹ 6 × 30,000 unit)
30,00,000 30,00,000
(ii) Statement reconciling the profit as per costing profit and loss account with the profit as per
financial accounts
Profit as per cost records 2,92,875
Add: Overheads over-absorbed:
- Works overheads (₹ 4,31,600 – ₹ 4,26,000) 5,600
- Administration OH (₹ 1,60,000 – ₹ 1,50,000) 10,000
- Selling and Distribution (₹ 1,80,000 – ₹ 1,65,000) 15,000 30,600
Less: Closing stock overvalued (₹ 1,68,475 – ₹ 1,67,500) (975)
Profit as per financial accounts 3,22,500
*It is assumed that the number of units Produced
= Number of units sold + Finished stock = 30,000 + 2,000 = 32,000 units.
Question 13
The financial books of a company reveal the following data for the year ended 31st March, 2023:
(`)
Opening Stock:
Finished goods 625 units 1,06,250
Work-in-process 92,000
01.04.2022 to 31.03.2023
Direct Labour 12,20,000

7.15

Administration overheads (production related) 3,96,000
Dividend paid 2,44,000
Bad Debts 36,000
Selling and Distribution Overheads 1,44,000
Interest received 76,000
Rent received 92,000
Sales 12,615 units 45,60,000
Closing Stock: Finished goods 415 units 91,300
Work-in-process 82,400
The cost records provide as under:

 Factory overheads are absorbed at 70% of direct wages.
 Administration overheads are recovered at 15% of factory cost.
 Selling and distribution overheads are charged at ` 6 per unit sold.
 Opening Stock of finished goods is valued at ` 240 per unit.
 The company values work-in-process at factory cost for both Financial and Cost
Profit Reporting.
Required:
(i) Prepare statements for the year ended 31st March, 2023 showing:
 the profit as per financial records
 the profit as per costing records.
(ii) Prepare a statement reconciling the profit as per costing records with the profit as per
financial records. (RTP Nov ’23 & Nov ‘22) (Same concept different figures RTP Nov’18,
RTP May’21)
Answer 13
(for the year ended March 31, 2023)
(`) (`)
To Opening stock of 1,06,250 By Sales 45,60,000
Finished Goods
To Work-in-process 92,000 By Closing stock of 91,300
finished Goods
To Raw materials consumed 16,80,000 By Work-in-Process 82,400
To Direct labour 12,20,000 By Rent received 92,000
To Factory overheads 8,44,000 By Interest received 76,000
To Administration overheads 3,96,000
To Selling & distribution 1,44,000

overheads
To Dividend paid 2,44,000
To Bad debts 36,000
To Profit 1,39,450
49,01,700 49,01,700

7.16
Statement of Profit as per costing records (for the

year ended March 31,2023)
(`)
Sales revenue (A) (12,615 45,60,000
units)
Cost of sales:
Opening stock (625 units × ` 240) 1,50,000
Add: Cost of production of 12,405 units (Refer to 43,28,140
working note 2)
. 43,28,140 415
12,405
Production cost of goods sold (12,615 units) 43,33,345

Selling & distribution overheads (12,615 units × `6) 75,690
Cost of sales: (B) 44,09,035
Profit: {(A) – (B)} 1,50,965
(ii) Statement of Reconciliation

(Reconciling the profit as per costing records with the profit as per financial records)
(`) (`)
Profit as per Cost Accounts 1,50,965
Add: Administration overheads over absorbed 1,68,540
(`5,64,540 – `3,96,000)
Opening stock overvalued (`1,50,000 – ` 1,06,250) 43,750
Interest received 76,000
Rent received 92,000
Factory overheads over recovered (` 10,000 3,90,290
8,54,000 – ` 8,44,000)
5,41,255
Less: Selling & distribution overheads under recovery (` 68,310
1,44,000 – ` 75,690)
Closing stock overvalued (`1,44,795 – ` 91,300) 53,495
Dividend 2,44,000
Bad debts 36,000 (4,01,805)
Profit as per financial accounts 1,39,450
Working notes:
1. Number of units produced
Units
Sales 12,615
Add: Closing stock 415
Total 13,030
Less: Opening stock (625)
Number of units produced 12,405
2.Cost Sheet
(`)
7.17

(70% of direct
wages)
Add: Opening work-in-process 92,000
Less: Closing work-in-process (82,400)
Factory cost of goods produced 37,63,600
(15% of factory cost)
Cost of production of 12,405 43,28,140
units (Refer to working note 1)
Cost of production per unit:
!"#$% &" # "' ()"*+,#-". .12, , 1
= /"."' +.-# ()"*+,0*
= , 13+.-#
= Rs. 348.90
Question 14
The financial records of Riva Private Limited showed a net profit of `1,69,500 for the year ended 31st
March, 2022. The cost accounts, however, disclosed a net loss of ` 88,500 for the same period. The
following information were revealed as a result of scrutiny of the figures of cost accounts and financial
accounts:
(`)
(i) (Administrative overhead under recovered 63,750.0
(ii) Factory overhead over recovered 3,37,500.0
(iii) Depreciation under charged in Cost Accounts 65,000.0
(iv) Dividend received 50,000.0
(v) Loss due to obsolescence charged in Financial Accounts 42,000.0
(vi) Income tax provided 1,09,000.0
(vii) Bank interest credited in Financial Accounts 34,000.0
(viii) Value of opening stock:
In Cost Accounts 4,12,500.0
In Financial Accounts 3,62,500.0
(ix) Value of closing stock:
In Cost Accounts 3,13,750.0
In Financial Accounts 3,30,000.0
(x) Goodwill written-off in Financial Accounts 62,500.0
(xi) Notional rent of own premises charged in Cost Accounts 1,50,000.0
(xii) Provision for doubtful debts in Financial Accounts 37,500.0
Prepare a reconciliation statement by taking costing net loss as base. (RTP May 23) (Same concept
different figures MTP April ‘19, 10 Marks)
Answer 14
Sl. No. Particulars (`) (`)
Net loss as per Cost Accounts (88,500)
Additions
7.18
1 Factory O/H over recovered 3,37,500

2 Dividend Received 50,000
3 Bank Interest received 34,000
4 Difference in Value of Opening Stock 50,000
(4,12,500 – 3,62,500)
5 Difference in Value of Closing Stock 16,250
(3,30,000 – 3,13,7500)
6 Notional Rent of own Premises 1,50,000 6,37,750
Deductions
1 Administration O/H under recovered 63,750
2 Depreciation under charged 65,000
3 Loss due to obsolescence 42,000
4 Income tax Provided 1,09,000
5 Goodwill written-off 62,500
6 Provision for doubtful debts 37,500 (3,79,750)
Net Profit as per Financial A/c. 1,69,500
Question 15
Explain integrated accounting system and state its advantages (PYP May ‘19, 5 Marks)
Answer 15
Integrated Accounting System: Integrated Accounts is the name given to a system of accounting, whereby
cost and financial accounts are kept in the same set of books.
Obviously, then there will be no separate sets of books for Costing and Financial records.
Integrated accounts provide or meet out fully the information requirement for Costing as well as for
Financial Accounts. For Costing it provides information useful for ascertaining the cost of each product,
job, and process, operation of any other identifiable activity and for carrying necessary analysis.
Integrated accounts provide relevant information which is necessary for preparing profit and loss
account and the balance sheets as per the requirement of law and also helps in exercising effective control
over the liabilities and assets of its business.
Advantages of Integrated Accounting System
The main advantages of Integrated Accounts are as follows:
(i) No need for Reconciliation - The question of reconciling costing profit and financial profit does not
arise, as there is only one figure of profit.
(ii) Less efforts - Due to use of one set of books, there is a significant saving in efforts made.
(iii) Less time consuming - No delay is caused in obtaining information as it is provided from books of original
entry.
(iv) Economical process - It is economical also as it is based on the concept of “Centralization of Accounting
function”.

This theoretical question was related to advantages of ‘Integrated Accounting’. Average
performance of the examinees was observed.
Question 16
M/s Abid Private Limited disclosed a net profit of Rs. 48,408 as per cost books for the year ending 31st
March 2019. However, financial accounts disclosed net loss of Rs. 15,000 for the same period. On
scrutinizing both the set of books of accounts, the following information was revealed:
Works Overheads under-recovered in Cost Books 48,600
Office Overheads over-recovered in Cost Books 11,500
7.19
Dividend received on Shares 17,475

Interest on Fixed Deposits 21,650
Provision for doubtful debts 17,800
Obsolescence loss not charged in Cost Accounts 17,200
Stores adjustments (debited in Financial Accounts) 35,433
Depreciation charged in financial accounts 30,000
Depreciation recovered in Cost Books 35,000
Prepare a Memorandum Reconciliation Account. (PYP May ‘19, 5 Marks)
Answer 16
Memorandum Reconciliation Account
Dr. Cr.
Particulars (Rs. ) Particulars (Rs. )
To Works overheads under recovered By Net profit as per Costing books 48,408
in Cost Accounts 48,600 By Office overheads over covered
To Provision for doubtful debts 17,800 in cost accounts 11,500
To Obsolescence loss 17,200 By Dividend received on shares 17,475
To Store adjustment (Debit) 35,433 By Interest on fixed deposit 21,650
By Depreciation overcharged 5,000
By Net loss as per financial accounts 15,000
1,19,033 1,19,033
[Note: This question may also be solved by taking net loss as per financial accounts as basis.]

This was a numerical problem on ‘Reconciliation of profit of cost account and financial
account’. Performance of the examinees was above average. Overall performance in this
compulsory question was average.
Question 17
GK Ltd. showed net loss of Rs. 2,43,300 as per their financial accounts for the year ended 31st March,
2018. However, cost accounts disclosed net loss of Rs. 2,48,300 for the same period. On scrutinizing both
the set of books of accounts, the following information were revealed:
Rs.
(i) Works overheads over recovered 30,400 30,000
(ii) Selling overheads under recovered 20,300
(iii) Administrative overheads under recovered 27,700
(iv) Depreciation over charged in cost accounts 35,100
(v) Bad debts w/off in financial accounts 15,000
(vi) Preliminary Exp. w/off in financial accounts 5,000
(vii) Interest credited during the year in financial accounts 7,500
Prepare a reconciliation statement reconciling losses shown by financial and cost accounts by taking
costing net loss as base. (PYP May’18, 5 Marks)
Answer 17
Particulars ₹ ₹
Loss as per Cost Accounts (2,48,300)
Add: Works overheads over recovered 30,400
Depreciation over charged in cost accounts 35,100

7.20
Interest credited during the year in financial accounts 7,500 73,000

Less: Selling overheads under recovered 20,300
Administrative overheads under recovered 27,700
Bad debts w/off in financial accounts 15,000
Preliminary Exp. w/off in financial accounts 5,000 (68,000)
Loss as per Financial Accounts (2,43,300)
Question 18
Explain what are the pre-requisites of integrated accounting. (PYP 5 Marks Nov 20, RTP May’23) (SM
May 22, MTP 5 Marks Mar’22)
Answer 18
The essential pre-requisites for integrated accounts include the following steps:
 The management’s decision about the extent of integration of the two sets of books. Some concerns
find it useful to integrate up to the stage of prime cost or factory cost while other prefer full integration
of the entire accounting records.
 A suitable coding system must be made available so as to serve the accounting purposes of financial
and cost accounts.
 An agreed routine, with regard to the treatment of provision for accruals, prepaid expenses, other
adjustment necessary for preparation of interim accounts.
 Perfect coordination should exist between the staff responsible for the financial and cost aspects of
the accounts and an efficient processing of accounting documents should be ensured.
 Under this system there is no need for a separate cost ledger. Of course there will be a number of
subsidiary ledgers; in addition to the useful Customers’ Ledger and the Bought Ledger, there will be: (a) Stores
Ledger; (b) Stock Ledger and (c) Job Ledger.
Question 19 (Also includes concepts of Cost Sheet)

The Profit and Loss account of ABC Ltd. for the year ended 31st March, 2021 is given below:
Profit and Loss account
(for the year ended 31st March, 2021)
To Direct Material 6,50,000 By Sales (15000 15,00,000
units)
To Direct Wages 3,50,000 By Dividend received 9,000
To Factory overheads 2,60,000
To Administrative overheads 1,05,000
To Selling overheads 85,000
To Loss on sale of investments 2,000
To Net Profit 57,000
15,09,000 15,09,000
 Factory overheads are 50% fixed and 50% variable.

 Administrative overheads are 100% fixed.
 Selling overheads are completely variable.
 Normal production capacity of ABC Ltd. is 20,000 units.
 Indirect Expenses are absorbed in the cost accounts on the basis of normal production capacity.
 Notional rent of own premises charged in Cost Accounts is amounting to ₹ 12,000. You are
required to:
7.21
(i) Prepare a Cost Sheet and ascertain the Profit as per Cost Records for the year ended 31st March,
2021.
(ii) Reconcile the Profit as per Financial Records with Profit as per Cost Records. (PYP 10 Marks July 21)
Answer 19
Cost Sheet
(for the year ended 31st March, 2021)
(₹) (₹)
Direct material 6,50,000
Factory Overheads:
Variable (50% of ₹ 2,60,000) 1,30,000
Fixed (₹ 1,30,000 × 15,000/20,000) 97,500 2,27,500
Works cost 12,27,500
Administrative Overheads (₹ 1,05,000 × 15,000/20,000) 78,750
Notional Rent 12,000
Selling Overheads 85,000
Profit (Balancing figure) 96,750
Sales revenue 15,00,000
(ii) Statement of Reconciliation
(Reconciling profit shown by Financial and Cost Accounts)
(₹) (₹)
Profit as per Cost Account 96,750
Add: Dividend received 9,000
Add: Notional Rent 12,000 21,000
Less: Factory Overheads under-charged in Cost Accounts (₹ 2,60,000 32,500
– ₹ 2,27,500)
Less: Administrative expenses under-charged in Cost Accounts 26,250
(₹ 1,05,000 – ₹ 78,750)
Less: Loss on sale of Investments 2,000 (60,750)
Profit as per Financial Accounts 57,000
(Note: Solution can be done considering base profit as per Financial Accounts)

It was a practical problem requiring preparation of cost sheet and reconciling profit as per
financial records with profit as per cost records. In the preparation of the cost sheet,
examinees faced problems in the identification of absorbed indirect expenses on the basis
of normal production capacity. Performance of the examinees was below average.
Question 20
Journalise the following transactions, in cost books under Non- Integrated system of Accounting.
(iii) Credit Purchase of Material Rs. 27,000
(iv) Manufacturing overhead charged to Production Rs. 6,000
(v) Selling and Distribution overheads recovered from Sales Rs. 4,000
(vi) Indirect wages incurred Rs. 8,000
7.22
(vii) Material returned from production to stores Rs. 9,000 (PYP Nov’19,5 Marks, MTP 5
Marks, Oct ’21)
Answer 20
Journal entries are as follows:
Dr. Cr.
(Rs. ) (Rs. )
(i) Stores Ledger Control A/c…………………… Dr. 27,000
To Cost Ledger Control A/c 27,000
(ii) Work-in-Process Control A/c........................... Dr. 6,000
To Manufacturing Overhead Control A/c 6,000
(iii) Cost of Sales A/c……………………………… Dr. 4,000
To Selling & Dist. Overhead Control A/c 4,000
(iv) (1) Wage Control A/c…………………… Dr. 8,000
To Cost Ledger Control A/c 8,000
(2) Manufacturing Overhead Control A/c……… Dr. 8,000
OR
Manufacturing Overhead Control A/c……………. Dr.
To Cost Ledger Control A/c 8,000 8,000
(v) Stores Ledger Control A/c ……………………… Dr. 9,000
To Work-in-Process Control A/c 9,000
*Cost Ledger Control A/c is also known as General Ledger Control A/c

This was a theoretical question based on Non-Integrated system of accounting. Average
performance was observed by the examinees.
Question 21
R Ltd. showed a Net Profit of ₹ 3,60,740 as per their cost accounts for the year ended 31st March,
2021. The following information was revealed as a result of scrutiny of the figures from the both sets
of accounts:
Sr. No. Particulars (₹)
i. Over recovery of selling overheads in cost accounts 10,250
ii. Over valuation of closing stock in cost accounts 7,300
iii. Rent received credited in financial accounts 5,450
iv. Bad debts provided in financial accounts 3,250
v. Income tax provided in financial accounts 15,900
vi. Loss on sale of capital asset debited in financial accounts 5,800
vii. Under recovery of administration overheads in cost accounts 3,600
Required: Prepare a reconciliation statement showing the profit as per financial records. (PYP 5 Marks
Dec ‘21)
Answer 21
(Reconciling the profit as per costing records with the profit as per financial records)
(₹) (₹)
7.23
Net Profit as per Cost Accounts 3,60,740

Add:
Over recovery of selling overheads in cost accounts 10,250
Rent received credited in financial accounts 5,450 15,700
376,440
Less:
Over valuation of closing stock in cost accounts 7,300
Bad debts provided in financial accounts 3,250
Income tax provided in financial accounts 15,900
Loss on sale of capital asset debited in financial accounts 5,800
Under recovery of administration overheads in cost accounts 3,600 35,850

Question was on preparation of reconciliation statement to calculate the profit as per
financial records. This sub part can be considered as an easy one and most of the examinees
attempted in the correct line. Performance of the examinees was good.
Question 22
The following balances were extracted from a Company's ledger as on 30th June, 2018:
Particulars Debit (Rs. ) Credit (Rs. )
Raw material control a/c 2,82,450
Work-in-progress control a/c 2,38,300
Finished stock control a/c 3,92,500
General ledger adjustment a/c 9,13,250
Total 9,13,250 9,13,250
The following transactions took place during the quarter ended 30th September, 2018:
Rs.
(i) Factory overheads - allocated to work-in-progress 1,36,350
(ii) Goods furnished - at cost 13,76,200
(iii) Raw materials purchased 12,43,810
(iv) Direct wages - allocated to work-in-progress 2,56,800
(v) Cost of goods sold 14,56,500
(vi) Raw materials - issued to production 13,60,430
(vii) Raw materials - credited by suppliers 27,200
(viii) Raw materials losses - inventory audit 6,000
(ix) Work-in-progress rejected (with no scrap value) 12,300
(x) Customer's returns (at cost) of finished goods 45,900
You are required to prepare:
(i) Raw material control a/c
(ii) Work-in-progress control a/c
(iii) Finished stock control a/c
(iv) General ledger adjustment a/c (PYP Nov ‘18, 10 Marks)
Answer 22
(i) Raw Material Control A/c (Rs. ) (Rs.)
To Balance b/d 2,82,450 By General Ledger Adjustment A/c 27,200
‘’ General Ledger 12,43,810 ” Work-in-progress Control A/c 13,60,430
7.24
Adjustment A/c
Costing P & L A/c 6,000
(Loss) (OR GLA)
” Balance c/d 1,32,630
15,26,260 15,26,260
(ii) Work-in-Progress Control
A/c
(Rs. ) (Rs. )
To Balance b/d 2,38,300
” Raw Material Control A/c 13,60,430 ” Finished Goods Control A/c 13,76,200
” Wages Control A/c 2,56,800 Costing P&L A/c (OR GLA) 12,300
” Factory OH Control A/c 1,36,350 ” Balance c/d 6,03,380
19,91,880 19,91,880
(iii) Finished Goods Control A/c
(₹) (₹)
To Balance b/d 3,92,500 By Cost of goods sold A/c 14,56,500
(OR GLA)
General Ledger Adjustment 45,900
A/c
” Work-in-process Control 13,76,200 ” Balance c/d 3,58,100
A/c
18,14,600 18,14,600
(iv) General Ledger Adjustment A/c
(Rs. ) (Rs. )
To Costing P&L A/c (sales) 25,68,910 By Balance b/d 9,13,250

(Balancing figure)
” Raw MaterialControl A/c 27,200 ” Raw Material Control A/c 12,43,810

“Wages Control A/c 2,56,800
“Factory OH Control A/c 1,36,350
“Finished Goods Control A/c 45,900
25,96,110 25,96,110
OR
General ledger adjustment account
(Rs.) (Rs. )
To Raw Material Control A/c 27,200 By Balance b/d 9,13,250
” Raw Material control 6,000 ” Raw Material Control A/c 12,43,810
account(loss)
‘’ WIP control Account (rejection) 12,300 ” Wages Control A/c 2,56,800
“ Finished stock Control Account 14,56,500 ” Factory OH Control A/c 1,36,350
“” Balance c/d 10,94,110 ” Finished Goods Control A/c 45,900
25,96,110 25,96,110
Working:
Factory Overhead Control A/c
(₹) (₹)
To General Ledger 1,36,350 By Work-in-progress A/c 1,36,350
Adjustment A/c
1,36,350 1,36,350
7.25

This numerical question was related to Non Integrated Accounts. Four different ledgers are
required to be prepared. Performance of the examinees was average. The examinees have
made mistakes in the posting of particular transaction in concerned account.
Question 23
Answer any four of the following:
Briefly explain the essential features of a good Cost Accounting System. (PYP 5 Marks May’22, RTP
Nov’18, MTP 5 Marks Oct’22)
Answer 23
(a) The essential features, which a good cost accounting system should possess, are as follows:
(a) Informative and simple: Cost accounting system should be tailor-made, practical, simple and capable
of meeting the requirements of a business concern. The system of costing should not sacrifice the utility
by introducing inaccurate and unnecessary details.
(b) Accurate and authentic: The data to be used by the cost accounting system should be accurate and
authenticated; otherwise it may distort the output of the system and a wrong decision may be taken.
(c) Uniformity and consistency: There should be uniformity and consistency in classification, treatment
and reporting of cost data and related information. This is required for benchmarking and
comparability of the results of the system for both horizontal and vertical analysis.
(d) Integrated and inclusive: The cost accounting system should be integrated with other systems like
financial accounting, taxation, statistics and operational research etc. to have a complete overview and
clarity in results.
(e) Flexible and adaptive: The cost accounting system should be flexible enough to make necessary
amendment and modifications in the system to incorporate changes in technological, reporting,
regulatory and other requirements.
(f) Trust on the system: Management should have trust on the system and its output. For this, an active
role of management is required for the development of such a system that reflects a strong conviction
in using information for decision making.
Question 24
X Ltd. follows Non-Integrated Accounting System. Financial Accounts of the company show a Net
Profit of ₹ 5,50,000 for the year ended 31st March, 2022. The chief accountant of the company has
provided following information from the Financial Accounts and Cost Accounts:
Sr. No Particulars (₹)
(i) Legal Chargers Provided in Financial accounts 15,250
(ii) Interim Dividend received credited in financial accounts 4,50,000
(iii) Preliminary Expenses written off in financial accounts 25,750
(iv) Over recovery of selling overheads in cost accounts 11,380
(v) Profit on sale of capital asset credited in financial 30,000
accounts
(vi) Under valuation of closing stock in cost accounts 25,000
(vii) Over recovery of production overheads in cost accounts 10,200
(viii) Interest paid on Debentures shown in financial accounts 50,000
7.26
Required:
Find out the Profit (Loss) as per Cost Accounts by preparing a Reconciliation Statement.
(PYP 5 Marks Nov 22)
Answer 24
(Reconciliation the profit as per financial records with the profit as per costing records)
Particulars (₹) Total (₹)
Add: Legal Charges 15,250
Interest paid 50,000 91,000
6,41,000
Less: Under-valuation of closing stock in cost book 25,000
Interim Dividend Received 4,50,000
Over recovery of selling overheads in cost 11,380
accounts 5,26,580
Over recovery of production overhead in cost 10,200
accounts
Profit on sale of Assets 30,000
Profit as per Cost Accounts 1,14,420
Question 25
Indicate, for following items, whether to be shown in the Cost Accounts or Financial Accounts:
(i) Preliminary expenses written off during the year
(ii) Interest received on bank deposits
(iii) Dividend, interest received on investments
(iv) Salary for the proprietor at notional figure though not incurred
(v) Charges in lieu of rent where premises are owned
(vi) Rent receivables
(vii) Loss on sale of Fixed Assets
(viii) Interest on capital at notional figure though not incurred
(ix) Goodwill written off
(x) Notional Depreciation on the assets fully depreciated for which book value is Nil. (PYP
5 Marks Nov 22)
Answer 25
S. No. Items Accounts
(i) Preliminary expenses written off during the year Financial Accounts
(ii) Interest received on bank deposits Financial Accounts
(iii) Dividend, interest received on investments Financial Accounts
(iv) Salary for the proprietor at notional figure though not Cost Accounts
incurred
(v) Charges in lieu of rent where premises are owned Cost Accounts
(vi) Rent receivables Financial Accounts
(vii) Loss on the sales of Fixed Assets Financial Accounts
(viii) Interest on capital at notional figure though not Cost Accounts
incurred
7.27
(ix) Goodwill written off Financial Accounts

(x) Notional Depreciation on the assets fully depreciated Cost Accounts
for which book value is nil
Question 40
Journalize the following transactions assuming the cost and financial accounts are integrated:
Direct Materials issued to production ₹ 5,88,000
Allocation of Wages (Indirect) ₹ 7,50,000
Factory Overheads (Over absorbed) ₹ 2,25,000
Administrative Overheads (Under absorbed) ₹ 1,55,000
Deficiency found in stock of Raw material (Normal) ₹ 2,00,000
(PYP 5 Marks May’22)
Answer 40
Particulars (₹) (₹)
(i) Work-in-Progress Ledger Control A/c Dr. 5,88,000
(Being issue of direct materials to production)
(ii) Factory Overhead control A/c Dr. 7,50,000
(Being allocation of Indirect wages)
(iii) Factory Overhead Control A/c Dr. 2,25,000
To Costing Profit & Loss A/c 2,25,000
(Being transfer of over absorption of Factory
overhead)
(iv) Costing Profit & Loss A/c Dr. 1,55,000
To Administration Overhead Control A/c 1,55,000
(Being transfer of under absorption of Administration
overhead)
(v) Factory Overhead Control A/c Dr. 2,00,000
(Being transfer of deficiency in stock of raw material)
(Note: Costing P/&/L = P/&/L and SLC = MLC)

8.1
Chapter 8
Unit & Batch Costing
Question 1
STATE the differences between Job costing and Batch costing (MTP 5Marks, May 20, Oct 19, Old & New
SM, RTP Nov ’21, RTP Nov ’18, RTP May ‘23)
Answer 1
Differences between Job costing and Batch costing:
Sr. Job Costing Batch Costing

No
1 Method of costing used for non- standard Homogeneous products produced in a continuous
and non- repetitive products produced as production flow in lots.
per customer specifications and against
specific orders.
2 Cost determined for each Job. Cost determined in aggregate for the entire Batch
and then arrived at on per unit basis.
3 Jobs are different from each other and Products produced in a batch are homogeneous
independent of each other. Each Job is and lack of individuality.
unique.
Question 2
A jobbing factory has undertaken to supply 300 pieces of a component per month for the ensuing six
months. Every month a batch order is opened against which materials and labour hours are booked at
actual. Overheads are levied at a rate per labour hour. The selling price contracted for is ₹ 8 per piece.
From the following data CALCULATE the cost and profit per piece of each batch order and overall
position of the order for 1,800 pieces.
Month Batch Material cost Direct wages Direct labour
Output (₹) (₹) hours
January 310 1150 120 240
February 300 1140 140 280
March 320 1180 150 280
April 280 1130 140 270
May 300 1200 150 300
June 320 1220 160 320
The other details are:
Month Chargeable expenses Direct labour
(₹) (Hours)
January 12,000 4,800
February 10,560 4,400
March 12,000 5,000
April 10,580 4,600
May 13,000 5,000
June 12,000 4,800
(MTP 5 Marks, Oct.’2020) (Same concept different figures MTP 5 Marks Mar’21, RTP May’23)
Answer 2
Particulars Jan. Feb. March April May June Total
Batch output (in units) 310 300 320 280 300 320 1,830
Sale value (₹) 2,480 2,400 2,560 2,240 2,400 2,560 14,640
Material cost (₹) 1,150 1,140 1,180 1,130 1,200 1,220 7,020
Chapter 8 Unit & Batch Costing
8.2
Direct wages (₹) 120 140 150 140 150 160 860
Chargeable expenses* (₹) 600 672 672 621 780 800 4,145
Total cost (₹) 1,870 1,952 2,002 1,891 2,130 2,180 12,025
Profit per batch (₹) 610 448 558 349 270 380 2,615
Total cost per unit (₹) 6.03 6.51 6.26 6.75 7.10 6.81 6.57
Profit per unit (₹) 1.97 1.49 1.74 1.25 0.90 1.19 1.43
Overall position of the order for 1,200 units

Sales value of 1,800 units @ ₹ 8 per unit ₹ 14,400
Total cost of 1,800 units @ ₹ 6.57 per unit ₹ 11,826
Profit ₹ 2,574
* Chargeable expenses / Direct labour hour for the month X Direct labour hours for batch
Question 3
Zee Ltd. manufactures pistons used in car engines. As per the study conducted by the Auto Parts
Manufacturers Association, there will be a demand of 80 million pistons in the coming year. A Ltd.
is expected to have a market share of 2.15% of the total market demand of the pistons in the coming
year. It is estimated that it costs ₹ 2.50 as inventory holding cost per piston per month and that the
set-up cost per run of piston manufacture is ₹ 4,500.
(i) COMPUTE the optimum run size for piston manufacturing?
(ii) Assuming that the company has a policy of manufacturing 20,000 pistons per run, CALCULATE how
much extra costs the company would be incurring as compared to the optimum run suggested in (i)
above? (MTP 5 Marks, Oct’21) (Same concept different figures MTP 5 Marks Apr 19, MTP 5 Marks
Mar 19 but different figures)
Answer 3
(i) Optimum run size or Economic Batch Quantity (EBQ) =
Where, D = Annual demand i.e. 2.15% of 8,00,00,000 = 17,20,000 units
S = Set-up cost per run = ₹ 4,500

C = Inventory holding cost per unit per annum
= ₹ 2.5 × 12 months = ₹ 30
, , . ,
EBQ = .
= 22,716 units
(ii) Calculation of Total Cost of set-up and inventory holding

Batch size No. of set- Set-up Inventory Total Cost
ups Cost (₹) holding cost
(₹) (₹)
A 20,000 86 3,87,000 3,00,000 6,87,000
units 17,20,000 (86 × ₹ 20,000 Rs. 30
20,000 4,500) 2
B 22,716 76 3,42,000 3,40,740 6,82,740

units 17,20,000 (76 × ₹ 22,716 Rs. 30
22,716 4,500) 2
Extra Cost (A – B) 4,260
Question 4
8.3
Arnav Confectioners (AC) owns a bakery which is used to make bakery items like pastries, cakes and
muffins. AC use to bake atleast 50 units of any item at a time. A customer has given an order for 600
cakes. To process a batch of 50 cakes, the following cost would be incurred:
Direct materials - Rs. 5,000
Direct wages - Rs. 500
Oven set-up cost Rs. 750
AC absorbs production overheads at a rate of 20% of direct wages cost. 10% is added to the total
production cost of each batch to allow for selling, distribution and administration overheads.
AC requires a profit margin of 25% of sales value. Required:
(i) DETERMINE the price to be charged for 600 cakes.
(ii) CALCULATE cost and selling price per cake.
(iii) DETERMINE what would be selling price per unit If the order is for 605 cakes. (MTP 5 Marks Aug ’18
& March ‘23) (RTP May ’18) (Same concept different figures Old & New SM)
Answer 4
Statement of cost per batch and per order
No. of batch = 600 units ÷ 50 units = 12 batches
Particulars Cost per batch Total Cost

(Rs.) (Rs.)
Direct Material Cost 5,000.00 60,000
Direct Wages 500.00 6,000
Oven set-up cost 750.00 9,000
Add: Production Overheads (20% of Direct wages) 100.00 1,200
Total Production cost 6,350.00 76,200
Add: S&D and Administration overheads 635.00 7,620
(10% of Total production cost)
Total Cost 6,985.00 83,820
Add: Profit (1/3rd of total cost) 2,328.33 27,940
(i) Sales price 9,313.33 1,11,760
No. of units in batch 50 units
(ii) Cost per unit (Rs.6,985 ÷ 50 units) 139.70
Selling price per unit (9,313.33 ÷ 50 units) 186.27
(iii) If the order is for 605 cakes, then selling price per cake would be as below:
Particulars Total Cost (Rs.)
Direct Material Cost 60,500
Direct Wages 6,050
Oven set-up cost 9,750
Add: Production Overheads (20% of Direct wages) 1,210
Total Production cost 77,510
Add: S&D and Administration overheads 7,751
(10% of Total production cost)
Total Cost 85,261
Add: Profit (1/3rd of total cost) 28,420
Sales price 1,13,681
No. of units 605 units
Selling price per unit (Rs.1,13,681 ÷ 605 units) 187.90

8.4
Question 5
In Batch Costing, STATE how is Economic Batch Quantity determined? (MTP 4 Marks Mar 22, Mar
18)
Answer 5
The economic batch size or Economic Batch Quantity may be determined by calculating the total cost
for a series of possible batch sizes and checking which batch size gives the minimum cost. The objective
here being to determine the production lot (Batch size) that optimizes on both set up and inventory
holding cots formula. The mathematical formula usually used for its determination is as follows:
! "
(EBQ) = #
Where,
D = Annual demand for the product
S =Setting up cost per batch
C=Carrying cost per unit of production
Question 6
Arnav Ltd. operates in beverages industry where it manufactures soft -drink in three sizes of Large
(3 litres), Medium (1.5 litres) and Small (600 ml) bottles. The products are processed in batches. The
5,000 litres capacity processing plant consumes electricity of 90 Kilowatts per hour and a batch
takes 1 hour 45 minutes to complete. Only symmetric size of products can be processed at a time.
The machine set-up takes 15 minutes to get ready for next batch processing. During the set-up,
power consumption is only 20%.
(I) The current price of Large, Medium and Small are ₹ 150, ₹ 90 and ₹ 50 respectively.
(II) To produce a litre of beverage, 14 litres of raw material-W and 25 ml of Material-C are required
which costs ₹ 0.50 and ₹1,000 per litre respectively.
(III) 20 direct workers are required. The workers are paid ₹ 880 for 8 hours shift of work.
(IV) The average packing cost per bottle is ₹3
(V) Power cost is ₹ 7 per Kilowatt -hour (Kwh)
(VI) Other variable cost is ₹ 30,000 per batch.
(VII) Fixed cost (Administration and marketing) is ₹ 4,90,00,000.
(VIII) The holding cost is ₹ 1 per bottle per annum.
The marketing team has surveyed the following demand (bottle) of products:
Large Medium Small
3,00,000 7,50,000 20,00,000
Required:
CALCULATE net profit/ loss of the organization and also COMPUTE Economic Batch Quantity (EBQ).
(MTP 10 Marks April ’22)
Answer 6
Workings:
1. Maximum number of bottles that can be processed in a batch:
, $%
= &' () *'( +)

8.5
Large Medium Small

Qty (ltr) Max bottles Qty (ltr) Max bottles Qty (ml) Max bottles
3 1,666 1.5 3,333 600 8,333
For simplicity of calculation small fractions has been ignored.
2. Number of batches to be run:
Large Medium Small Total
A Demand 3,00,000 7,50,000 20,00,000
B Bottles per batch (Refer WN- 1,666 3,333 8,333
1)
C No. of batches [A÷B] 180 225 240 645
3. Quantity of Material-W and Material C required to meet demand:
Particulars Large Medium Small Total
A Demand (bottle) 3,00,000 7,50,000 20,00,000
B Qty per bottle (Litre) 3 1.5 0.6
C Output (Litre) [A×B] 9,00,000 11,25,000 12,00,000 32,25,000
D Material-W per litre 14 14 14
of output (Litre)
E Material-W required (Litre) 1,26,00,000 1,57,50,000 1,68,00,000 4,51,50,000
[C×D]
F Material-C required per 25 25 25
litre of output (ml)
G Material-C required (Litre) 22,500 28,125 30,000 80,625
[(C×F)÷1000]
4. No. of Man-shift required:

A No. of batches 180 225 240 645
B Hours required per batch (Hours) 2 2 2
C Total hours required (Hours) [A×B] 360 450 480 1,290
D No. of shifts required [C÷8] 45 57 60 162
E Total manshift [D×20 workers] 900 1,140 1,200 3,240
5. Power consumption in Kwh
For processing
A No. of batches 180 225 240 645
B Hours required per batch 1.75 1.75 1.75 1.75
(Hours)
C Total hours required (Hours) 315 393.75 420 1,128.75
[A×B]
D Power consumption per hour 90 90 90 90
(Kwh)
E Total Power consumption 28,350 35,437.5 37,800 1,01,587
(Kwh) [C×D]
8.6
F Per batch consumption* 157.5 157.5 157.5 157.5

(Kwh) [E÷A]
For set-up
G Hours required per batch 0.25 0.25 0.25 0.25
(Hours)
H Total hours required (Hours) 45 56.25 60 161.25
[A×G]
I Power consumption per hour 18 18 18 18
(Kwh) [20%×90]
J Total Power consumption 810 1,012.5 1,080 2,902.5
(Kwh) [H×I]
K Per batch consumption* 4.5 4.5 4.5 4.5
(Kwh) [J÷A]
* Per batch consumption can be directly calculated as [Hours required per batch x Power consumption
per hour]
Calculation of Profit/ loss per batch:
Particulars Large Medium Small Total
A Demand (bottle) 3,00,000 7,50,000 20,00,000 30,50,000
B Price per bottle (₹) 150 90 50
C Sales value (₹) [A×B] 4,50,00,000 6,75,00,000 10,00,00,000 21,25,00,000
Direct Material cost:
E Material-W (₹) [Qty in 63,00,000 78,75,000 84,00,000 2,25,75,000
WN-3 × ₹0.50]
F Material-C (₹) [Qty in 2,25,00,000 2,81,25,000 3,00,00,000 8,06,25,000
WN-3 × ₹1,000]
G [E+F] 2,88,00,000 3,60,00,000 3,84,00,000 10,32,00,000
H Direct Wages (₹) [Man- 7,92,000 10,03,200 10,56,000 28,51,200
shift in WN-4 × × ₹880]
I Packing cost (₹) 9,00,000 22,50,000 60,00,000 91,50,000
[A×₹3]
Power cost (₹)
J For processing (₹) 1,98,450 2,48,062.5 2,64,600 7,11,112.5
[WN-5 × ₹7]
K For set-up time (₹) [WN-5 5,670 7,087.5 7,560 20,317.5
× ₹7]
L [J+K] 2,04,120 2,55,150 2,72,160 7,31,430
M Other variable cost (₹) 54,00,000 67,50,000 72,00,000 1,93,50,000
[No. of batch in WN-2 ×
₹30,000]
N Total Variable cost per 3,60,96,120 4,62,58,350 5,29,28,160 13,52,82,630
batch
[G+H+I+L+M]
O Profit/ loss before 89,03,880 2,12,41,650 4,70,71,840 7,72,17,370
fixed cost [C-N]
P Fixed Cost 4,90,00,000
Q Net Profit [O-P] 2,82,17,370
Computation of Economic Batch Quantity (EBQ):
, ! ,"
EBQ = #
D = Annual Demand for the Product = Refer A below

8.7
S = Set-up cost per batch = Refer D below

C = Carrying cost per unit per annum =Refer E below
Particulars Large Medium Small

A Annual Demand (bottle) 3,00,000 7,50,000 20,00,000
B Power cost for set-up time (₹) 31.50 31.50 31.50
[Consumption per batch in WN-5 × ₹7]
C Other variable cost (₹) 30,000 30,000 30,000
D Total Set-up cost [B+C] 30,031.50 30,031.50 30,031.50
E Holding cost: 1.00 1.00 1.00
F EBQ (Bottle) 1,34,234 2,12,243 3,46,592
Question 7
Arnav Motors Ltd. manufactures pistons used in car engines. As per the study conducted by the Auto
Parts Manufacturers Association, there will be a demand of 80 million pistons in the coming year. Arnav
Motors Ltd. is expected to have a market share of 1.15% of the total market demand of the pistons in
the coming year. It is estimated that it costs Rs.1.50 as inventory holding cost per piston per month and
that the set-up cost per run of piston manufacture is Rs. 3,500.
(i) DETERMINE the optimum run size for piston manufacturing?
(ii) Assuming that the company has a policy of manufacturing 40,000 pistons per run, CALCULATE the
extra costs company would be incurring as compared to the optimum run suggested in (i) above?
(iii) IDENTIFY variability of cost with respect to unit and batch level from the following cost:
(a) Inventory carrying cost; (b) Designing cost for a job; (c) Machine set-up cost to run production
and (d) Depreciation of factory building. (MTP Oct ‘18, 10 Marks)
Answer 7
! "
(i) Optimum run size or Economic Batch Quantity (EBQ) = #

S = Set-up cost per run = ₹ 3,500
= ₹ 1.5 × 12 months = ₹ 18
-, , ,
EBQ= .
= 18,915 units
(ii) Calculation of Total Cost of set-up and inventory holding

Batch size No. of set-ups Set-up Cost (Rs.) Inventory holding Total Cost
cost (Rs.) (Rs.)
23 80,500 3,60,000
A 40,000 units 9,20,000 (23 × Rs. 3,500) 40,000 Rs. 18 4,40,500
40,000 2
49 1,70,235
9,20,000 18,91 Rs. 18
1,71,500
B 18,915 units 3,41,735
18,915 2
(49 × Rs.3,500)
Extra Cost (A – B) 98,765
(iii)
Costs Unit level Batch level
(a) Inventory carrying cost Variable cost Variable cost

8.8
(b) Designing cost for a job Fixed cost Variable cost, provided the entire job
work is processed in a single batch.
(c) Machine set-up cost to run Fixed cost Variable cost
production
(d) Depreciation of factory Fixed cost Fixed cost
building
Question 8
M/s. KBC Bearings Ltd. is committed to supply 48,000 bearings per annum to M/s. KMR Fans on a
steady daily basis. It is estimated that it costs Rs. 1 as inventory holding cost per bearing per month
and that the set up cost per run of bearing manufacture is Rs. 3,200
(i) DETERMINE what would be the optimum run size of bearing manufacture?
(ii) DETERMINE What would be the interval between two consecutive optimum runs?
(iii) CALCULATE the minimum inventory cost? (MTP 5 Marks Oct ’18, Old & New SM)
Answer 8
(i) Optimum batch size or Economic Batch Quantity (EBQ):
!" ., ,
EBQ = = = 5,060 units
#
(ii) Number of Optimum runs = 48,000 ÷ 5,060 = 9.49 or 10 runs Interval between 2 runs (in days)
= 365 days ÷ 10 = 36.5 days
(iii) Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per unit per annum
Average Inventory = 5,060 units ÷ 2 = 2,530 units
Carrying Cost per unit per annum = Rs.1 × 12 months = Rs.12
Minimum Inventory Holding Costs = 2,530 units × Rs. 12 =
Rs.30, 360
Question 9
DESCRIBE Unit Costing. WHAT kind of industries follow this method of costing? (MTP 5 Marks Sep’22)
Answer 9
Unit costing: It is that method of costing where the output produced is identical and each unit of output
requires identical cost. Unit costing is synonymously known as single or output costing, but these are sub-
division of unit costing method.
This method of costing is followed by industries which produce single output or few variants of a single
output, therefore, this method of costing, finds its application in industries like paper, cement, steel works,
mining, breweries etc. These types of industries produce identical products and therefore have identical
costs.
Question 10
BTL LLP. manufactures glass bottles for HDL Ltd., a pharmaceutical company, which is ayurvedic
medicines business.
BTL can produce 2,00,000 bottles in a month. Set-up cost of each production run is ₹ 5,200 and the cost
of holding one bottle for a year is ₹1.50.
As per an estimate HDL Ltd. can order as much as 19,00,000 bottles in a year spreading evenly
throughout the year.
At present the BTL manufactures 1,60,000 bottles in a batch.
Required:
(i) Compute the Economic Batch Quantity for bottle production.
(ii) Compute the annual cost saving to BTL by adopting the EBQ of a production.(RTP Nov’19)
Answer 10
8.9
!"
Economic Batch Quantity (EBQ) =
#
Where, D = Annual demand for the product

S = Setting up cost per batch
C = Carrying cost per unit of production
(i) Computation of EBQ:
34,55,555 6 .7, 55
= 6 .3.7
= 1,14,775 bottles
(ii) Computation of savings in cost by adopting EBQ:
Batch Size No. of Batch Set-up cost Carrying cost Total Cost
1,60,000 62,400 1,20,000
bottles 12 (‘5,200× 12) (‘1.5 ×1,20,000 ½ × 1,60,000) 1,82,400
1,14,775 88,081.25 86,081.25
17 1,74,481.25
bottles (‘5,200 × 88,40017) (‘1.586,081.25 × ½ × 1,14,775)
Saving 7,918.75
Question 11
A Ltd. manufactures mother boards used in smart phones. A smart phone requires one mother board.
As per the study conducted by the Indian Cellular Association, there will be a demand of 180 million
smart phones in the coming year. A Ltd. is expected to have a market share of 5.5% of the total
market demand of the mother boards in the coming year. It is estimated that it costs ₹6.25 as
inventory holding cost per board per month and that the set-up cost per run of board manufacture
is ₹33,500.
(i) COMPUTE the optimum run size for board manufacturing?
(ii) Assuming that the company has a policy of manufacturing 80,000 boards per run, CALCULATE
how much extra costs the company would be incurring as compared to the optimum run
suggested in (i) above? (RTP Nov ’20) (MTP 5 Marks Sep ’23)
Answer 11
! "
Optimum run size or Economic Batch Quantity (EBQ) =
#
S = Set-up cost per run = ₹33,500

= ₹6.25 × 12 months = ₹75
--, , 8 . ,
EBQ = .
= 94,042.5 Units or 94,043 Units

Calculation of Total Cost of set-up and inventory holding
Batch size No. of set- ups Set-up Cost (₹) Inventory holding cost Total Cost (₹)
(₹)
30,00,000
80,000 Rs. 75
80,000 124 41,54,000
99,00,000
A units 2 71,54,000
80,000
(124 ×
₹33,500)

8.10
106 35,51,000 35,26,612.5

B
94,043 99,00,000 (106 × 94,043 Rs. 75 70,77,612.50
94,043 2
units
₹33,500)
Extra Cost (A – B) 76,387.50
Question 12
PS Ltd. manufactures articles in predetermined lots simultaneously. The following costs
have been incurred for Batch No. ‘PS143’ in the month of March, 2022:
Units produced 1,000 units
Direct materials cost ₹ 2,00,000
Direct Labour -
Department A 800 labour hours @ ₹ 100 per hour.
Department B 1,400 labour hours @ ₹ 120 per hour.
Factory overheads are absorbed on labour hour basis and the rates are:
Department A @ ₹ 140 per hour.
Department B @ ₹ 80 per hour.
Administrative overheads are absorbed at 10% of selling price.
The firm expects 25% gross profit (sales value minus factory cost) for determining the selling price.
You are required to CALCULATE the selling price per unit of Batch No. 'PS143'. (RTP Nov’22)
Answer 12
Statement showing selling price per unit of Batch number 'PS143'
Direct Labour
Department A 800 labour hours @ ₹100 per hour 80,000
Department B 1400 labour hours @ ₹120 per hour 1,68,000 2,48,000
Factory overheads
Department A 800 labour hours @ ₹140 per hour Department B 1400 1,12,000
1,12,000 2,24,000
labour hours @ ₹80 per hour
Add: Administrative overheads (10% of selling price) (6,72,000/75% x 10%) 89,600

Add: Profit (15% of selling price) (6,72,000/75% x 15%) 1,34,400
Selling price of batch no 'PS143' 8,96,000
Selling price per unit (8,96,000 / 1000 units) 896
Alternatively, selling price calculation:-

Selling price assume X
25% = (X – factory cost) / X
or 0.25 X = X- 6,72,000
or 0.75 X = 6,72,000
hence X = ₹ 8,96,000
8.11
Question 13
Explain ‘Job Costing’ and ‘Batch Costing’. (PYP May ‘18, 5 Marks)
Answer 13
Job costing: In this method of costing, cost of each job is ascertained separately. It is suitable in all cases
where work is undertaken on receiving a customer’s order like a printing press, motor work shop, etc.
This method of costing is used for non- standard and non- repetitive products produced as per customer
specifications and against specific orders. Jobs are different from each other and independent of each
other. Each Job is unique.
Batch Costing: It is the extension of Job costing. Homogeneous products are produced in a continuous
production flow in lots. A batch may represent a number of small orders passed through the factory in
batch. Each batch here is treated as a unit of cost and thus separately costed. Here cost per unit is
determined by dividing the cost of the batch by number of units produced in the batch.
Question 14
GHI Ltd. manufactures 'Stent' that is used by hospitals in heart surgery. As per the estimates provided
by Pharmaceutical Industry Bureau, there will be a demand of 40 Million 'Stents' in the coming year.
GHI Ltd. is expected to have a market share of 2.5% of the total market demand of the Stents in the
coming year. It is estimated that it costs 1.50 as inventory holding cost per stent per month and that
the set-up cost per run of stent manufacture is ₹ 225.
Required:
(i) What would be the optimum run size for Stent manufacture?
(ii) What is the minimum inventory holding cost?
(iii) Assuming that the company has a policy of manufacturing 4,000 stents per run, how much extra costs
the company would be incurring as compared to the optimum run suggested in (i) above? (PYP 5
Marks Jan ‘21) (Same concept different figures RTP May’22)
Answer 14
(i) Computation of Optimum Run size of ‘Stents’ or Economic Batch Quantity (EBQ)
!
Economic Batch Quantity (EBQ) = #
Where, D = Annual demand for the Stents
= 4,00,00,000 × 2.5% = 10,00,000 units
S = Set- up cost per run
= ₹ 225
C = Carrying cost per unit per annum
= ₹ 1.50 × 12 = ₹ 18
, , .
EBQ = . .
= 5,000 units of Stents

(ii) Minimum inventory holding cost
Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per unit per annum
= (5,000 ÷ 2) × ₹ 18
= ₹ 45,000
(iii) Calculation of the extra cost due to manufacturing policy
When run size is 4,000 units When run size is 5,000 units
i.e. at EBQ
, , , ,
Total set up cost = ,
Rs. 225 = ,
Rs. 225

8.12
= ₹ 56,250 = ₹ 45,000
Total Carrying cost ½ × 4,000 × ₹ 18 ½ × 5,000 × ₹ 18
= ₹ 36,000 = ₹ 45,000
Total Cost ₹ 92,250 ₹ 90,000
Extra cost = ₹ 92,250 - ₹ 90,000 = ₹ 2,250
Question 15
XYZ Ltd. has obtained an order to supply 48000 bearings per year from a concern. On a steady
basis, it is estimated that it costs Rs. 0.20 as inventory holding cost per bearing per month and
the set-up cost per run of bearing manufacture is Rs. 384.
(i) compute the optimum run size and number of runs for bearing manufacture.
(ii) compute the interval between two consecutive runs.
(iii) find out the extra costs to be incurred, if company adopts a policy to manufacture 8000 bearings
per run as compared to optimum run Size.
(iv) give your opinion regarding run size of bearing manufacture.
Assume 365 days in a year. (PYP Nov ‘18, 10 Marks)
Answer 15
(i) Optimum batch size or Economic Batch Quantity (EBQ):
!" ., .
EBQ = #
= .
= 3919.18 or 3,920 units
Number of Optimum runs = 48,000 ÷ 3,920 = 12.245 or 13 run

(ii) Interval between 2 runs (in days) = 365 days ÷ 13 = 28 days Or
365 ÷ 12.24=29.82 days
(iii) If 8,000 bearings are manufactures in a run:
Total cost = Set-up cost + Inventory holding cost
=Rs. .384×(48,000÷8,000) + (8,000÷2)×₹.2.4
= 2304+9,600 = 11,904
Extra cost =Rs. (11,904 – 9,406*) =₹ 2,498/- OR
Extra cost =Rs. (11,904 – 9,696*) =Rs. 2,208/-
* Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per unit per
annum Average Inventory = 3,920 units ÷ 2 = 1,960 units
Carrying Cost per unit per annum =Rs. 0.2 × 12 months =Rs. 2.4 Minimum Inventory
Holding Costs = 1,960 units ×Rs. 2.4 =Rs. 4,704
Total cost = Set-up cost + Inventory holding cost= (12.245×384)+ 4704=Rs. 9,406
(approx.)
OR
Total cost = Set-up cost + Inventory holding cost= (13× 384)+ 4704=Rs. 9,696 (approx.)
(iv) To save cost the company should run at optimum batch size i.e. 3,920 Units. It saves Rs.
2,498 or 2208. Run size should match with the Economic production run of bearing
manufacture. When managers of a manufacturing operation make decisions about the
number of units to produce for each production run, they must consider the costs
related to setting up the production process and the costs of holding inventory
Alternative presentation to part 3(a) (iii)
Statement showing Total Cost at Production Run size of 3,600 and 8,000 bearings

8.13
A. Annual requirement 48,000 48,000

B. Run Size 3,920 8,000
C. No. of runs (A/B) 12.245 6
D. Set up cost per run ₹ 384 ₹ 384
E. Total set up cost (CxD) ₹ 4,702 ₹ 2,304
F. Average inventory (B/2) 1,960 4,000
G. Carrying cost per unit p.a. 2.40 2.40
H. Total Carrying cost (FxG) 4,704 9,600
I. Total cost (E+H) 9,406 11,904
Extra cost incurred, if run size is of 8,000=Rs. 11,904-9,406=Rs. 2,498
This numerical question was based on batch costing. The majority of examinees did well.
Question 16
AUX Ltd. has an Annual demand from a single customer for 60,000 Covid-19 vaccines. The customer
prefers to order in the lot of 15,000 vaccines per order. The production cost of vaccine is ₹ 5,000 per
vaccine. The set-up cost per production run of Covid-19 vaccines is ₹ 4,800. The carrying cost is ₹ 12
per vaccine per month.
(i) Find the most Economical Production Run.
(ii) Calculate the extra cost that company incurs due to production of 15,000 vaccines in a batch.(PYP
5 Marks July ’21)
Answer 16
i. Calculation of most Economical Production Run
9 , . ,.
= = 2,000 Vaccine
ii. Calculation of Extra Cost due to processing of 15,000 vaccines in a batch

When run size is 2,000 When run size is 15,000
vaccines vaccines
Total set up cost 9 ,
Rs. 4,800 60,000
=
, : Rs. 4,800
15,000
= ₹ 1,44,000 = ₹ 19,200
Total Carrying cost ½ × 2,000 × ₹ 144 ½ × 15,000 × ₹ 144
= ₹ 1,44,000 = ₹ 10,80,000
Total Cost ₹ 2,88,000 ₹ 10,99,200
Thus, extra cost = ₹ 10,99,200 – ₹ 2,88,000 = ₹ 8,11,200

It was a practical problem requiring to calculate Economic Production Run and
extra cost due to a different production plan. Performance of the examinees was
above average.
Question 17
A Ltd. is a pharmaceutical company which produces vaccines for diseases like Monkey Pox, Covid-
19 and Chickenpox. A distributor had given an order for 1,600 Monkey Pox Vaccines. The company
can produce 80 vaccines at a time. To process a batch of 80 Monkey Pox vaccines, the following
costs would be incurred:
8.14
₹
Direct Materials 4,250
Direct wages 500
Lab set-up cost 1,400
The Production Overheads are absorbed at a rate of 20% of direct wages and 20% of total
production cost is charged in each batch for Selling, distribution and administration Overheads.
The company is willing to earn profit of 25% on sales value.
You are required to determine:
(i) Total Sales value for 1,600 Monkey Pox Vaccines
(ii) Selling price per unit of the Vaccine. (PYP 5 Marks Nov 22)
Answer 17
(i) & (ii) Calculation of Sales value and Selling price per unit of Monkey Pox vaccine
Particulars Amount (₹) Amount (₹) for 1600 Amount (₹)
per Batch units or 20 batches per unit
Direct materials 4,250 85,000 53.125
Direct wages 500 10,000 6.250
Lab set-up cost 1,400 28,000 17.500
Production overheads 100 2,000 1.250
(20% of direct wages)
Production Cost 6,250 1,25,000 78.125
Selling, distribution and 1,250 25,000 15.625
administration cost (20%
of Production cost)
Total Cost 7,500 1,50,000 93.75
Add: Profit (1/3rd of Total 2,500 50,000 31.25
cost or 25% of Sales
value)
Sales value 10,000 2,00,000 125.00
Question 18
TSK Limited manufactures a variety of products. The annual demand for one of its products- Product
'X' is estimated as `1,35,000 units. Product 'X' is to be manufactured done in batches. Set up cost of
each batch is ` 3,375 and inventory holding cost is ` 5 per unit. It is expected that demand of Product
'X' would be uniform throughout the year.
Required:
(i) Calculate the Economic Batch (EBQ) for Product 'X'.
(ii) Assuming that the company has a policy of manufacturing 7,500 units of Product 'X' per batch,
calculate the additional cost incurred as compared to the cost incurred as per Economic Batch
Quantity (EBQ) as computed in (i) above. (PYP 5 Marks, May ‘23)
Answer 18
;
i) Economic Batch Quantity (EBQ) =
where,
D = Annual demand for the product
S = Set-up cost per batch
C = Carrying cost per unit per annum.

8.15
; 3,<7,555
= = 13,500 units.
7
ii) Total Cost (of maintaining the inventories) when batch size (Q) are 13,500 and 7,500 units
respectively
Total cost = Total set-up cost + Total carrying cost.
When batch size is 13,500 When batch size is 7,500 units

units
Total set up cost , , , , ` 3,375
= ,
× ` 3,375 = = ,
` 33,750 Or,
No. of setups = 10
= ` 60,750
= 10 x ` 3,375 = ` 33,750
Total Carrying cost 1/2 × 13,500 × 5 1/2 × 7,500 × 5
= ` 33,750 = ` 18,750
Total Cost ` 67,500 ` 79,500
12,000 is the excess cost borne by the company due to batch size not being economic batch
quantity.
Alternative presentation
EOQ 13,500 Batch size 7500 Extra cost Saving
No of setup 10 18 8 x 3375 = 27,000
Carrying cost 13,500 – 7500 = 6000/ 2 @ 5 15,000
Net extra cost = (27,000- 15,000) = ` 12,000

9.1
Chapter 9
Job Costing and Contract Costing
Question 1
A factory uses job costing. The following data are obtained from its books for the year ended 31st
March, 20X8:
Amount (Rs.)
Direct materials 9,00,000
Profit 6,09,000
(i) PREPARE a Job Cost sheet indicating the Prime cost, Cost of Production, Cost of sales and the Sales
value.
(ii) In 2018-19, the factory received an order for a job. It is estimated that direct materials required will
be Rs.2,40,000 and direct labour will cost Rs.1,50,000. DETERMINE what should be the price for the
job if factory intends to earn the same rate of profit on sales assuming that the selling and distribution
overheads have gone up by 15%. The factory recovers overheads as a percentage of Cost of
Production, based on cost rates prevailing in the previous year. (MTP Aug ‘18,10 Marks) (RTP May ’20
& May ’18)
Answer 1
(i) Production Statement
For the year ended 31st March, 2018
Amount (₹ )
Profit 6,09,000
Calculation of Rates:
1. Percentage of factory overheads to direct wages = Rs. 4,50,000 / Rs. 7,50,000x 100 = 60%
2. Percentage of administration overheads to Cost of production = Rs.4,20,000/Rs.21,00,000
100 = 20%
3. Selling and distribution overheads = ₹ 5,25,000 × 115% = ₹ 6,03,750 Selling and distribution
. , ,
overhead % to Cost of production = . , ,
100 = 28.75%
. , ,
4. Percentage of profit to sales = . , ,
100= 16.67%
(ii) Calculation of price for the job received in 2018 -19

Amount (₹ )
Prime Cost 3,90,000
Factory overheads (60% of ₹ 1,50,000) 90,000
Chapter 9 Job Costing and Contract Costing
9.2
Administration overheads (20% of ₹ 4,80,000) 96,000

Selling and distribution overheads (28.75% of ₹ 4,80,000) 1,38,000
Profit (20% of ₹ 7,14,000) 1,42,800
Question 2
APFL Ltd. deals in plumbing materials and also provides plumbing services to its customers. On 12th August,
2019, APFL received a job order for a students’ hostel to supply and fitting of plumbing materials. The work
is to be done on the basis of specification provided by the hostel owner. Hostel will be inaugurated on 5th
September, 2019 and the work is to be completed by 3rd September, 2019. Following are the details related
with the job work:
Direct Materials
APFL uses a weighted average method for the pricing of materials issues. Opening stock of materials
as on 12th August 2019:
• 15mm GI Pipe, 12 units of 15 feet size @ Rs.600 each
• Other fitting materials, 60 units @ Rs. 26 each
• Stainless Steel Faucet, 6 units @ Rs. 204each
• Valve, 8 units @ Rs. 404 each Purchases:
On 16th August 2019:
• 20mm GI Pipe, 30 units of 15 feet size @ Rs. 610 each
• 10 units of Valve @ Rs. 402 each On 18th August 2019:
• Other fittingmaterials, 150 units @ Rs. 28 each
• Stainless Steel Faucet, 15 units @ Rs. 209 each On 27th August2019:
• Valve, 14 units @ Rs. 424 each Issues for the hostel job:
On 12th August 2019:
• 20mm GI Pipe, 2 units of 15 feet size
• Other fitting materials, 18 units On 17th August 2019:
• Other fitting materials, 30 units On 28th August 2019:
• Other fitting materials, 34 units
• Valve, 6 units On 30th August:
• Other fitting materials, 60 units
• Stainless Steel Faucet, 15 units
Direct Labour:
Plumber: 180 hours @ Rs. 50 per hour (includes 12 hours overtime) Helper: 192 hours @ Rs.35 per hour
(includes 24 hours overtime) Overtimes are paid at 1.5 times of the normal wage rate.
Overheads:
Overheads are applied @ Rs. 13 per labour hour.
Pricing policy:
It is company’s policy to price all orders based on achieving a profit margin of 25% on sales price.
9.3
You are required to

(a) Calculate the total cost of the job.
(b) Calculate the price to be charged from the customer. (MTP Oct. ‘19, 10 Marks) (RTP Nov ’20)
Answer 2
(a) Calculation of Total Cost for the Hostel Job
Direct Material Cost:
- 15mm GI Pipe (Working Note-1) 11,051.28
- 20mm GI Pipe (Working Note-2) 2,588.28
- Other fitting materials (Working Note- 3) 3,866.07
- Stainless steel faucet
.
15 units
-Value 3,113.57
. . . 2,472.75 23,091.95
6 units
Direct Labour:
-Plumber [(180 hours× Rs. 50) + (12hours ×Rs. 25)] 9,300.00
-Helper [(192hours × Rs.35)+ (24hours × Rs.17.5)] 7,140.00 16,440.00
- Overheads [Rs. 13 × (180 + 192) hours] 4,836.00
Total Cost 44,367.95
(b) Price to be charged for the job work:
Amount (Rs.)
Total Cost incurred on the job 44,367.95
14,789.32
, .
Add: 25% Profit on Job Price
%
25%
59,157.27
Working Note:
1. Cost of 15mm GI Pipe
Date Amount (Rs.)
17-08-2019 8 units × Rs. 600 4,800.00
28-08-2019 6,251.28
. .
10 units
11,051.28
2. Cost of 20mm GI Pipe
Date Amount (Rs.)
12-08-2019 2 units × Rs. 660 1,320.00
28-08-2019
. . .
2 units 1,268.28
2,588.28
3. Cost of Other fitting materials
Date Amount (Rs.)
12-08-2019 18 units × Rs. 26 468.00
17-08-2019 780.00
28-08-2019 30 units × Rs. 26 946.96
. .
34 units
. .
60 units
30-08-2019
1,671.11
9.4
3,866.07
Question 3
A Ltd. is an engineering manufacturing company producing job orders on the basis of specifications
provided by the customers. During the last month it has completed three jobs namely A, B and C. The
following are the items of expenditures which are incurred in addition to direct materials and direct
employee cost:
Office and administration cost - Rs. 6,00,000
Product blueprint cost for job A - Rs. 2,80,000
Hire charges paid for machinery used in job work B - Rs. 80,000
Salary to office attendants - Rs. 1,00,000
One time license fee paid for software used to make computerised graphics for job C - Rs. 1,00,000.
Salary paid to marketing manager - Rs. 2,40,000.
Required:
CALCULATE direct expenses attributable to each job. (MTP 5 Marks Mar 21)
Answer 3
Calculation of Direct expenses
Particulars Job A (Rs.) Job B (Rs.) Job C (Rs.)
Product blueprint cost 2,80,000 -- --
Hire charges paid for machinery -- 80,000 --
License fee paid for software -- -- 1,00,000
Total Direct expenses 2,80,000 80,000 1,00,000
Question 4
MT Ltd. pays the followings to skilled workers engaged in production works. The following are the
employee benefits paid to the employees:
(a) Basic salary per day ₹1,000
(b) Dearness allowance (DA) 20% of basic salary
(c) House rent allowance 16% of basic salary
(d) Transport allowance ₹50 per day of actual work
(e) Overtime Twice the hourly rate (considers basic and DA), only
if works more than 9 hours a day otherwise no
overtime allowance. If works for more than 9 hours
a day then overtime is considered after 8th hours.
(f) Work of holiday and Sunday Double of per day basic rate provided works at least
4 hours. The holiday and Sunday basic is eligible for
all allowances and statutory deductions.
(h) Earned leave & Casual leave These are paid leave.
(h) Employer’s contribution to Provident 12% of basic and DA
fund
(i) Employer’s contribution to Pension 7% of basic and DA
fund
The company normally works 8-hour a day and 26-day in a month. The company provides 30 minutes
lunch break in between. During the month of August 2020, Mr. Z works for 23 days including 15 th
August and a Sunday and applied for 3 days of casual leave. On 15th August and Sunday he worked
9.5
for 5 and 6 hours respectively without lunch break.

On 5th and 13th August he worked for 10 and 9 hours respectively. During the month Mr. Z worked for
100 hours on Job no.HT200. You are required to CALCULATE:
(i) Earnings per day
(ii) Effective wages rate per hour of Mr. Z.
(iii) Wages to be charged to Job no.HT200 [MTP 10 Marks April ‘23]
Answer 4
Workings:
1. Normal working hours in a month = (Daily working hours – lunch break) × no. of days
= (8 hours – 0.5 hours) × 26 days = 195 hours
2. Hours worked by Mr.Z = No. of normal days worked + Overtime + holiday/ Sunday worked
= (21 days × 7.5 hours) + (9.5 hours + 8.5 hours) + (5 hours + 6 hours)
= 157.5 hours + 18 hours + 11 hours = 186.50 hours.
(i) Calculation of earnings per day
31,200
41,288
No. of working days in a month (days) 26
Rate per day 1,588
Transport allowance per day 50
Earnings per day 1,638
(ii) Calculation of effective wage rate per hour of Mr. Z:
Additional basic salary for Sunday & holiday (₹1,000 × 2 days) 2,000
33,600
Transport allowance (₹50 × 23 days) 1,150
Overtime allowance (₹160 × 2 × 2 hours)* 640
Total monthly wages 46,254
Hours worked by Mr.Z (hours) 186.5
Effective wage rate per hour 248
*(Daily Basic+DA) ÷ 7.5 hours
= (1,000+200) ÷ 7.5 = ₹₹160 per hour
9.6
(iii) Calculation of wages to be charged to Job no. HT200

= ₹248 × 100 hours = ₹24,800
Question 5
Ispat Engineers Limited (IEL) undertook a plant manufacturing work for a client. It will charge a profit
mark up of 20% on the full cost of the jobs. The following are the information related to the job:
Direct materials utilized – ₹ 1,87,00,000
Direct labour utilized – 2,400 hours at ₹ 80 per hour
Budgeted production overheads are Rs. 48,00,000 for the period and are recovered on the basis of
24,000 labour hours.
Budgeted selling and administration overheads are ₹ 18,00,000 for the period and recovered on the
basis of total budgeted total production cost of ₹ 36,00,00,000.
Required:
Calculate the price to be charged for the job. (RTP Nov’19)
Answer 5
Calculation of job price
Direct materials 1,87,00,000
Direct wages (₹80 × 2,400 hours) 1,92,000
Production overheads 4,80,000
. 48,00,000
2,400ℎ" #
24,000ℎ"
Production cost 1,93,72,000

Selling and administration overheads 96,860
. 18,00,000
. 1,93,72,000#
. 36,00,00,000
Total cost of sales 1,94,68,860
Profit mark-up @ 20% 38,93,772
Price for the job 2,33,62,632
Question 6
A company has been asked to quote for a job. The company aims to make a net profit of 30% on sales.
The estimated cost for the job is as follows:
Direct materials 10 kg @₹ 10 per kg
Direct labour 20 hours @ ₹5 per hour
Variable production overheads are recovered at the rate of ₹ 2 per labour hour.
Fixed production overheads for the company are budgeted to be ₹ 1,00,000 each year and are
recovered on the basis of labour hours.
There are 10,000 budgeted labour hours each year. Other costs in relation to selling, distribution and
administration are recovered at the rate of ₹ 50 per job.
DETERMINE quote for the job by the Company. (RTP Nov’18)
Answer 6
Determination of quotation price for the job
Cost (₹ )
Direct Material (10kg × ₹ 10) 100
Direct Labour (20hrs × ₹ 5) 100
Variable production overhead (20hrs × ₹ 2) 40
9.7
Fixed Overhead ( Rs. 1,00,000 / 10,000 Budgeted Hours200

20)*+"
Other costs 50
Total costs 490
Net profit is 30% of sales, therefore total costs represent 70% ( ₹ 490 × 100) ÷ 70 = ₹ 700 price to quote
for job.
To check Answer is correct; profit achieved will be ₹ 210 (₹ 700 - ₹ 490)
= ₹ 210 ÷ ₹ 700 = 30%
Question 7
KJ Motors Ltd. is a manufacturer of auto components. Following are the details of expenses for the
year 2020-21:
(₹)
(i) Opening Stock of Material 15,00,000
(ii) Closing Stock of Material 20,00,000
(iii) Purchase of Material 1,80,50,000
(iv) Direct Labour 90,50,000
(v) Factory Overhead 30,80,000
(vi) Administrative Overhead 20,50,400
During the FY 2021-22, the company has received an order from a car manufacturer where it estimates
that the cost of material and labour will be ₹ 80,00,000 and ₹ 40,50,000 respectively. The company
charges factory overhead as a percentage of direct labour and administrative overheads as a
percentage of factory cost based on previous year's cost. Cost of delivery of the components at
customer's premises is estimated at ₹ 9,50,000. You are required to:
(i) CALCULATE the overhead recovery rates based on actual costs for 2020-21.
(ii) PREPARE a Job cost sheet for the order received and the price to be quoted if the desired profit is
25% on sales. (RTP May’21, May ’22 & Nov ‘23)
Answer 7
(i) Calculation of Overhead Recovery Rate:
,-. /01 234054-6 7

Factory Overhead Recovery Rate = 8 04. 9-:/ 0 ;/ 7
X 100
. , ,
= X 100 = 34 % of Direct labour
-. , ,
<6= 0- 34 234054-6 7
Administrative Overhead Recovery Rate = ,-. /01 ;/ 7 >[email protected]
X 100
. , ,
= . , , ,
X 100 = 6.91 % of Factory Cost
Working Note: Calculation of Factory Cost in 2020-21
Opening Stock of Material 15,00,000
Add: Purchase of Material 1,80,50,000
Less: Closing Stock of Material (20,00,000)
Material Consumed 1,75,50,000
Factory Overhead 30,80,000
9.8

(ii) Job Cost Sheet for the order received in 2021-22
Material 80,00,000
Labour 40,50,000
Factory Overhead (34% of ₹ 40,50,000) 13,77,000
Administrative Overhead (6.91% of ₹ 1,34,27,000) 9,27,806
Cost of delivery 9,50,000
Total Cost 1,53,04,806
Add: Profit @ 25% of Sales or 33.33% of cost 51,01,602
Sales value (Price to be quoted for the order) 2,04,06,408
Hence the price to be quoted is ₹ 2,04,06,408.
Question 8
Distinguish between Job costing and Process Costing. (Any five points of differences)
(PYP 5 Marks May’22, Old & New SM)(MTP 5 Marks Oct ’23)
Answer 8
Job Costing Process Costing
A Job is carried out or a product is produced The process of producing the product has a
by specific orders. continuous flow and the product
produced is homogeneous.
(ii) Costs are determined for each job. Costs are compiled on time basis i.e., for
production of a given accounting period for each
process or department.
(iii) Each job is separate and independent of Products lose their individual identity as they are
other jobs. manufactured in a continuous flow.
(iv) Each job or order has a number and costs are The unit cost of process is an average cost for the
collected against the same job number. period.
(v) Costs are computed when a job is completed. Costs are calculated at the end of the cost period.
The cost of a job may be determined by The unit cost of a process may be computed by
adding all costs against the job. dividing the total cost for the period by the
output of the process during that period.
(vi) As production is not continuous and each job Process of production is usually standardized and
may be different, so more managerial is therefore, quite stable. Hence control here is
attention is comparatively easier.
required for effective control.
Question 9
B Limited has taken a contract for ` 70,00,000 and furnishes the following information:
1st Year 2nd Year

(Amount in `) (Amount in `)
Material 12,50,000 13,65,000
Wages 12,50,000 11,44,000
Direct Expenses 4,20,000 3,80,000
Indirect Expenses 2,70,000 2,60,000
Work Certified 32,00,000 70,00,000
Work Uncertified 2,19,000 -
9.9
Other Information:
• Plant costing ` 3,40,000 was bought at the commencement of the contract.
• Depreciation of ` 85,000 per annum is charged on the plant on Straight Line Method (SLM) basis.
• There is a provision for escalation clause in the contract for increase in material rate and wage
rate in the second year only.
• Standard material for the first and second year was ` 12,000 units each year @ ` 90 per unit
whereas the actual consumption was 12,500 @ ` 100 per unit in the first year and 13,000 units
@ ` 105 per unit in the 2ndyear. Standard labour hours for first year were 10,000 hours and for
the second year it was 9,000 hours. Standard wage rate was ` 120 per hour. The firm has paid
for 10,000 hours @ ` 125 per hour in the first year and 8,800 hours @ ` 130 per hour in the second
year.
Required:
(i) Prepare Contract Account for both years without considering escalation clause.
(ii) Compute the total value of contract by considering the escalation clause.
(iii) Compute the total increase / (decrease) in the cost of material and wages for both the years.
(PYP 10 Marks, May ‘23)
Answer 9
i) Contract Account (For 1st Year)
Particulars (`) Particulars (`)

To Material 12,50,000 By work in Progress
To Wages 12,50,000 Work certified
32,00,000
To Direct expense 4,20,000 Work uncertified 2,19,000 34,19,000
To Indirect expense 2,70,000
To Depreciation 85,000
(`3,40,000 – `2,55,000)
To Costing P&L 1,44,000
(Notional Profit b/f)
34,19,000 34,19,000
Contract Account (For 2nd Year)
Particulars (`) Particulars (`)

To Opening Work in By Contractee A/C 70,00,000
Progress:
Work certified 32,00,000
Work uncertified 2,19,000 34,19,000
To Material 13,65,000
To Wages 11,44,000
To Direct expenses 3,80,000
To Indirect expenses 2,60,000
To Depreciation 85,000
(` 2,55,000 – ` 1,70,000)
3,47,000
9.10
To Costing P&L (b/f) 70,00,000 70,00,000
ii) Computation of total value of contract after escalation clause
Particulars (`)
Contract Price 70,00,000
Increase in cost of material 12,000 (105 – 90) 1,80,000
Increase in cost of labour 9,000 (130-120) 90,000
72,70,000
iii) Calculation of Increase/Decrease in cost of material and wages
Year 1 Standard Cost Actual Cost Increase/Decrease

Material 10,80,000 12,50,000 1,70,000
(12,000 x 90) (12,500 x 100)
Labour 12,00,000 12,50,000 50,000
(10,000 x 120) (10,000 x 125)
2,20,000
Year 2 Standard Cost Actual Cost Increase/Decrease
Material 10,80,000 13,65,000 2,85,000
(12,000 x 90) (13,000 x 105)
Labour 10,80,000 11,44,000 64,000
(9,000 x 120) (88,000 x 130)
3,49,000

10.1
Chapter 10
Process & Operation Costing
Question 1
Following details are related to the work done in Process-I by XYZ Company during the month of March:
(`)
Opening work-in process (2,000 units)
Materials 80,000
Labour 15,000
Overheads 45,000
Materials introduced in Process-I (38,000 units) 14,80,000
Overheads 10,77,000
Units scrapped: 3,000 units
Degree of completion:
Materials 100%
Labour and overheads 80%
Closing work-in process: 2,000 units
Materials 100%
Units finished and transferred to Process-II: 35,000 units
Normal Loss:
5% of total input including opening work-in-process. Scrapped units fetch ` 20 per piece. You are
required to PREPARE using average method:
(i) Statement of equivalent production
(ii) Statement of cost
(iii) Statement of distribution cost, and
(iv) Process-I Account, Normal Loss Account and Abnormal Loss Account.
(Old & New SM) (Same concept different figures PYP 10 Marks Nov 20)
Answer 1
(i) Statement of Equivalent Production
Particulars Input Particulars Output Equivalent Production
Units Units Material Labour &
O.H.
% Units % Units
Opening WIP 2,000 Completed and 35,000 100 35,000 100 35,000
transferred to
Process-II
Units introduced 38,000 Normal Loss 2,000 -- -- -- --
(5% of 40,000)
Abnormal loss 1,000 100 1,000 80 800
(Balancing
figure)
Closing WIP 2,000 100 2,000 80 1,600
40,000 40,000 38,000 37,400
(ii) Statement showing cost for each element
Particulars Materials Labour Overhead Total
(`) (`) (`) (`)
Cost of opening work-in- 80,000 15,000 45,000 1,40,000
process
Cost incurred during the month 14,80,000 3,59,000 10,77,000 29,16,000
Less: Realisable Value of normal scrap (40,000) -- -- (40,000)
(` 20 × 2,000 units)
Total cost: (A) 15,20,000 3,74,000 11,22,000 30,16,000
Chapter 10 Process & Operation Costing
10.2
Equivalent units: (B) 38,000 37,400 37,400

Cost per equivalent unit: (C) = (A ÷ B) 40.00 10.00 30.00 80.00
(iii) Statement of Distribution of cost
Amount (`) Amount (`)
1. Value of units completed and transferred 28,00,000
(35,000 units × ` 80)
2. Value of Abnormal Loss:
- Materials (1,000 units × ` 40) 40,000
- Labour (800 units × ` 10) 8,000
- Overheads (800 units × ` 30) 24,000 72,000
3. Value of Closing W-I-P:
- Materials (2,000 units × ` 40) 80,000
- Labour (1,600 units × ` 10) 16,000
- Overheads (1,600 units × ` 30) 48,000 1,44,000
(iv) Process-I A/c
Particulars Units (`) Particulars Units (`)
To Opening W.I.P: By Normal Loss 2,000 40,000
(`20 × 2,000
units)
- Materials 2,000 80,000 By Abnormal loss 1,000 72,000
- Labour -- 15,000 By Process-I A/c 35,000 28,00,000
- Overheads -- 45,000 By Closing WIP 2,000 1,44,000
To Materials 38,000 14,80,000
introduced
To Direct Labour 3,59,000
To Overheads 10,77,000
40,000 30,56,000 40,000 30,56,000
Normal Loss A/c
To Process-I A/c 2,000 40,000 By Cost Ledger 2,000 40,000
Control A/c
2,000 40,000 2,000 40,000
Abnormal Loss A/c
To Process-I A/c 1,000 72,000 By Cost Ledger 1,000 20,000
Control A/c
By Costing Profit & Loss 52,000
A/c
1,000 72,000 1,000 72,000
Question 2
Aditya Agro Ltd. mixes powdered ingredients in two different processes to produce one product.
The output of Process- I becomes the input of Process -II and the output of Process-II is transferred to
the Packing department.
From the information given below, you are required to PREPARE accounts for Process-I, Process-II and
Abnormal loss/ gain A/c to record the transactions for the month of February 20X9.
Process-I
Input:
Material A 6,000 kilograms at Rs. 50 per kilogram
Material B 4,000 kilograms at Rs. 100 per kilogram
Labour 430 hours at Rs. 50 per hour
Normal loss 5% of inputs. Scrap are disposed off at Rs.16 per
kilogram
10.3
Output 9,200 kilograms.

There is no work- in- process at the beginning or end of the month.
Process-II
Input:
Material C 6,600 kilograms at Rs. 125 per kilogram
Material D 4,200 kilograms at Rs. 75 per kilogram
Flavouring Essence Rs. 3,300
Labour 370 hours at Rs.50 per hour
Normal loss 5% of inputs with no disposal value
Output 18,000 kilograms.
There is no work-in-process at the beginning of the month but 1,000 kilograms in process at the end of
the month and estimated to be only 50% complete so far as labor and overhead were concerned.
Overhead of Rs. 92 ,000 incurred to be absorbed on the basis of labor hours. (MTP 10 Marks March ’19
& Sep ‘23)
Answer 2
Process-I A/c
Particulars Qty. Amount Particulars Qty. Amount
(kgs) (kgs) ( Rs.)
To Material A 6,000 3,00,000 By Normal loss 500 8,000
To Material B 4,000 4,00,000 By Process-II A/c 9,200 7,38,857
To Labour - 21,500 By Abnormal loss A/c 300 24,093
To Overhead -- 49,450
. 92,000 430ℎ
800ℎ
10,000 7,70,950 10,000 7,70,950
. , , . , , . , . , . , ."," , . ,
* = =Rs. 80.3105
, ! , !
Process-II A/c
Particulars Qty. Amount Particulars Qty. (kgs) Amount
(kgs) (Rs.) (Rs.)
To Process-I A/c 9,200 7,38,857 By Normal loss 1,000 --
To Material C 6,600 8,25,000 By Packing 18,000 18,42,496
Dept. A/c
(See the working
notes)
To Material D 4,200 3,15,000 By WIP A/c 1,000 1,00,711
(See the working
notes)
To Flavouring essence -- 3,300
To Labour -- 18,500
To Overheads -- 42,550
. , " #$
#$
20,000 19,43,207 20,000 19,43,207

Abnormal loss A/c
Particulars Qty. Amount Particulars Qty. Amount
(kgs) ( Rs.) (kgs) ( Rs.)
T o Process-I A/c 300 24,093 By Bank 300 4,800

10.4
By Costing
Profit & Loss A/c -- 19,293
300 24,093 300 24,093
Working Notes:
Calculation of Equivalent Production units
Input Units Output Units Process-I Mat-C & D Labour & OH

(%) Units (%) Units (%) Units
9,200 Transferred to 18,000 100 18,000 100 18,000 100 18,000
Packing.
Mat-C 6,600 Closing WIP 1,000 100 1,000 100 1,000 50 500
Mat-D 4,200 Normal loss 1,000 -- -- -- -- -- --
20,000 20,000 19,000 19,000 18,500
Calculation of Unit cost

Cost component Amount (Rs.) Equivalent units Cost per unit
( Rs.)
Transferred-in 7,38,857 19,000 38.8872
Material-C 8,25,000 19,000 43.4211
Material-D 3,15,000 19,000 16.5789
Flavouring essence 3,300 19,000 0.1737
Total Material Cost 18,82,157 19,000 99.0609
Labour 18,500 18,500 1.0000
Overheads 42,550 18,500 2.3000
Total Cost 19,43,207 102.3609
Value of Materials transferred to Packing Department
= 18,000 unit × Rs.102.3609 = 18,42,496
Value of WIP: For Materials- 1,000units× Rs.99.0609
Rs.99,061
For Labour & Overheads 500 units × Rs.3.30= Rs.1,650
Rs.1,00,711
Question 3
The following are the details in respect of Process A and Process B of a processing factory:
Process A (₹) Process B (₹ )
Materials 40,000 --
Labour 40,000 56,000
Overheads 16,000 40,000
The output of Process A is transferred to Process B at a price calculated to give a profit of 20% on the
transfer price and the output of Process B is charged to finished stock at a profit of 25% on the transfer
price. The finished stock department realized ₹ 4,00,000 for the finished goods received from Process B.
PREPARE process accounts and CALCULATE total profit, assuming that there was no opening or closing
work-in-progress. (MTP March ‘18, 5 Marks)
Answer 3
10.5
Process A Account
Dr. Cr.
₹ ₹
To Materials 40,000 By Process B A/c 1,20,000
(Transfer to Process B)
To Labour 40,000
To Overheads 16,000
96,000
To Profit (20% of transfer price, i.e., 25%
of cost) 24,000
1,20,000 1,20,000
Process B Account
Dr. Cr.
₹ ₹
To Process A A/c 1,20,000 By Finished Stock A/c
(Transferred from Process A) (Transfer to finished stock) 2,88,000
To Labour 56,000
To Overhead 40,000
2,16,000
To Profit (25% of transfer price i.e., 72,000
33.33% of cost)
2,88,000 2,88,000
Statement of Total Profit
₹
Profit from Process A 24,000
Profit from Process B 72,000
Profit on Sales (₹ 4,00,000 – ₹ 2,88,000) 1,12,000
Total Profit 2,08,000
Question 4
The M-Tech Manufacturing Company is presently evaluating two possible processes for the manufacture
of a toy. The following information is available:
Particulars Process A (Rs.) Process B (Rs.)
Variable cost per unit 12 14
Sales price per unit 20 20
Total fixed costs per year 30,00,000 21,00,000
Capacity (in units) 4,30,000 5,00,000
Anticipated sales (Next year, in units) 4,00,000 4,00,000
SUGGEST:
1. Which process should be chosen?
2. Would you change your Answer as given above, if you were informed that the capacities of the two
processes are as follows:
A - 6,00,000 units; B - 5,00,000 units? STATE the reason? (MTPAug. ‘18, 5 Marks)
Answer 4
(1) Comparative Profitability Statements
Particulars Process- A (Rs.) Process- B (Rs.)
Less: Variable Cost per unit 12.00 14.00
Contribution per unit 8.00 6.00

10.6
Total Contribution 32,00,000 24,00,000

(Rs. 8 × 4,00,000) (Rs. 6 × 4,00,000)
Less: Total fixed costs 30,00,000 21,00,000
Profit 2,00,000 3,00,000
*Capacity (units) 4,30,000 5,00,000
Total Contribution at full capacity 34,40,000 30,00,000
(Rs. 8 × 4,30,000) (Rs. 6 × 5,00,000)
Fixed Cost 30,00,000 21,00,000
Profit 4,40,000 9,00,000
Process- B should be chosen as it gives more profit as compared to Process-A.
(2)
Particulars Process- A (Rs.) Process- B (Rs.)
*Capacity (units) 6,00,000 5,00,000
Total contribution 48,00,000 30,00,000
(Rs. 8 × 6,00,000) (Rs. 6 × 5,00,000)
Fixed Cost 30,00,000 21,00,000
Profit 18,00,000 9,00,000
If the capacity of the Process A and B is 6,00,000 units and 5,00,000 units respectively then Process-A is
giving double profit than Process C. Thus Process A be chosen.
*Note: It is assumed that capacity produced equals sales.
Question 5
The following information relate to Process A:
(i) Opening Work-in-Process 8,000 units at Rs.15,00,000
Degree of Completion:
Material 100%
Labour and Overhead 60%
(ii) Input 1,82,000 units at Rs.1,47,50,000
(iii) Wages paid Rs.68,12,000
(iv) Overheads paid Rs.34,06,000
(v) Units scrapped 14,000
Degree of Completion: Material 100%
Wages and Overheads 80%
(vi) Closing Work - in- Process 18,000 units
Degree of Completion: Material 100%
Wages and Overheads 70%
(vii) Units completed and transferred to next process 1,58,000 units
(viii) Normal loss 10% of total input including opening WIP
(ix) Scrap value is Rs.15 per unit to be adjusted out of direct material cost
You are required to COMPUTE on the basis of FIFO

(i) Equivalent Production
(ii) Cost per unit

10.7
(iii) Value of units transferred to next process. (MTP Oct ‘18, 10 Marks, RTP Nov 19) (Same concepts
different figures MTP 10 Marks Apr’21)
Answer 5
(i) Statement of Equivalent Production (FIFO Method)
Input Output Equivalent Production
Particulars Units Particulars Units Material Labour & Overheads
(%) Units (%) Units
Opening WIP 8,000 Transfer to next
Process:
Introduced 1,82,000 Opening WIP 8,000 -- -- 40 3,200
completed
Introduced & 1,50,000 100 1,50,000 100 1,50,000
completed
Normal loss 19,000 -- -- -- --
10% (8,000 +
182,000)
Abnormal gain (5,000) 100 (5,000) 100 (5,000)
Closing WIP 18,000 100 18,000 70 12,600
1,90,000 1,90,000 1,63,000 1,60,800
(ii) Computation of Cost per unit
Particulars Materials Labour Overhead
(Rs.) (Rs.) (Rs.)
Input of Materials 1,47,50,000 -- --
Expenses -- 68,12,000 34,06,000
Total 1,47,50,000 68,12,000 34,06,000
Less: Sale of Scrap (19,000 units × Rs.15) (2,85,000) -- --
Net cost 1,44,65,000 68,12,000 34,06,000
Equivalent Units 1,63,000 1,60,800 1,60,800
Cost Per Unit 88.7423 42.3632 21.1816
Total cost per unit = ₹ (88.7423 + 42.3632 + 21.1816) = ₹ 152.2871
(iii) Value of units transferred to next process:
Amount Amount
(Rs.) (Rs.)
Opening W-I-P 15,00,000.00
Add: Labour (3,200 units × Rs. 42.3632) 1,35,562.24
Overhead (3,200 units × Rs. 21.1816) 67,781.12 17,03,343.36
New introduced (1,50,000 units × Rs. 152.2871) 2,28,43,065.00
2,45,46,408.36
Question 6
G K Ltd. produces a product "XYZ" which passes through two processes, viz. Process-A and Process-B.
The details for the year ending 31st March, 2020 are as follows:
Process A Process - B
40,000 units introduced at a cost of Rs. 3,60,000 -
Material consumed Rs. 2,42,000 2,25,000
Direct wages Rs. 2,58,000 1,90,000
Manufacturing expenses Rs. 1,96,000 1,23,720
Output in units 37,000 27,000
Normal wastage of inputs 5% 10%
Scrap value (per unit) Rs. 15 20
Selling price (per unit) Rs. 37 61

10.8
(a) 80% of the output of Process-A, was passed on to the next process and the balance was sold. The
entire output of Process- B was sold.
(b) Indirect expenses for the year was Rs. 4,48,080.
(c) It is assumed that Process-A and Process-B are not responsibility centre.
Required:
(i) PREPARE Process-A and Process-B Account.
(ii) PREPARE Costing Profit & Loss Account showing the net profit/ net loss for the year. (MTP 10 Marks May
’20 & Oct ‘23)
Answer 6
(i) Process- A Account
Particulars Units Amount Particulars Units Amount
(Rs.) (Rs.)
To Inputs 40,000 3,60,000 By Normal wastage 2,000 30,000
(2,000 units × Rs.15)
To Material --- 2,42,000 By Abnormal loss A/c 1,000 27,000
(1,000 units × Rs.27)
To Direct wages --- 2,58,000 By Process- B 29,600 7,99,200
(29,600 units × Rs.27)
To Manufacturing Exp. --- 1,96,000 By Profit & Loss A/c 7,400 1,99,800
(7,400 units × Rs.27)
40,000 10,56,000 40,000 10,56,000
Cost per unit = Rs. 10,56,000- Rs. 30,000 / 40,000units -2,000 units = Rs. 27 per unit
Normal wastage = 40,000 units × 5% = 2,000 units
Abnormal loss = 40,000 units – (37,000 units + 2,000 units) = 1,000 units Transfer
to Process- B = 37,000 units × 80% = 29,600 units
Sale = 37,000 units × 20% = 7,400 units
Process- B Account
(Rs.) (Rs.)
To Process- A A/c 29,600 7,99,200 By Normal wastage 2,960 59,200
(2,960 units × Rs. 20)
To Material --- 2,25,000 By Profit & Loss A/c 27,000 12,96,000
(27,000 units × Rs. 48)
To Direct Wages --- 1,90,000
To Manufacturing Exp. --- 1,23,720
360 17,280
To Abnormal Gain A/c 29,960 13,55,200 29,960 13,55,200
(360 units × Rs. 48)
Cost per unit = Rs. 13,37,920-Rs.59,200 / 29,600 units – 2,960 units = Rs. 48 per unit
Normal wastage = 29,600 units × 10% = 2,960 units
Abnormal gain = (27,000 units + 2,960 units) – 29,600 units = 360 units
(ii) Costing Profit & Loss Account
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Process- A A/c 1,99,800 By Sales: 2,73,800
To Process- B A/c 12,96,000 - Process-A 16,47,000
(7,400 units × Rs. 37)

10.9
To Abnormal loss A/c 12,000 - Process- B 10,080

(27,000 units × Rs. 61)
To Indirect Expenses 4,48,080 By Abnormal gain 25,000
19,55,880 By Net loss 19,55,880
Working Notes: Normal wastage (Loss) Account
Particulars Units Amount (Rs.) Particulars Units Amount (Rs.)

To Process- A 2,000 30,000 By Abnormal Gain A/c 360 7,200
A/c (360 units × Rs. 20)
To Process- B 2,960 59,200 By Bank (Sales) 4,600 82,000
A/c
4,960 89,200 4,960 89,200
Abnormal Loss Account
Particulars Units Amount Particulars Units Amount (Rs.)
(Rs.)
To Process- 1,000 27,000 By Bank A/c 1,000 15,000
A A/c (1,000 units × Rs. 15)
By Profit & Loss A/c --- 12,000
1,000 27,000 1,000 27,000
Abnormal Gain Account
(Rs.) (Rs.)
To Normal loss A/c (360 360 7,200 By Process- B A/c 360 17,280
units × Rs. 20)
To Profit & Loss A/c 10,080
360 17,280 360 17,280
Question 7
‘Healthy Sweets’ is engaged in the manufacturing of jiggery. Its process involve sugarcane crushing for
juice extraction, then filtration and boiling of juice along with some chemicals and then letting it cool
to cut solidified jaggery blocks.
The main process of juice extraction (Process – I) is done in conventional crusher, which is then filtered
and boiled (Process – II) in iron pots. The solidified jaggery blocks are then cut, packed and dispatched.
For manufacturing 10 kg of jaggery, 100 kg of sugarcane is required, which extracts only 45 litre of juice.
Following information regarding Process – I has been obtained from the manufacturing
department of Healthy Sweets for the month of January, 2020:
(₹)
Opening work-in process (4,500 litre)
Sugarcane 50,000
Labour 15,000
Overheads 45,000
Sugarcane introduced for juice extraction (1,00,000 kg) 5,00,000
Overheads 6,00,000
Abnormal Loss: 1,000 kg
Sugarcane 100%

10.10

Closing work-in process: 9,000 litre Degree of completion:
Sugarcane 100%
Extracted juice transferred for filtering and boiling: 39,500 litre (Consider mass of 1 litre of juice
equivalent to 1 kg)
You are required to PREPARE using average method:
(i) Statement of equivalent production,
(ii) Statement of cost,
(iv) Process-I Account. [MTP 10 Marks Oct ’20, Old & New SM)
Answer 7
Units Units Sugarcane Labour & O.H.
% Units % Units
Opening WIP 4,500 Completed and 39,500 100 39,500 100 39,500
transferred to
Process - II
Units introduced 1,00,000 Normal Loss 55,000 -- -- -- --
(55%* of 1,00,000)
Abnormal loss 1,000 100 1,000 80 800
Closing WIP 9,000 100 9,000 80 7,200

1,04,500 1,04,500 49,500 47,500
* 100 kg of sugarcane extracts only 45 litre of juice. Thus, normal loss = 100 – 45 = 55%

Particulars Sugarcane Labour Overhead Total
(₹) (₹) (₹) (₹)
Cost of opening work-in-process 50,000 15,000 45,000 1,10,000
Cost incurred during the month 5,00,000 2,00,000 6,00,000 13,00,000
Total cost: (A) 5,50,000 2,15,000 6,45,000 14,10,000
Equivalent units: (B) 49,500 47,500 47,500
Cost per equivalent unit: (C) = (A ÷ B) 11.111 4.526 13.579 29.216
Amount Amount
(₹) (₹)
1. Value of units completed and transferred (39,500 11,54,032
units × ₹ 29.216)
2. Value of Abnormal Loss:
- Sugarcane (1,000 units × ₹ 11.111) 11,111
- Labour (800 units × ₹ 4.526) 3,621
- Overheads (800 units × ₹ 13.579) 10,863 25,595
- Sugarcane (9,000 units × ₹ 11.111) 99,999
10.11
- Labour (7,200 units × ₹ 4.526) 32,587

- Overheads (7,200 units × ₹ 13.579) 97,769 2,30,355
(iv) Process-I A/c
Particulars Units (₹) Particulars Units (₹)
To Opening W.I.P: By Normal Loss 55,000 --
- Sugarcane 4,500 50,000 By Abnormal 1,000 25,613
loss (₹25,595 + ₹18
(difference due
to
approximation))
- Labour -- 15,000 By Process-II A/c 39,500 11,54,032
- Overheads -- 45,000 By Closing WIP 9,000 2,30,355
To Sugarcane introduced 100,000 5,00,000
104,500 14,10,000 104,500 14,10,000
Question 8
MP Ltd. produces a Product-X, which passes through three processes, I, II and III. In Process-III a by-
product arises, which after further processing at a cost of Rs. 85 per unit, product Z is produced. The
information related for the month of September 2020 is as follows:
Process-I Process-II Process-III
Normal loss 5% 10% 5%
Materials introduced (7,000 units) 1,40,000 - -
Materials added 62,000 1,36,000 84,200
Direct wages 42,000 54,000 48,000
Direct expenses 14,000 16,000 14,000
Production overhead for the month is Rs. 2,88,000, which is absorbed as a percentage of direct wages.
The scraps are sold at Rs. 10 per unit
Product-Z can be sold at Rs. 135 per unit with a selling cost of Rs. 15 per unit No. of units produced:
Process-I- 6,600; Process-II- 5,200, Process-III- 4,800 and Product-Z- 600 There is no stock at the
beginning and end of the month.
You are required to PREPARE accounts for:
(i) Process-I, II and III
(ii) By-Product-Z (MTP 10 Marks March ’21, RTP Nov’20)
Answer 8
Total direct wages
= Rs. 42,000 + Rs. 54,000 + Rs. 48,000 = Rs. 1,44,000
Percentage absorption of production overhead on the basis of direct wages
%,&&,'''
= (,)),''' 100 = 200%
(i) Process-I A/c

10.12
Particulars Units Amt. (Rs.) Particulars Units Amt. (Rs.)

To Materials 7,000 1,40,000 By Normal loss 350 3,500
(5% of 7,000 units)
To Other materials - 62,000 By Process-II* 6,600 3,35,955
To Direct wages - 42,000 By Abnormal loss* 50 2,545
To Direct expenses - 14,000
To Production OH - 84,000
(200% of Rs.42,000)
7,000 3,42,000 7,000 3,42,000
. , , ,
*Cost per Unit = ", * !
= Rs.50.9022
Process-II A/c
Particulars Units Amt.(Rs.) Particulars Units Amt.(Rs.)

To Process-I A/c 6,600 3,35,955 By Normal loss 660 6,600
(10% of 6,600 units)
To Other materials - 1,36,000 By Process-III** 5,200 5,63,206
To Direct wages - 54,000 By Abnormal loss** 740 80,149
To Direct expenses - 16,000
To Production OH - 1,08,000
(200% of Rs.54,000)
6,600 6,49,955 6,600 6,49,955
. +, , +,+
*Cost per Unit = +,+ ++ * !
= Rs. 108.3089
Process-III A/c
Particulars Units Amt. Particulars Units Amt.
(Rs.) (Rs.)
To Process-I A/c 5,200 5,63,206 By Normal loss 260 2,600
(5% of 5,200 units)
To Other materials - 84,200 By Product-X*** 4,800 8,64,670
To Direct wages - 48,000
To Direct expenses - 14,000 By Product-Z# 600 21,000
(Rs.35 × 600 units)
To Production OH - 96,000
(200% of Rs.48,000)
To Abnormal gain*** 460 82,864
5,660 8,88,270 5,660 8,88,270
. , , + ,+ ,
***Cost per Unit = , + ++ * !
= Rs. 180.1396
# Realizable value = Rs. 135 – (85+15) = Rs. 35
(ii) By-Product Process A/c

Particulars Units Amt. (Rs.) Particulars Units Amt. (Rs.)
To Process-III A/c 600 21,000 By Product-Z 600 81,000
To Processing cost - 51,000
To Selling - 9,000
expenses
600 81,000 600 81,000

10.13
Question 9
An article passes through three successive operations from raw materials stage to the finished product
stage. The following data are available from the production records for the month of March, 2021:
Operation No. of pieces No. of pieces (Rejected) No. of pieces
(Input) (Output)
1 1,80,000 60,000 1,20,000
2 1,98,000 18,000 1,80,000
3 1,44,000 24,000 1,20,000
(i) DETERMINE the input required to be introduced in the first operation in no. of pieces in order to
obtain finished output of 500 pieces after the last operation.
(ii) CALCULATE the cost of raw material required to produce one piece of finished product, if the weight
of the finished piece is 0.5 kg. and the price of raw material is Rs. 80 per kg. (MTP 5 Marks, April ’21)
Answer 9
Statement of production
Operation Input Rejections Output
Total % of
output
1 1,80,000 60,000 50 1,20,000
2 1,98,000 18,000 10 1,80,000
3 1,44,000 24,000 20 1,20,000
(i) Determination of input required to obtain 500 pieces of finished output:
Particulars No. of pieces

Output required after operation 3 500
Add: Rejection in operation 3 (20%) 100
Input required in operation 1 990
(ii) Calculation of cost of raw material:
To produce 500 pieces of final output, 990 pieces of inputs are required at operation 1. Thus, to get a
finished piece of 0.5 kg. of output, the weight of input required is:
=0.5/500 × 990 = 0.99 kg.
The cost of raw material would be Rs. 80 × 0.99 kg. = Rs.79.20
Question 10
Navyug Ltd. manufactures chemical solutions for the food processing industry. The manufacturing takes
place in a number of processes and the company uses a FIFO process costing system to value work-in-
process and finished goods. At the end of the last month, a fire occurred in the factory and destroyed
some of the paper files containing records of the process operations for the month.
Navyug Ltd. needs your help to prepare the process accounts for the month during which the fire
occurred. You have been able to gather some information about the month’s operating activities but
some of the information could not be retrieved due to the damage. The following information was
salvaged:
 Opening work-in-process at the beginning of the month was 900 litres, 70% complete for labour and
60% complete for overheads. Opening work-in-process was valued at ₹ 29,970.
10.14
 Closing work-in-process at the end of the month was 160 litres, 30% complete for labour and 20%
complete for overheads.
 Normal loss is 10% of input and total losses during the month were 1,800 litres partly due to the fire
damage.
 Output sent to finished goods warehouse was 4,200 litres.
 Losses have a scrap value of ₹ 20 per litre.
 All raw materials are added at the commencement of the process.
 The cost per equivalent unit (litre) is ₹39 for the month made up as follows:
(₹)
Raw Material 23
Labour 7
Overheads 9
39
REQUIRED:
(i) Calculate the quantity (in litres) of raw material inputs during the month.
(ii) Calculate the quantity (in litres) of normal loss expected from the process and the quantity (in litres)
of abnormal loss / gain experienced in the month.
(iii) Calculate the values of raw material, labour and overheads added to the process during the month.
(iv) Prepare the process account for the month. (MTP 10 Marks Oct ’21, RTP May’18) (Same concept
different figures RTP May’20)
Answer 10
(i) Calculation of Raw Material inputs during the month:
Quantities Entering Process Litres Quantities Leaving Process Litres
Opening WIP 900 Transfer to Finished Goods 4,200
Raw material input (balancing 5,260 Process Losses 1,800
figure)
Closing WIP 160
6,160 6,160
(ii) Calculation of Normal Loss and Abnormal Loss/Gain
Particulars Litres
Total process losses for month 1,800
Normal Loss (10% input) 526
Abnormal Loss (balancing figure) 1,274
(iii) Calculation of values of Raw Material, Labour and Overheads added to the process:
Material Labour Overheads
Cost per equivalent unit ₹ 23.00 ₹ 7.00 ₹ 9.00
Equivalent units (litre) (refer the 4,734 4,892 4,966
working note)
Cost of equivalent units ₹ 1,08,882 ₹ 34,244 ₹ 44,694
Add: Scrap value of normal loss ₹ 10,520 -- --
(526 units × ₹ 20)
Total value added ₹ 1,19,402 ₹ 34,244 ₹ 44,694
Workings: Statement of Equivalent Units (litre):
Input Details Units Output details Units Equivalent Production
Material Labour Overheads
Units (%) Units (%) Units (%)
Opening WIP 900 Units completed:
10.15
Units introduced 5,260 - Opening WIP 900 -- -- 270 30 360 40

- Fresh inputs 3,300 3,300 100 3,300 100 3,300 100
Normal loss 526 -- -- -- -- -- --
Abnormal loss 1,274 1,274 100 1,274 100 1,274 100
Closing WIP 160 160 100 48 30 32 20
6,160 6,160 4,734 4,892 4,966
(iv) Process Account for Month
Litres Amount (₹) Litres Amount (₹)
To Opening WIP 900 29,970 By Finished goods 4,200 1,63,800
To Raw Materials 5,260 1,19,402 By Normal loss 526 10,520
To Wages -- 34,244 By Abnormal loss 1,274 49,686
To Overheads -- 44,694 By Closing WIP 160 4,304
6,160 2,28,310 6,160 2,28,310
Question 11
Following information is available regarding process A for the month of October, 2021:
Production Record:
Units in process as on 01.10.2021 8,000
(All materials used, 25% complete for labour and overhead)
New units introduced 32,000
Units completed 28,000
Units in process as on 31.10.2021 12,000
(All materials used, 33-1/3% complete for labour and overhead)
Cost Records:
Work-in-process as on 01.10.2021 (₹)
Materials 12,00,000
Labour 2,00,000
Overhead 2,00,000
16,00,000
Cost during the month
Materials 51,20,000
Labour 30,00,000
Overhead 30,00,000
1,11,20,000
Presuming that average method of inventory is used, PREPARE:
(i) Statement of Equivalent Production.
(ii) Statement showing Cost for each element.
(iii) Statement of Apportionment of cost.
(iv) Process Cost Account for Process A. (MTP 10 Marks Nov ’21, RTP May ’19, Old & New SM) (Same
concept different figures RTP Nov’21)
Answer 11
(i) Statement of Equivalent Production (Average cost method)
Input Particulars Output Equivalent Production
(Units) Units Materials Labour Overheads
(%*) Units** (% )* Units** (%)* Units**

10.16
40,000 Completed 28,000 100 28,000 100 28,000 100 28,000

WIP 12,000 100 12,000 33-1/3 4,000 33-1/3 4,000
40,000 40,000 40,000 32,000 32,000
*Percentage of completion ** Equivalent units
(ii) Statement showing Cost for each element

Cost of opening work-in-progress (₹) 12,00,000 2,00,000 2,00,000 16,00,000
Cost incurred during the month (₹) 51,20,000 30,00,000 30,00,000 1,11,20,000
Total cost (₹) : (a) 63,20,000 32,00,000 32,00,000 1,27,20,000
Equivalent units : (B) 40,000 32,000 32,000
Cost per equivalent unit (₹) : C= (A ÷ 158 100 100 358
B)
(iii) Statement of Apportionment of cost
(₹) (₹)
Value of output transferred: (A) (28,000 units × ₹ 1,00,24,000
358)
Value of closing work-in-progress: (B)
Material (12,000 units × ₹158) 18,96,000
Labour (4,000 units × ₹ 100) 4,00,000
Overhead (4,000 units × ₹ 100) 4,00,000 26,96,000
Total cost : (A + B) 1,27,20,000
(iv) Process- A Account
To Opening WIP 8,000 16,00,000 By Completed 28,000 1,00,24,000
units
To Materials 32,000 51,20,000 By Closing WIP 12,000 26,96,000

To Labour 30,00,000
To Overhead 30,00,000
40,000 1,27,20,000 40,000 1,27,20,000
Question 12
Chill Ltd. uses process costing to manufacture water density sensor for hydro sector. The following
information pertains to operations for the month of February:
Particulars Units
Beginning WIP, February 1 22,400
Started in production during February 1,40,000
Completed production during February 1,28,800
Ending work in progress, February 28 33,600
The beginning work in progress was 50% complete for materials and 30% complete for conversion
costs. The ending inventory was 80% complete for material and 30% complete for conversion costs.
Costs pertaining to the month of February are as follows:
Beginning inventory costs are material ₹ 1,38,350, direct labour ₹ 1,50,600 and factory overhead ₹
63,600

10.17
Cost incurred during February are material ₹ 23,95,000, direct labour ₹ 9,14,400, factory overheads
₹ 19,55,800.
CALCULATE:
(i) Using the FIFO method, the equivalent units of production for material.
(ii) Cost per equivalent unit for conversion cost. (MTP 5 Marks March ’22, Old & New SM)
Answer 12
i. Calculation of equivalent units of production:
Equivalent Units
Input Details Units Output Units Material Conversion cost
Particulars
% Units % Units
Beginning WIP 22,400 From 22,400 50 11,200 70 15,680
beginning WIP
Unit 1,40,000 Completed 1,06,400 100 1,06,400 100 1,06,400
Introduced output
Closing W-I-P 33,600 80 26,880 30 10,080
Total 1,62,400 Total 1,62,400 1,44,480 1,32,160
ii. Calculation of cost per equivalent unit for conversion costs

Particulars
Direct labour ₹ 9,14,400
Factory overheads ₹ 19,55,800
Total ₹ 28,70,200
Equivalent units 1,32,160 units
Cost per equivalent unit ₹ 21.72
Question 13
WHAT is inter-process profit? STATE its advantages and disadvantages. (MTP 4 Marks Mar’22)
Answer 13
Inter-Process Profit: To control cost and to measure performance, different processes within an
organization are designated as separate profit centres. In this type of organizational structure, the output
of one process is transferred to the next process not at cost but at market value or cost plus a percentage
of profit. The difference between cost and the transfer price is known as inter - process profits. The
advantages and disadvantages of using inter-process profit, in the case of process type industries are as
follows:
Advantages:
1. Comparison between the cost of output and its market price at the stage of completion is facilitated.
2. Each process is made to stand by itself as to the profitability.
Disadvantages:
1. The use of inter-process profits involves complication.
2. The system shows profits which are not realised because of stock not sold out.
Question 14
A Manufacturing unit manufactures a product which passes through three distinct Processes - A, B and
C. The following data is given:
Process A Process B Process C
Material consumed (in ₹) 36,400 31,500 28,000
Direct wages (in ₹) 56,000 49,000 42,000

10.18
 The total Production Overhead of ₹ 2,20,500 was recovered @ 150% of Direct wages.
 15,000 units at ₹ 28 each were introduced to Process 'A'.
 The output of each process passes to the next process and finally, 12,000 units were transferred
to Finished Stock Account from Process ' C'.
 No stock of materials or work in progress was left at the end. The following additional information
is given:
Process % of wastage to normal Value of Scrap per unit (₹)
input
A 6% 15.40
B ? 28.00
C 5% 14.00
(i) FIND OUT the percentage of wastage in process 'B', given that the output of Process 'B' is
transferred to Process 'C' at ₹ 56 per unit.
(ii) PREPARE Process accounts for all the three processes A, B and C. (10 Marks April ’22) (Same concept
different figures PYP 10 Marks July 21)
Answer 14
Dr. Process-A Account Cr.
To Material 15,000 4,20,000 By Normal Loss A/c 900 13,860
introduced [(6% of 15,000
units)
x ₹ 15.40]
” Additional -- 36,400 ” Process-B A/c 14,100 5,82,540
material (₹ 41.31* × 14,100
units)
” Direct wages -- 56,000
” Production OH -- 84,000
15,000 5,96,400 15,000 5,96,400
* Cost per unit of completed units
,-!./ 1- ! 2./ .3/2 4./ 2 5$-6 -$6./ /- . , +, . , +
= 7 8 ! ! 9-$6./ /- !
= , ! !
= Rs. 41.31
15,000 units - 900 units

Dr. Process-B Account Cr.
To Process-A A/c 14,100 5,82,540 By Normal Loss A/c 1,895 53,060
[(#13.44% of 14,100
units) x ₹ 28]
” Additional -- 31,500 ” Process-C A/c 12,205 6,83,480

material (₹ 56 × 12,205 units)
” Direct wages -- 49,000

14,100 7,36,540 14,100 7,36,540
#Calculation for % of wastage in process ‘B’:

10.19
Let’s consider number of units lost under process ‘B’ = b

Now, Total Cost - Realisable value from normal loss / Inputs units - Normal loss units = 56
.", +, . 3
, ! 3
= Rs. 56
₹ 7,36,540 - ₹ 28b = ₹ 7,89,600 - ₹ 56b

28b = ₹ 53,060 => b = 1,895 units
% of wastage = 1,895 units /14,100 units = 13.44%
Dr. Process-C Account Cr.
To Process-B A/c 12,205 6,83,480 By Normal Loss A/c 610 8,540
[(5% of 12,205
units)
x ₹ 14]
” Additional -- 28,000 ” Finished Stock 12,000 8,36,160
material A/c (₹ 69.68$ ×
12,000
” Direct wages -- 42,000 units)
” Abnormal gain 405 28,220
(₹ 69.68$ × 405
units)
12,610 8,44,700 12,610 8,44,700
Cost per unit of completed units
,-!./ 1- ! 2./ .3/2 4./ 2 5$-6 -$6./ /- . , +, . ,
= 7 8 ! ! 9-$6./ /- !
= , ! + !
= Rs. 69.68
It was a practical problem on process costing which required the examinees to prepare
process accounts and also find the percentage of wastage in process Y. Very few examinees
answered the question in the correct line. Most of the examinees could not calculate the
percentage of wastage correctly. Average performance was observed.
Question 15
The following data are available in respect of Process-I for January 20X9:
(1) Opening stock of work in process: 600 units at a total cost of Rs. 4,20,000.
(2) Degree of completion of opening work in process:
Material 100%
Labour 60%
Overheads 60%
(3) Input of materials at a total cost of Rs.55,20,000 for 9,200 units.
(4) Direct wages incurred Rs.18,60,000
(5) Production overhead Rs.8,63,000.
(6) Units scrapped 200 units. The stage of completion of these units was:
Materials 100%
10.20
Labour 80%
Overheads 80%
(7) Closing work in process; 700 units. The stage of completion of these units was:
Material 100%
Labour 70%
Overheads 70%
(8) 8,900 units were completed and transferred to the next process.
(9) Normal loss is 4% of the total input (opening stock plus units put in)
(10) Scrap value is Rs.60 per unit. You are required to:
(i) COMPUTE equivalent production,
(ii) CALCULATE the cost per equivalent unit for each element.
(iii) CALCULATE the cost of abnormal loss (or gain), closing work in process and the units
transferred to the next process using the FIFO method. (10 Marks April ‘19) (Same
concept different figures MTP 10 Marks Oct’22)
Answer 15
(i) (FIFO Method)
Input Output Equivalent Production
Materials Labour Production
Overhead
Details Units Details Units % Units % Units % Units
Opening 600 From opening 600 - - 40 240 40 240
Stock stock
- From fresh 8,300 100 8,300 100 8,300 100 8,300
materials
Closing W-I-P 700 100 700 70 490 70 490
Fresh inputs 9,200 Normal loss 392 - - - - - -
9,992 9,000 9,030 9,030
Less: Abnormal
Gain (192) 100 (192) 100 (192) 100 (192)
9,800 9,800 8,808 8,838 8,838
(ii) Statement of Cost per equivalent units
Elements Cost Equivalent units Cost per
(EU) EU
(Rs.) (Rs.) (Rs.)
Material Cost 55,20,000
Less: Scrap realisation 392 (2,3520) 54,96,480 8,808 624.03
units @ Rs. 60/- p.u.
Labour cost 18,60,000 8,838 210.45
Production OH Cost 8,63,000 8,838 97.65
Total Cost 82,19,480 932.13
(iii) Cost of Abnormal Gain – 192 Units
(Rs.) (Rs.)
Material cost of 192 units @ Rs. 624.03 p.u. 1,19,813.76
Labour cost of 192 units @ Rs. 210.45 p.u. 40,406.40

Production OH cost of 192 units @ Rs. 97.65 p.u. 18,748.80 1,78,968.96
10.21
Cost of closing WIP – 700 Units

Material cost of 700 equivalent units @ Rs. 4,36,821.00
624.03 p.u.
Labour cost of 490 equivalent units @ Rs. 210.45 1,03,120.50
p.u.
Production OH cost of 490 equivalent @ Rs. 47,848.50 5,87,790.00
97.65 p.u.
Cost of 8,900 units transferred to next process
(i) Cost of opening W-I-P Stock b/f – 600 units 4,20,000.00
(ii) Cost incurred on opening W-I-P stock
Material cost —
Labour cost 240 equivalent units @ Rs. 210.45 p.u. 50,508.00
Production OH cost 240 equivalent units @ Rs 97.65 p.u . 23,436.00
4,93,944.00
(iii) Cost of 8,300 completed units
8,300 units @ Rs. 932.13 p.u. 77,36,679.00
Total cost [(i) + (ii) + (iii))] 86,50,623.00
Question 16
XYZ Ltd. is manufacturer of medicines. It carries on production operation in two processes. The material
first passes through Process I, where Medicine ' X' is produced. Following data are given for the month
October, 2022:
Opening work-in-progress quantity (in Liter) 12,000
(Material 100% and conversion 50% complete)
Material input quantity (in Liter) 60,000
Work completed quantity (in Liter) 40,000
Closing work-in-progress quantity (in Liter) 15,000
Opening work-in-progress cost
Material cost (in ₹) 1,75,000
Processing cost (in ₹) 1,40,000
Material input cost (in ₹) 7,70,000
Processing cost (in ₹) 8,35,000
Normal process loss is 15% of material input. It has no realizable value.
Any quantity of Medicine 'X' can be sold for ₹ 42.50 per Liter. Alternatively, it can be transferred to
Process II for further processing and then sold as Medicine ' XYZ' for ₹ 50 per Liter. Further materials are
added in Process II, which yield 1.25 Liter of Medicine ' XYZ' for every Liter of Medicine 'X' of Process I.
Out of the 40,000 Liter of work completed in Process I, 10,000 Liter are sold as Medicine 'X' and 30,000
Liter are passed through Process II for sale as Medicine 'XYZ'.
The monthly costs incurred in Process II (other than the cost of Medicine ' X') are:
Input 30,000 Liter of Medicine 'X'
Materials Cost ₹ 2,75,000
Processing Costs ₹ 2,50,000

(i) PREPARE Statement of Equivalent production and determine the cost per Liter of Medicine 'X' in Process
I, using the weighted average cost method.

10.22
(ii) Company is mulling over the option to sell the 30,000 Liter of Medicine ' X' at Process-I without
processing it further in Process-II. WILL IT BE beneficial for the company over the current pattern of
processing 30,000 Liter in process-II? (MTP 10 Marks Sep’22)
Answer 16
(i) Process I Statement of Equivalent Production (Under Weighted Average Method)
units units (in Material Conversion
(in Liter) (%) Equivalen t (%) Equivalent
Liter) units (in units
Liter) (in Liter)
Opening WIP 12,000 Units introduced 40,000 100 40,000 100 40,000
and completed
New Material 60,000 Normal Loss (15% 9,000 - - - -
Introduced of 60,000 liters)
Closing WIP 15,000 100 15,000 80 12,000
Abnormal Loss
(Bal. fig.) 8,000 100 8,000 100 8,000
72,000 72,000 63,000 60,000
Statement of Cost for Each Element
Elements of Costs Material (₹) Conversion Cost (₹)
Costs of Opening WIP 1,75,000 1,40,000
Cost of the Process (for the period) 7,70,000 8,35,000
Total Cost 9,45,000 9,75,000
Equivalent Units (in liter) 63,000 60,000
Cost Per equivalent Units (in liter) ₹ 15 ₹ 16.25
Therefore, Cost of Medicine ‘X’ is ₹ 31.25 per liter (₹ 15 + ₹ 16.25)
(ii) Statement showing comparative data to decide whether 30,000 Liters of Medicine ‘X' should be further
processed into 'XYZ'
Alternative 1 Alternative 2
Sell medicine 'X' Process further into
afterProcess I 'XYZ'
(₹) (₹)
Sales 12,75,000 18,75,000
(30,000 liters x ₹ 42.50) (37,500 liters x ₹ 50)
Less: Costs:
Process I - Costs (30,000 liters x ₹ 31.25)
9,37,500 9,37,500
Material in Process II - 2,75,000
Conversion cost in Process II - 2,50,000
Total Cost 9,37,500 14,62,500
Profit 3,37,500 4,12,500
Hence, company should process further as it will increase profit further by ₹ 75,000 (₹ 4,12,500 – ₹
3,37,500)
Question 17
SM Pvt. Ltd. manufactures their products in three consecutive processes. The details are as below:
Process X Process Y Process Z
Transferred to next Process 60% 50%
Transferred to warehouse for 40% 50% 100%
sale
10.23
In each process, there is a weight loss of 2% and scrap of 4% of input of each process. The realizable
value of scrap of each process is as below:
Process X @ ₹ 3 per ton
Process Y @ ₹ 5 per ton
Process Z @ ₹ 7 per ton.
The following particulars relate to January 2023:
Process X Process Y Process Z
Materials used (in Tons) 1,500 454 189
Rate per ton ₹ 21.5 ₹ 14 ₹ 12
Direct Wages ₹ 5,000 ₹ 3,260 ₹ 2,540
Direct Expenses ₹ 3,820 ₹ 2,775 ₹ 1,900
PREPARE Process Accounts- X, Y and Z & calculate cost per ton at each process. (MTP 10 Marks March
‘23) (Same concept different figures RTP Nov’22)
Answer 17
Process X Account
Particulars Tones Amount Particulars Tones Amount
(₹) (₹)
To Materials 1,500 32,250 By Weight Loss 30 ---
To Wages 5,000 By Scrap 60 180
To Direct Expenses 3,820 By Process Y 846 24,534
By Warehouse 564 16,356
Total 1,500 41,070 Total 1,500 41,070
Cost per Ton = (41,070 - 180)/(1,500-30-60) = ₹ 29 per ton

Process Y account
Amount Amount
Particulars Tones Particulars Tones
(₹) (₹)
To Process X 846 24,534 By Weight Loss 26 ---
To Materials 454 6,356 By Scrap 52 260
To Wages 3,260 By Process Z 611 18,332.5
To Direct Expenses 2,775 By Warehouse 611 18,332.5
Total 1300 36,925 Total 1300 36,925
Cost per Ton = (36,925-260)/(1,300-26-52)= ₹30 per ton
Process Z Accounts
Amount
Particulars Tones Particulars Tones Amount (₹)
(₹)
To Process Y 611 18332.5 By Weight Loss 16 ---
To Materials 189 2,268 By Scrap 32 224
To Wages 2,540 By Warehouse 752 24,817
To Direct Expenses 1,900
Total 800 25,041 Total 800 25041
Cost per Ton = (25,041-224)/(800-16-32) = ₹ 33 per ton

10.24
Question 18
From the following information for the month of January, 20X9, PREPARE Process-III cost accounts.
Opening WIP in Process-III 1,600 units at ₹ 24,000
Transfer from Process-II 55,400 units at ₹ 6,23,250
Transferred to warehouse 52,200 units
Closing WIP of Process-III 4,200 units
Units Scrapped 600 units
Direct material added in Process-III ₹ 2,12,400
Direct wages ₹ 96,420
Production overheads ₹ 56,400
Opening Stock Closing Stock Scrap
Material 80% 70% 100%
Labour 60% 50% 70%
Overheads 60% 50% 70%
The normal loss in the process was 5% of the production and scrap was sold @ ₹ 5 per unit. (Students
may treat material transferred from Process – II as Material – A and fresh material used in Process – III
as Material B) (RTP Nov.’18)
Answer 18
Statement of Equivalent Production Process III
Input Units Output Units Equivalent Production
Details Particulars Material -A Material - B Labour &
Overhead
% Units % Units % Units
Opening 1,600 Work on 1,600 - - 20 320 40 640
WIP Op. WIP
Process – 55,400 Introduced 50,600 100 50,600 100 50,600 100 50,600
II &
Transfer Completed
During the
Month
Normal 2,640 - - - - - -
Loss (5 % of
52,800
units)
Closing WIP 4,200 100 4,200 70 2,940 50 2,100
Abnormal (2,040) 100 (2,040) 100
Gain
Working note:
Production units = Opening units + Units transferred from Process-II – Closing Units
= 1,600 units + 55,400 units – 4,200 units = 52,800 units
Statement of Cost
Cost (₹) Equivalent Cost per
units equivalent
units (₹ )

10.25
Material A (Transferred from previous process) 6,23,250

Less: Scrap value of normal loss (2,640 units × ₹ 5) (13,200)
6,10,050 52,760 11.5627
Material B 2,12,400 51,820 4.0988
Labour 96,420 51,300 1.8795
Overheads 56,400 51,300 1.0994
9,75,270 18.6404
Statement of apportionment of Process Cost
Amount (₹) Amount (₹)
Opening WIP Material A 24,000
Completed opening Material B (320 units × ₹ 4.0988) 1311.62
WIP units-1600
Wages (640 units × ₹ 1.8795) 1202.88
Overheads (640 units × ₹ 1.0994) 703.62 3,218.12
Introduced & 50,600 units × ₹ 18.6404 9,43,204.24
Completed-50,600 units
Total cost of 52,200 finished goods units 9,70,422.36
Closing WIPunits- 4,200 Material A (4,200 units × ₹ 11.5627)
48,563.34
Material B (2,940 units × ₹ 4.0988) 12,050.47
Wages (2,100 units × ₹ 1.8795) 3,946.95
Overheads (2,100 units × ₹ 1.0994) 2,308.74
66,869.50
Abnormal gain units - 2,040 (2,040 units ×₹ 18.6404) 38026.42
Process III A/c
Particulars Units Amount (₹) Particulars Units Amount (₹)
To Balance b/d 1,600 24,000 By Normal loss 2,640 13,200
To Process II A/c 55,400 6,23,250 By Finished goods 52,200 9,70,422.36
To Direct material 2,12,400 By Closing WIP 4,200 66,874.06*
To Direct wages 96,420
To Production overheads 56,400
To Abnormal gain 2,040 38,026.42

59,040 10,50,496.42
59,040 10,50,496.42
* Difference in figure due to rounding off has been adjusted with closing WIP.
Question 19
A company produces a component, which passes through two processes. During the month of
November, 2020, materials for 40,000 components were put into Process- I of which 30,000 were
completed and transferred to Process- II. Those not transferred to Process- II were 100% complete as to
materials cost and 50% complete as to labour and overheads cost. The Process- I costs incurred were as
follows:
Direct Materials ₹ 3,00,000
Direct Wages ₹ 3,50,000
Factory Overheads ₹ 2,45,000
Of those transferred to Process II, 28,000 units were completed and transferred to finished goods stores.
There was a normal loss with no salvage value of 200 units in Process II. There were 1,800 units,
remained unfinished in the process with 100% complete as to materials and 25% complete as regard to
wages and overheads.
10.26
Costs incurred in Process-II are as follows:

Packing Materials ₹ 80,000
Direct Wages ₹ 71,125
Factory Overheads ₹ 85,350
Packing material cost is incurred at the end of the second process as protective packing to the
completed units of production.
Required:
(i) PREPARE Statement of Equivalent Production, Cost per unit and Process I A/c.
(ii) PREPARE statement of Equivalent Production, Cost per unit and Process II A/c. (RTP May
’21)(Same concept but different figures RTP May’22 & Old & New SM)
Answer 19
Process I
Statement of Equivalent Production and Cost
40,000 Completed 30,000 100 30,000 100 30,000 100 30,000
Closing WIP 10,000 100 10,000 50 5,000 50 5,000
40,000 40,000 40,000 35,000 35,000

Cost incurred (₹) 3,00,000 3,50,000 2,45,000 8,95,000
Equivalent units 40,000 35,000 35,000
Cost per equivalent unit (₹) 7.50 10.00 7.00 24.50
Process-I Account
To Materials 40,000 3,00,000 By Process-II A/c 30,000 7,35,000
(30,000 units × ₹24.5)
To Labour 3,50,000 By Closing WIP* 10,000 1,60,000

To Overhead 2,45,000
40,000 8,95,000 40,000 8,95,000
* (Material 10,000 units × ₹ 7.5) + (Labour 5,000 units × ₹ 10) + (Overheads 5,000 units × ₹7)
= ₹ 75,000 + ₹ 50,000 + ₹ 35,000 = ₹ 1,60,000
Process II
Statement of Equivalent Production and Cost
30,000 Completed 28,000 100 28,000 100 28,000 100 28,000
Normal loss 200 -- -- --
Closing WIP 1,800 100 1,800 25 450 25 450
30,000 30,000 29,800 28,450 28,450
Process-I Cost 7,35,000 -- -- 7,35,000
Cost incurred (₹) -- 71,125 85,350 1,56,475
10.27
Equivalent units 29,800 28,450 28,450 --

Cost per equivalent unit (₹) 24.6644 2.5000 3.0000 30.1644
Process-II Account
To Process-I A/c 30,000 7,35,000 By Normal loss A/c 200 --
To Packing Material -- 80,000 By Finished Goods Stock 28,000* 9,24,604
A/c
To Direct Wages -- 71,125 By Closing WIP 1,800** 46,871
To Factory Overhead -- 85,350
30,000 9,71,475 30,000 9,71,475
* 28,000 × ₹ 30.1644 = ₹ 8,44,603 + ₹ 80,000 (Packing Material Cost) = ₹ 9,24,604
** 1,800 units × ₹ 24.6644 + 450 units × (₹ 2.5 + ₹3) = ₹ 46,871
Question 20
EXPLAIN the term Equivalent units used in process industries. (RTP Nov.’19)
Answer 20
Equivalent Units: Equivalent units or equivalent production units, means converting the incomplete
production units into their equivalent completed units. Under each process, an estimate is made of the
percentage completion of work-in-process with regard to different elements of costs, viz., material, labour
and overheads. It is important that the estimate of percentage of completion should be as accurate as
possible. The formula for computing equivalent completed units is: For instance, if 25% of work has been
done on the average of units still under process, then 200 such units will be equal to 50 completed units
and the cost of work-in process will be equal to the cost of 50 finished units.
Question 21
Describe Operation costing with two examples of industries where operation costing is applied.
(May’18)
Answer 21
This product costing system is used when an entity produces more than one variant of final product using
different materials but with similar conversion activities. Which means conversion activities are similar for all
the product variants but materials differ significantly. Operation Costing method is also known as Hybrid
product costing system as materials costs are accumulated by job order or batch wise but conversion costs i.e.
labour and overheads costs are accumulated by department, and process costing methods are used to assign
these costs to products. Moreover, under operation costing, conversion costs are applied to products using
a predetermined application rate. This predetermined rate is based on budgeted conversion costs. The two
example of industries are Ready made garments and Jewellery making.
Question 22
‘Dairy Wala Private limited’ is engaged in the production of flavoured milk. Its process involve filtration
and boiling of milk after that some sugar, flavour, colour is added and then letting it cool to fill the
product into clean and sterile bottles. For Producing 10 litre of flavour milk, 100 litre of Raw milk is
required, which extracts only 45 litres of standardized milk.
Following information regarding Process – I has been obtained from the manufacturing department of
Dairy Wala Private limited for the month of December 2022:
Items (`)
Opening work-in process (13,500 litre)
Milk 1,50,000
Labour 45,000
Overheads 1,35,000
Milk introduced for filtration and boiling (3,00,000 litre) 15,00,000
10.28

Overheads 18,00,000
Abnormal Loss: 3,000 litres
Milk 100%
Closing work-in process: 27,000 litres
Milk 100%
Milk transferred for Packing: 1,18,500 litres
You are required to PREPARE using average method:
(i) Statement of equivalent production,
(ii) Statement of cost,
(iv) Process-I Account.
(RTP May 23)
Answer 22
Units Units Milk Labour & O.H.
% Units % Units
Opening 13,500 Completed 1,18,500 100 1,18,500 100 1,18,500
WIP
and transferred to
Process-II
Units 3,00,000 Normal Loss (55%* 1,65,000 -- -- -- --
introduced of 3,00,000)
Abnormal loss 3,000 100 3,000 80 2400
Closing WIP 27,000 100 27,000 80 21,600
3,13,500 3,13,500 1,48,500 1,42,500
* 100 litre of milk extracts only 45 litre of standardized milk. Thus, normal loss = 100 – 45
= 55%
Particulars Milk (`) Labour (`) Overhead (`) Total (`)
Cost of opening work-in- 1,50,000 45,000 1,35,000 3,30,000
process
Cost incurred during the 15,00,000 6,00,000 18,00,000 39,00,000
month
Total cost: (A) 16,50,000 6,45,000 19,35,000 42,30,000
Equivalent units: (B) 1,48,500 1,42,500 1,42,500
Cost per equivalent unit: (C) 11.111 4.526 13.578 29.216
= (A ÷ B)
(`) (`)

10.29
1. Value of units completed and transferred 34,62,096

(1,18,500 units × ` 29.216)
2. Value of Abnormal Loss: -
Milk (3,000 units × ` 11.111) 33,333
Labour (2400 units × ` 4.526) 10,863
Overheads (2400 units × ` 13.579) 32,590 76,786
Milk (27,000 units × ` 11.111) 299997
Labour (21,600 units × ` 4.526) 97,762
Overheads (21,600 units × ` 13.579) 2,93,306 6,91,065
(iv) Process-I A/c
(`) (`)
To Opening By Normal Loss 1,65,000 --
W.I.P:
Milk 13,500 1,50,000 By Abnormal Loss 3,000 76,839
(`.44 difference
due to
approximation)
Labour -- 45,000 By Process-II A/c 1,18,500 34,62,096
Overheads -- 1,35,000 By Closing WIP 27,000 6,91,065
To Milk 3,00,000 15,00,000
introduced
3,13,500 42,30,000 3,13,500 42,30,000
Question 23
The following information is furnished by ABC Company for Process - II of its manufacturing activity for
the month of April 2023:
(i) Opening Work-in-Progress – Nil
(ii) Units transferred from Process I – 55,000 units at ` 3,27,800
(iii) Expenditure debited to Process – II:
Consumables ` 1,57,200
Labour ` 1,04,000
Overhead ` 52,000
(iv) Units transferred to Process III – 51,000 units
(v) Closing WIP – 2,000 units (Degree of completion):
Consumables 80%
Labour 60%
Overhead 60%
(vi) Units scrapped - 2,000 units, scrapped units were sold at ` 5 per unit
(vii) Normal loss – 4% of units introduced

(i) Prepare a Statement of Equivalent Production.
(ii) Determine the cost per unit
10.30
(iii) Determine the value of Work-in-Process and units transferred to Process – III
(RTP Nov ’23)
Answer 23
Equivalent Production
Output Material- Consumables Labour &
Input Details Units Particulars Units A* Overheads
% Units % Units % Units
Units 55,000 Units 51,000 100 51,000 100 51,000 100 51,000
transferre transferred to
d from Process-III
Process-I
Normal loss (4% 2,200 - - - - - -
of 55,000)
Closing W-I-P 2,000 100 2,000 80 1,600 60 1,200
Abnormal Gain (200) 100 (200) 100 (200) 100 (200)
55,000 55,000 52,800 52,400 52,000
*Material A represent transferred-in units from process-I
(ii) Determination of Cost per Unit

Particulars Amount (`) Units Per Unit (`)
(i) Direct Material (Consumables) :
Value of units transferred from 3,27,800
Process-I
Less: Value of normal loss
(2,200 units × ` 5) (11,000)
3,16,800 52,800 6.00
(ii) Consumables added in Process-II 1,57,200 52,400 3.00
(iii) Labour 1,04,000 52,000 2.00
(iii) Overhead 52,000 52,000 1.00
Total Cost per equivalent unit 12.00
(iii) Determination of value of Work-in-Process and units transferred to Process-III

Particulars Units Rate (`) Amount (`)
Value of Closing W-I-P:
Material from Process-I 2,000 6.00 12,000
Consumables 1,600 3.00 4,800
Labour 1,200 2.00 2,400
Overhead 1,200 1.00 1,200
20,400
Value of units transferred to Process-III 51,000 12.00 6,12,000
Question 24
A product passes through two distinct processes before completion. Following information are available
in this respect:
Process-1 Process 2
Raw materials used 10000 units -
Raw material cost (per unit) ₹ 75 -
Transfer to next process/Finished good 9000 units 8200 units
10.31
Normal loss (on inputs) 5% 10%

Direct wages ₹ 3,00,000 ₹ 5,60,000
Direct expenses 50% of direct wages 65% of direct wages
Manufacturing overheads 25% of direct wages 15% of direct wages
Realizable value of scrap (per unit) ₹ 13.50 ₹ 145
8000 units of finished goods were sold at a profit of 15% on cost. There was no opening and closing stock
of work-in-progress.
Prepare:
(i) Process-1 and Process-2 Account
(ii) Finished goods Account
(iii) Normal Loss Account
(iv) Abnormal Loss Account
(v) Abnormal Gain Account (PYP Nov’19,10 Marks) (Same concept different figures Old & New SM)
Answer 24
(i)
Dr Process-1 Account Cr.
. Particulars Units Total (₹ ) Particulars Units Total (₹)
To Raw Material 10,000 7,50,000 By Normal Loss A/c
Consumed @ 13.5 500 6,750
” Direct Wages — 3,00,000 ” Process 2 @ 133.5 9,000 12,01,500
” Direct — 1,50,000 ” By Abnormal 500 66,750
Expenses Loss @ 133.5
“ Manufacturing
Overheads 75,000
10,000 12,75,000 10,000 12,75,000
Cost per unit of completed units and abnormal loss:
:;.(%,<=,'' :;.>,<='
= Rs. 133.5
(',''' ?@AB; =' ?@AB;
(ii)
Dr. Process-2 Account Cr.
Particulars Units Total (₹) Particulars Units Total (₹)
To Process-I A/c 9,000 12,01500 B Normal Loss A/c @ 900 1,30,500
y 145
” To Direct Wages -- 5,60,000 ” By Finished Stock 8,200 21,04,667
A/c [bal fig]
” Direct Expenses -- 3,64,000
” Manufacturing -- 84,000
Overheads
” To Abnormal gain 100 25,667
(₹ 256.67 × 100
units)
9,100 22,35,167 9,100 22,35,167
Cost per unit of completed units and abnormal gain:
CD. , , CD.
, EFGHD
= Rs. 256.67
Dr. Finished Goods A/c Cr.

10.32

To Process II A/c 8,200 21,04,667 By By Cost of Sales 8,000 20,53,333
” By Balance c/d 200 51,334
8,200 21,04,667 8,200 21,04,667
(iii) Normal Loss A/c
Dr. Cr.
Particular s Units Total (₹) Particulars Units Total (₹)
To Process I 500 6,750 By By abnormal Gain II 100 14,500
Process II 900 1,30,500 By Cash 500 6,750
By Cash 800 1,16,000
1400 1,37,250 1400 1,37,250
(iv) Abnormal Loss A/c
Dr. Cr.
To Process I 500 66,750 By By Cost Ledger 500 6,750
Control A/c
By Costing P& L 60,000
A/C (Abnormal
Loss)
66,750 66,750
(v) Abnormal Gain A/c
Dr. Cr.
To Normal Loss A/c 100 14,500 By Process II 100 25,667
@ 145
To Costing P & L A/C 11,167
100 25,667 100 25,667
This was a numerical problem from the topic ‘Process Costing’. The question required
preparing Process accounts, normal loss, abnormal loss and abnormal gain accounts.
Generally, well answered by most of the examinees. Performance of the examinees in this
question was good.
Question 25
KT Ltd. produces a product EMM which passes through two processes before it is completed and
transferred to finished stock. The following data relate to May 2019:
Particulars Process Finished stock
A (₹ ) B (₹ ) (₹ )
Opening Stock 5,000 5,500 10,000
Direct Materials 9,000 9,500
Direct Wages 5,000 6,000
Factory Overheads 4,600 2,030
Closing Stock 2,000 2,490 5,000

10.33
Inter-process profit included in opening stock 1,000 4,000

Output of Process A is transferred to Process B at 25% profit on the transfer price and output of Process
B is transferred to finished stock at 20% profit on the transfer price.
Stock in process is valued at prime cost. Finished stock is valued at the price at which it is received from
Process B. Sales during the period are ₹ 75,000.
Prepare the Process cost accounts and Finished stock account showing the profit element at each stage.
(PYP May ‘19, 10 Marks) (Same concept different figures Old & New SM)
Answer 25
Process-A A/c
Particulars Total(₹) Cost(₹ ) Profit(₹ ) Particulars Total(₹) Cost(₹ ) Profit(₹ )
Opening stock 5,000 5,000 _ Process 28,800 21,600 7,200
BA/c
Direct materials 9,000 9,000 _
Direct wages 5,000 5,000 _
19,000 19,000 _
Less: Closing stock (2,000) (2,000) _
Prime Cost 17,000 17,000 _
Overheads 4,600 4,600 _
Process Cost 21,600 21,600 _
Profit (33.33%
of total cost) 7,200 - 7,200
28,800 21,600 7,200 28,800 21,600 7,200
Process-B A/c
Particulars Total(₹) Cost(₹ ) Profit(₹ ) Particulars Total(₹) Cost(₹ ) Profit(₹ )
Opening stock 5,500 4,500 1,000 Finished
stock A/c 61,675 41,550 20,125
Process A A/c 28,800 21,600 7,200
Direct materials 9,500 9,500 _
Direct wages 6,000 6,000 _
49,800 41,600 8,200
Less: Closing stock (2,490) (2,080) (410)
Prime Cost 47,310 39,520 7,790
Overheads 2,030 2,030 _
Process Cost 49,340 41,550 7,790
Profit (25%
of total cost) 12,335 - 12,335
61,675 41,550 20,125 61,675 41,550 20,125
Finished Stock A/c
Particulars Total(₹) Cost(₹ ) Profit(₹ ) Particulars Total(₹) Cost(₹ ) Profit(₹
)
Opening stock 10,000 6,000 4,000 Costing
P & L A/c 75,000 44,181 30,819
In this numerical question of ‘Process Costing’ examinees were asked to prepare process
cost accounts and finished stock account. Examinees made a mistake in the calculation of
profit in the closing stock in the Process B Account and Finished Stock Account.
Performance of the examinees was not satisfactory. Overall performance in this question
was below average.
10.34
Process B A/c 61,675 41,550 20,125

71,675 47,550 24,125
Less: Closing stock (5,000) (3,369) (1,631)
COGS 66,675 44,181 22,494
Profit 8,325 - 8,325
75,000 44,181 30,819 75,000 44,181 30,819
Question 26
Following details have been provided by M/s AR Enterprises:
(i) Opening works-in-progress - 3000 units (70% complete)
(ii) Units introduced during the year - 17000 units
(iii) Cost of the process (for the period) - ₹ 33,12,720
(iv) Transferred to next process - 15000 units
(v) Closing works-in-progress - 2200 units (80% complete)
(vi) Normal loss is estimated at 12% of total input (including units in process in the beginning). Scraps realise
₹ 50 per unit. Scraps are 100% complete.
Using FIFO method, compute:
(i) Equivalent production
(ii) Cost per equivalent unit (PYP Nov ‘18, 5 Marks)
Answer 26
Statement of Equivalent Production Units (Under FIFO Method)
Particulars Input Particulars Output Equivalent
units units Production
(%) Equivalent
units
Opening W-I-P 3,000 From opening W-I-P 3,000 30 900

Units introduced 17,000 From fresh inputs 12,000 100 12,000
Units completed
(Transferred to next process) 15,000
Normal Loss
{12% (3,000 + 17,000 units)} 2,400 -- --
Closing W-I-P 2,200 80 1760
Abnormal loss (Balancing figure) 400 100 400
20,000 11,000 15,060
Computation of cost per equivalent production unit:
Cost of the Process (for the period) ₹ 33,12,720

Less: Scrap value of normal loss (₹ 50 × 2,400 units) (₹ 1,20,000)
Total process cost ₹ 31,92,720
In this numerical problem of process costing for calculation of equivalent production and
cost per equivalent unit. Performance of the examinees was average.
Question 27
10.35
Alpha Ltd. is engaged in the production of a product A which passes through 3 different process -
Process P, Process Q and Process R. The following data relating to cost and output is obtained from the
books of accounts for the month of April 2017:
Particular Process P Process Q Process R
Direct Material 38,000 42,500 42,880
Direct Labour 30,000 40,000 50,000
Production overheads of ₹ 90,000 were recovered as percentage of direct labour.
10,000 kg of raw material @ ₹ 5 per kg. was issued to Process P. There was no stock of materials or
work in process. The entire output of each process passes directly to the next process and finally to
warehouse. There is normal wastage, in processing, of 10 %.
The scrap value of wastage is ₹ 1 per kg. The output of each process transferred to next process and
finally to warehouse are as under:
Process P = 9,000 kg Process Q = 8,200 kg Process R = 7,300 kg
The company fixes selling price of the end product in such a way so as to yield a profit of 25% selling price.
Prepare Process P, Q and R accounts. Also calculate selling price per unit of end product. (PYP May ‘18,
10 Marks)
Answer 27
Process- P Account
Particulars Kg. Amount Particulars Kg. Amoun
t
(₹ ) (₹ )
To Input 10,000 By Normal wastage 1,000
50,000 1,000
(1,000 kg. × ₹ 1)
To Direct Material — 38,000 By Process- Q 9,000 1,39,50
(9,000 kg. × ₹ 15.50) 0
To Direct Labour — 30,000
To Production OH — 22,500
(₹ 90,000 × 3/12)
10,000 1,40,500 10,00 1,40,50
0 0
. , , . ,
Cost per unit = , IJ. , IJ.
= Rs. 15.50
Process- Q Account
Particulars Kg. Amount Particulars Kg. Amoun
t
(₹ ) (₹ )
To Process-P A/c 9,000 1,39,500 By Normal wastage
(900 kg. × ₹ 1) 900 900
To Direct Material — 42,500 By Process- Q (8,200kg. × ₹ 8,20 2,54,20
31) 0 0
To Direct Labour — 40,000
To Production OH (₹ — 30,000
90,000 × 4/12)
To Abnormal Gain 100 3,100
(100 kg. × ₹ 31)
9,100 2,55,100 9,10 2,55,10
0 0
:;.%,=%,''' :;.K''
Cost per unit =
K,'''LM K''LM.
10.36
Process- R Account
Particulars Kg. Amount Particulars Kg. Amount
(₹ ) (₹ )
To Process-Q A/c 8,200 2,54,200 By Normal wastage 820 820
(820 kg. × Re.1)
To Direct Material — 42,880 By Abnormal loss 80 4,160
(80 kg. × ₹ 52)
To Direct Labour — 50,000 By Finished Goods 7,30 3,79,600
0
(7,300 kg. × ₹ 52)
To Production OH
(₹ 90,000 × 5/12) — 37,500
8,200 3,84,580 3,84,580
8,200
. , , .
Cost per unit = , IJ. IJ
= Rs. 52
Calculation of Selling price per unit of end product:

Cost per unit ₹ 52.00
Add: Profit 25% on selling price i.e. 1/3rd of cost ₹ 17.33 Selling price per unit
₹ 69.33
Question 28
MNO Ltd has provided following details:
 Opening work in progress is 10,000 units at ₹ 50,000 (Material 100%, Labour and overheads 70%
complete).
 Input of materials is 55,000 units at ₹ 2,20,000. Amount spent on Labour and Overheads is ₹ 26,500
and ₹ 61,500 respectively.
 9,500 units were scrapped; degree of completion for material 100% and for labour & overheads 60%.
 Closing work in progress is 12,000 units; degree of completion for material 100% and for labour &
overheads 90%.
 Finished units transferred to next process are 43,500 units.
Normal loss is 5% of total input including opening work in progress. Scrapped units would fetch ₹ 8.50
per unit.
You are required to prepare using FIFO method:
(i) Statement of Equivalent production
(ii) Abnormal Loss Account (PYP 5 Marks Jan 21)
Answer 28
(i) Statement of Equivalent Production (Using FIFO method)
Units Units Material Labour &
O.H.
% Units % Units
Opening WIP 10,000 Completed and
transferred to
Process-II
- From opening WIP
Units introduced 55,000 10,000 - 30 3,000

10.37
- From fresh inputs 33,500 100 33,500 100 33,500
43,500 33,500 36,500

3,250 - -
Normal Loss
{5% (10,000 +
55,000 units)}
Abnormal loss (9,500
6,250 100 6,250 60 3,750
– 3,250)
Closing WIP 12,000 100 12,000 90 10,800
65,000 65,000 51,750 51,050
Abnormal Loss A/c
To Process-I A/c 6,250 29,698 By Cost Ledger Control A/c 6,250 53,125
(Refer Working (6,250 units × ₹ 8.5)
Note-2)
To Costing Profit - 23,427
& Loss A/c
6,250 53,125 6,250 53,125
Working Notes:
1. Computation of Cost per unit
Particulars Materials Labour Overhead
(₹) (₹) (₹)
Input costs 2,20,000 26,500 61,500
Less: Realizable value of normal (27,625) -- --
scrap (3,250 units x ₹ 8.5)
Net cost 1,92,375 26,500 61,500
Equivalent Units 51,750 51,050 51,050
Cost Per Unit 3.7174 0.5191 1.2047
Total cost per unit = ₹ (3.7174 + 0.5191 + 1.2047) = ₹ 5.4412
2. Valuation of Abnormal Loss

(₹)
Materials (6,250 units × ₹ 3.7174) 23,233.75
Labour (3,750 units × ₹ 0.5191) 1,946.63
Overheads (3,750 units × ₹ 1.2047) 4,517.62
29,698
Question 29
A product passes through Process-I and Process-II. Particulars pertaining to the Process-I are:
Materials issued to Process-I amounted to ₹ 80,000, Wages ₹ 60,000 and manufacturing overheads were
₹ 52,500. Normal Loss anticipated was 5% of input, 9,650 units of output were produced and
transferred out from Process-I to Process-II. Input raw materials issued to Process-I were 10,000 units.
There were no opening stocks.
Scrap has realizable value of ₹ 5 per unit. You are required to prepare:
(i) Process-I Account
(ii) Abnormal Gain/Loss Account (PYP 5 Marks Dec ’21)
10.38
Answer 29
(i) Process - I Account
To Materials 10,000 80,000 By Normal loss 500 2,500
(5%of 10,000)
To Wages - 60,000 By Process-II A/c 9,650 1,93,000
(₹20*×9,650units )
To Manufacturing OH 52,500
To Abnormal Gain A/c 150 3,000
(₹20*×150units)
10,150 1,95,500 10,150 1,95,500
, + , , ,
,
= 20
(ii) Abnormal Gain - Account
To Normal loss A/c 150 750 By Process-I A/c 150 3,000
To Costing P&L A/c - 2,250
150 3,000 150 3,000
This Numerical question was based on the basic concept of Process Costing. A few examinees
made mistake in the calculation of abnormal gain amounts. Overall performance of the
examinees was good.
Question 30
STG Limited is a manufacturer of Chemical 'GK', which is required for industrial use. The complete
production operation requires two processes. The raw material first passes through Process I, where
Chemical 'G' is produced. Following data is furnished for the month April 2022:
Particulars (in kgs.)
Opening work-in-progress quantity 9,500
Material input quantity 1,05,000
Work Completed quantity 83,000
Closing work-in-progress quantity 16,500
You are further provided that:

Particulars (in ₹)
Opening work-in-progress cost Material cost 29,500
Processing cost 14,750
Material input cost 3,34,500
Processing cost 2,53,100

10.39
Normal process loss may be estimated to be 10% of material input. It has no realizable value. Any loss
over and above normal loss is considered to be 100% complete in material and processing.
The Company transfers 60,000 kgs. of output (Chemical G) from Process I to Process II for producing
Chemical 'GK'. Further materials are added in Process II which yield 1.20 kg. of Chemical 'GK' for every
kg. of Chemical 'G' introduced. The chemicals transferred to Process II for further processing are then
sold as Chemical 'GK' for ₹ 10 per kg. Any quantity of output completed in Process I, are sold as
Chemical 'G' @ ₹ 9 per kg.
The monthly costs incurred in Process II (other than the cost of Chemical 'G') are: Input 60,000 kg. of
Chemical 'G'
Materials Cost ₹ 85,000

Processing Costs₹ 50,000 You are required:
(i) Prepare and determine the cost per kg. of Chemical ‘G' in Process I using the weighted average
cost method.
(ii) Prepare a statement showing cost of Chemical 'G’ transferred to Process II, cost of abnormal loss
and cost of closing work-in progress.
(iii) STG is considering the option to sell 60,000 kg. of Chemical 'G' of Process I without processing it
further in Process-II. Will it be beneficial for the company over the current pattern of processing
60,000 kg in process-II?
(Note: You are not required to prepare Process Accounts) (PYP 10 Marks May’22)
Answer 30
Statement of Equivalent Production
Particulars Input Particulars Total Material Processing Cost
quantity % Units % Units
Opening WIP 9,500 Units completed 83,000 100% 83,000 100% 83,000
Material 1,05,000 Normal loss (10% 10,500 - - - -
Input of 1,05,000)
Abnormal loss 4,500 100% 4,500 100% 4,500
(Bal. fig.)
Closing WIP 16,500 100% 16,500 60% 9,900
1,14,500 1,14,500 1,04,000 97,400
Statement of Cost for each element
Particulars Material Processing Total cost
(₹) (₹) (₹)
Cost of opening WIP 29,500 14,750 44,250
Cost incurred during the month 3,34,500 2,53,100 5,87,600
Total cost (A) 3,64,000 2,67,850 6,31,850
Equivalent production (B) 1,04,000 97,400
Cost per kg of Chemical ‘G’ (A/B) 3.5 2.75 6.25
Alternative Presentation
Statement showing cost per kg of each statement
(₹) (₹)
Material 29,500 O 3,34,000 3.5
1,04,000

10.40
Processing cost 14,750 O 2,53,100 2.75

1,04,000
Total Cost per kg 6.25
(ii) Statement showing cost of Chemical ‘G’ transferred to Process II, cost of abnormal loss and cost of
closing work-in- progress
(₹)
Units transferred (60,000 × 6.25) 3,75,000
Abnormal loss (4,500 × 6.25) 28,125
Closing work in progress:
Material (16,500 × 3.5) 57,750
Processing cost (9,900 × 2.75) 27,225
84,975
(iii) Calculation of Incremental Profit / Loss after further processing
Sales if further processed (A) (60,000 x 1.20 x ₹ 10) 7,20,000
Calculation of cost in Process II
Chemical transferred from Process I 3,75,000
Add: Material cost 85,000
Add: Process cost 50,000
Total cost of finished stock (B) 5,10,000
Profit, if further processed (C = A – B) 2,10,000
If sold without further processing then,
Sales (60,000 x ₹ 9) 5,40,000
Less: Cost of input without further processing 3,75,000
Profit without further processing (D) 1,65,000
Incremental Profit after further processing (C – D) 45,000
Additional net profit on further processing in Process II is 45,000.
Therefore, it is advisable to process further chemical ‘G’.
Calculation of Incremental Profit / Loss after further processing
(₹)
If 60,000 units are sold @ ₹ 9 5,40,000
If 60,000 units are processed in process II (60,000 × 1.2 × ₹ 10) 7,20,000
Incremental Revenue (A) 1,80,000
Incremental Cost: (B)
Material Cost 85,000
Processing Cost 50,000
1,35,000
Incremental Profit (A-B) 45,000
Additional net profit on further processing in Process II is 45,000. Therefore, itis advisable to process
further chemical ‘G’.
Question 31
N Ltd. produces a product which passes through two processes – Process – I and Process-II. The company
has provided following information related to the Financial Year 2021-22:
10.41
Process-I Process -II

Raw Material @₹ 65 per unit 6,500 units -
Direct Wages ₹ 1,40,000 ₹ 1,30,000
Direct Expenses 30% of Direct 35% of Direct
Wages Wages
Manufacturing Overheads ₹ 21,500 ₹ 24,500
Realisable value of scrap per unit ₹ 4.00 ₹ 16.00
Normal Loss 250 units 500 units
Units transferred to Process-II / finished 6,000 units 5,500 units
stock
Sales - 5,000 units
There was no opening or closing stock of work-in progress. You
are required to prepare:
(i) Process-I Account
(ii) Process -II Account
(iii) Finished Stock Account (PYP 10 Marks Nov 22)
Answer 31
Process-I A/c
To Raw material used 6,500 4,22,500 By Normal loss 250 1,000
(₹ 65 × 6,500 units) (250 units × ₹ 4)
To Direct wages -- 1,40,000 By Process- II A/c 6,000 6,00,000
(₹ 100 × 6,000 units)
To Direct expenses -- 42,000 By Abnormal loss 250 25,000
(30% of ₹ 1,40,000) (₹ 100 × 250 units)
To Manufacturing 21,500
overhead
6,500 6,26,000 6,500 6,26,000
,-!./ 1- ! 2./ .3/2 4./ 2 5$-6 -$6./ /-

Cost per unit of completed units and abnormal loss : 7 8 ! ! 9-$6./ /- !
.+, +, . , .+, ,
= +, ! !
= +, !
= Rs. 100
Process- II A/c
To Process - I A/c 6,000 6,00,000 By Normal loss 500 8,000
(500 units × ₹16)
To Direct wages -- 1,30,000 By Finished Stock 5,500 7,92,000
A/c (₹144 × 5,500
units)
To Direct expenses -- 45,500
(35% of ₹
1,30,000)
To Manufacturing -- 24,500
overhead 6,000 8,00,000 6,000 8,00,000
Cost per unit of completed units and abnormal loss:

10.42
RSTUV WS T X YUVZ U[VY \UV]Y ^ S_ `S _UV VS

a`b]T ]`ZT X cS _UV VS ]`ZT
. , , . . .", ,
= +, ! !
= , !
= Rs. 144
Finished Goods Stock A/c

To Process II A/c 5,500 7,92,000 By Cost of Sales 5,000 7,20,000
(₹144 × 5,000 units)
By Balance c/d 500 72,000

5,500 7,92,000 5,500 7,92,000
Question 32
How will you treat normal loss, abnormal loss and abnormal gain in process costing? Explain (PYP 5
Marks, May ‘23)
Answer 32
Treatment of normal loss, abnormal loss and abnormal gain in process costing
Treatment of Normal loss in Cost Accounts: The cost of normal process loss in practice is absorbed by
good units produced under the process. The amount realised by the sale of normal process loss units
should be credited to the process account.
Treatment of Abnormal loss in Cost Accounts: The cost of an abnormal process loss unit is equal to the
cost of a good unit. The total cost of abnormal process loss is credited to the process account from which
it arises. Cost of abnormal process loss is not treated as a part of the cost of the product. In fact, the
total cost of abnormal process loss is debited to costing profit and loss account.
Treatment of Abnormal Gain in Cost Accounts: The process account under which abnormal gain arises
is debited with the abnormal gain and credited to abnormal gain account which will be closed by
transferring to the Costing Profit and Loss account. The cost of abnormal gain is computed on the basis
of normal production.

11.1
Chapter 11
Joint Product and By Product
Question 1
Three products X,Y and Z along with a byproduct B are obtained again in a crude state which
require further processing at a cost of Rs. 5 for X; Rs. 4 for Y; and Rs. 2.50 for Z per unit before sale.
The byproduct is however saleable as such to a nearby factory. The selling prices for the three main
products and byproduct, assuming they should yield a net margin of 25 percent of cost, are fixed
at Rs. 13.75 Rs. 8.75 and Rs. 7.50 and Re. 1.00 respectively – all per unit quantity sold.
During a period, the joint input cost including the material cost was Rs. 90,800 and the respective
outputs were:
X 8,000 units
Y 6,000 units
Z 4,000 units
B 1,000 units
By product should be credited to the joint cost and only the net joint costs are to be allocated to the main
products.
Calculate the joint cost per unit of each product and the margin available as a percentage on cost. (MTP
Aug. ‘18, 10 Marks)
Answer 1
Working Notes:
(i) Computation of Allocation Ratio for Joint Costs
Products
X Y Z.
Rs. Rs. Rs.
Selling Price 13.75 8.75 7.50
Less: Anticipated margin@ 25% on cost or 20% on sales 2.75 1.75 1.50
Cost of sales 11.00 7.00 6.00
Less: Post split off cost 5.00 4.00 2.50
Joint cost per unit 6.00 3.00 3.50
Output (units) 8,000 6,000 4,000
Total output cost 48,000 18,000 14,000
Allocation ratio for joint costs 24 9 7
(ii) Computation of net allocable joint costs
Rs. Rs.
Joint input cost including material cost 90,800
Less: Credit for realization from by-product B: Sales revenue
(1,000 × Re. 1) 1,000
Less: profit @ 25% on cost or 20% on sales 200 800
Net joint costs to be allocated 90,000
Determination of joint cost per unit of each product
Product Net joint costs allocation Rs. Output(units) Joint cost per unit
Rs. Rs.
X 54,000 (Note : 1) 8,000 6.75
Y 20,250 6,000 3.38
Z 15,750 4,000 3.94
90,000
Profit margin available on each product as a percentage on cost

Chapter 11 Joint Product And By Product
11.2
Product Joint Cost Post spilt Total Cost Selling Margin Margin % on
off cost Rs. Price Rs. cost
Rs. Rs. Rs. Rs.
X 6.75 5.00 11.75 13.75 2.00 17.02
Y 3.38 4.00 7.38 8.75 1.37 18.56
Z 3.94 2.50 6.44 7.50 1.06 16.46
Note: 1
X= X 90,000= 54000
Y= X 90,000= 20250
Z= X 90,000= 15750
Total 90000
Question 2
In an Oil Mill, four products emerge from a refining process. The total cost of input during the quarter ending
March 2019 is Rs.22,20,000. The output, sales and additional processing costs are as under:
Products Output in Additional processing Sales value (Rs.)

Litres cost after split off (Rs.)
A 8,000 6,45,000 25,87,500
B 4,000 1,35,000 2,25,000
C 2,000 - 90,000
D 4,000 22,500 6,75,000
In case these products were disposed-off at the split off point that is before further processing, the
selling price per litre would have been:
A (Rs.) B (Rs.) C (Rs.) D (Rs.)
225.00 90.00 45.00 112.50
PREPARE a statement of profitability based on:
(i) If the products are sold after further processing is carried out in themill.
(ii) If they are sold at the split off point. (MTP Oct. ‘19, 10 Marks, RTP Nov ’18)
Answer 2
Statement of profitability of an Oil Mill (after carrying out further processing) for the quarter ending 31st
March2019.
Products Sales Value after Share of Joint Additional Total cost Profit (loss)
further cost processing after
processing cost processing
A 25,87,500 14,80,000 6,45,000 21,25,000 4,62,500
B 2,25,000 2,96,000 1,35,000 4,31,000 (2,06,000)
C 90,000 74,000 - 74,000 16,000
D 6,75,000 3,70,000 22,500 3,92,500 2,82,500
35,77,500 22,20,000 8,02,500 30,22,500 5,55,000
Statement of profitability at the split off point
Products Selling price of Output in Sales value at Share of joint Profit at split
split off units split off point cost off point
A 225.00 8,000 18,00,000 14,80,000 3,20,000

B 90.00 4,000 3,60,000 2,96,000 64,000
11.3
C 45.00 2,000 90,000 74,000 16,000

D 112.50 4,000 4,50,000 3,70,000 80,000
- - 27,00,000 22,20,000 4,80,000
Note: Share of Joint Cost has been arrived at by considering the sales value at split off point.
Question 3
EXPLAIN the treatment of by-product cost in cost accounting. (MTP 5 Marks May 20, PYP 5 Marks Nov
’18, Old & New SM, RTP May 20)
Answer 3
By-product cost can be dealt in cost accounting in the following ways:
(i) When they are of small total value: When the by-products are of small total value, the amount realised
from their sale may be dealt in any one the following two ways:
1. The sales value of the by-products may be credited to the Costing Profit and Loss Account and no
credit be given in the Cost Accounts. The credit to the Costing Profit and Loss Account here is treated
either as miscellaneous income or as additional sales revenue.
2. The sale proceeds of the by-product may be treated as deductions from the total costs. The sale
proceeds in fact should be deducted either from the production cost or from the cost of sales.
(ii) When the by-products are of considerable total value: Where by-products are of considerable total value,
they may be regarded as joint products rather than as by-products. To determine exact cost of by-products
the costs incurred upto the point of separation, should be apportioned over by-products and joint
products by using a logical basis. In this case, the joint costs may be divided over joint products and by-
products by using relative market values; physical output method (at the point of split off) or ultimate
selling prices (if sold).
(iii) Where they require further processing: In this case, the net realisable value of the by- product at the split-
off point may be arrived at by subtracting the further processing cost from the realisable value of by-
products.
If total sales value of by-products at split-off point is small, it may be treated as per the provisions
discussed above under (i).
In the contrary case, the amount realised from the sale of by-products will be considerable and thus it
may be treated as discussed under (ii).
This was a theoretical question on process costing on treatment of by product. Below

average performance was observed.
Question 4
‘Buttery Butter’ is engaged in the production of Buttermilk, Butter and Ghee. It purchases processed
cream and let it through the process of churning until it separates into buttermilk and butter. For the
month of January, 2020, ‘Buttery Butter’ purchased 50 Kilolitre processed cream @ ₹ 100 per 1000 ml.
Conversion cost of ₹ 1,00,000 were incurred up-to the split off point, where two saleable products were
produced i.e. buttermilk and butter. Butter can be further processed into Ghee.
The January, 2020 production and sales information is as follows:
Products Production (in Sales Quantity (in Selling price per

Kilolitre/tonne) Kilolitre/tonne) Litre/Kg (₹)
Buttermilk 28 28 30
Butter 20 — —
11.4
Ghee 16 16 480
All 20 tonne of butter were further processed at an incremental cost of ₹ 1,20,000 to yield 16 Kilolitre
of Ghee. There was no opening or closing inventories of buttermilk, butter or ghee in January, 2020.
Required:
SHOW how joint cost would be apportioned between Buttermilk and Butter under Estimated Net
Realisable Value method.
‘Healthy Bones’ offers to purchase 20 tonne of butter in February at ₹ 360 per kg. In case ‘Buttery
Butter’ accepts this offer, no Ghee would be produced in February. SUGGEST whether ‘Buttery
Butter’ shall accept the offer affecting its operating income or further process butter to make Ghee
itself? (MTP 5 Marks Oct 20, Old & New SM)
Answer 4
(i) Estimated Net Realizable Value Method:
Buttermilk Butter
Amount (₹) Amount (₹)
Sales Value 8,40,000 76,80,000
(₹ 30 × 28 × 1000) (₹ 480 × 16 × 1000)
Less: Post split-off cost (Further
processing cost) - (1,20,000)
Net Realizable Value 8,40,000 75,60,000
Apportionment of Joint Cost of 5,10,000 45,90,000
₹ 51,00,000* in ratio of 1:9
* [(₹ 100 × 50 × 1000) + ₹ 1,00,000] = ₹ 51,00,000
(ii) Incremental revenue from further processing of Butter into Ghee

(₹ 480 × 16 × 1000 - ₹ 360 × 20 × 1000) ₹ 4,80,000
Less: Incremental cost of further processing
of Butter into Ghee ₹ 1,20,000
Incremental operating income from further processing ₹ 3,60,000
The operating income of ‘Buttery Butter’ will be reduced by ₹ 3,60,000 in February if it sells 20 tonne
of Butter to ‘Healthy Bones’, instead of further processing of Butter into Ghee for sale. Thus, ‘Buttery
Butter’ is advised not to accept the offer and further process butter to make Ghee itself.
Question 5
A factory produces two products, 'Ghee' and 'Cream' from a single process. The joint processing
costs during a particular month are:
Direct Material ₹ 60,000
Direct Labour ₹ 19,200
Variable Overheads ₹ 24,000
Fixed Overheads ₹ 64,000
Sales: Ghee - 200 litre @ ₹ 600 per litre; Cream – 240 litre @ ₹ 200 per litre. REQUIRED:
I. Apportion joints costs on the basis of:
(i) Physical Quantity of each product.
(ii) Contribution Margin method, and
II. Determine Profit or Loss under both the methods. (MTP 5 Marks, Oct.’21, PYP 5 Marks Nov ’19)
Answer 5
Total Joint Cost
11.5

Direct Material 60,000
Direct Labour 19,200
Variable Overheads 24,000
Total Variable Cost 1,03,200
Fixed Overheads 64,000
Total joint cost 1,67,200
Apportionment of Joint Costs:
Product-Ghee Product-Cream
I. (i) Apportionment of Joint ₹ 76,000 ₹ 91,200
Cost on the basis of Rs. 1,67, 200/200+240 Rs. 1,67,200/200+240 litre
‘Physical Quantity’ litre 200 240
(ii) Apportionment of Joint
Cost on the basis of
‘Contribution Margin
Method’:
- Variable Costs (on ₹ 46,909 ₹ 56,291
basis of physical (Rs. 1,03,200 /200+240 (Rs. 1,03,200 /200+240
units) litre 200 litre 240
Contribution Margin 73,091 - 8,291

(₹600×200 – 46,909) (₹200×240 – 56,291)
Fixed Costs* ₹ 64,000
Total apportioned cost ₹ 1,10,909 ₹ 56,291
II. (iii) Profit or Loss:
When Joint cost apportioned on basis of physical units
A. Sales Value ₹ 1,20,000 ₹ 48,000
B. Apportioned joint cost on ₹ 76,000 ₹ 91,200
basis of ‘Physical
Quantity’:
A-B Profit or (Loss) 44,000 (43,200)
When Joint cost apportioned on basis of ‘Contribution Margin Method’
C Apportioned joint cost on ₹ 1,10,909 ₹ 56,291
basis of ‘Contribution
Margin Method’
A-C Profit or (Loss) ₹ 9,091 ₹ (8,291)
* The fixed cost of ₹ 64,000 is to be apportioned over the joint products- Ghee and Cream in the
ratio of their contribution margin but contribution margin of Product- Cream is Negative so fixed
cost will be charged to Product- Ghee only.
This was a numerical problem from the topic ‘Joint products and by-products’. The question
required apportionment of joint cost on the basis of physical quantity method and
contribution margin method. Performance of the examinees was average.
Question 6
How apportionment of joint costs up-to the point of separation amongst the joint products using
market value at the point of separation and net realizable value method is done? DISCUSS. (MTP 5
Marks Nov ’21, RTP May ’21)
11.6
Answer 6
Apportionment of Joint Cost amongst Joint Products using:
Market value at the point of separation: This method is used for apportionment of joint costs to
joint products upto the split off point. It is difficult to apply if the market value of the product at the
point of separation is not available. It is useful method where further processing costs are incurred
disproportionately.
Net realizable value Method: From the sales value of joint products (at finished stage) the followings are
deducted:
 Estimated profit margins

 Selling & distribution expenses, if any
 Post- split off costs.
The resultant figure so obtained is known as net realizable value of joint products. Joint costs are
apportioned in the ratio of net realizable value.
Question 7
SV chemicals Limited processes 9,00,000 kgs. of raw material in a month purchased at ₹ 95 per kg in
department X. The input output ratio of department X is 100 : 90. Processing of the material results in
two joint products being produced ‘P 1’ and ‘P2’ in the ratio of 60 : 40. Product ‘P 1’ can be sold at split
off stage or can be further processed in department Y and sold as a new product ‘YP 1’. The input
output ratio of department Y is 100 : 95. Department Y is utilized only for further processing of product
‘YP 1’ to product P1. Individual departmental expenses are as follows:
Dept. X (₹ lakhs) Dept. Y (₹ lakhs)
Direct Materials 95.00 14.00
Direct Wages 80.00 27.00
Variable Overheads 100.00 35.00
Fixed Overheads 75.00 52.00
Total 350.00 128.00
Further, selling expenses to be incurred on three products are:
Particulars Amount (₹ in lakhs)
Product ‘P1’ 28.38
Product ‘P2’ 25.00
Product ‘YP1’ 19.00
Selling price of the products ‘P1’ and ‘P2’ at split off point is ₹ 110 per kg and ₹ 325 per kg respectively.
Selling price of new product ‘YP1’ is ₹ 150 per kg.
(i) Prepare a statement showing apportionment of joint costs, in the ratio of value of sales, net of
selling expenses.
(ii) Prepare a Statement showing profitability at split off point.
(iii) Prepare a Statement of profitability of ‘YP 1’.
(iv) Determine that would you recommend further processing of P 1? (MTP March ‘18, 10 Marks)
Answer 7
Working Notes:
Input output ratio of material processed in Department X = 100:90
Particulars Quantity (Kg)
Material input 9,00,000
Less: Loss of material in process @ 10% of 9,00,000 kgs (90,000)
Output 8,10,000
11.7
Output of department X is product ‘P1’ and ‘P2’ in the ratio of 60 : 40.
60 8,10,000
Output ‘P1’= = 4,86,000 kgs.
100
40 8,10,000
Output ‘P2’ = = 3,24,000 kgs.
100
Statement showing ratio of net sales

Product P1 P2 Total
Quantity (kgs) 4,86,000 3,24,000 8,10,000
Selling price per kg (₹ ) 110.00 325.00
Sales Value (₹ in lakhs) 534.60 1,053.00 1587.60
Less: Selling Expenses (₹ in l akhs) (28.38) (25.00) (53.38)
Net Sales (₹ in lakhs) 506.22 1,028.00 1,534.22
Ratio 33% 67% 100.00
Computation of Joint Costs
Particulars Amount (₹ Lakhs)
Raw Material input 9,00,000 kgs @ ₹ 95 per kg 855.00
Direct Materials 95.00
Direct Wages 80.00
Variable Overheads 100.00
Fixed Overheads 75.00
Total 1,205.00
(i) Statement showing apportionment of joint costs in the ratio of net sales
Particulars Amount (₹ in lakhs)
Joint cost of P1 – 33% of ₹ 1,205 lakhs 397.65

Joint cost of P2 – 67% of ₹ 1,205 lakhs 807.35
Total 1,205.00
(ii) Statement showing profitability at split off point
Product P1 P2 Total
Net Sales Value (₹ in lakhs) – [A] 506.22 1,028.00 1,534.22
Less: Joint costs (₹ in lakhs) (397.65) (807.35) (1,205.00)
Profit (₹ i n lakhs) [A] – [B] 108.57 220.65 329.22
Product P1 P2 Total
Sales Value (₹ in lakhs) – [A] 534.60 1,053.00 1,587.60
Less: Joint costs (₹ in lakhs) 397.65 807.35 1,205.00
Selling Expenses 28.38 25.00 53.38
Total Cost [B] 426.03 832.35 1,258.38
Profit (₹ in lakhs) [A] – [B] 108.57 220.65 329.22
(iii) Statement of profitability of product ‘YP1’
Particulars YP1
Sales Value (₹ in lakhs) (Refer working note) [A] 629.55
Less: Cost of P1 397.65
Cost of Department Y 128.00
Selling Expenses of Product ‘YP1’ 19.00
Total Costs [B] 544.65
Profit (₹ in lakhs) [A] – [B] 84.90
11.8
Working Note:
Computation of product ‘YP1’
Quantity of product P1 input used = 4,86,000 kgs
Input output ratio of material processed in Department Y = 100 : 95
Particulars Quantity (Kg)
Material input 4,86,000
Less: Loss of material in process @ 5% of 4,86,000 (24,300)
Output 4,61,700
Sales Value of YP1 = 4,61,700 kgs @ ₹ 150 per kg = ₹ 692.55 lakhs
(iv) Determination of profitability after further processing of product P1 into product YP1:
Particulars (₹ in lakhs)
Profit of Product ‘P1’ {refer (ii) above} 108.57
Profit of Product ‘YP1’{refer (iii) above} 84.90
Decrease in profit after further processing 23.67
Based on the above profitability statement, further processing of product P1 into YP1 should not
be recommended.
Question 8
DESCRIBE net realizable value method of apportioning joint costs to by-products (MTP 5 Marks Aug
’18, MTP 5 Marks March ‘21)
Answer 8
Net Realisable Value method: The realisation on the disposal of the by-product may be deducted from
the total cost of production so as to arrive at the cost of the main product. For example, the amount
realised by the sale of molasses in a sugar factory goes to reduce the cost of sugar produced in the
factory. When the by-product requires some additional processing and expenses are incurred in making
it saleable to the best advantage of the concern, the expenses so incurred should be deducted from
the total value realised from the sale of the by-product and only the net realisations should be
deducted from the total cost of production to arrive at the cost of production of the main product.
Separate accounts should be maintained for collecting additional expenses incurred on:
(i) further processing of the by-product, and
(ii) selling, distribution and administration expenses attributable to the by-product.
Question 9
Mili Ltd., a manufacturing company, produces two main products and a by-product out of a joint
process. The ratio of output quantities to input quantities of direct material used in the joint process
remains consistent on yearly basis. Company has employed the physical volume method to allocate
joint production costs to the main products. The net realizable value of the by-product is used to
reduce the joint production costs before the joint costs are allocated to the main products. During a
month, company incurred joint production costs of ₹ 15,00,000. The main products are not
marketable at the split off point and thus have to be processed further. Details of company’s
operation are given in the table below.
Particulars Product-Q Product-R By product
Monthly output in kg. 90,000 1,80,000 75,000
Selling price per kg. ₹ 50 ₹ 30 ₹5
Process costs ₹ 3,00,000 ₹ 4,50,000
FIND OUT the amount of joint product cost that Mili Ltd. would allocate to product-R by using the
physical volume method to allocate joint production costs? .(MTP 5 Marks March ’22, Old & New
11.9
SM)
Answer 9
Calculation of Net joint costs to be allocated:
Joint Costs 15,00,000
Less: Net Realizable value of by-product (75,000 × 5) 3,75,000
Net joint costs to be allocated 11,25,000
Therefore, amount of joint product cost that Mili Ltd. would allocate to the product-R by using the
physical volume method to allocate joint production costs:
= X Net joint costs to be allocated

," ,
= X 11,25,000 = Rs. 7,50,000
, ,
Question 10
Following information is available for A Ltd.:
Sales- P: 200 kg @ ₹ 120 per kg. Q: 240 kg @ ₹ 60 per kg.
Joint costs- Marginal cost ₹ 17,600 Fixed cost ₹ 15,600
You are required to FIND OUT the cost of joint products P and Q using contribution margin method.
(MTP 5 Marks April ’22)
Answer 10
The marginal cost (variable cost) of ₹ 17,600 is apportioned over the joint products P and Q in the ratio
of their physical quantity i.e. 200 : 240
Marginal cost for Product P : ₹ 17,600 × 200/440 = ₹ 8,000
Marginal cost for Product Q : ₹ 17,600 × 240/440 = ₹ 9,600
The fixed cost of ₹ 15,600 is apportioned over the joint products P and Q in the ratio of their
contribution margin i.e. 160 : 48 (Refer to working note)
Product P : ₹ 15,600 × 160/208 = ₹ 12,000 Product Q : ₹ 15,600 × 48/208 = ₹ 3,600 Working
Note:
Computation of contribution margin ratio
Products Sales revenue Marginal cost Contribution
(₹) (₹) (₹)
P 24,000 8,000 16,000
Q 14,400 9,600 4,800
(Refer to above)
Contribution ratio is 160 : 48
Question 11
A manufacturing process yields the following products out of the raw materials introduced in the
process:
Main Product X 60% of Raw Materials
By-Product Y 15% of Raw Materials
By Product Z 20% of Raw Materials
Wastage 5% of Raw Materials
Other information is as follows:
11.10
a. Total Cost: Raw Materials 1,000 units of ₹ 9,200; Labour ₹ 8,200; Overheads ₹ 12,000
b. One unit of product z requires ½ the raw materials required for one unit of product Y, one unit
of product X requires1½ times the raw materials required for product Y.
c. Product X required double the time needed for production of one unit of Y and one unit of Z.
d. Product Z requires ½ the time required for the production of one unit of product Y.
e. Overheads are to be apportioned in the ratio of 6:1:1.
You are required to CALCULATE the total and per unit of cost of each of the products. (MTP 5 Marks
Sep’22)
Answer 11
Statement of Distribution of Costs
Cost Elements Basis Total Main Product X By-Product Y By-Product Z
Cost (600 Units) (150 Units) (200 Units)
Total Per Total Per Total Per
Unit Unit Unit
Raw Materials 18:3:2 9,200 7,200 12 1,200 8 800 4
Labour 36:3:2 8,200 7,200 12 600 4 400 2
Overheads 6:1:1 12,000 9,000 15 1,500 10 1,500 7.50
Total 29,400 23,400 39 3,300 22 2,700 13.50
Working Notes:
1. Calculation of Units produced:
Main Product X 60% of Raw Materials 600 Units

By-Product Y 15% of Raw Materials 150 Units
By Product Z 20% of Raw Materials 200 Units
Wastage 5% of Raw Materials 50 Units 1000 Units
2. Cost Allocation Raw Materials
Let Product Z requires 1 unit of raw materials then, Product Y will require 2 units of raw materials and
Product X will require 3 units of raw materials.
Product X Y Z Individual Unit ratio
(a) 3 : 2 : 1
Units (b) 600 : 150 : 200
Ratio for Cost Allocation (a*b) 1800 : 300 : 200
Ratio 18 : 3 : 2
Labour:
Let Product Z requires 1 hour of Labour then, Product Y will require 2 hours of Labour and Product X
will require 6 hours of Labour.
Product X Y Z
Individual hour ratio (a) 6 : 2 : 1
Units (b) 600 150 200
Ratio for Cost Allocation (a*b) 3600 : 300 : 200
Ratio 36 : 3 : 2
Question 12
ABC Ltd. operates a simple chemical process to convert a single material into three separate items,
referred to here as X, Y and Z. All three end products are separated simultaneously at a single split-off
point.
11.11
Product X and Y are ready for sale immediately upon split off without further processing or any other
additional costs. Product Z, however, is processed further before being sold. There is no available
market price for Z at the split-off point.
The selling prices quoted here are expected to remain the same in the coming year. During 2022-23,
the selling prices of the items and the total amounts sold were:
X –186 tons sold for ₹3,000 per ton Y –527 tons sold for ₹2,250 per ton
Z –736 tons sold for ₹1,500 per ton
The total joint manufacturing costs for the year were ₹12,50,000.
An additional ₹6,20,000 was spent to finish product Z.
There were no opening inventories of X, Y or Z at the end of the year. The following inventories of
complete units were on hand:
X 180 tons
Y 60 Tons
Z 25 tons
There was no opening or closing work-in-progress.
Required:
COMPUTE the cost of inventories of X, Y and Z and cost of goods sold for year ended March 31,
2023, using Net realizable value (NRV) method of joint cost allocation. (MTP 10 Marks April ’23)
(Same concepts different figures MTP 10 Marks Mar’23, RTP Nov’20)
Answer 12
Statement of Joint Cost allocation of inventories of X, Y and Z
(By using Net Realisable Value Method)
Products
X Y Z Total
(₹) (₹) (₹) (₹)
Final sales value of total 10,98,000 13,20,750 11,41,500 35,60,250
production (Working Note (366 × (587 × ₹2,250) (761 × ₹1,500)
1) ₹3,000)
Less: Additional cost -- -- (6,20,000) (6,20,000)
Net realisable value 10,98,000 13,20,750 5,21,500 29,40,250
(at split-off point)
Joint cost allocated 4,66,797 5,61,496 2,21,707 12,50,000
(Working Note 2)
Cost of goods sold as on March 31, 2023
(By using Net Realisable Value Method)
Product
s Total
X Y Z
(₹) (₹) (₹) (₹)
Allocated joint cost 4,66,797 5,61,496 2,21,707 12,50,000
Additional costs -- -- 6,20,000 6,20,000
Cost of goods 4,66,797 5,61,496 8,41,707 18,70,000
available for sale
(CGAS)
11.12
Less: Cost of ending 2,29,571 57,385 27,692 3,14,648

inventory (CGAS×49.18 (CGAS × (CGAS ×
(Working Note 1) %) 10.22%) 3.29%)
Cost of goods sold 2,37,226 5,04,111 8,14,015 15,55,352
Working Notes
1. Total production of three products for the year 2022-2023
Product Quantity sold in Quantity of Total Ending

s tones ending production inventory
inventory in percentage
tons (%)
(1) (2) (3) (4) = [(2) + (3)} (5) = (3)/
(4)
X 186 180 366 49.18
Y 527 60 587 10.22
Z 736 25 761 3.29
2. Joint cost apportioned to each product:
# $
% % & %' %
X Net Realizable Value of each Product
. ,) ,
Total Cost of Product X = . , , )
X Rs. 10,98,000 = Rs. 4,66,797
. ,) ,
Total Cost of Product Y = . , , )
X Rs. 13,20,750= Rs. 5,61,496
. ,) ,
Total Cost of Product Z = . , , )
X Rs. 5,21,500 = Rs. 2,21,707
Question 13
A company processes a raw material in its Department 1 to produce three products, viz. A, B and X at
the same split-off stage. During a period 1,80,000 kgs of raw materials were processed in Department 1
at a total cost of ₹ 12,88,000 and the resultant output of A, B and X were 18,000 kgs, 10,000 kgs and
54,000 kgs respectively. A and B were further processed in Department 2 at a cost of ₹ 1,80,000 and ₹
1,50,000 respectively.
X was further processed in Department 3 at a cost of ₹ 1,08,000. There is no waste in further processing.
The details of sales affected during the period were as under:
A B X
Quantity Sold (kgs.) 17,000 5,000 44,000
Sales Value (Rs.) 12,24,000 2,50,000 7,92,000
There were no opening stocks. If these products were sold at split-off stage, the selling prices of A, B
and X would have been ₹ 50, ₹ 40 and ₹ 10 per kg respectively.
Required:
(i) Prepare a statement showing the apportionment of joint costs to A, B and X.
(ii) Present a statement showing the cost per kg of each product indicating joint cost and further
processing cost and total cost separately.
(iii) Prepare a statement showing the product wise and total profit for the period.
(iv) State with supporting calculations as to whether any or all the products should be further processed
or not. (RTP May’18, RTP May’19)(MTP 10 Marks Sep ’23)
Answer 13

11.13
(i) Statement showing the apportionment of joint costs

to A, B and X
Products A B X Total
Output (kg) 18,000 10,000 54,000
Sales value at 9,00,000 4,00,000 5,40,000 18,40,000
the point of split (Rs. 50 x 18,000) (Rs. 40 x 10,000) (Rs. 10 x 54,000)
off (Rs.)
Joint cost 6,30,000 2,80,000 3,78,000 12,88,000
apportionment +,. 12,88,000 +,. 12,88,000 +,. 12,88,000
* * *
on the basis of +,. 18,40,000 +,. 18,40,000 +,. 18,40,000
sales value at
+,. 9,00,0000 +,. 4,00,0000 +,. 5,40,0000
the point of split
off (Rs.)
(ii) Statement showing the cost per kg. of each product (indicating
joint cost; further processing cost and total cost separately)
Products A B X
Joint costs apportioned (Rs.) : (I) 6,30,000 2,80,000 3,78,000
Production (kg) : (II) 18,000 10,000 54,000
Joint cost per kg (Rs.): (I ÷ II) 35 28 7
Further processing Cost per kg. (Rs.) 10 15 2
+,. 1,80,000 +,. 1,50,000 +,. 1,08,000
* 0 * 0 * 0
18,00023 10,00023 54,00023
Total cost per kg (Rs.) 45 43 9

(iii) Statement showing the product wise and total profit for the period
Sales value (Rs.) 12,24,000 2,50,000 7,92,000
Add: Closing stock value (Rs.)
(Refer to Working note 2) 45,000 2,15,000 90,000
Value of production (Rs.) 12,69,000 4,65,000 8,82,000 26,16,000
Apportionment of joint cost (Rs.) 6,30,000 2,80,000 3,78,000
Add: Further processing cost (Rs.) 1,80,000 1,50,000 1,08,000
Total cost (Rs.) 8,10,000 4,30,000 4,86,000 17,26,000
Profit (Rs.) 4,59,000 35,000 3,96,000 8,90,000
Working Notes 1.
Products A B X
Sales value (Rs.) 12,24,000 2,50,000 7,92,000
Quantity sold (Kgs.) 17,000 5,000 44,000
Selling price Rs./kg 72 50 18
+,. 12,24,000 +,. 2,50,000 +,. 7,92,000
* 0 * 0 * 0
17,00023 5,00023 44,00023
2. Valuation of closing stock:
Since the selling price per kg of products A, B and X is more than their total costs, therefore closing
stock will be valued at cost.

11.14
Closing stock (kgs.) 1,000 5,000 10,000

Cost per kg (Rs.) 45 43 9
Closing stock value (Rs.) 45,000 2,15,000 90,000 3,50,00
(Rs. 45 x 1,000 kg) (Rs. 43 x 5,000 kg) (Rs.9x10,000 kg)
(iv) Calculations for processing decision
Products A B X
Selling price per kg at the point of split off (Rs.) 50 40 10
Selling price per kg after further processing (Rs.) 72 50 18
(Refer to working Note 1)
Incremental selling price per kg (Rs.) 22 10 8
Less: Further processing cost per kg (Rs.) (10) (15) (2)
Incremental profit (loss) per kg (Rs.) 12 (5) 6
Product A and X has an incremental profit per unit after further processing, hence, these two products
may be further processed. However, further processing of product B is not profitable hence, product B
shall be sold at split off point.
Question 14
A company produces two joint products A and B from the same basic materials. The processing is
completed in three departments.
Materials are mixed in Department I. At the end of this process, A and B get separated. After
separation, A is completed in the Department II and B in Department III. During a period, 4,00,000
kg of raw material was processed in Department I at a total cost of ₹ 17,50,000, and the
resultant 50% becomes A and 40% becomes B and 10% normally lost in processing. In Department
II, 1/5th of the quantity received from Department I is lost in processing. A is further processed in
Department II at a cost of ₹ 2,60,000.
In Department III, further new material is added to the material received from Department I and
weight mixture is doubled, there is no quantity loss in the department III. Further processing cost
(with material cost) in Department III is ₹ 3,00,000.
The details of sales during the said period are:
Product A Product B
Quantity sold (kg) 1,50,000 3,00,000
Sales price per kg (₹) 10 4
There were no opening stocks. If these products sold at split-off-point, the selling price of A and B
would be ₹ 8 and ₹ 4 per kg respectively.
Required:
(i) PREPARE a statement showing the apportionment of joint cost to A and B in proportion of sales
value at split off point.
(ii) PREPARE a statement showing the cost per kg of each product indicating joint cost, processing cost
and total cost separately.
(iii) PREPARE a statement showing the product wise profit for the year.
(iv) On the basis of profits before and after further processing of product A and B, give your COMMENT
that products should be further processed or not. (RTP Nov ’21)
Answer 14
(i) Calculation of quantity produced
Dept I (kg) Dept II (kg) Dept III (kg)
11.15
Input 4,00,000 2,00,000 1,60,000

(50% of 4,00,000 kg.) (40% of 4,00,000 kg.)
Weight (lost) or (40,000) (40,000) 1,60,000
added (10% of 4,00,000 kg.) (1/5th of 2,00,000 kg.)
3,60,000 1,60,000 3,20,000
Production of A 2,00,000 1,60,000 --
Production of B 1,60,000 -- 3,20,000
(ii) Statement of apportionment of joint cost of dept I
Product A Product B
Output (kg) 2,00,000 1,60,000
Selling price per kg (₹) 8 4
Sales value (₹) 16,00,000 6,40,000
Share in Joint cost (5:2) 12,50,000 5,00,000
(₹ 17,50,000 × 5 ÷ 7) (₹ 17,50,000 × 2 ÷ 7)
(iii) Statement of cost per kg
Product A Product B
Output (kg) 1,60,000 3,20,000
Share in joint cost (₹) 12,50,000 5,00,000
Joint Cost per kg (₹) (A) 7.8125 1.5625
Further processing cost (₹) 2,60,000 3,00,000
Further processing cost per kg (₹) (B) 1.625 0.9375
Total cost per kg (₹) {(A)+(B)} 9.4375 2.5000
(iv) Statement of profit
Product A Product B
Output (kg) 1,60,000 3,20,000
Sales (kg) (1,50,000) (3,00,000)
Closing stock (kg) 10,000 20,000
(₹) (₹)
Sales 15,00,000 12,00,000
(1,50,000 kg × ₹ 10) (3,00,000 kg × ₹ 4)
Add: closing stock (at full cost) 94,375 50,000
(10,000 kg × ₹ 9.4375) (20,000 kg × ₹ 2.5)
Value of production 15,94,375 12,50,000
Less: Share in joint cost 12,50,000 5,00,000
Further processing cost 2,60,000 3,00,000
Profit 84,375 4,50,000
(v) Profitability statement before and after processing
Product A Product B
Before (₹) After (₹) Before (₹) After (₹)
Sales Value 16,00,000 6,40,000
Share in joint 12,50,000 5,00,000
costs
Profit 3,50,000 84,375 1,40,000 4,50,000
(as per iii above) (as per iii above)
Product A should be sold at split off point and product B after processing because of higher
profitability.
Question 15
DISCUSS the treatment of by-product cost in Cost Accounting when they are of small total value.
11.16
(RTP Nov ’21)

Answer 15
When the by-products are of small total value, the amount realised from their sale may be dealt in
any one the following two ways:
(i) The sales value of the by-products may be credited to the Costing Profit and Loss Account and no
credit be given in the Cost Accounts. The credit to the Costing Profit and Loss Account here is treated
either as miscellaneous income or as additional sales revenue.
(ii) The sale proceeds of the by-product may be treated as deductions from the total costs. The sale
proceeds in fact should be deducted either from the production cost or from the cost of sales.
Question 16
JP Ltd. uses joint production process that produces three products at the split -off point. Joint
production costs during the month of July, 2022 were ₹ 33,60,000.
Product information for the month of July is as follows:
Particulars Product A Product B Product C
Units produced 3,000 6,000 9,000
Sales prices:
At the split-off ₹ 200
After further processing ₹ 300 ₹ 350 ₹ 100
Costs to process after split-off ₹ 6,00,000 ₹ 6,00,000 ₹ 6,00,000
1. Other information is as follows:
2.Product C is a by-product and the company accounts for the by-product at net realizable value as a
reduction of joint cost. Further, Product B & C must be processed further before they can be sold. FIND
OUT the joint cost allocated to Product A in the month of July if joint cost allocation is based on Net
Realizable Value. (RTP Nov’22)
Answer 16
Product A
As the Question says that "Products B and C must be processed further before they can be sold", it
means Product A can be sold at the split-off point.
Cost to process Product A after the split-off point = ₹ 6,00,000
Additional revenue to be earned by processing further = ₹ 3,00,000
(₹ 100 increase in selling price per unit x 3,000 units)
Therefore, Product A will not be processed further, and the sales value at split -off for A will be used for
allocating the joint costs.
Sales value at the split-off for A = ₹ 6,00,000 (₹ 200 × 3,000 units)
Product B
Since Product B must be processed further, we use its net realizable value for the joint cost allocation.
Net realizable value of Product B = ₹ 15,00,000
[(₹ 350 × 6,000 units) – ₹ 6,00,000 further processing costs]
Product C
Product C, the by-product, must also be processed further to be sold.
Net realizable value of Product C = ₹ 3,00,000
[(₹ 100 × 9,000 units) – ₹ 6,00,000 in further processing costs]

11.17
Joint Cost Allocation

Joint production cost = ₹ 33,60,000
Since, by-product C is accounted for as a reduction to the joint costs, the joint costs to be allocated
= ₹ 30,60,000
(₹ 33,60,000 - ₹ 3,00,000 NRV of Product C)
Allocation of joint costs between Product A and B will be on the basis of ₹ 6,00,000: ₹ 15,00,000
₹ 6, ,
Joint Cost allocated to Product= ₹ 30,60,000 ₹ 8,74,286
₹ ,
Question 17
A factory producing article A also produces a by-product B which is further processed into finished
product. The joint cost of manufacture is given below:
Material ` 5,000
Labour ` 3,000
Overhead ` 2,000
` 10,000
Subsequent cost in ` are given below:
A B
Material 3,000 1,500
Labour 1,400 1,000
Overhead 600 500
5,000 3,000
Selling prices are A ` 16,000

B ` 8,000
Estimated profit on selling prices is 25% for A and 20% for B.
Assume that selling and distribution expenses are in proportion of sales prices. Show how you would
apportion joint costs of manufacture and prepare a statement showing cost of production of A and B.
(RTP Nov ’23) (MTP 5 Marks , Oct ’23)
Answer 17
Apportionment of Joint Costs
Particulars A (`) B (`)
Selling Price 16,000 8,000
Less: Estimated profit 4,000 1,600
(25% of `16,000) (20% of ` 8,000)
Cost of sales 12,000 6,400
Less: Selling & Distribution exp. 267 133
(Refer working note) (` 400 × 2/3) (` 400 × 1/3)
Less: Subsequent cost 5,000 3,000
Share of Joint cost 6,733 3,267
So, Joint cost of manufacture is to be distributed to A & B in the ratio of 6733 : 3267
Statement showing Cost of Production of A and B
Elements of cost Joint Cost Subsequent Cost Total Cost
A B A B A B
Material 3,367 1,633 3,000 1,500 6,367 3,133
Labour 2,020 980 1,400 1,000 3,420 1,980

11.18
Overheads 1,346 654 600 500 1,946 1,154

Cost of production 11,733 6,267
Working Note:
Calculation of Selling and Distribution Expenses
Particulars (`)
Total Sales Revenue (` 16,000 + ` 8,000) 24,000
Less: Estimated Profit (` 4,000 + ` 1,600) (5,600)
Cost of Sales 18,400
Less: Cost of production:
- Joint Costs (10,000)
- Subsequent costs (` 5,000 + ` 3,000) (8,000)
Selling and Distribution expenses (Balancing figure) 400
Question 18
A Factory is engaged in the production of chemical Bomex and in the course of its manufacture a by-
product Cromex is produced which after further processing has a commercial value. For the month of
April 2019 the following are the summarised cost data:
Joint Expense(₹ ) Separate Expenses (₹)
Bomex Cromex
6,000 4,000
Materials 1,00,000
Labour 50,000 20,000 18,000
Overheads 30,000 10,000 6,000
Selling Price per unit 100 40
Estimated profit per unit on sale of Cromex 5
Number of units produced 2,000 2,000
Units Units
The factory uses net realisable value method for apportionment of joint cost to by products.
You are required to prepare statements showing :
(i) Joint cost allocable to Cromex
(ii) Product wise and overall profitability of the factory for April 2019.
(PYP May ‘19, 5 Marks)
Answer 18
(i) Statement Showing Joint Cost Allocation to ‘Cromex’
Particulars Cromex (₹ )
Sales (₹ 40 × 2,000 units) 80,000
Less: Post Split Off Costs (4,000 + 18,000 + 6,000) (28,000)
Less: Estimated Profit ( ₹ 5 × 2,000 units) (10,000)
Joint cost allocable 42,000
(ii) Statement Showing Product Wise and Overall Profitability
Particulars Bomex (₹ ) Cromex (₹ ) Total (₹ )

Sales 2,00,000 80,000 2,80,000
11.19
Less: Share in Joint Expenses (1,38,000)* (42,000) (1,80,000)

Less: Post Split Off Costs (36,000) (28,000) (64,000)
Profit 26,000 10,000 36,000
(*) 1,80,000 – 42,000
In this numerical problem of ‘By-products’ examinees were asked to calculate joint cost
allocation product wise and overall profitability. Many examinees failed to differentiate
between main product and joint product and did not applied Net Realizable Value (NRV)
method for joint cost allocation. Candidate performance was observed below average.
Question 19
A company's plant processes 6,750 units of a raw material in a month to produce two products 'M'
and 'N'.
The process yield is as under:
Product M 80%
Product N 12%
Process Loss 8%
The cost of raw material is ₹ 80 per unit.
Processing cost is ₹ 2,25,000 of which labour cost is accounted for 66%. Labour is chargeable to
products 'M' and 'N' in the ratio of 100:80.
Prepare a Comprehensive Cost Statement for each product showing:
(i) Apportionment of joint cost among products 'M' and 'N' and
(ii) Total cost of the products 'M' and 'N'. (PYP 5 Marks Nov 20)
Answer 19
Comprehensive Cost Statement
Particulars Total Cost Product-M Product-N
(₹) (₹) (₹)
No. of units produced * 5,400 units 810 units
Cost of raw material (₹ 80 × 6,750 5,40,000
units)
Processing cost:
- Labour cost (₹ 2,25,000 × 66%) 1,48,500
- Other costs (₹ 2,25,000 - 76,500

1,48,500)
Total joint cost 7,65,000
(i) Apportionment of joint costs

between the joint products
Labour cost in the ratio of 100:80 1,48,500
82,500 66,000
7, 89, :;; 7;; 7, 89, :;; 9;
* 0 * 0
79; 79;
Other joint costs (including material) 6,16,500

5,36,087 80,413
11.20
in the ratio of output

<, 7<, :;; :, 8;; <, 7<, :;; 97;
* 0 * 0
<, =7; <, =7;
(5,400:810)
(ii) Total product cost 7,65,000
6,18,587 1,46,413
* No. of units produced of Product M = 6750 units x 80% = 5400 units No. of units produced of Product N
= 6750 units x 12% = 810 units
Question 20
Narrate the terms ‘Joint Products’ and ‘By-Products’ with an example of each term. (PYP 4 Marks Dec
‘21)
Answer 20
(i) Joint Products - Joint products represent “two or more products separated in the course of the same
processing operation usually requiring further processing, each product being in such proportion that
no single product can be designated as a major product”.
In other words, two or more products of equal importance, produced, simultaneously from the same
process, with each having a significant relative sale value are known as joint products. For example, in
the oil industry, gasoline, fuel oil, lubricants, paraffin, coal tar, asphalt and kerosene are all produced
from crude petroleum. These are known as joint products.
(ii) By-Products - These are defined as “products recovered from material discarded in a main process, or from the
production of some major products, where the material value is to be considered at the time of severance from
the main product.” Thus, by- products emerge as a result of processing operation of another product or they
are produced from the scrap or waste of materials of a process. In short, a by-product is a secondary
or subsidiary product which emanates as a result of manufacture of the main product.
The point at which they are separated from the main product or products is known as split-off point.
The expenses of processing are joint till the split –off point.
Examples of by-products are molasses in the manufacture of sugar, tar, ammonia and benzole obtained
on carbonisation of coal and glycerine obtained in the manufacture of soap.
This theory question tested the basic knowledge of Joint product and By product with
example. Most of the examinees answered it partially correct. Performance of the
examinees was below average.
Question 21
Mayura Chemicals Ltd buys a particular raw material at ₹ 8 per litre. At the end of the processing in
Department- I, this raw material splits-off into products X, Y and Z. Product X is sold at the split-off
point, with no further processing. Products Y and Z require further processing before they can be sold.
Product Y is processed in Department-2, and Product Z is processed in Department-3. Following is
a summary of the costs and other related data for the year 2019-20:
Particulars Department
1 2 3
Cost of Raw Material ₹ 4,80,000 - -
Direct Labour ₹ 70,000 ₹ 4,50,000 ₹ 6,50,000
Manufacturing Overhead ₹ 48,000 ₹ 2,10,000 ₹ 4,50,000
Products
X Y Z
Sales (litres) 10,000 15,000 22,500
Closing inventory (litres) 5,000 - 7,500
Sale price per litre (₹) 30 64 50

11.21
There were no opening and closing inventories of basic raw materials at the beginning as well as at the
end of the year. All finished goods inventory in litres was complete as to processing. The company uses
the Net-realizable value method of allocating joint costs.
You are required to prepare:
(i) Schedule showing the allocation of joint costs.
(ii) Calculate the Cost of goods sold of each product and the cost of each item in Inventory.
(iii) A comparative statement of Gross profit. (PYP 10 Marks Jan 21)
Answer 21
(i)
Statement of Joint Cost allocation of inventories of X, Y and Z
Products Total (₹)
X (₹) Y (₹) Z (₹)
Final sales value of 4,50,000 9,60,000 15,00,000 29,10,000
total production (15,000 x ₹ 30) (15,000 x ₹ 64) (30,000 x ₹ 50)
(Working Note 1)
Less: Additional -- 6,60,000 11,00,000 17,60,000
cost
Net realizable value 4,50,000 3,00,000 4,00,000 11,50,000
(at split-off point)
Joint cost allocated 2,34,000 1,56,000 2,08,000 5,98,000
(Working Note 2)
(ii) Calculation of Cost of goods sold and Closing inventory
Products Total (₹)
X (₹) Y (₹) Z (₹)
Allocated joint cost 2,34,000 1,56,000 2,08,000 5,98,000
Add: Additional costs -- 6,60,000 11,00,000 17,60,000
Cost of goods sold (COGS) 2,34,000 8,16,000 13,08,000 23,58,000
Less: Cost of closing 78,000 -- 3,27,000 4,05,000

inventory (COGS × 100/3%) (COGS × 25%)
(Working Note 1)
Cost of goods sold 1,56,000 8,16,000 9,81,000 19,53,000
(iii) Comparative Statement of Gross Profit
Products Total
X (₹) Y (₹) Z (₹) (₹)
Sales revenue 3,00,000 9,60,000 11,25,000 23,85,000
(10,000 x ₹ 30) (15,000 x ₹ 64) (22,500 x ₹ 50)
Less: Cost of goods 1,56,000 8,16,000 9,81,000 19,53,000
sold
Gross Profit 1,44,000 1,44,000 1,44,000 4,32,000
Working Notes:
1. Total production of three products for the year 2019-2020

Products Quantity Quantity of closing Total Closing inventory
sold in inventory in litres production percentage (%)
litres
(1) (2) (3) (4) = [(2) + (3)} (5) = (3)/ (4)
X 10,000 5,000 15,000 100/3
Y 15,000 -- 15,000 --
11.22
Z 22,500 7,500 30,000 25

2. Joint cost apportioned to each product:
>?@AB C?DE@ F?G@
= >?@AB HI@ JIABDGAKBI LABMI HI@ JIABDGAKBI LABMI ?N IAOP QR?SMO@
TU.), ",
Joint cost of product X = TU. ,) ,
Rs. 4,50,000 = Rs. 2,34,000
TU.), ",
Joint cost of product Y = TU. ,) ,
Rs. 3,00,000 = Rs. 1,56,000
TU.), ",
Joint cost of product Y = Rs. 4,00,000 = Rs. 2,08,000
TU. ,) ,
Question 22
OPR Ltd. purchases crude vegetable oil. It does refining of the same. The refining process results in
four products at the spilt-off point - S, P, N and A. Product 'A’ is fully processed at the split-off point.
Product S, P and N can be individually further refined into SK, PM, and NL respectively. The joint cost
of purchasing the crude vegetable oi l and processing it were ₹ 40,000. Other details are as follows:
Product Further processing costs Sales at split-off point Sales after further
(₹) (₹) processing (₹)
S 80,000 20,000 1,20,000
P 32,000 12,000 40,000
N 36,000 28,000 48,000
A - 20,000 -
You are required to identify the products which can be further processed for maximizing profits and
make suitable suggestions. (PYP 5 Marks July 21)
Answer 22
Statement of Comparison of Profits before and after further processing
S (₹) P (₹) N (₹) A (₹) Total (₹)
A. Sales at split off point 20,000 12,000 28,000 20,000 80,000
B. Apportioned Joint Costs (Refer 10,000 6,000 14,000 10,000 40,000
Working Note)
C. Profit at split-off point 10,000 6,000 14,000 10,000 40,000
D. Sales after further 1,20,000 40,000 48,000 - 2,08,000
processing
E. Further processing cost 80,000 32,000 36,000 - 1,48,000
F. Apportioned Joint Costs (Refer 10,000 6,000 14,000 - -
Working Note)
G. Profit if further processing (D – E 30000 2,000 (-) 2,000 - -
+ F)
H. Increase/ decrease in profit after 20,000 - 4000 - 16,000 - -
further processing (G- C)
Suggested Product to be further processed for maximizing profits:

On comparing the figures of "Profit if no further processing" and "Profits if further processing", one
observes that OPR Ltd. is earning more after further processing of Product S only i.e. ₹ 20,000. Hence,
for maximizing profits, only Product S should be further processed and Product P, N and A should be
sold at split-off point.
Working Note:
Apportionment of joint costs on the basis of Sales Value at split -off point

11.23
YZ[\] ^Z_`[ aZU[

Apportioned joint cost = YZ[\] b\]cU d\]ec \[ Uf]_[ Zgg fZ_`[
Sales value of each product
Where, Total Joint cost = ₹ 40,000
Total sales at split off point (S, P, N and A) = 20,000 + 12,000 + 28,000 + 20,000 = ₹ 80,000
TU. ,
Share of S in joint cost = TU." ,
Rs. 20,000 = Rs. 10,000
TU. ,
Share of P in joint cost = Rs. 12,000 = Rs. 6,000
TU." ,
TU. ,
Share of N in joint cost = TU." ,
Rs. 28,000 = Rs. 14,000
TU. ,
Share of A in joint cost = Rs. 20,000 = Rs. 10,000
TU." ,
Alternative Solution
Decision for further processing of Product S, P and N
Products S (₹) P (₹) N (₹)
Sales revenue after further processing 1,20,000 40,000 48,000
Less: sales value at split-off point 20,000 12,000 28,000
Incremental Sales Revenue 1,00,000 28,000 20,000
Less: Further Processing cost 80,000 32,000 36,000
Profit/ loss arising due to further processing 20,000 (-)4,000 (-)16,000
Suggested Product to be further processed for maximizing profits:
On comparing the figures of "Profit if no further processing" and "Profits if further processing", one
observes that OPR Ltd. is earning more after further processing of Product S only i.e. ₹ 20,000. Hence,
for maximizing profits, only Product S should be further processed and Product P, N and A should be
sold at split-off point.
It was a practical problem on treatment of joint cost and identification of products which
has to be further processed for maximizing profits. Many examinees could not present the
answer in a convincing manner in spite of arriving at the correct decision. Performance of
the examinees was average.
Question 23
RST Limited produces three joint products X, Y and Z. The products are processed further. Pre-
separation costs are apportioned on the basis of weight of output of each joint product. The following
data are provided for the month of April, 2022.
Cost incurred up to separation point: ₹ 10,000
Product X Product Y Product Z
Output (in Litre) 100 70 80
₹ ₹ ₹
Cost incurred after separation point 2,000 1,200 800
Selling Price per Litre:
After further processing 50 80 60
At pre-separation point (estimated) 25 70 45

11.24
Prepare a statement showing profit or loss made by each product after further processing using the
presently adopted method of apportionment of pre-separation cost.
Advise the management whether, on purely financial consideration, the three products are to be
processed further or not.(PYP 5 Marks May22)
Answer 23
Statement showing profit/loss by each product after further processing products
(in ₹) (in ₹) (in ₹)
Sales value after further processing 5,000 5,600 4,800
Less: Further processing cost 2,000 1,200 800
Less: Joint Cost* (as apportioned) 4,000 2,800 3,200
Profit/(loss) (1,000) 1,600 800
* Statement showing apportionment of joint cost on the basis of physical units
Product X Product Y(in ₹) Product Z Total (₹)
(in ₹) (in ₹)
Output (in litre) 100 70 80 250
Weight 0.4 (100/250) 0.28 (70/250) 0.32 (80/250)
Joint cost apportioned 4,000 2,800 3,200
(ii)Decision whether to process further or not
Product X(in ₹) Product Y(in ₹) Product Z(in ₹)
Incremental Revenue 2,500 700 1,200
[(50-25) × 100] [(80-70) × 70] [(60-45) × 80]
Less: Further processing cost 2,000 1,200 800
Incremental profit /(loss) 500 (500) 400
Product X Product Y Product Z Total

(in ₹) (in ₹) (in ₹)
Sales 2500 4900 3600 11000
Pre separation costs 4000 2800 3200 10000
Profit/(Loss) (1500) 2100 400 1000
It is advisable to further process only product X and Z and to sale product Y at the point of separation.
Question 24
ASR Ltd mainly produces Product 'L' and gets a by-Product 'M' out of a joint process. The net
realizable value of the by-product is used to reduce the joint production costs before the joint
costs are allocated to the main product. During the month of October 2022, company incurred
joint production costs of ₹ 4,00,000. The main Product 'L' is not marketable at the split off point.
Thus, it has to be processed further. Details of company's operation are as under:
Particulars Product L By- Product M

Production (units) 10,000 200
Selling price per kg ₹ 45 ₹5
Further processing ₹ 1,01,000 -
cost
You are required to find out:
(i) Profit earned from Product 'L'.
(ii) Selling price per kg of product 'L', if the company wishes to earn a profit of ₹ 1,00,000 from
the above production. (PYP 5 Marks Nov 22)
11.25
Answer 24
(i) Calculation of profit on product ‘L’
Particular ₹
Sales 4,50,000
Less: Further processing cost (1,01,000)
3,49,000
Less: Joint Production Cost* (3,99,000)
loss (50,000)
*Joint Production Cost = [4,00,000 – (200 × 5)] = 3,99,000
(ii) Calculation of desired selling price of product ‘L’

vcU_wcx ywZg_[zYZ[\] {ZU[
Desired Selling Price = |`_[U }c\Uewcx
, , z , , z~, ,
= ,
= Rs. 60 per kg.
Question 25
ABC Company produces a Product 'X' that passes through three processes: R, S and T. Three types of
raw materials, viz., J, K, and L are used in the ratio of 40:40:20 in process R. The output of each process
is transferred to next process. Process loss is 10% of total input in each process. At the stage of output
in process T, a by-product 'Z' is emerging and the ratio of the main product 'X' to the by-product 'Z' is
80:20. The selling price of product 'X' is `60 per kg.
The company produced 14,580 kgs of product ‘X’
Material price : Material J @ ` 15 per kg; Material K @ ` 9 per kg.
Material L@ ` 7 per kg Process costs are as follows:
Process Variable cost per kg (`) Fixed cost of Input (`)
R 5.00 42,000
S 4.50 5,000
T 3.40 4,800
The by-product 'Z' cannot be processed further and can be sold at ` 30 per kg at the splitoff stage.
There is no realizable value of process losses at any stage.
Required:
Present a statement showing the apportionment of joint costs on the basis of the sales value of
product 'X' and by-product 'Z' at the split- off point and the profitability of product 'X' and by-product
'Z. (PYP 10 Marks, May ‘23)
Answer 25
Working Notes:
1. Calculation of Input of Raw Material
Let assume total raw material in Process R be 100%
∴ Output of Process T will be equal to:
Input R 100%
10% Normal Loss ` 10
Input S 90%
10% Normal loss 9
Input T 81%
10% Normal loss 8.1
Output of T 72.9
Actual output of X 14,580 units
Which is 80% of the total output
11.26
∴ Output of Process T
78,:9;
= 9; %
= 18,225
79==:
∴ Input of Process R = = 25,000 kgs
•=.‚%
Alternative presentation for Calculation of Input in Process R, S and T
Working notes:
Process T (Kg.)
To Input (Transfer from process 20,250 By Normal loss 2,025
S)
By Output Product X 14,580
By output of by-product 3,645
20,250 Z 20,250
Process S (kg.)
To Input (Transfer from process S) 22,500 By Normal loss (10%) 2,250
By Transfer to process T 20,250
22,500 22,500
Process R (kg.)
To Input 25,000 By Normal loss (10%) 2,500
By Transfer to process S 22,500
25,000 25,000
2. Calculation of Joint Cost

Process Inputs Variable cost per kg Variable Fixed Total Cost
cost Cost
` ` ` `
R 25,000 5 1,25,000 42,000 1,67,000
S 22,500 4.5 1,01,250 5,000 1,06,250
T 20,250 3.4 68,850 4,800 73,650
3,46,900
Raw material J 10000 x 15 ` 1,50,000
K 10000 x 9 ` 90,000
L 5000 x 7 ` 35,000
2,75,000
Add: Processing cost (as above) ` 3,46,900
Total Joint Cost 6,21,900
i) Statement showing apportionment of Joint Cost
Particulars Product X By-Product Z Total

Units 14,580 3,645
11.27
Selling price (`) 60 30

Sales Value (`) 8,74,800 1,09,350 9,84,150
(` 6,21,900 to apportioned in ratio 5,52,800 69,100 6,21,900
of sales value at split off point)
ii) Statement of Profitability
Particulars Product X By-Product Z Total

Sales Value 8,74,800 1,09,350 9,84,150
Joint Cost (5,52,800) (69,100) (6,21,900)
(As apportioned above)
Profit 3,22,000 40,250 3,62,250

12.1
Chapter 12
Service Costing
Question 1 (Illustration)
A lodging home is being run in a small hill station with 100 single rooms. The home offers
concessional rates during six off- season (Winter)months in a year when numbers of visitor are
limited. During this period, half of the full room rent is charged. The management’s profit
margin is targeted at 20% of the room rent. The following are the cost estimates and other details
for the year ending on 31st March. [Assume a month to be of 30 days].
(i) Occupancy during the season is 80% while in the off- season it is 40% only.
(ii) Total investment in the home is ` 200 lakhs of which 80% relate to buildings and balance for
furniture and equipment.
(iii) Expenses:
 Staff salary [Excluding room attendants]: ` 5,50,000
 Repairs to building : ` 2,61,000
 Laundry charges : ` 80, 000
 Interior : ` 1,75,000
 Miscellaneous expenses : ` 1,90,800
(iv) Annual depreciation is to be provided for buildings @ 5% and on furniture and equipment @ 15% on
straight-line basis.
(v) Room attendants are paid ` 10 per room day on the basis of occupancy of the rooms in a month.
(vi) Monthly lighting charges are ` 120 per room, except in four months in winter when it is ` 30 per
room.
You are required to WORK OUT the room rent chargeable per day both during the season and the
off-season months on the basis of the foregoing information. (Old & New SM) (Same concept
different figures MTP 10 Marks, Oct ’21, PYP 10 Marks Nov ’19)
Answer 1
Working Notes:
(i) Total Room days in a year
Season Occupancy (Room-days) Equivalent Full Room
charge days
Season – 100 Rooms × 80% × 6 months 14,400 Room Days ×
80% × 30 days in a month = 14,400 100% = 14,400
Occupancy Room Days
Off-season – 40% 100 Rooms × 40% × 6 months 7,200 Room Days ×
Occupancy × 30 days in a month = 7,200 50% = 3,600
Room Days
Total Room Days 14,400 + 7,200 = 21,600 Room 18,000 Full Room days
Days
(ii) Lighting Charges:
It is given in the question that lighting charges for 8 months is `120 per month and during
winter season of 4 months it is `30 per month. Further it is also given that peak season is 6
months and off season is 6 months.
It should be noted that – being Hill station, winter season is to be considered as part of Off season.
Hence, the non-winter season of 8 months include – Peak season of 6 months and Off season of 2
months.
Accordingly, the lighting charges are calculated as follows:
Season Occupancy (Room-days)
Season & Non-winter – 80% 100 Rooms × 80% × 6 months × `120 per month = `
Occupancy 57,600
Off- season & Non-winter – 40% 100 Rooms × 40% × 2 months × `120 per month = `
Occupancy (8 – 6 months) 9,600
Off- season & -winter – 40% 100 Rooms × 40% × 4 months × ` 30 per month = `
Occupancy months) 4,800
Total Lighting charges ` 57,600+ 9,600 + 4,800 = ` 72,000
Chapter 12 Service Costing
12.2
Statement of total cost:

(`)
Staff salary 5,50,000
Repairs to building 2,61,000
Laundry & Linen 80,000
Interior 1,75,000
Sundries Expenses 1,90,800
Depreciation on Building (` 200 Lakhs × 80% × 5%) 8,00,000
Depreciation on Furniture & Equipment (` 200 Lakhs × 20% × 15%) 6,00,000
Room attendant’s wages (` 10 per Room Day for 21,600 Room Days) 2,16,000
Lighting charges 72,000
Total cost 29,44,800
Add: Profit Margin (20% on Room rent or 25% on Cost) 7,36,200
Total Rent to be charged 36,81,000
Calculation of Room Rent per day:

Total Cost / Equivalent Full Room days = ` 36,81,000/ 18,000 = `204.50 Room Rent during Season –
`204.50
Room Rent during Off season = `204.50 × 50% = ` 102.25

This was a numerical question relating to the topic ‘Costing of Service Sector’. Examinees
were required to calculate hotel room rent chargeable per day. Most of the examinees
could not compute the total cost correctly and hence could not work out room rent
chargeable per day during season and off-season. Performance of the examinees was
below average.
Question 2 (Illustration)
ABC Hospital runs a Critical Care Unit (CCU) in a hired building. CCU consists of 35 beds and 5 more
beds can be added, if required.
Rent per month - ` 75,000
Supervisors – 2 persons – ` 25,000 Per month – each
Nurses – 4 persons – ` 20,000 per month – each
Ward Boys – 4 persons – ` 5,000 per month – each
Doctors paid ` 2,50,000 per month – paid on the basis of number of patients attended and the time
spent by them
Other expenses for the year are as follows:
Repairs (Fixed) – ` 81,000
Food to Patients (Variable) – ` 8,80,000
Other services to patients (Variable) – ` 3,00,000
Laundry charges (Variable) – ` 6,00,000
Medicines (Variable) – ` 7,50,000
Other fixed expenses – ` 10,80,000
Administration expenses allocated – ` 10,00,000
It was estimated that for 150 days in a year 35 beds are occupied and for 80 days only 25 beds are
occupied.
The hospital hired 750 beds at a charge of ` 100 per bed per day, to accommodate the flow of
patients. However, this does not exceed more than 5 extra beds over and above the normal capacity of
35 beds on any day.
You are required to –
(1) CALCULATE contribution per Patient day, if the hospital recovers on an average ` 2,000 per day from
each patient.
(2) FIND OUT Breakeven point for the hospital. (Old & New SM) (MTP 10 Marks Oct ’23)
12.3
Answer 2
Working Notes:
1) Calculation of number of Patient days
35 Beds × 150 days = 5,250
25 Beds × 80 days = 2,000
Extra beds = 750
Total = 8,000
Statement of Profitability
Income for the year (` 2,000 per patient per day 1,60,00,000
× 8,000 patient days)
Variable Costs:
Doctor Fees (` 2,50,000 per month × 12) 30,00,000
Food to Patients (Variable) 8,80,000
Other services to patients (Variable) 3,00,000
Laundry charges (Variable) – (`) 6,00,000
Medicines (Variable) – (`) 7,50,000
Bed Hire Charges (`100 × 750 Beds) 75,000
Total Variable costs 56,05,000
Contribution 1,03,95,000
Fixed Costs:
Rent (` 75,000 per month × 12) 9,00,000
Supervisor (2 persons × `25,000 ×12) 6,00,000
Nurses (4 persons × ` 20,000 × 12) 9,60,000
Ward Boys (4 persons × ` 5,000 × 12) 2,40,000
Repairs (Fixed) 81,000
Other fixed expenses – (`) 10,80,000
Administration expenses allocated – (`) 10,00,000
Total Fixed Costs 48,61,000
Profit 55,34,000
(1) Calculation of Contribution per Patient day
Total Contribution – ` 1,03,95,000 Total Patient days – 8,000
Contribution per Patient day – ` 1,03,95,000 / 8,000 = ` 1,299.375
(2) Breakeven Point = Fixed Cost / Contribution per Patient day
= ` 48,61,000 / `1,299.375
= 3,741 patient days
Question 3
Calculate a suggested fare per passenger-km from the following information for a Mini Bus:
(i) Length of route: 30 km

(ii) Purchase price Rs. 4,00,000
(iii) Part of above cost met by loan, annual interest of which is Rs. 10,000 p.a.
(iv) Other annual charges: Insurance Rs. 15,000, Garage rent Rs. 9,000, Road tax Rs. 3,000, Repairs &
maintenance Rs. 15,000, Administrative charges Rs. 5,000.
(v) Running Expenses: Driver & Conductor Rs. 5,000 p.m., Repairs/Replacement of tyre-tube Rs. 3,600
p.a., Diesel and oil cost per km Rs. 5.
(vi) Effective life of vehicle is estimated at 5 years at the end of which it will have a scrap value of Rs.
10,000.
(vii) Mini Bus has 20 seats and is planned to make Six no. two way trips for 25 days/p.m.
(viii) Provide profit @ 20% of total revenue. (MTP Aug.’18 5Marks)
Answer 3
12.4
Working Notes:
Depreciation per annum: =
. , , . ,
= =Rs.78,000
= Total distance travelled by mini-bus in 25 days:

= Length of the route (two -sides) × No. of trips per day × No. of days
= 60km × 6 trips × 25 days = 9,000 km
1. Total Passenger-Km:
= Total distance travelled by mini-bus in 25 days × No. of seats
= 9,000 km × 20 seats = 1,80,000 passenger-km
Statement suggesting fare per passenger-km
Particulars Cost per annum Cost per month
Rs. Rs.
Fixed expenses:
Insurance 15,000
Garage rent 9,000
Road tax 3,000
Administrative charges 5,000
Depreciation 78,000
Interest on loan 10,000
1,20,000 10,000
Running expenses:
Repair and maintenance 15,000 1,250
Replacement of tyre-tube 3,600 300
Diesel and oil cost (9,000 km × Rs. 5) - 45,000
Driver and conductor’s salary - 5,000
Total cost (per month) 61,550.00
Add: Profit 20% of total revenue cost or 25% of total cost 15,387.50
Total revenue 76,937.50
Rate per passenger-km Rs. 76,937.50/1,80,000 passenger km = 0.42743 i.e., = 0.43 i.e., 43 paise.
Question 4
DKG Airlines owns single passenger aircraft and operates between Melbourne and Delhi only. Flight
leaves Melbourne on Monday and Thursday and departs from Delhi on Wednesday and Saturday. DKG
Airlines cannot afford any more flight between Melbourne and Delhi. Only economical class seats are
available on its flight and all tickets are booked by travel agents. The following information are
collected.
Seating capacity per plane 360
Average passengers per flight 250
Flights per week 4
Flights per year 208
Average one-way fare Rs.50,000
Variable fuel cost Rs.28,00,000 per flight
Food service to passengers (not charged to Passengers) Rs.2,600 per
passenger
12.5
Commission to travel agents 15% of fare

Fixed annual lease cost allocated to each flight Rs. 15,30,000 per flight
Fixed ground services (maintenance, check in, Rs.1,70,000 per flight
Baggage handling cost) allocated to each flight
Fixed salaries of flight crew allocated to each flight Rs.6,50,000 per flight
For the sake of simplicity assume that fuel cost is unaffected by the actual number of passengers on
a flight.
Required:
(i) Calculate the operating income that DKG Airlines makes on each way flight between Melbourne and
Delhi?
(ii) The market research department of DKG Airlines indicates that lowering the average one-way fare
to Rs. 48,000 and increase in agents’ commission to 17.5% will increase the average number of
passenger per flight to 275. DECIDE whether DKG Airlines should lower its fare or not? (MTP Oct‘18,
10Marks)
Answer 4
(i) Statement of operating income of DKG Airlines for Melbourne-Delhi flight (one way)
Particulars Amount(₹ ) Amount(₹ )
Fare received (per flight): 250 passengers × ₹ 50,000 1,25,00,000
Variable costs (per flight):
- Fuel cost 28,00,000
- Food (250 × ₹ 2,600) 6,50,000
- Commission to Travel Agents (15% of ₹ 1,25,00,000) 18,75,000 (53,25,000)
Contribution per flight 71,75,000
Fixed cost (per flight):
Annual lease cost 15,30,000
Fixed ground service costs 1,70,000
Salaries of flight crew 6,50,000 (23,50,000)
Operating income per flight 48,25,000
(ii) Operating income of DKG Airlines per Melbourne-Delhi flight (one way) after reduction in fare
Fare received (per flight): 275 passengers × ₹ 48,000 1,32,00,000
Variable costs (per flight):
Fuel cost 28,00,000
Food (275 × ₹ 2,600) 7,15,000
Commission to Travel Agents (17.5% of ₹ 1,32,00,000) 23,10,000 (58,25,000)
Contribution per flight 73,75,000
Excess contribution due to lowering of fare ( ₹ 73,75,000 – ₹ 71,75,000) = ₹ 2,00,000. DKG Airlines should
lower its fare as it would increase its contribution by ₹ 2,00,000.
Question 5
KR Resorts (P) Ltd. offers three types of rooms to its guests, viz deluxe room, super deluxe room and
luxury suite. You are required to DETERMINE the tariff to be charged to the customers for different
types of rooms on the basis of following information:
Types of Room Number of Rooms Occupancy
Deluxe Room 100 90%
Super Deluxe Room 60 75%
Luxury Suite 40 60%
Rent of ‘super deluxe’ room is to be fixed at 2 times of ‘deluxe room’ and that of ‘luxury suite’ is 3
12.6
times of ‘deluxe room’. Annual expenses are as follows:

Particulars Amount (Rs. lakhs)
Staff salaries 780.00
Lighting, Heating and Power 350.00
Repairs, Maintenance and Renovation 220.00
Linen 60.00
Laundry charges 34.00
Interior decoration 85.00
Sundries 36.28
An attendant for each room was provided when the room was occupied and he was paid Rs. 500 per
day towards wages. Further, depreciation is to be provided on building @ 5% on Rs. 900 lakhs,
furniture and fixtures @ 10% on Rs. 90 lakhs and air conditioners @ 10% on Rs. 75 lakhs. Profit is to
be provided @ 25% on total taking and assume 360 days in a year. (MTP 10 Marks May 20) (Same
concepts but different figures MTP March ‘18, 10 Marks) (RTP Nov ’23)
Answer 5
Total cost statement of KR Resort (P) Limited
Particulars Cost per annum
(Rs. in lakhs)
Staff Salaries 780.00
Room Attendant’s Wages (Refer working note 3) 286.20
Lighting, Heating & Power 350.00
Repairs, Maintenance & Renovation 220.00
Linen 60.00
Laundry charges 34.00
Interior Decoration 85.00
Sundries 36.28
Depreciation: (Refer working note 4)
- Building 45.00
- Furniture & Fixture 9.00
- Air Conditioners 7.50
Total cost for the year 1912.98
Computation of profit:
Let Rs. x be the rent for deluxe from.
Equivalent deluxe room days are 90,720 (Refer working note 2)
Total takings = Rs. 90,720x
Profit is 25% of total takings.
Profit = 25% of Rs. 90,720x = Rs. 22,680x Total takings
= Total Cost + Profit
Rs. 90,720x = Rs. 19,12,98,000 + Rs. 22,680x Rs. 90,720x -Rs. 22,680x = Rs.
19,12,98,000 Rs. 68,040x = Rs. 19,12,98,000
. , , ,
X= . ,
= Rs. 2,811.55
Rent to be charged for deluxe room Rs. 2,811.55

Rent to be charged for super deluxe room = Rent Rs. 5,623.10
of deluxe room x 2 = Rs. 2,811.55 x 2
Rent to be charged for luxury suite = Rs. 8,434.65
12.7
Rent of Super Deluxe room x 1.5 = Rs. 5,623.10 x 1.5
Working Notes:
(1) Computation of Room Occupancy
Type of Room No. of rooms x no. of days x Room days
occupancy %
Deluxe Room 100 rooms x 360 days x 90% 32,400
occupancy
Super Deluxe Room 60 rooms x 360 days x 75% occupancy16,200
Luxury Suite 40 rooms x 360 days x 60% occupancy8,640
Total 57,240
(2) Computation of equivalent deluxe room days
Rent of ‘super deluxe’ room is to be fixed at 2 times of ‘deluxe room’ and luxury suite’ is
3 times of ‘deluxe room’. Therefore, equivalent room days would be:
Type of Room Room days Equivalent deluxe room
days
Deluxe Room 32,400 x 1 32,400
Super Deluxe Room 16,200 x 2 32,400
Luxury Suite 8,640 x 3 25,920
Total 90,720
(3) Computation of room attendant’s wages
Room occupancy days @ Rs. 500 per day = 286.2 lakhs (i.e. 57,240 days ×Rs. 500)
(4) Computation of Depreciation per annum
Particulars Cost (Rs.) Rate of Depreciation (Rs.)
Depreciation
Building 9,00,00,000 5% 45,00,000
Furniture & Fixtures 90,00,000 10% 9,00,000
Air Conditioners 75,00,000 10% 7,50,000
Question 6
EXPLAIN standing charges and running charges in the case of transport organizations. LIST three
examples of both. (MTP 5 Marks, Oct ’20)
Answer 6
Standing Charges: These are the fixed costs that remain constant irrespective of the distance travelled.
These costs include the following-
 Insurance
 License fees
 Salary to Driver, Conductor, Cleaners, etc. if paid on monthly basis
 Garage costs, including garage rent
 Depreciation (if related to efflux of time)
 Taxes Administration expenses, etc.
Running Charges: These costs are generally associated with the distance travelled. These costs include
the following-
 Petrol and Diesel
 Lubricant oils,
 Wages to Driver, Conductor, Cleaners, etc. if it is related to operations
12.8
 Depreciation (if related to activity) Any other variable costs identified
Question 7
GMCS Ltd. collects raw milk from the farmers of Ramgarh, Pratapgarh and Devgarh panchayats and
processes this milk to make various dairy products. GMCS Ltd. has its own vehicles (tankers) to collect
and bring the milk to the processing plant. Vehicles are parked in the GMCS Ltd.'s garage situated
within the plant compound. Following are the information related with the vehicles:
Ramgarh Pratapgarh Devgarh

No. of vehicles assigned 4 3 5
No. of trips a day 3 2 4
One way distance from the processing plant 24 k.m. 34 k.m. 16 k.m.
Fess & taxes per month (Rs.) 5,600 6,400 ---
All the 5 vehicles assigned to Devgarh panchayat, were purchased five years back at a cost of Rs.
9,25,000 each. The 4 vehicles assigned to Ramgarh panchayat, were purchased two years back at a
cost of Rs. 11,02,000 each and the remaining vehicles assigned to Pratapgarh were purchased last
year at a cost of Rs. 13,12,000 each. With the purchase of each vehicle a two years free servicing
warranty is provided. A vehicle gives 10 kmpl mileage in the first two year of purchase, 8 kmpl in next
two years and 6 kmpl afterwards. The vehicles are subject to depreciation of 10% p.a. on straight line
basis irrespective of usage. A vehicle has the capacity to carry 10,000 litres of milk but on an average
only 70% of the total capacity is utilized.
The following expenditures are related with the vehicles:
Salary of Driver (a driver for each vehicle) Rs. 24,000 p.m.

Salary to Cleaner (a cleaner for each Rs. 12,000 p.m.
vehicle)
Allocated garage parking fee Rs. 4,200 per vehicle per month
Servicing cost Rs. 15,000 for every complete 5,000 k.m.
run.
Price of diesel per litre Rs. 78.00
From the above information you are required to CALCULATE
(i) Total operating cost per month for each vehicle. (Take 30 days for the month) Vehicle
operating cost per litre of milk. (MTP 10 Marks , Mar‘21)
Answer 7
(i) Calculation of Operating Cost per month for each vehicle
Ramgarh Pratapgarh Devgarh Total
(Rs.) (Rs.) (Rs.) (Rs.)
A. Running Costs:
- Cost of diesel (Working 1,68,480 95,472 2,49,600 5,13,552
Note- 2)
- Servicing cost (Working 45,000 - 45,000 90,000
Note- 3)
2,13,480 95,472 2,94,600 6,03,552
B. Fixed Costs:
- Salary to drivers 96,000 72,000 1,20,000 2,88,000
(4 drivers × (3 drivers × (5 drivers ×
Rs. 24,000) Rs. 24,000) Rs. 24,000)
- Salary to cleaners 48,000 36,000 60,000 1,44,000
(4 cleaners × (3 cleaners × (5 cleaners ×
12.9
Rs. 12,000) Rs. 12,000) Rs. 12,000)

- Allocated garage 16,800 12,600 21,000 50,400
parking fee (4 vehicles × (3 vehicles × (5 vehicles ×
Rs.4,200) Rs.4,200) Rs.4,200)
- Depreciation (Working 36,733 32,800 38,542 1,08,075
Note- 4)
- Fess & taxes 5,600 6,400 --- 12,000
2,03,133 1,59,800 2,39,542 6,02,475
Total [A + B] 4,16,613 2,55,272 5,34,142 12,06,027
Operating Cost per vehicle 1,04,153 85,091 1,00,502 1,06,828
(Rs.4,16,613 ÷ (Rs.2,55,272 ÷ (Rs.5,34,142 ÷ (Rs.12,06,027 ÷
4 vehicles) 3 vehicles) 5 vehicles) 12 vehicles)
(ii) Vehicle operating cost per litre of milk
!" # $% &" '"$ . , , )
!" ' ( & '"$
=) , , * +," ( $% -" .
= Rs. 0.15
Working Notes:
1. Distance covered by the vehicles in a month
Route Total Distance (in
K.M.)
Ramgarh (4 vehicles × 3 trips × 2 × 24 km. × 30 days) 17,280
Pratapgarh (3 vehicles × 2 trips × 2 × 34 km. × 30 days) 12,240
Devgarh (5 vehicles × 4 trips × 2 × 16 km. × 30 days) 19,200
2. Cost of diesel consumption
Total distance travelled (K.M.) 17,280 12,240 19,200
Mileage per litre of diesel 8 kmpl 10 kmpl 6 kmpl
Diesel consumption (Litre) 2,160 1,224 3,200
(17,280 ÷ 8) (12,240 ÷ 10) (19,200 ÷ 6)
Cost of diesel consumption @ Rs. 1,68,480 95,472 2,49,600
78 per litre (Rs.)
3. Servicing Cost
Total distance travelled 17,280 12,240 19,200
(K.M.)
Covered under free No Yes No
service warranty
No. of services 3 2 3
required (17,280 k.m. ÷ 5,000 k.m.) (12,240 k.m. ÷ (19,200 k.m. ÷ 5,000 k.m.)
5,000 k.m.)
Total Service Cost 45,000 --- 45,000
(Rs.) (Rs. 15,000 × 3) (Rs. 15,000 × 3)
4. Calculation of Depreciation
No. of vehicles 4 3 5
Cost of a vehicle (Rs.) 11,02,000 13,12,000 9,25,000
Total Cost of vehicles 44,08,000 39,36,000 46,25,000
(Rs.)
12.10
Depreciation per 36,733 32,800 38,542

month (Rs.) Rs. 44,08,000 5 10% Rs. 39,36,000 5 10% Rs. 46,25,000 5 10%
/ > / > / >
12 months 12 months 12 months
5. Total volume of Milk Carried

Route Milk Qty. (Litre)
Ramgarh (10,000 ltr. × 0.7 × 4 vehicles × 3 trips × 30 days) 25,20,000
Pratapgarh (10,000 ltr. × 0.7 × 3 vehicles × 2 trips × 30 days) 12,60,000
Devgarh (10,000 ltr. × 0.7 × 5 vehicles × 4 trips × 30 days) 42,00,000
79,80,000
Question 8
DIFFERENCIATE between Service costing and Product costing (MTP 5 Marks, March ‘21)
Answer 8
Service costing differs from product costing (such as job or process costing) in the following ways due to
some basic and peculiar nature.
(i) Unlike products, services are intangible and cannot be stored, hence, there is no inventory for the
services.
(ii) Use of Composite cost units for cost measurement and to express the volume of outputs.
(iii) Unlike a product manufacturing, employee (labour) cost constitutes a major cost element than
material cost.
(iv) Indirect costs like administration overheads are generally have a significant proportion in total
cost of a service as unlike manufacturing sector, service sector heavily depends on support
services and traceability of costs to a service may not economically feasible.
Question 9
Harry Transport Service is a Delhi based national goods transport service provider, owning five trucks
for this purpose. The cost of running and maintaining these trucks are as follows:
Particulars Amount
Diesel cost Rs.15 per km.
Engine oil Rs. 4,200 for every 14,000 km.
Repair and maintenance Rs.12,000 for every 10,000 km.
Driver’s salary Rs. 20,000 per truck per month
Cleaner’s salary Rs. 7,000 per truck per month
Supervision and other general expenses Rs.15,000 per month
Cost of loading of goods Rs. 200 per Metric Ton (MT)
Each truck was purchased for Rs. 20 lakhs with an estimated life of 7,20,000 km. During the next
month, it is expecting 6 bookings, the details of which are as follows:
Sl. Journey Distance Weight - Up Weight - Down
No. (in km) (in MT) (in MT)
1. Delhi to Kochi 2,700 15 7
2. Delhi to Guwahati 1,890 13 0
3. Delhi to1,840 16 0
Vijayawada
4. Delhi to Varanasi 815 11 0
5. Delhi to Asansol 1,280 13 5
12.11
6. Delhi to Chennai 2,185 11 9

Total 10,710 79 21
Required:
(i) CALCULATE the total absolute Ton-km for the next month.
(ii) CALCULATE the cost per ton-km. (MTP 10 Marks, April.’21)
Answer 9
(i) Calculation of Absolute Ton-km for the next month:
Journey Distance Weight- Ton-km Weight Ton-km Total
(in km) Up - Down
(in MT) (in MT)
(a) (b) (c) = (a)×(b) (d) (e) = (a)×(d) (f) = (c)+(e)
Delhi to Kochi 2,700 15 40,500 7 18,900 59,400

Delhi to Guwahati 1,890 13 24,570 0 0 24,570
Delhi to Vijayawada 1,840 16 29,440 0 0 29,440
Delhi to Varanasi 815 11 8,965 0 0 8,965

Delhi to Asansol 1,280 13 16,640 5 6,400 23,040
Delhi to Chennai 2,185 11 24,035 9 19,665 43,700
Total 10,710 79 1,44,150 21 44,965 1,89,115
Total absolute Ton-Km = 1,89,115 ton-km

(ii) Calculation of cost per ton-km:
A. Running cost:
- Diesel Cost {Rs.15 × (10,710 × 2)} 3,21,300
- Engine oil cost ( Rs.4,200 / 14,000 km× 21,420 km) 6,426
- Cost of loading of goods {Rs.200 × (79 + 21)} 20,000

- Depreciation +Rs. 20,00,000/7,20,000 km 5 21,420km. 59,500 4,07,226
B. Repair & Maintenance Cost 25,704

. ,
( , ( 5 21,420km.
C. Standing Charges
- Drivers’ salary (Rs.20,000 × 5 trucks) 1,00,000
- Cleaners’ salary (Rs.7,000 × 5 trucks) 35,000
- Supervision and other general expenses 15,000 1,50,000
Total Cost (A + B + C) 5,82,930
Total absolute ton-km 1,89,115
Cost per ton-km 3.08
Question 10
MKL Infrastructure built and operates 110 k.m. highway on the basis of Built-Operate- Transfer
(BOT) for a period of 21 years. A traffic assessment has been carried out to estimate the traffic flow
per day which shows the following figures:
Sl. No. Type of vehicle Daily traffic volume
1. Two wheelers 44,500
12.12
2. Car and SUVs 3,450

3. Bus and LCV 1,800
4. Heavy commercial vehicles 816
The following is the estimated cost of the project:
Sl. no. Activities Amount (₹ in
lakh)
1 Site clearance 341.00
2 Land development and filling work 9,160.00
3 Sub base and base courses 10,520.00
4 Bituminous work 32,140.00
5 Bridge, flyovers, underpasses, Pedestrian subway, footbridge, etc. 28,110.00
6 Drainage and protection work 9,080.00
7 Traffic sign, marking and road appurtenance 8,810.00
8 Maintenance, repairing and rehabilitation 12,850.00
9 Environmental management 1,964.00
Total Project cost 1,12,975.00
An average cost of ₹1,200 lakh has to be incurred on administration and toll plaza operation. On the
basis of the vehicle specifications (i.e. weight, size, time saving etc.), the following weights has been
assigned to the passing vehicles:
Sl. No. Type of vehicle
1. Two wheelers 5%
2. Car and SUVs 20%
3. Bus and LCV 30%
4. Heavy commercial vehicles 45%
Required:
(i) CACULATE the total project cost per day of concession period.
(ii) COMPUTE toll fee to be charged for per vehicle of each type, if the company wants earn a profit of
15% on total cost. [Note: Concession period is a period for which an infrastructure is allowed to
operate and recover its investment] (MTP 10 Marks Nov ’21) (Same concept different figures MTP 10
Marks Oct’19, Old & New SM)
Answer 10
(i) Calculation of total project cost per day of concession period:
Activities Amount (₹ in lakh)
Site clearance 341.00
Land development and filling work 9,160.00
Sub base and base courses 10,520.00
Bituminous work 32,140.00
Bridge, flyovers, underpasses, Pedestrian subway, footbridge, etc 28,110.00
Drainage and protection work 9,080.00

Traffic sign, marking and road appurtenance 8,810.00
Maintenance, repairing and rehabilitation 12,850.00
Environmental management 1,964.00
Total Project cost 1,12,975.00
Administration and toll plaza operation cost 1,200.00
Total Cost 1,14,175.00
Concession period in days (21 years × 365 days) 7,665
Cost per day of concession period (₹ in lakh) 14.90
12.13
(ii) Computation of toll fee:

Cost to be recovered per day = Cost per day of concession period + 15% profit on cost
= ₹ 14,90,000 + ₹ 2,23,500 = ₹ 17,13,500
Cost Per equivalent vehicle = ₹ 17,13,500 / 76,444 units (Refer working note)
= ₹ 22.42 per equivalent vehicle
(iii) Vehicle type-wise toll fee:
Sl. Type of vehicle Equivalent Weigh Toll fee per
No. cost [A] t [B] vehicle
[A×B]
1. Two wheelers ₹22.42 1 22.42
2. Car and SUVs ₹22.42 4 89.68
3. Bus and LCV ₹22.42 6 134.52
4. Heavy commercial vehicles ₹22.42 9 201.78
Working Note:
The cost per day has to be recovered from the daily traffic. The each type of vehicle is to be converted
into equivalent unit. Let’s convert all vehicle types equivalent to Two-wheelers..
Sl. Type of vehicle Daily traffic Weight Ratio Equivalent
No. volume [A] [B] Two- wheeler
[A×B]
1. Two wheelers 44,500 0.05 1 44,500
2. Car and SUVs 3,450 0.20 4 13,800
3. Bus and LCV 1,800 0.30 6 10,800
4. Heavy commercial vehicles 816 0.45 9 7,344
Total 76,444
Question 11
YSPP Transport Company is running local city buses. It has a fleet of 20 Buses. Each bus can carry average
40 passengers per day and cover distance of 112.50 kms per day. Due to Covid-19 pandemic, the company
is running 90% buses on average.
Below are the operational expenses worked out for the month of November, 2021:
Original cost per bus ₹ 48,00,000
Insurance for 20 buses ₹ 63,36,000 per annum
Diesel & Oil ₹ 10 per km.
Salary of drivers per bus ₹ 25,000
Salary of cleaners per bus ₹ 15,000
Tyres and tubes ₹ 12,58,040
Lubricants ₹ 10,70,000
Repairs ₹ 24,70,000
Road tax per bus ₹ 1,50,000
Administrative overhead ₹ 50,88,000 per annum
Depreciation on buses is computed @ 20% using Straight Line Method. Passenger tax is 15% on total
taking. Based on abovementioned information, you are required to COMPUTE the fare to be charged
from each passenger per kilometer assuming 25% margin on total taking (Total receipts from
passengers.) (MTP 10 Marks March ‘22)
Answer 11
12.14
Operating Cost Statement

Particulars Total Cost Per
Month (in ₹)
Fixed Charges:
Salary of Drivers (₹ 25,000 × 20 buses) 5,00,000
Salary of Cleaners (₹ 15,000 × 20 buses) 3,00,000
Road Tax (₹ 1,50,000 × 20 buses) 30,00,000
Insurance (₹ 63,36,000/12 months) 5,28,000
48,00,000 5 20% 5 20buses
/ >
12 months
Administrative Overheads (₹ 50,88,000/12 months) 4,24,000

Total (A) 63,52,000
Variable Charges:
Diesel (60,750 km. × ₹10) 6,07,500
Tyres and Tubes 12,58,040
Lubricants 10,70,000
Repairs 24,70,000
Total (B) 54,05,540
Total Operating Cost (A+B) 1,17,57,540
Add: Passenger tax (Refer to WN-1) 29,39,385
Add: Profit (Refer to WN-1) 48,98,975
Total takings (C) 1,95,95,900
No. of passengers kms. in a month (D) 24,30,000
Cost per passenger km. (C/D) 8.06
Working Notes:
1. Let total takings be X then Passenger tax and profit will be as follows: X = ₹
1,17,57,540 + 0.15X + 0.25X
X – 0.40X = ₹ 1,17,57,540
, ), ),
X = .
= ₹ 1,95,95,900
Passenger tax = ₹ 1,95,95,900 × 0.15 = ₹ 29,39,385 Profit

= ₹ 1,95,95,900 × 0.25 = ₹ 48,98,975
2. Total Kilometres to run during the month of November, 2021
= (112.50 km. × 30 days × 20 Buses) x 90% = 60,750 Kilometres
3. Total passenger Kilometres during the month of November, 2021
= 60,750 km. × 40 passengers = 24,30,000 Passenger- km.
Question 12
STATE the unit of cost for the following service industries:
(i) Electricity Supply service
(ii) Hospital
(iii) Cinema
12.15
(iv) Hotels (MTP 4 Marks April ’22 & Sep ‘22)

Answer 12
S. Service industry Unit of cost
No.
(i) Electricity Supply service Kilowatt- hour (kWh)
(ii) Hospital Patient per day, room per day or per bed, per operation
etc.
(iii) Cinema Per ticket.
(iv) Hotels Guest Days or Room Days
Question 13
Answer the following:
A company has the following three alternative proposals for conveyance facilities for its sales personnel
who has to do substantial traveling, approximately 20,000 kilometers yearly:
(i) Purchasing and maintaining its own fleet of cars. The average cost of a car is ₹ 7,20,000
(ii) Allow the Executive to use their own car and reimburse the expenses @ ₹ 12 per kilometer and also
bear insurance costs.
(iii) Hire cars from an agency at ₹ 2,16,000 per year per car. The company will have to bear costs of petrol,
taxes and tyres.
The following further details are available:
Petrol ₹ 7.20 per km.
Tyre ₹ 0.144 per km.
Taxes ₹ 960 per car per annum
Repairs and maintenance ₹ 0.24 per km.
Insurance ₹ 1,440 per car per annum
Life of the car 5 years with annual mileage of 20,000 km.
Resale value ₹ 96,000 at the end of the fifth year. WORK OUT the relative costs of three proposals
and rank them. (MTP 5 Marks Sep’22, Old & New SM)
Answer 13
Calculation of relative costs of three proposals and their ranking
I- Use of II- Use of III- Use of
company’s car own car hired car
per km. (₹) per km. (₹) per km. (₹)
Reimbursement -- 12.00 --
Hire Charges -- -- 10.80*
Fixed cost:
Insurance 0.072 0.072 --
Taxes 0.048 -- 0.048
Depreciation 6.24# -- --
Running and Maintenance Cost:
Petrol 7.20 -- 7.20
Repairs and Maintenance 0.24 -- --
Tyre 0.144 -- 0.144
Total cost per km. 13.944 12.072 18.192
Cost for 20,000 km. 2,78,880 2,41,440 3,63,840
Ranking of proposals II I III
*(₹ 2,16,000 ÷ 20,000 km.) = ₹ 10.80
#[(₹ 7,20,000 - ₹ 96,000) ÷ 5 years] ÷ 20,000 km. = ₹ 6.24
The Second alternative i.e., use of own car by the executive and reimbursement of expenses by the
company is the best alternative from company’s point of view.
Question 14
12.16
Royal transport company has been given a 50-kilometre-long route to run 6 buses. The cost of each bus
is ₹ 75,00,000. The buses will make 3 round trips per day carrying on an average 75 percent passengers
of their seating capacity. The seating capacity of each bus is 48 passengers. The buses will run on an
average 25 days in a month. The other information for the year 2021-22 is given below:
Garage Rent ₹ 60,000 per month
Annual Repairs & Maintenance ₹ 2,40,000 each bus
Salaries of 6 drivers ₹ 20,000 each per month
Wages of 6 conductors ₹ 16,000 each per month
Wages of 6 cleaners ₹ 10,000 each per month
Manager’s salary ₹ 50,000 per month
Road Tax, Permit fee, etc. ₹ 60,000 for a quarter
Office expenses ₹ 25,000 per month
Cost of diesel per litre ₹92
Kilometer run per litre for each bus 6 kilometres
Annual Depreciation 20% of cost
Annual Insurance 4% of cost
Engine oils & lubricants (for 1,000 kilometres) ₹ 20,000
You are required to calculate the bus fare to be charged from each passenger per kilometer (upto four
I
decimal points), if the company wants to earn profit of 33 J percent on taking (total receipts from
passengers). (MTP 10 Marks Oct’22)
Answer 14
Working Notes:
1. Total Kilometres to be run during the year 2021-22
= 50 km.× 2 sides × 3 trips × 25 days × 12 months × 6 buses = 5,40,000 Kilometres
2. Total passenger Kilometres
= 5,40,000 km. × 48 passengers × 75% = 1,94,40,000 Passenger- km.
Operating Cost Sheet for the year 2021- 22
Particulars Total Cost (Rs.)
A. Fixed Charges:
Garage rent (Rs. 60,000 × 12 months) 7,20,000
Salary of drivers (Rs. 20,000 × 6 drivers ×12 months) 14,40,000
Wages of Conductors (Rs. 16,000 × 6 conductors × 12 months) 11,52,000
Wages of Cleaners (Rs. 10,000 × 6 cleaners × 12 months) 7,20,000
Manager’s salary (Rs.50,000 × 12 months) 6,00,000
Road Tax, Permit fee, etc. (Rs. 60,000 × 4 quarters) 2,40,000
Office expenses (Rs. 25,000 × 12 months) 3,00,000
Depreciation (Rs. 75,00,000 × 6 buses × 20%) 90,00,000
Insurance (Rs. 75,00,000 × 6 buses × 4%) 18,00,000
Total (A) 1,59,72,000
B. Variable Charges:
Repairs and Maintenance (Rs. 2,40,000 × 6 buses) 14,40,000
Diesel {(5,40,000 km. ÷ 6 km.) × Rs.92} 82,80,000
Engine oils & lubricants {(Rs. 20,000. ÷ 1000 km.) × 5,40,000 km} 1,08,00,000
Total (B) 2,05,20,000
Total Cost (A+B) 3,64,92,000
Add: 33 1/3 % Profit on takings or 50% on cost 1,82,46,000
C. Total Takings (Total bus fare collection) 5,47,38,000
12.17
D. Total Passenger-km. (Working Note 2) 1,94,40,000

E. Bus fare to be charged from each passenger per km. (C ÷ D) 2.82
Question 15
Secure lifeline Ltd. operates in life insurance business. It launched a new insurance policy 'Total
secure'. The company has incurred the following expenditures during the last year for the policy:
₹
Cost of marketing of the policy 74,58,000
Sales support expenses 18,89,250
Policy issuance cost 16,59,735
Claims management cost 2,07,240
Policy development cost 18,56,250
Postage and logistics 16,91,250
Facilities cost 25,14,600
Policy servicing cost 58,09,155
Employees cost 9,24,000
IT cost 1,22,62,800
Office administration cost 26,73,660
Number of policies sold- 844. Total insured value of policies - ₹ 1,640 crore.
Required:
(i) CALCULATE total cost for Professionals Protection Plus’ policy segregating the costs into four
main activities namely (a) Marketing and Sales support, (b) Operations, (c) IT and (d) Support
functions.
(ii) CALCULATE cost per policy.
(iii) CALCULATE cost per rupee of insured value. (MTP 5 Marks March ’23, Old & New SM, RTP
Nov ’18, PYP 5 Marks July ’21)
Answer 15
(i) Calculation of total cost for ‘Professionals Protection Plus’ policy
1 Marketing and Sales support:
- Policy development cost 18,56,250
- Cost of marketing 74,58,000
- Sales support expenses 18,89,250 1,12,03,500
2 Operations:
- Policy issuance cost 16,59,735
- Policy servicing cost 58,09,155
- Claims management cost 2,07,240 76,76,130
3 IT Cost 1,22,62,800
4 Support functions
- Postage and logistics 16,91,250
- Facilities cost 25,14,600
- Employees cost 9,24,000
- Office administration cost 26,73,660 78,03,510
Total Cost 3,89,45,940
!" &" L, , ,
(ii) Calculation of Cost per policy - K " "
= = Rs. 46,144.48
12.18
!" &" L, , ,
(iii) Cost per rupee of insured value !" $
= , "
= Rs. 0.0024

This practical problem was based on service costing which required examinees to segregate
costs of Insurance policy under four main activities and to calculate cost per policy. Most
of the examinees could not segregate the costs correctly. Performance of the examinees
was below average.
Question 16
Arnav LMV Pvt. Ltd, operates cab/ car rental service in Delhi/NCR. It provides its service to the
offices of Noida, Gurugram and Faridabad. At present it operates CNG fueled cars but it is also
considering to upgrade these into Electric vehicle (EV). The following details related with the owning
of CNG & EV propelled cars are as tabulated below:
Particulars CNG Car EV Car
Car purchase price (₹) 9,20,000 15,20,000
Govt. subsidy on purchase of car (₹) -- 1,50,000
Life of the car 15 years 10 years
Residual value (₹) 95,000 1,70,000
Mileage 20 km/kg 240 km per charge
Electricity consumption per full charge -- 30 Kwh
CNG cost per Kg (₹) 90 --
Power cost per Kwh (₹) -- 7.60
Annual Maintenance cost (₹) 8,000 5,200
Annual insurance cost (₹) 7,600 14,600
Tyre replacement cost in every 5 -year (₹) 16,000 16,000
Battery replacement cost in every 8- year (₹) 12,000 5,40,000
Apart from the above, the following are the additional information:
Particulars
Average distance covered by a car in a month 1,500 km
Driver’s salary (₹) 20,000 p.m
Garage rent per car (₹) 4,500 p.m
Share of Office & Administration cost per car (₹) 1,500 p.m
Required:
CALCULATE the operating cost of vehicle per month per car for both CNG & EV options. [MTP 10
Marks April ’23, RTP May ’22)
Answer 16
Working Notes:
1. Calculation of Depreciation per month:
A Car purchase price (₹) 9,20,000 15,20,000
B Less: Govt. subsidy (₹) -- (1,50,000)
12.19
C Less: Residual value (₹) (95,000) (1,70,000)

D Depreciable value of car (₹) [A-B-C] 8,25,000 12,00,000
E Life of the car 15 years 10 years
F Annual depreciation (₹) [D÷E] 55,000 1,20,000
G Depreciation per month (₹) [F÷12] 4,583.33 10,000
2. Fuel/ Electricity consumption cost per month:

A Average distance covered in a month (KM) 1,500 1,500
B Mileage (KM) 20 240
C Qty. of CNG/ Full charge required [A÷B] 75 kg. 6.25
D Electricity Consumption [C×30kwh] - 187.5
E Cost of CNG per kg (₹) 90 -
F Power cost per Kwh (₹) - 7.60
G CNG Cost per month (₹) [C×E] 6,750 -
H Power cost per month (₹) [D×F] - 1,425
3. Amortised cost of Tyre replacement:
A Life of vehicle 15 years 10 years
B Replacement interval 5 years 5 years
C No. of time replacement required 2 times 1 time
D Cost of tyres for each replacement (₹) 16,000 16,000
E Total replacement cost (₹) [C×D] 32,000 16,000
F Amortised cost per year (₹) [E÷A] 2,133.33 1,600
E Cost per month (₹) [F÷12] 177.78 133.33
4. Amortised cost of Battery replacement:

A Life of vehicle 15 years 10 years
B Replacement interval 8 years 8 years
C No. of time replacement required 1 time 1 time
D Cost of battery for each replacement (₹) 12,000 5,40,000
E Total replacement cost (₹) [C×D] 12,000 5,40,000
F Amortised cost per year (₹) [E÷A] 800 54,00
0
E Cost per month (₹) [F÷12] 66.67 4,500
Calculation of Operating cost per month:
Particulars CNG Car (₹) EV Car (₹)
A Running cost:
Fuel cost/ Power consumption cost [Refer WN-2] 6,750 1,425
B Maintenance cost:
Annual Maintenance cost [Annual cost ÷12] 666.67 433.33
Annual Insurance cost [Annual cost ÷12] 633.33 1,216.67
12.20
Amortised cost of Tyre replacement [Refer WN-3] 177.78 133.33

Amortised cost of Battery replacement [Refer 66.67 4,500
WN-4]
1,544.45 6,283.33
C Fixed cost:
Depreciation [Refer WN-1] 4,583.33 10,000
Driver’s salary 20,000 20,000
Garage rent 4,500 4,500
Share of Office & Administration cost 1,500 1,500
30,583.33 36,000
D Operating cost per month [A+B+C] 38,877.78 43,708.33
Question 17
AD Higher Secondary School (AHSS) offers courses for 11th & 12th standard in three streams i.e. Arts,
Commerce and Science. AHSS runs higher secondary classes along with primary and secondary classes
but for accounting purpose it treats higher secondary as a separate responsibility centre. The Managing
committee of the school wants to revise its fee structure for higher secondary students. The accountant
of the school has provided the following details for a year:
Amount (₹ )
Teachers’ salary (15 teachers × ₹ 35,000 × 12 months) 63,00,000
Principal’s salary 14,40,000
Lab attendants’ salary (2 attendants × ₹ 15,000 × 12 months) 3,60,000
Salary to library staff 1,44,000
Salary to peons (4 peons × ₹ 10,000 × 12 months) 4,80,000
Salary to other staffs 4,80,000
Examinations expenditure 10,80,000
Office & Administration cost 15,20,000
Annual day expenses 4,50,000
Sports expenses 1,20,000
Other information:
(i)
Standard 11 & 12 Primary &
Arts Commerce Science Secondary
No. of students 120 360 180 840
Lab classes in a year 0 0 144 156
No. of examinations in a year 2 2 2 2
Time spent at library per student 180 hours 120 hours 240 hours 60 hours
per year
Time spent by principal for 208 hours 312 hours 480 hours 1,400 hours
administration
Teachers for 11 & 12 standard 4 5 6 -
(ii) One teacher who teaches economics for Arts stream students also teaches commerce stream students.
The teacher takes 1,040 classes in a year, it includes 208 classes for commerce students.
(iii) There is another teacher who teaches mathematics for Science stream students also teaches business
mathematics to commerce stream students. She takes 1,100 classes a year, it includes 160 classes for
12.21
commerce students.
(iv) One peon is fully dedicated for higher secondary section. Other peons dedicate their 15% time for
higher secondary section.
(v) All school students irrespective of section and age participate in annual functions and sports activities.
Requirement:
(a) CALCULATE cost per student per annum for all three streams.
(b) If the management decides to take uniform fee of ₹ 1,000 per month from all higher secondary
students, CALCULATE stream wise profitability.
(c) If management decides to take 10% profit on cost, COMPUTE fee to be charged from the
students of all three streams respectively. (RTP May’ 20, RTP May’18, Old & New SM)
Answer 17
Calculation of Cost per annum
Particulars Arts (Rs.) Commerce (Rs.) Science (Rs.) Total (Rs.)

Teachers’ salary (W.N-1) 16,80,000 21,00,000 25,20,000 63,00,000
R-apportionment of Economics & (84,000) 1,45,091 (61,091) -
Mathematics teachers’ salary (W.N-
2)
Principal’s salary (W.N-3) 1,24,800 1,87,200 2,88,000 6,00,000
Lab assistants’ salary (W.N-4) - - 1,72,800 1,72,800
Salary to library staff (W.N-5) 43,200 28,800 57,600 1,29,600
Salary to peons (W.N-6) 31,636 94,909 47,455 1,74,000
Salary to other staffs (W.N-7) 38,400 1,15,200 57,600 2,11,200
Examination expenses (W.N- 8) 86,400 2,59,200 1,29,600 4,75,200
Office & Administration 1,21,600 3,64,800 1,82,400 6,68,800
expenses (W.N- 7)
Annual Day expenses (W.N-7) 36,000 1,08,000 54,000 1,98,000
Sports expenses (W.N- 7) 9,600 28,800 14,400 52,800
Total Cost per annum 20,87,636 34,32,000 34,62,764 89,82,400
(i) Calculation of cost per student per annum
Particulars Arts (Rs.) Commerce (Rs.) Science (Rs.) Total (Rs.)
Total Cost per annum 20,87,636 34,32,000 34,62,764 89,82,400
No. of students 120 360 180 660
Cost per student per 17,397 9,533 19,238 13,610
annum
(ii) Calculation of profitability
Particulars Arts (Rs.) Commerce Science (Rs.) Total (Rs.)
(Rs.)
Total Fees per annum 12,000 12,000 12,000
Cost per student per annum 17,397 9,533 19,238
Profit/ (Loss) per student per (5,397) 2,467 (7,238)
annum
No. of students 120 360 180
Total Profit/ (Loss) (6,47,640) 8,88,120 (13,02,840) (10,62,360)
(iii) Computation of fees to be charged to earn a 10% profit on cost

Particulars Arts (Rs.) Commerce Science (Rs.)
(Rs.)
12.22
Cost per student per annum 17,397 9,533 19,238

Add: Profit @10% 1,740 953 1,924
Fees per annum 19,137 10,486 21,162
Fees per month 1,595 874 1,764
Working Notes:
(1) Teachers’ salary
Particulars Arts Commerce Science
No. of teachers 4 5 6
Salary per annum (Rs.) 4,20,000 4,20,000 4,20,000
Total salary 16,80,000 21,00,000 25,20,000
(2) Re-apportionment of Economics and Mathematics teachers’ salary

Economics Mathematics
Particulars Arts Commerce Science Commerce
No. of classes 832 208 940 160
Salary re-apportionment (Rs.) (84,000) 84,000 (61,091) 61,091
Rs. 4,20,000 Rs. 4,20,000

/ 5 208> / 5 160>
1,040 1,100
(3) Principal’s salary has been apportioned on the basis of time spent by him for administration of classes.
(4) Lab attendants’ salary has beenapportioned on the basis of lab classes attended by the students.
(5) Salary of library staffs are apportioned on the basis of time spent by the students in library.
(6) Salary of Peons are apportioned on the basis of number of students. The peons’ salary allocable
to higher secondary classes is calculated as below:
Amount (Rs.)
Peon dedicated for higher secondary 1,20,000
(1 peon × Rs.10,000 × 12 months)
Add: 15% of other peons’ salary 54,000
{15% of (3 peons × Rs.10,000 × 12 months)}
1,74,000
(7) Salary to other staffs, office & administration cost, Annual day expenses and sports expenses are
apportioned on the basis of number of students.
(8) Examination Expenses has been apportion taking number of students and number examinations
into account.
Question 18
A transport company has a fleet of four trucks of 10 tonne capacity each plying in different directions for
transport of customer’s goods. The trucks run loaded with goods and return empty. The distance travelled,
number of trips made and the load carried per day by each truck are as under:
Truck No. One way No.of trips Load carried
Distance Km per day per trip / day tonnes
1 48 4 6
2 120 1 9
3 90 2 8
4 60 4 8
12.23
The analysis of maintenance cost and the total distance travelled during the last two years is as under
Year Total distance travelled Maintenance Cost ₹
1 1,60,200 1,38,150
2 1,56,700 1,35,525
The following are the details of expenses for the year under review:
Diesel ₹ 60 per litre. Each litre gives 4 km per litre of diesel on an
average.
Driver's salary ₹ 22,000 per truck per month
Licence and taxes ₹ 15,000 per annum per truck
Insurance ₹ 80,000 per annum for all the four trucks
Purchase Price per ₹30,00,000, Life 10 years. Scrap value at the end of life is
truck ₹1,00,000.
Oil and sundries ₹ 525 per 100 km run.
General Overhead ₹ 1,10,840 per annum
The trucks operate 24 days per month on an average.
Required
(i) PREPARE an Annual Cost Statement covering the fleet of four trucks
(ii) CALCULATE the cost per km. run.
(iii) DETERMINE the freight rate per tonne km. to yield a profit of 30% on freight. (RTP Nov’19) (Same concept
different figures MTP 10 Marks March ’19 & Sep ‘23)
Answer 18
(i) Annual Cost Statement of four vehicles
(₹ )
Diesel {(4,21,632 km. ÷ 4 km) × ₹ 60) (Refer to Working Note 1) 63,24,480
Oil & sundries {(4,21,632 km. ÷ 100 km.) × ₹ 525} 22,13,568
Maintenance {(4,21,632 km. × ₹ 0.75) + ‘ 18,000}(Refer to Working Note 2) 3,34,224
Drivers’ salary {(₹ 22,000 × 12 months) × 4 trucks} 10,56,000
Licence and taxes (₹ 15,000 × 4 trucks) 60,000
Insurance 80,000
Depreciation {(₹ 29,00,000 ÷ 10 years) × 4 trucks} 11,60,000
General overhead 1,10,840
Total annual cost 1,13,39,112
(ii) Cost per km. run
!" $$ " "
Cost per Kilometer run = !" ( " $$
. , L,L ,
= = Rs. 26.89
, , L M
(iii) Freight rate per tonne km (to yield a profit of 30% on freight)
!" $$ " "

Cost per Kilometer run = !" "$$ ( . $$
. , L,L ,
= , , (
= Rs. 7.04
.).
Freight rate per tonne km. N
.)
O 5 1 = Rs. 10.06
Working Notes:
1. Total kilometer travelled and tonnes kilometer (load carried) by four trucks in one year

12.24
Truck One way No. of Total distance Load carried per Total
number distance trips covered in km trip/ day effective
in kms per day in tonnes tonnes km
1 48 4 384 6 1,152
2 120 1 240 9 1,080
3 90 2 360 8 1,440
4 60 4 480 8 1,920
Total 1,464 5,592
Total kilometer travelled by four trucks in one year (1,464 km. × 24 days × 12 months) =
4,21,632
Total effective tonnes kilometer of load carried by four trucks during one year (5,592 tonnes km. × 24
days × 12 months) = 16,10,496
2. Fixed and variable component of maintenance cost:
P $ $ $ $ "
Variable maintenance cost per km =
P $ $ $
. ,L , . ,L ,
= , , M , ,) (
= Rs. 0.75
Fixed maintenance cost = Total maintenance cost–Variable maintenance cost
= ₹ 1,38,150 – 1,60,200 kms × ₹ 0.75 = ₹ 18,000
Question 19
A company runs a holiday home. For this purpose, it has hired a building at a rent of ₹ 10,00,000 per
month along with 5% of total taking. It has three types of suites for its customers, viz., single room,
double rooms and triple rooms.
Total annual cost of vehicles Total kilometer travelled annually
Following information is given:
Type of suite Number Occupancy percentage
Single room 100 100%
Double rooms 50 80%
Triple rooms 30 60%
The rent of double rooms suite is to be fixed at 2.5 times of the single room suite and that of triple
rooms suite as twice of the double rooms suite.
The other expenses for the year 20X9 are as follows:
(Rs.)
Staff salaries 14,25,00,000
Room attendants’ wages 4,50,00,000
Lighting, heating and power 2,15,00,000
Repairs and renovation 1,23,50,000
Laundry charges 80,50,000
Interior decoration 74,00,000
Sundries 1,53,00,000
Provide profit @ 20% on total taking and assume 360 days in a year.
You are required to Calculate the rent to be charged for each type of suite. (RTP May’19, Old & New SM)
Answer 19
(i) Total equivalent single room suites
12.25
Nature of suite Occupancy (Room-days) Equivalent single room suites

(Room-days)
Single room suites 36,000 36,000
(100 rooms X 360 days X 100%) (36,000 X 1)
Double rooms suites 14,400 36,000
(50 rooms X 360 days X 80%) (14,400 X 2.5)
Triple rooms suites 6,480 32,400
(30 rooms X 360 days X 60%) (6,480 X 5)
1,04,400
(ii) Statement of total cost:
(₹)
Staff salaries 14,25,00,000
Room attendant’s wages 4,50,00,000
Lighting, heating and power 2,15,00,000
Repairs and renovation 1,23,50,000
Laundry charges 80,50,000
Interior decoration 74,00,000
Sundries 1,53,00,000
25,21,00,000
Building rent {(₹10,00,000 12 months) + 5% 1,20,00,000+ 5% on total takings
on total taking}
Total cost 26,41,00,000 + 5% on total takings
Profit is 20% of total takings
∴ Total takings = ₹ 26,41,00,000 + 25% (5% +20%) of total takings
Let x be rent for single room suite
Then 1,04,400 x = 26,41,00,000 + 0.25 × 1,04,400 x
Or, 1,04,400 x = 26,41,00,000 + 26,100 x
∴Or, 78,300 x = 26,41,00,000
Or, x = 3,373
(iii) Rent to be charged for single room suite = ₹ 3,373
Rent for double rooms suites ₹ 3,373 x 2.5 = ₹ 8,432.5
Rent for triple rooms suites ₹ 3,373 x 5 = ₹ 16,865.
Question 20
A transport company has 20 vehicles, the capacities are as follows:
No. of Vehicles Capacity per vehicle
5 9 MT
6 12 MT
7 15 MT
2 20 MT
The company provides the goods transport service between stations ‘A’ to station ‘B’. Distance between these
stations is 100 kilometers. Each vehicle makes one round trip per day on an average. Vehicles are
loaded with an average of 90 per cent of capacity at the time of departure from station ‘A’ to station ‘B’
and at the time of return back loaded with 70 per cent of capacity. 10 per cent of vehicles are laid up for
repairs every day. The following information is related to the month of August, 2020:
12.26
Salary of Transport Manager ₹ 60,000

Salary of 30 drivers ₹ 20,000 each driver
Wages of 25 Helpers ₹ 12,000 each helper
Loading and unloading charges ₹ 850 each trip
Consumable stores (depends on running of vehicles) ₹ 1,35,000
Insurance (Annual) ₹ 8,40,000
Road Licence (Annual) ₹ 6,00,000
Cost of Diesel per litre ₹ 78
Kilometres run per litre each vehicle 5 Km.
Lubricant, Oil etc. ₹ 1,15,000
Cost of replacement of Tyres, Tubes, other parts etc. (on ₹ 4,25,000
running basis)
Garage rent (Annual) ₹ 9,00,000
Routine mechanical services ₹ 3,00,000
Electricity charges (for office, garage and washing station) ₹ 55,000
Depreciation of vehicles (on time basis) ₹ 6,00,000

There is a workshop attached to transport department which repairs these vehicles and other vehicles
also. 40 per cent of transport manager’s salary is debited to the workshop. The transport department has been
apportioned ₹88,000 by the workshop during the month. During the month operation was for 25
days.
You are required:
(i) CALCULATE per ton-km operating cost.
(ii) DETERMINE the freight to be charged per ton-km, if the company earned a profit of 25 per cent on
freight. (RTP Nov ’20)
Answer 20
(i) Operating Cost Sheet for the month of August, 2020

A. Fixed Charges:
Manager’s salary (₹60,000 × 60%) 36,000
Drivers’ Salary (₹20,000 × 30 drivers) 6,00,000
Helpers’ wages (₹12,000 × 25 helpers) 3,00,000
Insurance (₹8,40,000 ÷ 12 months) 70,000
Road licence (₹6,00,000 ÷ 12 months) 50,000
Garage rent (₹9,00,000 ÷ 12 months) 75,000
Routine mechanical services 3,00,000
Electricity charges (for office, garage and washing station) 55,000
Depreciation of vehicles 6,00,000

Apportioned workshop expenses 88,000
Total (A) 21,74,000
B. Variable Charges:
Loading and unloading charges (Working Note 1) 7,65,000
Consumable Stores 1,35,000
Cost of diesel (Working Note 2) 14,04,000
Lubricant, Oil etc. 1,15,000
12.27
Replacement of Tyres, Tubes & other parts 4,25,000

Total (B) 28,44,000
C. Total Cost (A + B) 50,18,000
D. Total Ton-Kms. (Working Note 3) 9,43,200
E. Cost per ton-km. (C ÷ D) 5.32
(ii) Calculation of Chargeable Freight
Cost per ton-km. ₹ 5.32
Add: Profit @ 25% on freight or 33⅓% on cost ₹ 1.77
Chargeable freight per ton-km. ₹ 7.09
Working Notes:
1. Wages paid to loading and unloading labours
Numbers of vehicles available per day × No. of days × trips × wages per trip (20 vehicles × 90%) × 25 days
× 2 trips × ₹850
18 × 25 × 2 × 850 = ₹7,65,000
2. Cost of Diesel:
Distance covered by each vehicle during August, 2020
= 100 k.m. × 2 × 25 days × 90% = 4,500 km.
, M.'.5 R
Consumption of diesel = M. .
= 18,000 litres
Cost of Diesel = 18,000 litres 5 Rs.78 = Rs.14,04,000

Calculation of Total ton –km:
Total Ton-Km. = Total Capacity × Distance covered by each vehicle × Average Capacity Utilisation ratio.
+ %W) %.
= [(55 9MT)+(65 12 MT. U +7 5 15 MT. U +2 5 20MT.V 5 4,500K.m. 5
= (45 + 72 + 105 + 40) × 4,500 k.m. × 80%
= 262 × 4,500 × 80%.

= 9,43,200 ton-km.
Question 21
VPS is a public school having 25 buses each plying in different directions for the transport of its school
students. In view of large number of students availing of the bus service, the buses work two shifts
daily both in the morning and in the afternoon. The buses are garaged in the school. The workload
of the students has been so arranged that in the morning, the first trip picks up senior students and
the second trip plying an hour later picks up junior students. Similarly, in the afternoon, the first trip
takes the junior students and an hour later the second trip takes the senior students home.
The distance travelled by each bus, one way is 8 km. The school works 22 days in a month and remains
closed for vacation in May and June. The bus fee, however, is payable by the students for all the 12
months in a year.
The details of expenses for a year are as under:
Driver's salary – payable for all the 12 in months ₹ 12,000 per month per driver
Cleaner's salary payable for all the 12 months ₹ 8,000 per month per cleaner License
fees, taxes etc. ₹ 8,400 per bus per annum
Insurance Premium ₹ 15,600 per bus per annum
Repairs and Maintenance ₹ 20,500 per bus per annum
Purchase price of the bus ₹ 20,00,000 each
12.28
Life of the bus 16 years

Scrap value ₹ 1,60,000
Diesel Cost ₹ 78.50 per litre
Each bus gives an average of 5 km. per litre of diesel. The seating capacity of each bus is 40 students.
The school follows differential transportation fees based on distance travelled as under:
Students picked up and dropped Transportation Percentage of
within the range of distance from the fee students availing
school this facility
2 km. 25% of Full 15%
4 km. 50% of Full 30%
8 km. Full 55%
Due to a pandemic, lockdown imposed on schools and the school remained closed from April 2020 to
December 2020. Drivers and cleaners were paid 75% of their salary during the lockdown period.
Repairing cost reduced to 75% for the year 2020.
Ignore the interest cost.
Required:
(i) PREPARE a statement showing the expenses of operating a single bus and the fleet of 25 buses for
a year.
(ii) FIND OUT transportation fee per student per month in respect of:
(a) Students coming from a distance of upto 2 km. from the school.
(b) Students coming from a distance of upto 4 km. from the school; and
(c) Students coming from a distance of upto 8 km. from the school.
(iii) CALCULATE the minimum bus fare that has to be recovered from the students for the year 2020.
(RTP May ’21, Old & New SM)
Answer 21
(i) Statement showing the expenses of operating a single bus
and the fleet of 25 buses for a year
Particulars Per busFleet of 25
per annum buses per
(₹) annum
(₹)
Running costs : (A)
Diesel (Refer to working note 1) 2,21,056 55,26,400
Repairs & maintenance costs: (B) 20,500 5,12,500
Fixed charges:
Driver's salary 1,44,000 36,00,000
(₹ 12,000 × 12 months)
Cleaners salary 96,000 24,00,000
(₹ 8,000 × 12 months)
Licence fee, taxes etc. 8,400 2,10,000
Insurance 15,600 3,90,000
Depreciation
Rs. 20,00,000 X Rs. 1,60,000
/ > 1,15,000 28,75,000
16 years
Total fixed charges: (C) 3,79,000 94,75,000
Total expenses: (A+B+C) 6,20,556 1,55,13,900
12.29
(ii) Average cost per student per month in respect of students coming from a distance of:
(a) 2 km. from the school {₹ 6,20,556 / (236 students × 12 ₹ 219.12
months)} (Refer to Working Note 2)
(b) 4 km. from the school (₹ 219.12 × 2) ₹ 438.24
(c) 8 km. from the school (₹ 219.12 × 4) ₹ 876.48
(iii) Calculation of minimum bus fare to be recovered from the students during the year 2020:
Statement showing the expenses of operating a single bus in year 2020
Particulars Per bus
per annum
(₹)
Running costs : (A)
Diesel (Refer to working note 3) 66,316.80
Repairs & maintenance costs: (B) 15,375
(₹ 20,500 x 0.75)
Fixed charges:
Driver's salary 1,17,000
{₹ 12,000 × 3 months + (75% of ₹ 12,000 × 9 months)}
Cleaners salary 78,000
{₹ 8,000 × 3 months + (75% of ₹ 8,000 × 9 months)}
Licence fee, taxes etc. 8,400
Insurance 15,600
Rs. 20,00,000 X Rs. 1,60,000

/ >
16 years
Total fixed charges: (C) 3,34,000
Total expenses: (A+B+C) 4,15,691.80
Minimum bus fare to be recovered:
(a) 2 km. from the school {₹ 4,15,691.8 / (236 students × 12 months)} ₹ 146.78
(Refer to Working Note 2)
(b) 4 km. from the school (₹ 146.78 × 2) ₹ 293.56
(c) 8 km. from the school (₹146.78 × 4) ₹ 587.12
Working Notes:
1. Calculation of diesel cost per bus:
No. of trips made by a bus each day 4
Distance travelled in one trip both ways (8 km. × 2 trips) 16 km.
Distance travelled per day by a bus (16 km. × 4 shifts) 64 km.
Distance travelled during a month (64 km. × 22 days) 1,408 km.
Distance travelled per year (1,408 × 10 months) 14,080 km.
No. of litres of diesel required per bus per year 2,816 litres
(14,080 km. ÷ 5 km.)
Cost of diesel per bus per year (2,816 litres × ₹ 78.50) ₹ 2,21,056
2. Calculation of equivalent number of students per bus:

Bus capacity of 2 trips (40 students × 2 trips) 80 students
1/
4th fare students (15% × 80 students) 12 students

12.30
½ fare students (30% × 80 students × 2) (equivalent to 1/4th 48 students

fare students)
Full fare students (55% × 80 students × 4) (equivalent to 1/4th 176 students
fare students)
Total students equivalent to 1/4th fare students 236 students
3. Calculation of diesel cost per bus in Year 2020:

Distance travelled during a month (64 km. × 22 days) 1,408 km.
Distance travelled during the year 2020 (1,408 × 3 months) 4,224 km.
No. of litres of diesel required per bus per year 844.8 litres
(4,224 km. ÷ 5 km.)
Cost of diesel per bus per year (844.8 litres × ₹ 78.50) ₹ 66,316.80
Question 22
Mr. PS owns a bus which runs according to the following schedule:
(i) Delhi to Hisar and back, the same day
Distance covered: 160 km. one way
Number of days run each month: 9
Seating capacity occupied 90%.
(ii) Delhi to Aligarh and back, the same day
Seating capacity occupied 95%
(iii) Delhi to Alwar and back, the same day
Seating capacity occupied 100%
(iv) Following are the other details:
Cost of the bus ₹ 15,00,000
Salary of the Driver ₹ 30,000 p.m.
Salary of the Conductor ₹ 26,000 p.m.
Salary of the part-time Accountant ₹ 7,000 p.m.
Insurance of the bus ₹ 6,000 p.a.
Diesel consumption 5 km. per litre at ₹ 90 per litre
Road tax ₹ 21,912 p.a.
Lubricant oil ₹ 30 per 100 km.
Permit fee ₹ 500 p.m.
Repairs and maintenance ₹ 5,000 p.m.
Depreciation of the bus @ 30% p.a.
Seating capacity of the bus 50 persons
Passenger tax is 20% of the total takings.
CALCULATE the bus fare to be charged from each passenger to earn a profit of 30% on total takings.
The fares are to be indicated per passenger for the journeys: (i) Delhi to Hisar (ii) Delhi to Aligarh and
(iii) Delhi to Alwar. (RTP Nov ’21)
Answer 22
Working Notes:

12.31
1. Total Distance (in km.) covered per month

Bus route Km. per trip Trips per day Days per Km. per
month month
Delhi to Hisar 160 2 9 2,880
Delhi to Aligarh 160 2 12 3,840
Delhi to Alwar 170 2 6 2,040
Total 8,760
2. Passenger- km. per month
Total seats available Capacity Km. Passenger-

per month (at 100% utilised per Km. per
capacity) (%) Seats trip month
Delhi to Hisar &900 90 810 160 1,29,600
Back (50 seats X 2 trips X 9 (810 seats ×
days) 160 km.)
Delhi to Aligarh &1,200 95 1,140 160 1,82,400
Back (50 seats X 2 trips X 12 (1,140 seats
days) × 160 km.)
Delhi to Alwar &600 100 600 170 1,02,000
Back (50 seats X 2 trips X 6 (600 seats ×
days) 170 km.)
Total 4,14,000
Monthly Operating Cost Statement
(i) Running Costs
Diesel {(8,760 km / 5 km) × ₹ 90} 1,57,680.00
Lubricant oil {(8,760 km / 100) × ₹ 30} 2,628.00 1,60,308.00
(ii) Maintenance Costs
Repairs & Maintenance 5,000.00
(iii) Standing charges
Salary to driver 30,000.00
Salary to conductor 26,000.00
Salary of part-time accountant 7,000.00
Insurance (₹ 6,000 ÷12) 500.00
Road tax (₹ 21,912 ÷12) 1,826.00
Permit fee 500.00
Depreciation {(₹ 15,00,000 × 30%) / 12} 37,500.00 1,03,326.00
Total costs per month before Passenger Tax (i)+(ii)+(iii) 2,68,634.00
Passenger Tax* 1,07,453.60

Total Cost 3,76,087.60
Add: Profit* 1,61,180.40
Total takings per month 5,37,268.00
*Let total takings be X then,
X = Total costs per month before passenger tax + 0.2 X (passenger tax) + 0.3 X (profit) X
= ₹ 2,68,634 + 0.2 X + 0.3 X
0.5 X = ₹ 2,68,634 or, X = ₹ 5,37,268
12.32
Passenger Tax = 20% of ₹ 5,37,268 = ₹ 1,07,453.60 Profit = 30% of ₹ 5,37,268 = ₹

1,61,180.40
Calculation of Rate per passenger km. and fares to be charged for different routes
Rate per Passenger-Km. = Total takings per month / Total Passenger – Km.per month
= Rs. 5,37,268 / 4,14,000 Passenger –Km. = Rs. 1.30 (approx.)
Bus fare to be charged per passenger:
Delhi to Hisar = ₹ 1.30 × 160 km = ₹ 208.00
Delhi to Aligarh = ₹ 1.30 × 160 km = ₹ 208.00
Delhi to Alwar = ₹ 1.30 × 170 km = ₹ 221.00
Question 23
Royal Transport Services runs fleet of buses within the limits of Jaipur city. The following are the details
which were incurred by the company during October, 2021:
(₹)
Cost of each Bus 24,00,000
Garage Rent 1,00,000
Insurance 25,000
Road tax 20,000
Manager’s Salary 60,000
Assistant’s Salary (Two) 32,000 each
Supervisor’s Salary (Three) 24,000 each
Driver’s Salary (Twenty-Five) 20,000 each
Cleaner’s Salary (Twenty) 5,000 each
Office Staff’s Salary 1,00,000
Consumables 1,20,000
Repairs & Maintenance 90,000
Other Fixed Expenses 72,000
Diesel (10 Kms per Litre) 80 per litre
Oils & Lubricants 1,45,000
Tyres and tubes 35,000
Depreciation 10% p.a. on Cost Other details are as below:
Capacity
Buses 60 Passengers
13Buses 50 Passengers
Each bus makes 4 round trips a day covering a distance of 10 Kilometers in each trip (One Way) on an
average. During the trips 80% of the seats are occupied. The annual records show that 5 buses are
generally required to be kept away from roods each day for repairs.
You are required to CALCULATE cost per passenger-km. Cost sheet to be prepared on the basis of 25
buses. (RTP Nov’22)
Answer 23
Operating Cost Sheet
Standing Charges:
Depreciation (₹ 24,00,000 X 10% X 1/12 X 25) 5,00,000
Garage Rent 1,00,000
Insurance Road Tax 25,000
Manager’s Salary
12.33
Assistant’s Salary (₹ 32,000 X 2) 20,000

Supervisor’s Salary (₹ 24,000 X 3) 60,000
Driver’s Salary (₹ 20,000 X 25) 64,000
Cleaner’s Salary (₹ 5,000 X 20) 72,000
Office Staff’s Salary 5,00,000
1,00,000
Consumables
1,00,000
Repairs & Maintenance 1,20,000
Other Fixed Expenses 90,000
72,000
18,23,000
Running Charges 3,96,800
Diesel (49,600 Kms / 10 Kms X ₹ 80 per unit) 1,45,000
Oils & Lubricants 35,000
Tyres and tubes 5,76,800
Total Operating Cost 23,99,800
!" # $% &"
Cost per passenger-km= $% –(
L, ,
= = 0.883
), ,
Working Note:
Calculation of Total Kilometers and Passenger Kilometers
Specification Total Km. Passenger–Km.
12 Buses (60 Passengers) 29,760 Kms 14,28,480
(10 Kms × 4 X 2 trips × 31 days (29760 Kms x 60 Pass. x
x 12 Buses) 80%)
13 Buses (50 Passengers) 32,240 Kms 12,89,600
(10 Kms × 4 X 2 trips × 31 days (32240 Kms x 50 Pass. x
x 13 Buses) 80%)
Total 62,000 27,18,080
Since 5 buses out of 25 buses are kept for repairs every day
Actual total Km. 62,000 × 20/25 = 49,600
Question 24
Health Wealth Hospital is interested in estimating the cost for each patient stay. The hospital offers
general health care facility i.e. only basic services.(RTP Nov’22)
(i) CLASSIFY each of the following costs as either direct or indirect with respect to each patient.
(ii) CLASSIFY each of the following costs as either fixed or variable with respect to hospital costs per
day.
Direct Indirect Fixed Variable
Electronic monitoring
Meals for patients
Nurses' salaries _
Parking maintenance
Security
Answer 24
a)
Item Direct Indirect Fixed Variable
12.34
Electronic monitoring YES YES

Meals for patients YES YES
Nurses' salaries YES YES
Parking maintenance YES YES
Security YES YES
Question 25
PREPARE cost statement of Panipat Thermal Power Station showing the cost of electricity generated
per kwh, from the following data.
Total units generated 16,50,000 kWh
(`)
Operating labour 21,75,000
Repairs & maintenance 7,25,000
Lubricants, spares and stores 5,80,000
Plant supervision 4,35,000
Insurance Charges 15,00,000
Fuel Charges 8,00,000
7 kWh. of electricity generated per kg. of coal consumed @ `4.75 per kg. Depreciation charges @ 5% on
capital cost of `3,10,00,000. (RTP May 23) (Same concept different figures Old & New SM)
Answer 25
Total units generated 16,50,000 kWh.
Cost Statement of Panipat Thermal Power Station
Per annum (`) Per kWh. (`)
Fixed costs:
Plant supervision 4,35,000
Insurance Charges 15,00,000
Depreciation (5% of ` 3,10,00,000 p.a.) 15,50,000
Total fixed cost: (A) 63,85,000 3.87
Variable costs:
Operating labour 21,75,000
Fuel Charges 8,00,000
Lubricants, spares and stores 5,80,000
Repairs & maintenance 7,25,000
Coal cost (Refer to working note) 11,19,643
Total variable cost: (B) 53,99,643 3.27
Total cost [(A) + (B)] 1,17,84,643 7.14
Working Note:
Coal cost (16,50,000 kWh. ÷ 7 kWh) × `4.75 per kg. = `11,19,643
Question 26
Describe Composite Cost unit as used in Service Costing and discuss the ways of computing it. (PYP
Nov’19,5 Marks)
Answer 26
12.35
Composite Cost Unit: Sometime two measurement units are combined together to know the cost of
service or operation. These are called composite cost units. For example, a public transportation
undertaking would measure the operating cost per passenger per kilometer.
Examples of Composite units are Ton- km., Quintal- km, Passenger-km., Patient-day etc. Composite unit
may be computed in two ways:
(i) Absolute (Weighted Average) basis.
(ii) Commercial (Simple Average) basis.
In both bases of computation of service cost unit, weightage is also given to qualitative factors rather
quantitative (which are directly related with variable cost elements) factors alone.
(i) Weighted Average or Absolute basis – It is summation of the products of qualitative and quantitative
factors. For example, to calculate absolute Ton-Km for a goods transport is calculated as follows.:
]+Weight Carried 5 Distance. U +Weight Carried 5 Distance.

U … . U+Weight Carried 5 Distance.$
Similarly, in case of Cinema theatres, price for various classes of seats are fixed differently. For example–
First class seat may be provided with higher quality service and hence charged at a higher rate,
whereas Second Class seat may be priced less. In this case, appropriate weight to be given effect for First
Class seat and Second Class seat – to ensure proper cost per composite unit.
(ii) Simple Average or Commercial basis – It is the product of average qualitative and total quantitative
factors. For example, in case of goods transport, Commercial Ton-Km is arrived at by multiplying total
distance km., by average load quantity.
,h W,iW⋯….,k
∑+Distance U Distance U … . & U Distance$)5 N O
$
In both the example, variable cost is dependent of distance and is a quantitative factor. Since, the
weight carried does not affect the variable cost hence and is a qualitative factor.

This was a theoretical question based on composite cost unit. Performance of the
Question 27
X Ltd. distributes’ its goods to a regional dealer using single lorry. The dealer premises are 40 kms away
by road. The capacity of the lorry is 10 tonnes. The lorry makes the journey twice a day fully loaded
on the outward journey and empty on return journey. The following information is available:
Diesel Consumption 8 km per litre
Diesel Cost ` 60 per litre
Engine Oil ` 200 per week
Driver’s Wages (fixed) ` 2,500 per week
Repairs ` 600 per week
Garage Rent ` 800 per week
Cost of Lorry (excluding cost of tyres) ` 9,50,000
Life of Lorry 1,60,000 kms
Insurance ` 18,200 per annum
Cost of Tyres ` 52,500
Life of Tyres 25,000 kms
Estimated sale value of the lorry at end of its life is ` 1,50,000
Vehicle License Cost ` 7,800 per annum
12.36
Other Overhead Cost ` 41,600 per annum

The lorry operates on a 5 day week.
Required :
(i) A statement to show the total cost of operating the vehicle for the four week period analysed into
Running cost and Fixed cost.
(ii) Calculate the vehicle operating cost per km and per tonne km. (Assume 52 weeks in a year) (PYP May
‘19, 10 Marks)
Answer 27
Working Notes:
Particulars For 4 weeks For 1 week (by dividing
by 4)
Total distance travelled (40 k.m × 2 3,200 km 800 km
× 2 trips × 5 days × 4 weeks)
Total tonne km (40 k.m × 10 tonnes × 2 16,000 tonne km 4,000 tonne km
× 5 days × 4 weeks)
(i) Statement showing Operating Cost

Amount (` )
Particulars For 4 weeks For 1 week (by
dividing by 4)
A. Fixed Charges:
Drivers’ wages (` 2,500 x 4 weeks) 10,000 2,500
Garage rent (` 800 × 4 weeks) 3,200 800
Insurance {(` 18,200 ÷ 52 weeks) × 4 weeks} 1,400 350
Vehicle license {(` 7,800 ÷ 52 weeks) × 4 weeks} 600 150
Other overheads cost {(` 41,600 ÷ 52 weeks) × 4 weeks} 3,200 800
Total (A) 18,400 4,600
B. Running Cost:
Cost of diesel {(3,200 ÷ 8 kms) × ` 60} 24,000 6,000
Engine Oil (` 200 × 4 weeks)* 800 200
Repairs (` 600 × 4 weeks)* 2,400 600
Depreciation on vehicle 16,000 4,000
Rs. 9,50,000 X Rs. 1,50,000

/ 5 3,200km>
1,60,000 Km
. , 6,720 1,680
Depreciation on tyres N , (
5 3,200kmO
Total (B) 49,920 12,480
C. Total Cost (A + B) 68,320 17,080
*Cost of engine oil & repairs may also be treated as fixed cost, as the question relates these with time
i.e. in weeks instead of running of vehicle.
(ii) Calculation of vehicle operating cost :
Operating cost per k.m. = ` 68,320 / or ` 17,080 / = ` 21.35
3,200 kms 800 Kms
Operating cost per Tonne-k.m. = ` 68,320 / or ` 17,080 / = ` 4.27
16,000 4,000

12.37

In this practical question on ‘Service Costing’ students were required to calculate operating
cost per km and per tonne km by preparing operating cost statement with the segregation
of cost items in running and fixed cost. Performance of the examinees in this sub part of the
question is good.
Question 28
M/s XY Travels has been given a 25 km. long route to run an air- conditioned Mini Bus. The cost of bus
is ` 20,00,000. It has been insured @3% premium per annum while annual road tax amounts to `
36,000. Annual repairs will be ` 50,000 and the bus is likely to last for 5 years. The driver's salary will
be ` 2,40,000 per annum and the conductor's salary will be ` 1,80,000 per annum in addition to 10% of
the takings as commission (to be shared by the driver and the conductor equally). Office and
administration overheads will be ` 18,000 per annum. Diesel and oil will be ` 1,500 per 100 km. The
bus will make 4 round trips carrying on an average 40 passengers on each trip.
Assuming 25% profit on takings and considering that the bus will run on an average 25 days in a month,
you are required to:
(i) prepare operating cost sheet (for the month).
(ii) calculate fare to be charged per passenger km. (PYP Nov‘18,10 Marks)
Answer 28
(i) Statement showing the Operating Cost per Passenger-km.
Yearly (` ) Monthly (` )
(A) Standing Charges:
60,000 5,000
Insurance Charge ` 20,00,000 × 3%
Road Tax 36,000 3,000
Depreciation (20,00,000/5) 4,00,000 33,333.33
Total 4,96,000 41,333.33
(B) Maintenance Charges:
Annual Repairs 50,000 4166.67
Office and administration overheads 3,18,000 26,500
Total 3,68,000 30666.67
(C) Running Cost/Charges:
2,40,000 20,000
Driver’s Salary
Conductor’s Salary 1,80,000 15,000
Diesel & Oil +60,000 5 1,500/100. 9,00,000 75,000
Total 13,20,000 41,333.33
Total (A+B+C) Cost before commission and profit 21,84,000 1,82,000
Commission (33,60,000 × 10%) (working note 2) 3,36,000 28,000
Profit (33,60,000 × 25% ) (working note 2) 8,40,000 70,000
Takings (working note 1) 33,60,000 2,80,000
mnopq rnqqstounv /mpwuvxy
(ii) Fare per passenger – K.m = mnopq zpyysvxs{ w| +}n{wuvx vnos J.
JJ,~•,•••
= Rs. 1.40
€•,••,•••
OR
12.38
€,‚•,•••
Fare per Passenger Km.(Monthly)= €,••,••• = Rs. 1.40
Working note :
1. Cost before commission (10%) and profit (25%) is 21,84,000 which is 65% of total takings. So total
takings is (21,84000÷65) ×100 = ` 33,60,000
2. Commission is 10% of ` 33,60,000 = ` 3,36,000 and Profit is 25% of ` 33,60,000= ` 8,40,000
3. Total Km is (4 Round Trips × Days in a month × Month = (4×2×25 ×25×12 ) = 60,000 km Passenger
km is 60,000 km×40 passenger= 24,00,000.

This practical problem was related to Service Costing. A few number of examinees secured
good marks. Some of the examinees failed to calculate passenger kilometres and lost three
marks. Overall performance in this question was average.
Question 29
A group of ‘Health Care Services’ has decided to establish a Critical Care Unit in a metro city with an
investment of ` 85 lakhs in hospital equipments. The unit’s capacity shall be of 50 beds and 10 more
beds, if required, can be added. Other information for a year are as under:
(` )
Building Rent 2,25,000 per month
Manager Salary (Number of Manager-03) 50,000 per month to each one Nurses
Salary (Number of Nurses-24) 18,000 per month to each
Nurse Ward boy’s Salary (Number of ward boys’ -24) 9,000 per month per person Doctor’s
payment (Paid on the basis of number 5,50,000 per month of patients attended and time
spent by them)
Food and laundry services (variable) 39,53,000

Medicines to patients (variable) 22,75,000 per year
Administrative Overheads 28,00,000 per year
Depreciation on equipments 15% per annum on original cost
It was reported that for 200 days in a year 50 beds were occupied, for 105 days 30 beds were occupied
and for 60 days 20 beds were occupied.
The hospital hired 250 beds at a charge of ` 950 per bed to accommodate the flow of patients.
However, this never exceeded the normal capacity of 50 beds on any day. Find out: (i) Profit per
patient day, if hospital charges on an average ` 2,500 per day from each patient. (ii) Break even point
per patient day (Make calculation on annual basis) [PYP May‘18, 10 Marks)
Answer 29
Number of Patient Days = (200x50) + (105x30) + (60x20)
=14,350 patient days + 250 = 14,600
Statement Showing Profit

Elements of Cost and Revenue Total (` )
A. Revenue (14,600 x ` 2,500) 3,65,00,000
Variable Costs
Food and Laundry Service 39,53,000
Medicines to Patients 22,75,000
12.39
Doctor’s Payment 66,00,000

Hire Charges of Bed (250 x ` 950) 2,37,500
Total Variable Cost 1,30,65,500
C. Fixed Costs
Building Rent 27,00,000
Manager’s Salary (` 50,000 x 3 x 12) 18,00,000
Nurse’s Salary (` 18,000 x 12 x 24) 51,84,000
Ward boy’s Salary (` 9,000 x 12 x 24) 25,92,000
Administrative Overheads 28,00,000
Depreciation on Equipment’s 12,75,000
1,63,51,000
D. Total Cost (B+C) 2,94,16,500
E. Profit (A-D) 70,83,500
Profit per patient day = ` 70,83,500/14,600 = ` 485.17
(i) Contribution (per patient day) = (` 3,65,00,000 – ` 1,30,65,500)/ 14,600 = ` 1,605.10 BEP =
1,63,51,000/1,605.10 = 10,186.90 or say 10,187 patient days
Notes:
1. Higher Charges for extra beds are a semi variable cost; still, for the sake of convenience it has
been considered a variable cost.
2. Assumed, the hospital hired 250 beds at a charge of ` 950 per bed to accommodate the flow
of patients. However, this never exceeded the 10 beds above the normal capacity of 50 beds
on any day.
3. The fees were paid based on the number of patients attended to and the time spent by them,
which on an average worked out to ` 5,50,000 p.m.
Question 30
SEZ Ltd. built a 120 km. long highway and now operates a toll road to collect tolls. The company has
invested ` 900 crore to build the road and has estimated that a total of 120 crore vehicles will be
using the highway during the 10 years toll collection tenure. The other costs for the month of “June
2020” are as follows:
(i) Salary:
 Collection personnel (3 shifts and 5 persons per shift) - ` 200 per day per person.
 Supervisor (3 shifts and 2 persons per shift) - ` 350 per day per person.
 Security personnel (2 shifts and 2 persons per shift) - ` 200 per day per person.
 Toll Booth Manager (3 shifts and 1 person per shift) - ` 500 per day per person.
(ii) Electricity - ` 1,50,000
(iii) Telephone - ` 1,00,000
(iv) Maintenance cost - ` 50 lakhs
(v) The company needs 30% profit over total cost.
Required:
(1) Calculate cost per kilometre.
(2) Calculate the toll rate per vehicle. (PYP 10 Marks Nov 20, Old & New SM)
Answer 30
Statement of Cost
12.40
Particulars (`)
A. Apportionment of Rs. 900 crore 1 7,50,00,000
/ 5 >
capital cost 10 Years 12months
B. Other Costs
Salary to Collection (3 Shifts × 5 persons per shift × 30 days 90,000
Personnel × ` 200 per day)
Salary to Supervisor (3 Shifts × 2 persons per shift × 30 days 63,000
× ` 350 per day)
Salary to Security (2 Shifts × 2 persons per shift × 30 days 24,000
Personnel × ` 200 per day)
Salary to Toll Booth (3 Shifts × 1 person per shift × 30 days 45,000
Manager × ` 500 per day)
Electricity 1,50,000
Telephone 1,00,000
4,72,000
C. Maintenance cost 50,00,000
Total (A + B + C) 8,04,72,000
(1) Calculation of cost per kilometer:
mnopq rnyo …y.‚,••,†€,•••
= mnopq „|.
= I€•w|.
= Rs. 6,70,600
(2) Calculation of toll rate per vehicle:

mnopq rnyoW€‡% ˆ{n‰uo …y.‚,••,†€,•••W…y.€,•I,•I,~••
= Šs‹utqsy zs{ |nvo‹
= I,••,••,••• Œs‹utqsy
= Rs. 10.46
Working :
!" "$
Vehicles per month = 5 "$
" "$
= 5 "$
= 1 Crore vehicles
Question 31
A machine shop has 8 identical machines manned by 6 operators. The machine cannot work without
an operator wholly engaged on it. The original cost of all the 8 machines works out to ` 32,00,000.
The following particulars are furnished for a six months period:
Normal available hours per month per operator 208
Absenteeism (without pay) hours per operator 18
Leave (with pay) hours per operator 20
Normal unavoidable idle time-hours per operator 10
Average rate of wages per day of 8 hours per ` 100
operator
Production bonus estimated 10% on wages
Power consumed ` 40,250
Supervision and Indirect Labour ` 16,500
Lighting and Electricity ` 6,000
The following particulars are given for a year:

Insurance ` 3,60,000
Sundry work Expenses ` 50,000
12.41
Management Expenses allocated ` 5,00,000 Depreciation 10% on the

original cost
Repairs and Maintenance (including consumables): 5% of the value of all the machines. Prepare a
statement showing the comprehensive machine hour rate for the machine shop.(PYP 5 Marks Jan
‘21)
Answer 31
Workings:
Particulars Six months 6
operators (Hours)
Normal available hours per month (208 x 6 months x 6 operators) 7,488
Less: Absenteeism hours (18 x 6 operators) (108)
Paid hours (A) 7,380
Less: Leave hours (20 x 6 operators) (120)
Less: Normal idle time (10 x 6 operators) (60)
Effective working hours 7,200
2021 Computation of Comprehensive Machine Hour Rate
Particulars Amount for six months (`)
Operators' wages (7,380/8 x100) 92,250
Production bonus (10% on wages) 9,225
Power consumed 40,250
Supervision and indirect labour 16,500
Lighting and Electricity 6,000
Repair and maintenance {(5% × ` 32,00,000)/2} 80,000
Insurance (` 3,60,000/2) 1,80,000
Depreciation {(` 32,00,000 × 10%)/2} 1,60,000
Sundry Work expenses (` 50,000/2) 25,000
Management expenses (` 5,00,000/2) 2,50,000
Total Overheads for 6 months 8,59,225
Comprehensive Machine Hour Rate = `
` 119.33
8,59,225/7,200 hours
(Note: Machine hour rate may be calculated alternatively. Further, presentation of figures may also be
done on monthly or annual basis.)
Question 32
ABC Health care runs an Intensive Medical Care Unit. For this purpose, it has hired a building at a
rent of ` 50,000 per month with the agreement to bear the repairs and maintenance charges also.
The unit consists of 100 beds and 5 more beds can comfortably be accommodated when the situation
demands. Though the unit is open for patients all the 365 days in a year, scrutiny of accounts for the
year 2020 reveals that only for 120 days in the year, the unit had the full capacity of 100 patients per
day and for another 80 days, it had, on an average only 40 beds occupied per day. But, there were
occasions when the beds were full, extra beds were hired at a charge of ` 50 per bed per day. This
did not come to more than 5 beds above the normal capacity on any one day. The total hire charges
for the extra beds incurred for the whole year amounted to ` 20,000.
The unit engaged expert doctors from outside to attend on the patients and the fees were paid on the
basis of the number of patients attended and time spent by them which on an average worked out to
` 30,000 per month in the year 2020.
The permanent staff expenses and other expenses of the unit were as follows:
`
2 Supervisors each at a per month salary of 5,000
12.42
4 Nurses each at a per month salary of 3,000

2 Ward boys each at a per month salary of 1,500
Other Expenses for the year were as under:
Repairs and Maintenance 28,000
Food supplied to patients 4,40,000
Caretaker and Other services for patients 1,25,000
Laundry charges for bed linen 1,40,000
Medicines supplied 2,80,000
Cost of Oxygen etc. other than directly borne for treatment of patients 75,000
General Administration Charges allocated to the unit 71,000

Required:
(i) What is the profit per patient day made by the unit in the year 2020, if the unit recovered an overall
amount of ` 200 per day on an average from each patient.
(ii) The unit wants to work on a budget for the year 2021, but the number of patients requiring medical
care is a very uncertain factor. Assuming that same revenue and expenses prevail in the year 2021
in the first instance, work out the number of patient days required by the unit to break even.
(PYP 10 Marks Jan 21)
Answer 32
Workings:
Calculation of number of Patient days
100 Beds × 120 days = 12000
40 Beds × 80 days = 3,200
Extra beds = 400
Total = 15,600
(i) Statement of Profitability

Particulars Amount (`) Amount (`)
Income for the year (` 200 per patient per day × 15,600 31,20,000
patient days)
Variable Costs:
Doctor Fees (` 30,000 per month × 12) 3,60,000
Food to Patients (Variable) 4,40,000
Caretaker Other services to patients (Variable) 1,25,000
Laundry charges (Variable) 1,40,000
Medicines (Variable) 2,80,000
Bed Hire Charges (` 50 × 400 Beds) 20,000
Total Variable costs (13,65,000)
Contribution 17,55,000
Fixed Costs:
Rent (` 50,000 per month × 12) 6,00,000
Supervisor (2 persons × ` 5,000 × 12) 1,20,000
Nurses (4 persons × ` 3,000 × 12) 1,44,000
Ward Boys (2 persons x ` 1500 x12) 36,000
Repairs (Fixed) 28,000
Cost of Oxygen 75,000
Administration expenses allocated 71,000
Total Fixed Costs (10,74,000)
Profit 6,81,000
Calculation of Contribution and profit per Patient day

Total Contribution = ` 17,55,000

12.43
Total Patient days = 15,600 days

Contribution per Patient day = ` 17,55,000 / 15,600 days = ` 112.50 Total Profit
= ` 6,81,000
Total Patient days = 15,600 days
Profit per Patient day = ` 6,81,000 / 15,600 days = ` 43.65
(ii) Breakeven Point = Fixed Cost / Contribution per Patient day
= ` 10,74,000 / ` 112.50
= 9,547 patient days
Question 33
What do you understand by Build-Operate-Transfer (BOT) approach in Service Costing? How is the
Toll rate computed? (PYP 5 Marks July 21)
Answer 33
Build-Operate-Transfer (BOT) Approach: In recent years a growing trend emerged among
Governments in many countries to solicit investments for public projects from the private sector under
BOT scheme. BOT is an option for the Government to outsource public projects to the private sector.
With BOT, the private sector designs, finances, constructs and operate the facility and eventually, after
specified concession period, the ownership is transferred to the Government. Therefore, BOT can be
seen as a developing technique for infrastructure projects by making them amenable to private sector
participation.
Toll Rate: In general, the toll rate should have a direct relation with the benefits that the road users
would gain from its improvements. The benefits to road users are likely to be in terms of fuel savings,
improvement in travel time and good riding quality.
To compute the toll rate, following formula may be used = Total Cost + Profit / Number of vehicles Or,
to compute the toll rate following formula with rounding off to nearest multiple of five has been
adopted: User fee = Total distance x Toll rate per km.
It was a service costing question on Build-Operate-Transfer (BOT). Performance of the
Question 34
M/s Zaina Private Limited has purchased a machine costing ` 29,14,800 and it is expected to have a
salvage value of ` 1,50,000 at the end of its effective life of 15 years.
Ordinarily the machine is expected to run for 4,500 hours per annum but it is estimated that 300 hours
per annum will be lost for normal repair & maintenance. The other details in respect of the machine
are as follows:
(i) Repair & Maintenance during the whole life of the machine are expected to be ` 5,40,000.
(ii) Insurance premium (per annum) 2% of the cost of the machine.
(iii) Oil and Lubricants required for operating the machine (per annum) ` 87,384.
(iv) Power consumptions: 10 units per hour @ ` 7 per unit. No power consumption during repair and
maintenance. ·
(v) Salary to operator per month ` 24,000. The operator devotes one third of his time to the machine.
You are required to calculate comprehensive machine hour rate. (PYP May ‘19, 5 Marks)
Answer 34
Effective machine hour = 4,500 – 300 = 4,200 hours
Calculation of Comprehensive machine hour rate
12.44
Elements of Cost and Revenue Amount (`) Per

Annum
Repair and Maintenance (`5,40,000 ÷15 years) 36,000
Power (4,200 hours × 10 units × `7) 2,94,000

. , , . , ,
Depreciation N •
O 1,84,320
Insurance (`29,14,800 × 2%) 58,296

Oil and Lubricant 87,384
Salary to Operator {(`24,000×12)/3} 96,000
Total Cost 7,56,000
Effective machine hour 4,200
Total Machine Rate Per Hour 180

This question was related to ‘Overheads’ on calculation of comprehensive machine hour
rate. Performance of the examinees was good.
Question 35
Paras Travels provides mini buses to an IT company for carrying its employees from home to office
and dropping back after office hours. It runs a fleet of 8 mini buses for this purpose. The buses are
parked in a garage adjoining the company’s premises. Company is operating in two shifts (one shift
in the morning and one shift in the afternoon). The distance travelled by each mini bus one way is
30 kms. The company works for 20 days in a month. The seating capacity of each mini bus is 30
persons. The seating capacity is normally 80% occupied during the year. The details of expenses
incurred for a year are as under:
Particulars
Driver’s salary ` 20,000 per driver per month
Lady attendant’s salary (mandatorily required for ` 10,000 per attendant per month
each mini bus)
Cleaner’s salary (One cleaner for 2 mini buses) ` 15,000 per cleaner per month
Diesel (Avg. 8 kms per litre) ` 80 per litre
Insurance charges (per annum) 2% of Purchase Price
License fees and taxes ` 5,080 per mini bus per month
Garage rent paid ` 24,000 per month
Repair & maintenance including engine oil and ` 2,856 per mini bus
lubricants (for every 5,760 kms)
Purchase Price of mini bus ` 15,00,000 each
Residual life of mini bus 8 Years
Scrap value per mini bus at the end of residual ` 3,00,000
life
Paras Travels charges two types of fare from the employees. Employees coming from a distance of
beyond 15 kms away from the office are charged double the fare which is charged from employees
coming from a distance of up-to 15 kms. away from the office. 50% of employees travelling in each
trip are coming from a distance beyond 15 kms. from the office. The charges are to be based on
average cost.
12.45
(i) Prepare a statement showing expenses of operating a single mini bus for a year,
(ii) Calculate the average cost per employee per month in respect of:
(a) Employees coming from a distance upto 15 kms. from the office.
(b) Employees coming from a distance beyond 15 kms. from the office. (PYP 10 Marks Dec ‘21)
Answer 35
(a) (i) Statement of Expenses of operating a mini bus in a year
Particulars Rate (`) Per Bus per
annum (`)
(A) Standing Charges:
Driver’s salary 20,000 p.m 2,40,000
Lady attendant’s salary 10,000 p.m 1,20,000
Average Cleaner’s salary (50%) 15,000 p.m 90,000
Insurance charge 30,000 p.a. 30,000
License fee, taxes etc. 5,080 p.m. 60,960
Average Garage Rent 24,000 p.m 36,000
Depreciation {(15,00,000 – 3,00,000) ÷ 8} 1,50,000 p.a. 1,50,000
(B) Maintenance Charges:
Repairs & maintenance including engine oil and 28,560 p.a.
lubricants (Working Note 1)
(C) Operating Charges:
Diesel (Working Note 2) 5,76,000
Total Cost (A + B + C) 13,31,520
Cost per month 1,10,960
(ii) Average cost per employee per month:
A. Employee coming from distance of upto 15 km
mnopq tnyo zs{ |nvo‹ I,I•,‘~•
= mnopq vn.n‰ sŽ•uŒpqsvo s|zqn•ss = †€∗
= Rs. 1,541.11
B. Employee coming from a distance beyond 15 km

= 1541.11 × 2 = ` 3,082.22
* Considering half fare employees as a base
Full fare employees (12 × 2) 24 employees
Add: Half fare employees (Working Note 3) 12 employees
Total Equivalent number of employees per month 36 employees
Total Equivalent number of employees per month (morning + 72 employees
afternoon shift of company)
Working Notes:
1. Calculation of Repairs and maintenance cost of a bus:
Distance travelled in a year:
(4 trip × 2 shifts × 30 km. × 20 days × 12 months) Distance travelled p.a.: 57,600 km.
Repairs and maintenance cost per Bus per annum:
), ( .
= X Rs. 2,856 per bus
,) (
= ` 28,560 per annum

2. Calculation of diesel cost per bus per annum: Distance travelled in a year = 57,600 km
Diesel cost per Bus per annum:

12.46
), ( .
= (
X Rs. 80
= 5,76,000
3. Calculation of equivalent number of employees per bus:
Seating capacity of a bus 30 employees
Occupancy (80% of capacity) 24 employees
Half fare employees (50% of 24 employees) 12 employees
Full fare employees (50% of 24 employees) 12 employee
[Note: Total Equivalent number of employees per month (morning + afternoon shift of company can
also be calculated considering full fare employees as a base. In that case the number will be 36. Then
fare for employees coming from distance beyond 15km will be 1,10,960/36 =` 3,082.22 and
employees coming from distance upto 15 km will be 3,082.22 / 2 = ` 1,541.11]

This Numerical Question was based on the concept of Operating Costing. Many examinees
faced hardship in the calculation of the cost of diesel, repairs & maintenance and
equivalent employee’s numbers. Performance of the examinees was below average.
Question 36
Coal is transported from two mines X & Y and unloaded at plots in a railway station. X is at distance of
15 kms and Y is at a distance of 20 kms from the rail head plots. A fleet of lorries having carrying
capacity of 4 tonnes is used to transport coal from the mines. Records reveal that average speed of
the lorries is 40 kms per hour when running and regularly take 15 minutes to unload at the rail head.
At Mine X average loading time is 30 minutes per load, while at mine Y average loading time is 25
minutes per load.
Drivers' wages, depreciation, insurance and taxes, etc. ₹ 12 per hour Operated Fuel, oil tyres, repairs
and maintenance, etc. ₹ 1.60 per km
You are required to prepare a statement showing the cost per tonne kilometre of carrying coal from
each mine 'X' and 'Y'.\ (PYP 5 Marks May’22)
Answer 36
Statement showing the cost per tonne-kilometre of carrying mineral from each mine
Mine X (₹) Mine Y (₹)
Fixed cost per trip: (Refer to working note 1)
(Driver's wages, depreciation, insurance and taxes)
X: 1 hour 30 minutes @ ₹ 12 per hour 18.00

Y: 1 hour 40 minutes @ ₹ 12 per hour 20.00
Running and maintenance cost:
(Fuel, oil, tyres, repairs and maintenance)
X: 30 km. ₹ 1.60 per km. 48.00
Y: 40 km. ₹ 1.60 per km. 64.00
Total cost per trip (₹) 66.00 84.00
Cost per tonne – km (Refer to working note 2) 1.1 1.05
₹66 ₹84
“ • “ •
60 tonne X km 80 tonne X km
Working notes:
Mine- X Mine- Y
(1) Total operated time taken per trip
Running time to & fro 45 minutes 60 minutes
12.47
60 minutes 60 minutes
“30km 5 • “40km 5 •
40 km 40 km
Un-loading time 15 minutes 15 minutes
Loading time 30 minutes 25 minutes
Total operated time 90 minutes or 100 minutes or
1 hour 30 minutes 1 hour 40 minutes
(2) Effective tones – km. 60(4 tonnes × 15 km.) 80(4 tonnes × 20 km.)
Question 37
ABC Bank is having a branch which is engaged in processing of ‘Vehicle Loan’ and ‘Education Loan’
applications in addition to other services to customers. 30% of the overhead costs for the branch
are estimated to be applicable to the processing of ‘Vehicle Loan’ applications and ‘Education Loan’
applications each.
Branch is having four employees at a monthly salary of ₹ 50,000 each, exclusively for processing of
Vehicle Loan applications and two employees at a monthly salary of ₹ 70,000 each, exclusively for
processing of Education Loan applications.
In addition to above, following expense are incurred by the Branch:
 Branch Manager who supervises all the activities of branch, is paid at ₹ 90,000 per month.
 Legal charges, Printing & stationery and Advertising Expenses are incurred at
₹ 30,000, ₹ 12,000 and ₹ 18,000 respectively for a month.
Other expenses are ₹ 10,000 per month. You are required to:
(i) Compute the cost of processing a Vehicle Loan application on the assumption that 496 Vehicle
Loan applications are processed each month.
(ii) Find out the number of Education Loan Applications processed, if the total processing cost
per Education Loan Application is same as in the Vehicle Loan Application as computed in (i)
above. (PYP 5 Marks Nov 22)
Answer 37
Particulars Vehicle loan Education loan Total
Applications Application
(₹) (₹) (₹)
Employee Cost 2,00,000 1,40,000 3,40,000
(₹ 50,000 × 4) (₹ 70,000 × 2)
Apportionment of Branch 27,000 27,000 54,000
manager’s salary
Legal charges, Printing & stationery, 18,000 18,000 36,000
and Advertising expenses
Other expenses 3,000 3,000 6,000
Total cost 2,48,000 1,88,000 4,36,000
(i) Computation of cost of processing a vehicle loan application:
Total Cost ÷ No. of applications
₹ 2,48,000 ÷ 496 = ₹ 500
(ii) Computation of no. of Education loan Processed
Total Cost = No. of applications × Processing cost per application
₹ 1,88,000 = No. of applications × ₹ 500
No. of education loan applications = ₹1,88,000 ÷ ₹500 = 376 applications
Question 38
RST Toll Plaza Limited built an 80-kilometre-long highway between two cities and operates a toll
plaza to collect tolls from passing vehicles using the highway. The company has estimated that 50,000

12.48
light weight, 12,000 medium weight and 10,000 heavy weight vehicles will be using the highway in
one month in outward journey and the same number for return journey.
As per government notification, vehicles used for medical emergencies, Members of Parliament, and
essential services are exempt from toll charges. It is estimated that 10% of light weight vehicles will
pass the highway for such use.
It is the policy of the company that if vehicles return within 24 hours of their outward journey, the
toll fare will be reduced by 25 percent automatically. It is estimated that 30% of chargeable light
weight vehicles return within the specified time frame.
The toll charges for medium weight vehicles is to be fixed as 2.5 times of the light weight vehicles
and that of heavy weight vehicles as 2 times of the medium weight vehicles.
The toll and maintenance cost for a month is ` 59,09,090, The company requires a profit of 10% over
the total cost to cover interest and other costs.
Required:
(i) Calculate the toll rate for each type of vehicle if concession facilities are not available on the
return journey.
(ii) Calculate the toll rate that will be charged from light weight vehicles if a return journey
concession facility is available, assuming that the revenue earned from light weight vehicles
calculated in option (i) remains the same. (PYP 5 Marks, May ‘23)
Answer 38
Working Notes:
(1) Calculation of equivalent numbers of Light weight vehicles (when no concession is provided on
return journey)
Type of vehicle Monthly Return Ratio Equivalent light
traffic (A) traffic (B) (C) weight [(A + B) × C]
Light weight 45,000* 45,000 1 90,000
Medium weight 12,000 12,000 2.5 60,000
Heavy weight 10,000 10,000 5 1,00,000
2,50,000
*50,000 light vehicles less 10% exempted vehicles
(2) Calculation of equivalent numbers of Light weight vehicles (when concession is provided on
return journey)
Type of vehicle Monthly Return traffic Ratio Equivalent
traffic (C) light weight
(A) (B) [(A + B) × C]
Light weight 45,000* 41,625 1 86,625
[45,000- (45,000 ×
30% × 25%)]
Medium weight 12,000 12,000 2.5 60,000
Heavy weight 10,000 10,000 5 1,00,000
2,46,625
(i) Calculation of toll rate for each type of vehicle:
Total cost to cover ÷ Equivalent type of vehicles
(` 59,09,090 + 10% of ` 59,09,090) ÷ 2,50,000 equivalent vehicles (Refer working note 1)
= 65,00,000 ÷ 2,50,000 = ` 26
Toll rate for:

12.49
Light weight vehicle = ` 26
Medium weight vehicle = ` 26 × 2.5 = ` 65
Heavy weight vehicle = ` 26 × 5 = ` 130
(ii) Calculation of toll rate for each type of vehicle:

Revenue earned from Light weight vehicle in (i) above
= 90,000 vehicles × ` 26 = ` 23,40,000
New toll rate to maintain the same revenue from Light weight vehicle
= ` 23,40,000 ÷ 86,625 (Refer working note-2) = ` 27.01
Light weight vehicle = ` 27.01
Rate to be charged from 13,500 light weight vehicles = 27.01 × 0.75 = 20.26
Alternative presentation
(iii) Toll rate to be charged from light weight vehicles if concession applicable Revenue share in
light vehicles = 90,000 × 26 = ` 23,40,000
Suppose rate is x, then outward journey 45,000 x; return journey (45,000 - 30% of 45,000) +
13,500 (x - 0.25)
45,000x + 31,500x + 13500 (0.75x) = ` 23,40,000
Toll rate to be charged from light weight vehicles: 86,625x = ` 23,40,000 = ` 27.01
Rate to be charged from 76,500 light weight vehicles @ 27.01; revenue will be ` 20,66,494
Rate to be charged from 13,500 light weight vehicles = 27.01 × 0.75 = 20.26 revenue will be `
2,73,506

13.1
Chapter 13
Standard Costing
Question 1
A manufacturing department of a company has employed 120 workers. The standard output of product
''NPX" is 20 units per hour and the standard wage rate is ₹ 25 per labour hour.
In a 48 hours week, the department produced 1,000 units of 'NPX' despite 5% of the time paid being lost
due to an abnormal reason. The hourly wages actually paid were ₹ 25.70 per hour.
Calculate:
(i) Labour Cost Variance

(ii) Labour Rate Variance
(iii) Labour Efficiency Variance
(iv) Labour Idle time Variance (PYP 5 Marks May’22)
Answer 1
Working Notes:
1. Calculation of standard man hours
When 120 worker works for 1 hr., then the std. output is 20 units.
Std. man hour per unit
= 6ℎ
2. Calculation of std. man hours for actual output

Total std. man hours = 1,000 units × 6 hrs. = 6,000 hrs.
Standard for actual Actual

Hours Rate Amount(₹) Actual hrs.paid Idle time Production Rate Amount
(₹) hrs. hrs. (₹) paid (₹)
6,000 25 1,50,000 5,760 288 5,472 25.70 1,48,032
(48 hrs. x 120
workers)
(i) Labour cost variance

= Std. labour cost – Actual labour cost
= 1,50,000 – 1,48,032 = ₹ 1,968 F
(ii) Labour rate variance

= (SR – AR) × AHPaid
= (25 - 25.70) × 5,760 = ₹ 4,032 A
(iii) Labour efficiency variance

= (SH – AH) × SR
= (6,000 – 5,472) × 25 = ₹ 13,200 F
(iv) Labour Idle time variance

= Idle Hours × SR
= 288 × 25 = ₹ 7,200 A
Note: Variances can also be calculated for one worker instead of 120.
Chapter 13 Standard Costing
13.2
Question 2
Following are the standard cost for a product-X:
(₹)
Direct materials 10 kg @ ₹ 90 per kg 900
Direct labour 8 hours @ ₹100 per hour 800
Variable Overhead 8 hours @ ₹15 per hour 120
Fixed Overhead 400
2,220
Budgeted output for the year was 2,000 units. Actual output is 1,800 units. Actual cost for
year is as follows:
(₹)
Direct Materials 17,800 Kg @ ₹ 92 per Kg. 16,37,600
Direct Labour 14,000 hours @ ₹ 104 per hour 14,56,000
Variable Overhead incurred 2,17,500
Fixed Overhead incurred 7,68,000
(i) Material Usage Variance
(ii) Material Price Variance
(iii) Material Cost Variance
(iv) Labour Efficiency Variance
(v) Labour Rate Variance
(vi) Labour Cost Variance
(vii) Variable Overhead Cost Variance
(viii) Fixed Overhead Cost Variance. [10 Marks April ‘23]
Answer 2
(i) Material Usage Variance = Std. Price (Std. Quantity – Actual Quantity)
= ₹ 90 (18,000 kg. – 17,800 kg.)
= ₹ 18,000 (Favourable)
(ii) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
= 17,800 kg. (₹ 90 – ₹ 92) = ₹ 35,600 (Adverse)
(iii) Material Cost Variance = Std. Material Cost – Actual Material Cost
= (SQ × SP) – (AQ × AP)
= (18,000 kg. × ₹ 90) – (17,800 kg. × ₹ 92)
= ₹ 16,20,000 – ₹ 16,37,600
= ₹17,600 (Adverse)
(iv) Labour Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)
= ₹ 100 (1,800 units × 8 – 14,000 hrs.)
= ₹ 100 (14,400 hrs. – 14,000 hrs.)
= ₹ 40,000 (Favourable)
(v) Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)
= 14,000 hrs. (₹ 100 – ₹104)
= ₹ 56,000 (Adverse)
(vi) Labour Cost Variance = Std. Labour Cost – Actual Labour Cost
13.3
= (SH × SR) – (AH × AR)

= (14,400 hrs. × ₹ 100) – (14,000 hrs. × ₹ 104)
= ₹ 14,40,000 – ₹ 14,56,000
= ₹16,000 (Adverse)
(vii) Variable Cost Variance = Std. Variable Cost – Actual Variable Cost
= (14,400 hrs. × ₹ 15) – ₹2,17,500
= ₹ 1,500 (Adverse)
(viii) Fixed Overhead Cost Variance = Absorbed Fixed Overhead – Actual Fixed Overhead
= (1,800 units × ₹400) - ₹ 7,68,000
= ₹ 7,20,000 – ₹ 7,68,000 = ₹ 48,000 (Adverse)
Question 3
The following standards have been set to manufacture a product:
Direct Material: (`)
2units of A @ ` 4 per unit 8.00 8.00
3 units of B @ ` 3 per unit 9.00 9.00
3units of B @ ` 3 per unit 15.00
15 units of C @ ` 1 per unit 32.00
Direct Labour: 3 hours @ ` 8 per hour 24.00 24.00
Total standard prime cost 56.00

The company manufactured and sold 6,000 units of the product during the year. Direct material costs
were as follows:
12,500 units of A at ` 4.40 per unit
18,000 units of B at ` 2.80 per unit
88,500 units of C at ` 1.20 per unit
The company worked 17,500 direct labour hours during the year. For 2,500 of these hours, the company
paid at ` 12 per hour while for the remaining, the wages were paid at standard rate.
CALCULATE
I. Materials price variance & Usage variance
II. Labour rate & Efficiency variances. (Old & New SM) (Same concepts different figures MTP Mar’19 10
Marks)
Answer 3
For Material Cost Variances
SQ × SP AQ × AP AQ × SP
A 12,000 × 4 = 48,000 12,500 × 4.40 = 55,000 12,500 × 4 = 50,000
B 18,000 × 3 = 54,000 18,000 × 2.80 = 50,400 18,000 × 3 = 54,000
C 90,000 × 1 = 90,000 88,500 × 1.20 = 1,06,200 88,500 × 1 = 88,500
Total ` 1,92,000 ` 2,11,600 `1,92,500
Variances:
Material Price Variance = Actual quantity (Std. price – Actual
price) Or, = (AQ × SP) – (AQ × AP)
Or, = ` 1,92,500 – `2,11,600
= ` 19,100 (A)
Material Usage Variance = Standard Price (Std. Quantity – Actual
Quantity) Or, = (SP × SQ) – (SP × AQ)
Or, = ` 1,92,000 – ` 1,92,500 = ` 500 (A)
For Labour Cost Variance:
SH × SR AH × AR AH × SR
Labour (6,000 × 3) ×` 8 2,500 × 12 = 30,000 17,500 × 8 =
= 1,44,000 15,000 × 8 = 1,20,000 1,40,000
13.4
Total ` 1,44,000 ` 1,50,000 ` 1,40,000

Variances:
Labour Rate Variance: Actual Hours (Std. Rate – Actual Rate) Or, =
(AH × SR) – (AH × AR)
Or, = `1,40,000 – `1,50,000
= `10,000 (A)
Labour Efficiency Variance: Standard Rate (Std. Hours – Actual Hours) Or,
= (SR × SH) – (SR × AH)
Or, = `1,44,000 – `1,40,000
= `4,000 (F)
Question 4
The standard labour component and the actual labour component engaged in a week for a job are as
follows:
Skilled Semi-skilled Un-Skilled
Workers Workers workers
Standard number of workers in the gang 32 12 6
Standard wage rate per hour (₹ ) 30 20 10
Actual number of workers employed in the gang
during the week 28 18 4
Actual wages rate per hour (₹ ) 34 23 12
During the 40 hours working week the gang produced 1,800 standard labour hours of work.
CALCULATE:
(i) Total labour cost variance;
(ii) Labour yield variance;
(iii) Labour mix variance; and
(iv) Labour wage rate variance. (MTP March ‘18, 10 Marks)
Answer 4
Work produced by the gang 1,800 standard labour hours, i.e.,
1, 800 / 32+ 12+6 or 36 gang hours
Standard hours of Skilled Labour (36 x 32) 1,152 hours
Standard hours of Semi-skilled Labour (36 x 12) 432 hours
Standard hours of Un-skilled Labour (36 x 6) 216 hours
Total 1,800 hours
Actual hours of Skilled Labour (40 x 28) 1,120 hours
Actual hours of Semi-skilled Labour (40 x 18) 720 hours
Actual hours of Un-skilled Labour (40 x 4) 160 hours
Total 2,000 hours
Revised Standard hours (actual hours worked expressed in standard ratio)
,
Skilled Labour ,
, 1,280 hours
Semi-skilled Labour 2,000 480 hours
,
Unskilled Labour ,
2,000 240 hours
2,000 hours
Standard Cost for Actual Output: ₹
Skilled Labour 1,152 hours @₹ 30 34,560
13.5
Semi-skilled Labour 432 hours @ ₹ 20 8,640

Unskilled Labour 216 hours @₹ 10 2,160
1,800 hours 45,360
Actual Cost:
Skilled Labour 1,120 hours @₹ 34 38,080
Semi-skilled Labour 720 hours @₹ 23 16,560
Unskilled Labour 160 hours @₹ 12 1,920
2,000 hours 56,560

(i) Total Labour Cost Variance
Standard Cost- Actual Cost ₹
₹ 45,360 - ₹ 56,560 11,200 (A)
(ii) Labour Yield Variance:
(Standard hours for Actual Output - Revised Standard hours) x Standard Rate
Skilled (1,152 - 1,280) x ₹ 30 3,840 (A)
Semi -skilled (432 - 480) x ₹ 20 960 (A)
Un-skilled (216 - 240) x ₹ 10 240 (A)
5,040 (A) 5,040 (A)
(iii) Labour Mix Variance:
(Revised Standard Hours - Actual Hours) x Standard Rate
Skilled (1,280 - 1,120) x ₹ 30 4,800 (F)
Semi-skilled (480-720) x ₹ 20 4,800 (A)
Un-skilled (240-160) x ₹ 10 800 (F)
800 (F) 800 (F)
(iv) Labour Wage Rate Variance:
(Standard Rate - Actual Rate) x Actual Hours
Skilled (₹ 30 - ₹ 34) x 1,120 4,480 (A)
Semi-skilled (₹ 20 - ₹ 23) x 720 2,160 (A)
Un-skilled (₹ 10 - ₹ 12) x 160 320 (A)
6,960 (A) 6,960 (A)
Check : Total Labour Cost Variance = Yield + Mix + Rate 11,200 (A)
Question 5
In a manufacturing company the standard units of production of the year were fixed at 1,20,000 units
and overhead expenditures were estimated to be:
Fixed ₹ 12,00,000; Variable ₹ 6,00,000;
Semi-Variable ₹ 1,80,000
Actual production during the April, 2019 of the year was 8,000 units. Each month has 20 working
days. During the month there was one public holiday. The actual overheads amounted to:
Fixed ₹ 1,10,000; Variable ₹ 48,000
Semi-variable ₹ 19,200
Semi-variable charges are considered to include 60 per cent expenses of fixed nature and 40 per cent of
variable character.
CALCULATE the followings:
(i) Overhead Cost Variance
13.6
(ii) Fixed Overhead Cost Variance

(iii) Variable Overhead Cost Variance
(iv) Fixed Overhead Volume Variance
(v) Fixed Overhead Expenditure Variance
(vi) Calendar Variance. (MTP Oct. ‘19, 10 Marks, PYP 10 Marks Dec ‘21)
Answer 5
COMPUTATION OF VARIANCES
(i) Overhead Cost Variance = Absorbed Overheads – Actual Overheads
= (₹87,200 + ₹44,800) – (₹1,21,520 + ₹55,680)
= ₹ 45,200 (A)
(ii) Fixed Overhead Cost = Absorbed Fixed Overheads – Actual Fixed Overheads
Variance = ₹ 87,200 – ₹1,21,520
= ₹ 34,320 (A)
(iii) Variable Overhead Cost = Standard Variable Overheads for Production –
Actual Variance Variable Overheads
= ₹ 44,800 – ₹ 55,680
= ₹ 10,880 (A)
(iv) Fixed Overhead Volume = Absorbed Fixed Overheads – Budgeted Fixed
Variance Overheads
= ₹ 87,200 – ₹1,09,000
= ₹ 21,800 (A)
(v) Fixed Overhead Expenditure = Budgeted Fixed Overheads – Actual Fixed
Overheads Variance
= ₹10.90 × 10,000 units – ₹1,21,520
= ₹ 12,520 (A)
(vi) Calendar Variance = Possible Fixed Overheads – Budgeted Fixed Overheads
= ₹1,03,550 – ₹1,09,000
= ₹ 5,450 (A)
WORKING NOTE
₹ 10
!" " # $" %&" "' ) . , ,
Fixed Overheads per Unit = !" " % (
= , ,
Fixed Overheads element in Semi-Variable Overheads i.e.
60% of ₹1,80,000 ₹ 1,08,000
₹ 0.90
!" " # $" %&" "' ) . , ,
Fixed Overheads per Unit = !" " % (
= , ,
Standard Rate of Absorption of Fixed Overheads per unit (₹10 +

₹0.90) ₹10.90
Fixed Overheads Absorbed on 8,000 units @ Rs10.90 ₹ 87,200
Budgeted Variable Overheads ₹ 6,00,000
Add : Variable element in Semi-Variable Overheads 40% of ₹ ₹ 72,000
1,80,000
Total Budgeted Variable Over heads ₹ 6,72,000
!" " # $" %&" "' ) . ,+ ,
Standard Variable Cost per unit = !" " % (
= , ,
= ₹5.60
13.7
Standard Variable Overheads for 8,000 units @ ₹5.60 ₹ 44,800
Budgeted Annual Fixed Overheads (₹ 12,00,000 + 60% of ₹ 1,80,000) ₹13,08,000
!" " # $" %&" "'

Possible Fixed Overheads = Actual Days ₹ 1,03,550
!" " % (
- . 1,09,000
, 19 012 3
20 012
Actual Fixed Overheads (₹1,10,000 + 60% of ₹ 19,200) ₹1,21,520
Actual Variable Overheads (₹48,000 + 40% of ₹19,200) ₹ 55,680
This Numerical question tested the basic knowledge of examinees on the topic of Standard
Costing. The examinees had to calculate various fixed and variable overhead cost variance.
The main theme of question was based on segregating the semi- variable overheads into
fixed and variable cot and to calculate standard cost for actual output. Some of the
examinees had calculated fixed overhead variances correctly but failed to calculate variable
overhead variances and calendar variance. Performance of the examinees was below
average.
Question 6
Arnav Ltd. manufactures a product Q, the standard cost of which is as follows:
Standard Cost per unit (₹)
Direct Material 600
Direct labour:
- Skilled @ ₹80 per hour 120
- Unskilled @ ₹60 per hour 90
Variable overheads 75
Fixed overheads 30
915
During the month just ended 4,000 units of Q were produced. The actual labour cost was as follows.
Rate per hour (₹) Cost (₹)
Skilled 87.50 5,77,500
Unskilled 55.00 2,97,000
10% of the labour time was lost due to idle time. The standard idle time was 7.5% of labour time. Arnav
Ltd. has budgeted to produce 4,200 units of Q. Arnav Ltd. absorbs its overheads on direct labour hour
(effective hours) basis. Actual fixed and variable overheads incurred were ₹1,55,000 and ₹2,85,000
respectively.
CALCULATE:
(i) Labour rate variance;
(ii) Labour efficiency variance;
(iii) Labour mix variance;
(iv) Labour yield variance;
(v) Labour idle time variance;
(vi) Variable overhead expenditure variance and
(vii) Variable overhead efficiency variance. (MTP Oct. ‘18, 10 Marks)
Answer 6
13.8
Workings:
Skilled Unskilled
Standard Rate per hour 80 60
Standard time for producing one unit 1.5 hours(₹ 120 ÷ ₹ 80) 1.5 hours(₹ 90 ÷ ₹ 60)
Actual hours paid (AHPaid) 6,600 hours 5,400 hours
Standard hours required to produce 6,000 hours 6,000 hours
4,000 units (SH) (1.5 hours× 4,000 units) (1.5 hours× 4,000 units)
Actual hours worked 6,600/100 97.5 5,400/100 97.5

(AHWorked) = 6,435 hours = 5,265 hours
, 78, , 78,
6 97.59 0.5 6 97.59 0.5
Idle timeAbnormal = 5,850 hours = 5,850 hours

(i) Labour Rate Variance 6,600 - 6,435 = 165 hours 5,400 – 5,265 = 135 hours
= AHPaid(Std. Rate – Actual Rate)
- Skilled = 6,600 hours (₹ 80 – ₹ 87.50) = ₹ 49,500 (A)
- Unskilled = 5,400 hours (₹ 60 – ₹ 55) = ₹ 27,000 (F)
= ₹ 22,500 (A)
(ii) Labour Efficiency Variance = Std. Rate (SH – AHWorked)
- Skilled = ₹ 80 (6,000 hours – 6,435 hours) = ₹ 34,800 (A)
- Unskilled = ₹ 60 (6,000 hours – 5,265 hours) = ₹ 44,100 (F)
= ₹ 9,300 (F)
(iii) Labour Mix Variance = Std. Rate (RSH – AHWorked)
- Skilled = ₹ 80 (5,850 hours – 6,435 hours) = ₹ 46,800 (A)
= ₹ 11,700 (A)
(iv) Labour Yield Variance = Std. Rate (SH – RSH)
- Skilled = ₹ 80 (6,000 hours – 5,850 hours) = ₹ 12,000 (F)
= ₹ 21,000 (F)
(v) Labour Idle time Variance = Std. Rate × Idle time Abnormal
- Skilled = ₹ 80 × 165 hours = ₹ 13,200 (A)
- Unskilled = ₹ 60 × 135 hours = ₹ 8,100 (A)
= ₹ 21,300 (A)
(vi) Variable Overhead Expenditure Variance
= AHWorked (SR - AR)
) .+8 ) . , 8,
= 11,700 hours = 6 ; 9
.8 : ,+ :
= 11,700 hours (₹ 25 – ₹ 24.36) = ₹ 7,488 (F)
(vii) Variable Overhead Efficiency Variance

= Std. Rate (SH – AHWorked)
= ₹ 25 (12,000 – 11,700) = ₹ 7,500 (F)
Question 7
ZX Ltd. has furnished the following information:
Budgeted Actual March
2020
Prakshal Shah | 8779794646 Number of working days 25 27
13.9
Production (in units) 20,000 22,000

Fixed Overheads ₹ 3,00,000 ₹ 3,10,000
Budgeted fixed overhead rate is ₹ 10.00 per hour. In March 2020, the actual hours worked were
31,500. In relation to fixed overheads, CALCULATE:
(i) Efficiency Variance
(ii) Capacity Variance
(iii) Calendar Variance
(iv) Volume Variance
(v) Expenditure Variance (MTP 5 Marks May 20)
Answer 7
Working:
) . , ,
(1) Budgeted Hours = ) . (" :
30,000hours
(2) Standard Fixed Overhead rate per hour (Standard Rate);
!" " < $" :&" "' ) . , ,
= !" " =:
= , :
= ₹ 10.00
(3) Standard hour per unit of output = 30,000 hours / 20,000 units = 1.5 hours
(4) Standard hours for Actual Output = 22,000 units × 1.5 hours = 33,000 Hours
(5) Budgeted Overhead per day for budgeted days= ₹3,00,000 / 25 days = ₹12, 000
(6) Budgeted Overhead for actual days worked = ₹ 12,000 × 27 days = ₹3,24,000
(7) Budgeted Hours for Actual days worked = 30,000hours / 25 days 27 days = 32,400 hours
Computation of Variances in relation to Fixed Overheads:

(i) Efficiency Variance
= Standard Rate × (Standard hours for actual output – Actual hours worked)
= ₹10 (33,000 hours – 31,500 hours) = ₹15,000 (Favourable)
(ii) Capacity Variance
= Standard Rate × (Actual Hours – Budgeted Hours for actual days worked)
= ₹10 (31,500 hours – 32,400 hours) = ₹9,000 (Adverse)
(iii) Calendar Variance
= Standard/Budgeted Fixed Overhead Rate per day × (Actual Working days – Budgeted working days)
= ₹12,000 (27 days – 25 days) = ₹24,000 (Favourable)
(iv) Volume Variance
= Standard Rate × (Standard hours – Budgeted hours)
= ₹10 (33,000 hours – 30,000 hours) = ₹30,000 (Favourable)
(v) Expenditure Variance
= Budgeted Overheads – Actual Overheads
= ₹3,00,000 – ₹3,10,000 = ₹10,000 (Adverse)
Note: Overhead Variances may also be calculated based on output.
Question 8
Following data is extracted from the books of XYZ Ltd. for the month of January, 2020:
(i) Estimation-
Particulars Quantity (kg.) Price (₹) Amount (₹)
Material-A 800 ? --
13.10
Material-B 600 30.00 18,000

--
Normal loss was expected to be 10% of total input materials.
(ii) Actuals- 1480 kg of output produced.
Particulars Quantity (kg.) Price (₹) Amount (₹)
Material-A 900 ? --
Material-B ? 32.50 --
59,825
(iii) Other Information-

Material Cost Variance = ₹ 3,625 (F) Material
Price Variance = ₹ 175 (F)
(i) Standard Price of Material-A;
(ii) Actual Quantity of Material-B;
(iii) Actual Price of Material-A;
(iv) Revised standard quantity of Material-A and Material-B; and
(v) Material Mix Variance; (MTP 10 Marks, Oct.’20 & March ’23, Old & New SM)
Answer 8
(i) Material Cost Variance (A + B) = {(SQ × SP) – (AQ × AP)}
₹ 3,625 = (SQ × SP) – ₹ 59,825

(SQ × SP) = ₹ 63,450
(SQA × SPA) + (SQB × SPB) = ₹ 63,450 (940 kg × SPA) + (705 kg × ₹ 30) = ₹ 63,450
(940 kg × SPA) + ₹ 21,150 = ₹ 63,450
(940 kg × SPA) = ₹ 42,300
SPA = ₹ 42,300 / 940kg
Standard Price of Material-A = ₹ 45
Working Note:
SQ i.e. quantity of inputs to be used to produce actual output
, >!
= ? %
= 1,645kg
>!
SQA =A 7 B
1,645 DE. = 940kg
>!
SQB =A 7 B
1,645 DE. = 705kg
(ii) Material Price Variance (A + B) = {(AQ × SP) – (AQ × AP)}

₹ 175 = (AQ × SP) – ₹ 59,825
(AQ × SP) = ₹ 60,000 (AQA
× SPA) + (AQB × SPB) = ₹ 60,000
(900 kg × ₹ 45 (from (i) above)) + (AQB × ₹30) = ₹ 60,000
₹ 40,500 + (AQB × ₹ 30) = ₹ 60,000
(AQB × ₹ 30) = ₹ 19,500
Prakshal Shah | 8779794646 AQB = 19,500 / 30 = 650 kg

13.11
Actual Quantity of Material B = 650 kg.

(iii) (AQ × AP) = ₹ 59,825
(AQA × APA) + (AQB × APB) = ₹ 59,825
(900 kg × APA) + (650 kg (from (ii) above) × ₹ 32.5) = ₹ 59,825 (900 kg × APA) + ₹ 21,125
= ₹ 59,825
(900 kg × APA) = ₹ 38,700
APA = 38,700 / 900 = 43
Actual Price of Material-A = ₹ 43
(iv) Total Actual Quantity of Material-A and Material-B

= AQA + AQB
= 900 kg + 650 kg (from (ii) above)

= 1,550 kg
Now,
Revised SQA = 800kg /800+600 X 1,550kg. = 886kg.
Revised SQB = 600kg/(800+600)X 1,550kg. = 664kg.
(v) Material Mix Variance (A + B) = {(RSQ × SP) – (AQ × SP)}

= {(RSQA × SPA) + (RSQB × SPB) – 60,000}
= (886 kg (from (iv) above) × ₹ 45 (from (i) above))
+ (664 kg (from (iv) above) × ₹ 30) - ₹60,000
= (39,870 + 19,920) – 60,000 = ₹ 210 (A)
Question 9
AK Ltd. has furnished the following standard cost data per unit of production:
Material 10 kg @ ₹ 100 per kg.
Labour 6 hours @ ₹ 55 per hour
Variable overhead 6 hours @ ₹ 100 per hour.
Fixed overhead ₹45,00,000 per month (Based on a normal volume of 30,000 labour hrs)
The actual cost data for the month of September 2020 are as follows:
Material used 50,000 kg at a cost of ₹ 52,50,000.
Labour paid ₹ 15,50,000 for 31,000 hours
Variable overheads ₹ 29,30,000
Fixed overheads ₹ 47,00,000
Actual production 4,800 units.
CALCULATE:
(i) Material Cost Variance.
(ii) Labour Cost Variance.
(iii) Fixed Overhead Cost Variance.
(iv) Variable Overhead Cost Variance (MTP 5 Marks, Mar‘21) (Same concept different figures
MTP 5 Marks Nov’21)
Answer
Prakshal Shah 9
| 8779794646
13.12
Budgeted Production 30,000 hours ÷ 6 hours per unit = 5,000 units
Budgeted Fixed Overhead Rate = ₹ 45,00,000 ÷ 5,000 units = ₹ 900 per unit Or
= ₹ 45,00,000 ÷ 30,000 hours = ₹ 150 per hour.

(i) Material Cost Variance = (Std. Qty. × Std. Price) – (Actual Qty. × Actual Price)
= (4,800 units × 10 kg. × ₹100) - ₹ 52,50,000
= ₹ 48,00,000 – ₹ 52,50,000
= ₹ 4,50,000 (A)
(ii) Labour Cost Variance = (Std. Hours × Std. Rate) – (Actual Hours × Actual rate)
= (4,800 units × 6 hours × ₹ 55) – ₹ 15,50,000
= ₹ 15,84,000 – ₹ 15,50,000
= ₹ 34,000 (F)
(iii) Fixed Overhead Cost Variance = (Budgeted Rate × Actual Qty) – Actual Overhead
= (₹ 900 × 4,800 units) – ₹47,00,000
= ₹ 3,80,000 (A) OR
= (Budgeted Rate × Std. Hours) – Actual Overhead
= (₹ 150 × 4,800 units × 6 hours) – ₹ 47,00,000
= ₹ 3,80,000 (A)
(iv) Variable Overhead Cost Variance = (Std. Rate × Std. Hours) – Actual Overhead
= (4,800 units × 6 hours × ₹ 100) - ₹ 29,30,000
= ₹ 28,80,000 - ₹ 29,30,000
= ₹ 50,000 (A)
Question 10
Following information has been provided by a company:
Number of units produced and sold 9,000

Standard labour rate per hour ₹ 12
Standard hours required for 9,000 units -
Actual hours required 25,641 hours
Labour efficiency 105.3%
Labour rate variance ₹ 1,53,846 (A)
(i) Actual labour rate per hour
(ii) Standard hours required for 9,000 units
(iii) Labour Efficiency variance
(iv) Standard labour cost per unit
(v) Actual labour cost per unit. (MTP 10 Marks, Oct’21)(RTP Nov ’23)
Answer 10
SR – Standard labour Rate per Hour
AR – Actual labour rate per hour

13.13
SH – Standard Hours
AH – Actual hours
(i) Labour rate Variance = AH (SR – AR)
- 1,53,846 = 25,641 (12 – AR)
-6 = 12 – AR
AR = ₹ 18
F=
(ii) Labour Efficiency = G=
100 = 105.3
G= 8. 8, 8.
SH = =
SH = 26,999.973
SH = 27,000 hours
(iii) Labour Efficiency Variance = SR (SH – AH)
= 12 (27,000 – 25,641)
= ₹ 16,308 (F)
+,
(iv) Standard Labour Cost per Unit = ?,
= ₹ 36
8,
(v) Actual Labour Cost Per Unit = ?,
= ₹51.282
Question 11
Rounak Minerals Ltd. operates in iron ore mining through open cast mining method. Explosives and
detonators are used for excavation of iron ores from the mines. The following are the details of
standard quantity of explosives materials used for mining:
Particulars Rate (₹) Standard Qty. for Standard Qty. for
Iron ore Overburden (OB)
SME 40.00 per kg. 2.4 kg per tonne 1.9 kg per cubic-
meter
Detonators 20.00 per piece 2 pcs per tonne 2 pcs per cubic-meter
The standard stripping ratio is 3:1 (means 3 cubic- meter of overburden soil to be removed to get one
tonne of iron ore). During the month of December 2021, the company produced 20,000 tonnes of iron
ore and removed 58,000 cubic- meter of OB. The quantity of explosive materials used and paid for
the month is as below:
Material Quantity Amount (₹)
SME 1,67,200 kg. 63,53,600
Detonators 1,18,400 pcs 24,27,200

(i) Material price variance
(ii) Material quantity variance
(iii) Material cost variance. (MTP 10 Marks April ’22 & Sep ‘23)
Answer 11
Workings:
1. Calculation of Standard Qty. of Explosives and Detonators for actual output:
Particulars Iron ore Overburden (OB) Total
13.14
SME:
A Actual Output 20,000 tonne 58,000 M3
B Standard Qty per unit 2.4 kg./tonne 1.9 kg./M3
C Standard Qty. for actual 48,000 kg. 1,10,200 kg. 1,58,200 kg.
production [A×B]
Detonators:
D Standard Qty per unit 2 pcs/ tonne 2 pcs/ M3
E Standard Qty. for actual 40,000 pcs. 1,16,000 pcs 1,56,000 pcs
production [A×D]
2. Calculation of Actual Price per unit of materials:

Material Quantity [A] Amount (₹) Rate (₹) [C = B÷A]
[B]
SME 1,67,200 kg. 63,53,600 38.00
Detonators 1,18,400 pcs 24,27,200 20.50
(i) Computation of material price variance:

Material Price Variance = Actual Qty. × (Std. Price - Actual Price)
SME = 1,67,200 kg. × (₹40 – ₹38) = ₹ 3,34,400 (F)
Detonators = 1,18,400 pcs × (₹20 – ₹20.5) = ₹ 59,200 (A)
Total = ₹ 2,75,200 (F)
(ii) Computation of material quantity variance:
Material Qty. Variance = Std. Price × (Std. Qty for actual output - Actual Qty.)
SME = ₹40 × (1,58,200 kg. - 1,67,200 kg.) = ₹ 3,60,000 (A)

Detonators = ₹20 × (1,56,000 pcs -1,18,400 pcs) = ₹ 7,52,000 (F)
Total = ₹ 3,92,000 (F)
(iii) Computation of material cost variance:
Material cost variance = Std. cost – Actual Cost
Or, (Std. Price × Std. Qty) – (Actual Price × Actual Qty.)
SME = (₹40 × 1,58,200 kg) – (₹38 × 1,67,200 kg.)
= ₹63,28,000 – ₹63,53,600 = ₹ 25,600 (A)
Detonators = (₹20 × 1,56,000 pcs) – (₹20.50 × 1,18,400 pcs)
= ₹31,20,000 – ₹24,27,200 = ₹ 6,92,800 (F)
Total = ₹ 6,67,200 (F)
Question 12
DISCUSS the Controllable and un-controllable variances (MTP 5 Marks, March ‘21)
Answer 12
Controllable and un-controllable variances: The purpose of the standard costing reports is to investigate
the reasons for significant variances so as to identify the problems and take corrective action. Variances
are broadly of two types, namely, controllable and uncontrollable. Controllable variances are those which
can be controlled by the departmental heads whereas uncontrollable variances are those which are beyond
their control. Responsibility centers are Answerable for all adverse variances which are controllable and are
appreciated for favourable variances. Controllability is a subjective matter and varies from situation to
13.15
situation. If the uncontrollable variances are of significant nature and are persistent, the standard may need
revision.
Question 13
BBC Ltd. manufactures Ordinary Portland Cement (OPC). The standard data for the raw
materials that are used to manufacture OPC are as follows:
Material Composition (%) Rate per Metric Ton (₹)
Limestone 65 565
Silica 20 4,800
Alumina 5 32,100
Iron ore 5 1,800
Others 5 2,400
During the month of February 20X8, A Ltd. produced 500 MT OPC. Actual data related with the
consumption and costs are as follows:
Raw Material Quantity (MT) Total Cost (₹)
Limestone 340 1,90,400
Silica 105 5,09,250
Alumina 25 8,12,500
Iron ore 30 53,400
Others 23 51,750
You are required to COMPUTE the following variances related with the production of OPC for the
month of February 20X8:
(i) Material Price Variance
(ii) Material Mix Variance
(iii) Material Yield Variance
(iv) Material Cost Variance. (MTP 10 Marks Apr 19)
Answer 13
(i) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
) . ,? ,
Limestone = 340(₹ 565 - )
= 340 (₹ 565 - ₹ 560) = 1,700 (F)
) .8, ?, 8
105(₹ 4,800 - )
Silica = 8
= 105 (₹ 4,800 - ₹ 4,850) = 5,250 (A)

) . , ,8
25(₹ 32,100 - )
Alumina = 8
= 25 (₹ 32,100 - ₹ 32,500) = 10,000 (A)
) .8 ,
Iron ore = 30(₹ 1,800 - )
= 30 (₹ 1,800 - ₹ 1,780) = 600 (F)
) .8 ,+8
Others = 23(₹ 2,400 - )
= 23 (₹ 2,400 - ₹ 2,250) = 3,450 (F)
9,500 (A)
(ii) Material Mix Variance = Std. Price (Revised Std. Quantity – Actual Quantity)
Limestone = ₹ 565 (523 × 65% - 340)
= ₹ 565 (339.95 - 340) = 28.25 (A)
Silica = ₹ 4,800 (523 × 20% - 105)
= ₹ 4,800 (104.6 - 105) = 1,920 (A)
13.16
Alumina = ₹ 32,100 (523 × 5% - 25)

= ₹ 32,100 (26.15 - 25) = 36,915 (F)
Iron ore = ₹ 1,800 (523 × 5% - 30)
= ₹ 1,800 (26.15 - 30) = 6,930 (A)
Others = ₹ 2,400 (523 × 5% - 23)
= ₹ 2,400 (26.15 - 23) = 7,560 (F)
35,596.75 (F)
(iii) Material Yield Variance = Std. Price (Standard Quantity – Revised Std. Quantity)
Limestone = ₹ 565 (500 × 65% - 523 × 65%)
= ₹ 565 (325 - 339.95) = 8,446.75 (A)
Silica = ₹ 4,800 (500 × 20% - 523 × 20%)
= ₹ 4,800 (100 - 104.6) = 22,080 (A)
Alumina = ₹ 32,100 (500 × 5% - 523 × 5%)
= ₹ 32,100 (25 - 26.15) = 36,915 (A)
Iron ore = ₹ 1,800 (500 × 5% - 523 × 5%)
= ₹ 1,800 (25 - 26.15) = 2,070 (A)
Others = ₹ 2,400 (500 × 5% - 523 × 5%)
= ₹ 2,400 (25 - 26.15) = 2,760 (A)
72,271.75 (A)
(iv) Material Cost Variance = (Std. Quantity × Std. Price) – (Actual Quantity × Actual Price)
Limestone = ₹ 565 × (500 × 65%) - ₹ 1,90,400
= ₹ 1,83,625 - ₹ 1,90,400 = 6,775 (A)
Silica = ₹ 4,800 × (500 × 20%) - ₹ 5,09,250
= ₹ 4,80,000 – ₹ 5,09,250 = 29,250 (A)
Alumina = ₹ 32,100 (500 × 5%) – ₹ 8,12,500
= ₹ 8,02,500 – ₹ 8,12,500 = 10,000 (A)
Iron ore = ₹ 1,800 (500 × 5%) – ₹ 53,400
= ₹ 45,000 – ₹ 53,400 = 8,400 (A)
Others = ₹ 2,400 (500 × 5%) – ₹ 51,750
= ₹ 60,000 – ₹ 51,750 = 8,250 (F)
46,175 (A)
Question 14
Following are the details given:
Budgeted Days 25
Budgeted Fixed Overheads 1,00,000
Budgeted Production 800 units per day
Actual Production 21,000 units
Fixed Overheads are absorbed @ ₹ 10 per
hour.
Fixed overheads efficiency variance 10,000A
Fixed overheads calendar variance 8,000F
Fixed overheads cost variance 15,000A
(a) Actual Fixed Overheads
(b) Actual Days

13.17
(c) Actual Hours
(d) Fixed overheads Expenditure variance
(e) Fixed overheads volume variance
(f) Fixed overheads capacity variance (MTP 10 Marks March ‘22)

Answer 14
(i) Fixed Overhead Cost Variance = (Std Fixed Overheads – Actual Fixed Overheads)
= ( 1,00,000 / 20,000 X 21,000 units – Actual Fixed Overheads) = 15,000A
= (1,05,000 - Actual Fixed Overheads) = 15,000A
=> Actual Fixed Overheads = 1,20,000
(ii) Fixed Overhead Calendar Variance=(Actual Days – Budgeted Days) x Budgeted rate per day
, ,
= (Actual Days -25)X = 8,000 F
8
= (Actual Days -25) =2
=> Actual Days = 27

(iii) Fixed Overhead Efficiency Variance =(Standard Hours for Actual Production – Actual Hours) x
Budgeted rate per hour
,
=6 ,
H 21,000 ; IJK 1L MN 9 X 10 = 10,000A
= (10,500 – Actual Hours) = -1,000

=> Actual Hours = 11,500
(iv) Fixed overheads Expenditure variance=(Budgeted Fixed Overheads – Actual Fixed Overheads)
= (1,00,000 – 1,20,000) = 20,000A
(v) Fixed overheads volume variance = (Budgeted units – Actual Units ) x Budgeted Rate per unit
, ,
= (20,000 – 21,000) X , = 5,000F
(vi) Fixed overheads capacity variance = (Budgeted Hours for Actual Days – Actual Hours)
x Budgeted Rate per Hour
,
=6 8
H 27 ; 11,5009 X 10 = 7,000F
Question 15
The details regarding a product manufactured by the company for the last one week are as follows:
Standard cost (per unit)
Direct materials 10 units @ ₹ 22.50 ₹ 225
Direct wages 5 hours @ ₹ 120 ₹ 600
Total: ₹ 825
Actual (for whole activity):
Direct materials ₹ 96,525
Direct wages ₹ 2,44,860
Analysis of variances:
Direct materials:
Price ₹ 8,775 (Adverse)
Usage ₹ 5,625 (Favourable)
Direct wages (labour):
Efficiency ₹ 5,400 (Adverse)
(i) Material Cost variance
(ii) Actual output units
13.18
(iii) Actual price of material per unit

(iv) Actual Wages rate per labour hour
(v) Labour rate variance
(vi) Labour Cost variance (MTP 10 Marks Sep’22)
Answer 15
(i) Material Cost Variance = Material Price Variance+ Material Usage Variance
= ₹ 8,775 A + ₹ 5,625 F= ₹ 3,150 Adverse
(ii) Actual output units

Let x be the actual quantity of output
Then Standard Quantity of input for actual output ‘x’
SQ = 10x
Material cost variance = (SQ x SP) - (AQ x AP)
-3,150 = (10x x 22.50) - ₹ 96,525
-3,150 = 225x - ₹ 96,525
225x = 96,525 – 3,150
= ₹ 93,375
X = 93,375/225 = 415 Units
(iii) Actual Price of Material per unit

Material Usage variance = (SQ - AQ) x SP 5,625 = (10x - AQ) x ₹ 22.50
5,625 = (10 x 415 units - AQ) x ₹ 22.50
5,625/22.50 = 4,150 - AQ
AQ = 4,150 - 250 = 3,900 units
Now, AQ x AP = ₹ 96,525 (given) AP = ₹ 96,525/AQ
= ₹ 96,525/3,900 units = ₹ 24.75
(iv) Actual wages rate per labour hour
Labour efficiency variance = 5,400 Adverse (given)
Standard rate per hour (Standard time – Actual time) = -5,400
₹ 120 [(Actual output units x Number of hours per output) – Actual time] = -5,400
₹ 120 [(415 units x 5 hrs) – Actual time] = -5,400 2,075 hrs – Actual time
= -5,400/120
Actual time = 2,075 + 45
= 2,120 hrs
Now Direct wages = ₹ 2,44,860 (given) Actual time x Actual rate per
hour
= ₹ 2,44,860
Actual rate per hour = ₹ 2,44,860 / 2,120 hrs

= ₹ 115.50
13.19
(v) Labour rate variance

= Actual time (Standard Rate – Actual Rate)
= 2,120 hrs (₹ 120 - ₹ 115.50)
= 2,120 hrs x ₹ 4.50 = 9,540 Favourable
(vi) Labour Cost variance
= Labour rate variance+ Labour efficiency variance
= 9,540 F + 5,400 A = 4,140 Favourable
Question 16
The following information is available from the cost records of a company for the month of July, 2022:
(1) Material purchased 22,000 pieces ₹ 9,00,000
(2) Material consumed 21,000 pieces
(3) Actual wages paid for 5,150 hours ₹ 2,57,500
(4) Fixed Factory overhead incurred ₹ 4,60,000
(5) Fixed Factory overhead budgeted ₹ 4,20,000
(6) Units produced 1,900
(7) Standard rates and prices are:
Direct material ₹ 45 per piece
Standard input 10 pieces per unit
Direct labour rate ₹ 60 per hour
Standard requirement 2.5 hours per unit
Overheads ₹ 80 per labour hour
You are required to CALCULATE the following variances:
(i) Material price variance
(ii) Material usage variance
(iii) Labour rate variance
(iv) Labour efficiency variance
(v) Fixed overhead expenditure variance
(vi) Fixed overhead efficiency variance
Fixed overhead capacity variance (MTP 10 Marks Oct’22) (Same concept different figures
Old & New SM)
Answer 16
(i) Material price variance (on the basis of Single plan):
= Actual Quantity YZ[\]^_à (Std. Price – Actual Price)
=22,000 pcs
b_.?, ,
(- . 45 − ) . , (c = Rs.90,000* (Favourable)
OR
Material price variance (on the basis of Partial plan):
= Actual Quantity \de_Zfà (Std. Price – Actual Price)
= 21,000 pcs (Rs. 45 − Rs.9,00,000 = Rs.85,909* (Favourable)
(*Figure may slightly differ due to rounding off the actual price per unit)
(ii) Material usage variance:

Prakshal Shah | 8779794646 = Std. price per piece (Std. Quantity – Actual Quantity \de_Zfà
13.20
= Rs.45 (1,900 units × 10 – 21,000) = Rs. 90,000 (Adverse)
(iii) Labour rate variance:

= Actual hours paid (Std. rate – Actual rate)
b_. ,8+,8
= 5,150 hours (Rs. 60 − 8, 8 : = Rs. 51,500 (Favourable)
(iv) Labour efficiency variance:

= Std. rate per hour (Std. hours – Actual Quantity gd[hà
= Rs.60 (1,900 units × 2.5 hours – 5,150 hours) = Rs. 24,000 (Adverse)
(v) Fixed overhead expenditure variance:

= Budgeted Overhead – Actual Overhead
= Rs. 4,20,000 – Rs. 4,60,000 = Rs. 40,000 (Adverse)
(vi) Fixed overhead efficiency variance:

= Std. rate (Std. hours - Actual hours worked)
= Rs.80 (1,900 units × 2.5 hours - 5,150 hours) = Rs. 32,000 (Adverse)
Or,
Fixed overhead efficiency variance on basis of units
= Std. rate per unit (Actual output – Standard output for actual hours)
= Rs.200 (1,900 units - 5,150 / 2.5 hours) = Rs. 32,000 (Adverse)
(vii) Fixed overhead capacity variance:

= Std. rate (Actual hours worked – Budgeted hours)
) .. , ,
= Rs. 80 (5,150hours − = Rs. 8,000 (Adverse)
) .
Or,
Fixed overhead capacity variances on basis of units
= Std. rate per unit (Standard output for actual hours – Budgeted output)
= Rs.200 (2,060 units - 4,20,000 / 200) = Rs. 8,000 (Adverse)
Question 17
X Associates undertake to prepare income tax returns for individuals for a fee. They use the weighted
average method and actual costs for the financial reporting purposes. However, for internal reporting,
they use a standard costs system. The standards, based on equivalent performance, have been
established as follows:
Labour per return 5 hrs @ ` 40 per hour
Overhead per return 5 hrs @ ` 20 per hour
For July 2023 performance, budgeted overhead is `98,000 for standard labour hours allowed. The
following additional information pertains to the month of July 2023:
July 1 Return-in-process (25% complete) 200 No.
Return started in July 825 Nos
July 31 Return-in-process (80% complete) 125 Nos
Cost Data:
July 1 Return-in-process labour ` 12,000
- Overheads ` 5,000
July 1 to 31 Labour : 4,000 hours ` 1,78,000
Overheads ` 90,000
13.21
You are required to compute:

(i) For each element, equivalent units of performance and the actual cost per equivalent unit.
(ii) Actual cost of return-in-process on July 31.
(iii) The standard cost per return.
(iv) The labour rate and labour efficiency variance as well as overhead volume and overhead
expenditure variance. (MTP 10 Marks, Oct ‘23)
Answer 17
I. Statement Showing Cost Elements Equivalent Units of Performance and the Actual Cost Per
Equivalent Unit
Detail of Detail Details Equivalent Units
Returns of Input Output Labour Overheads
Units Units Units % Units %
Returns in 200 Returns 900 900 100 900 100
Process at Completed in
Start July
Returns 825 Returns in 125 100 80 100 80
Started in July Process at the
end of July
1,025 1,025 1,000 1,000
Costs: Labour (`) Overhead (`)

From previous month 12,000 5,000
During the month 1,78,000 90,000
Total Cost 1,90,000 95,000
Cost per Equivalent Unit 190.00 95.00
II. Actual cost of returns in process on July 31:
Numbers Stage of Rate per Return Total (`)
Completion (`)
Labour 125 returns 0.80 190.00 19,000
Overhead 125 returns 0.80 95.00 9,500
28,500
III. Standard Cost per Return:

Labour 5 Hrs × ` 40 per hour = `200
Overhead 5 Hrs × ` 20 per hour = `100
` 300
Budgeted volume for July = ` 98,000 / 1000 = 980 Returns
Actual labour rate = ` 178000 / 4000 = `44.50
IV. Computation of Variances:
Statement Showing Output (July only) Element Wise Labour Overhead
Actual performance in July in terms of equivalent units as
Calculated above 1,000 1,000
Less: Returns in process at the beginning of July in terms
of equivalent units i.e. 25% of returns (200) 50 50
950 950
Variance Analysis:
Labour Rate Variance
= Actual Time × (Standard Rate – Actual Rate)
13.22
= Standard Rate × Actual Time – Actual Rate × Actual Time

= ` 40 × 4,000 hrs. – ` 1,78,000 = ` 18,000(A)
Labour Efficiency Variance
= Standard Rate × (Standard Time – Actual Time)
= Standard Rate × Standard Time – Standard Rate × Actual Time
= ` 40 × (950 units × 5 hrs.) – ` 40 × 4,000 hrs.
= ` 30,000(F)
Overhead Expenditure or Budgeted Variance
= Budgeted Overhead – Actual Overhead
= ` 98,000 – ` 90,000
= ` 8,000(F)
Overhead Volume Variance
= Recovered/Absorbed Overhead – Budgeted Overhead
= 950 Units × 5 hrs. × `20 – ` 98,000 = ` 3,000(A)
Question 18
ABC Ltd. had prepared the following estimation for the month of January:
Quantity Rate (₹ ) Amount (₹ )
Material-A 800 kg. 90.00 72,000
Material-B 600 kg. 60.00 36,000
Skilled labour 1,000 hours 75.00 75,000
Unskilled labour 800 hours 44.00 35,200
Normal loss was expected to be 10% of total input materials and an idle labour time of 5% of expected
labour hours was also estimated.
At the end of the month the following information has been collected from the cost accounting
department:
The company has produced 1,480 kg. finished product by using the followings:
Quantity Rate (₹ ) Amount (₹ )
Material-A 900 kg. 86.00 77,400
Material-B 650 kg. 65.00 42,250
Skilled labour 1,200 hours 71.00 85,200
Unskilled labour 860 hours 46.00 39,560
(a) Material Cost Variance; (b) Material Price Variance;
(c) Material Mix Variance; (d) Material Yield Variance;
(e) Labour Cost Variance; (f) Labour Efficiency Variance and (g)
Labour Yield Variance. (RTP May’19 , May ’20 May ’18) (Same concept different figures RTP May’18)
Answer 18
Material Variances:
Material SQ SP SQ × SP RSQ RSQ × SP AQ AQ × SP AP AQ × AP
(WN-1) (₹ ) (₹ ) (WN-2) (₹ ) (₹ ) (₹ ) (₹ )
A 940 kg. 90.00 84,600 886 kg. 79,740 900 kg. 81,000 86.00 77,400
B 705 kg. 60.00 42,300 664 kg. 39,840 650 kg. 39,000 65.00 42,250
1645 kg 1,26,900 1550 kg 1,19,580 1550 kg 1,20,000 1,19,650
WN-1: Standard Quantity (SQ):
13.23
>!.
Material A- 6 .? , >!.
1,480DE. 9 = 939.68 or 940kg.
>!.
Material B- 6 .? , >!.
1,480DE. 9 = 704.76 or 705 kg.
WN- 2: Revised Standard Quantity (RSQ):

>!.
Material A- 6 , >!.
1,550DE. 9 = 885.71 or 886kg.
>!.
Material B- 6 , >!.
1,550DE. 9 = 664.28 or 664 kg.
(a) Material Cost Variance (A + B) = {(SQ × SP) – (AQ × AP)}

= {1,26,900–1,19,650}=7,250(F)
(b) Material Price Variance (A + B) = {(AQ × SP) – (AQ × AP)

= {1,20,000 – 1,19,650} = 350 (F)
(c) Material Mix Variance (A + B) = {(RSQ × SP) – (AQ × SP)}
= {1,19,580 – 1,20,000} = 420 (A)
(d) Material Yield Variance (A + B) = {(SQ × SP) – (RSQ × SP)}
= {1,26,900–1,19,580}=7,320(F)
Labour Variances:
Labour SH SR SH × SR RSH RSH × SR AH AH × SR AR AH × AR
(WN-3) (₹ ) (₹ ) (WN-4) (₹ ) (₹ ) (₹ ) (₹ )
Skilled 1,116 hrs 75.00 83,700 1144 85,800 1,200 90,000 71.00 85,200
Unskilled 893 hrs 44.00 39,292 916 40,304 860 37,840 46.00 39,560
2,009 hrs 1,22,992 2,060 1,26,104 2,060 1,27,840 1,24,760
WN- 3: Standard Hours (SH):
.?8 , .
Skilled Labour - 6 1,480DE. 9 = 1,115.87 or 1,116 hrs.
.? , >!.
.j kl.
Unskilled labour- 6 ,m no. 9 = 892.69 or 893 hrs.
.j ,m no.
WN- 4: Revised Standard Hours (RSH):

, .
Skilled Labour - 6 , .
2,060ℎ . 9 = 1,115.87 or 1,116 hrs.
kl.
Unskilled labour- 6 , p kl. 9 = 915.56 or 916 hrs.
, kl.
(e) Labour Cost Variance (Skilled + Unskilled) = {(SH × SR) – (AH × AR)}
= {1,22,992 – 1,24,760} = 1,768 (A)
(f) Labour Efficiency Variance (Skilled + Unskilled)
= {(SH × SR) – (AH × SR)}
= {1,22,992 – 1,27,840} = 4,848 (A)
(g) Labour Yield Variance (Skilled + Unskilled) = {(SH × SR) – (RSH × SR)}
= {1,22,992 – 1,26,104} = 3,112 (A)
Question 19
JVG Ltd. produces a product and operates a standard costing system and value material and finished
goods inventories at standard cost. The information related with the product is as follows:
Particulars Cost per unit (₹ )
Direct materials (30 kg at ₹ 350 per kg) 10,500
13.24
Direct labour (5 hours at ₹ 80per hour) 400

The actual information for the month just ended is as follows:
(a) The budgeted and actual production for the month of September 2019 is 1,000 units.
(b) Direct materials –5,000 kg at the beginning of the month. The closing balance of direct materials for the
month was 10,000 kg. Purchases during the month were made at‘ 365 per kg. The actual utilization of
direct materials was 7,200 kg more than the budgeted quantity.
(c) Direct labour – 5,300 hours were utilized at a cost of ₹ 4,34,600.
Required:
Calculate (i) Direct material price and usage variances (ii) Direct labour rate and efficiency variances.
( RTP Nov’19)
Answer 19
Working:
Quantity of material purchased and used.
No. of units produced 1,000 units
Std. input per unit 30kg.
Std. quantity (Kg.) 30,000 kg.
Add: Excess usage 7,200 kg.
Actual Quantity 37,200 kg.
Add: Closing Stock 10,000 kg.
Less: Opening stock 5,000 kg.
Quantity of Material purchased 42,200 kg.
(i) Direct Material Price Variance:
= Actual Quantity purchased (Std. Price – Actual Price)
= 42,200 kg.(₹ 350 – ₹ 365) = 6,33,000 (Adverse)
Direct Material Usage Variance:
= Std. Price (Std. Quantity – Actual Quantity)
= ₹ 350 (30,000 kg. – 37,200 kg.) = ₹ 25,20,000 (Adverse)
(ii) Direct Labour Rate Variance:
= Actual hours (Std. Rate – Actual Rate)
= 5,300 hours (₹80 – ₹ 82) = ₹ 10,600 (Adverse)
Direct Labour Efficiency Variance:
= Std. Rate (Std. hours – Actual hours)
= ₹ 80 (1,000 units × 5 hours – 5,300 hours) = ₹ 24,000 (Adverse)
Question 20
Aaradhya Ltd. manufactures a commercial product for which the standard cost per unit is as follows:
(Rs.)
Material : 5 kg @ Rs. 4 per kg 20.00
Labour: 3 hours @ Rs. 10 per kg 30.00
Overhead
Variable: 3 hours @ ₹ 1 3.00
Fixed: 3 hours @ ₹0.50 1.50
Total 54.50
During Jan. 20X8, 600 units of the product were manufactured at the cost shown below:
(Rs.)
Materials purchased: 5,000 kg. @ ₹4.10 per kg. 20,500
13.25
Materials used: 3,500 kg.

Direct Labour : 1,700 hours @ ₹ 9 15,300
Variable overhead 1,900
Fixed overhead 900
Total 38,600
The flexible budget required 1,800 direct labour hours for operation at the monthly activity level used to set
the fixed overhead rate.
Compute:
(a) Material price variance, (b) Material Usage variance; (c) Labour rate variance; (d) Labour efficiency
variance; (e) Variable overhead expenditure variance; (f) Variable overhead efficiency variance; (g)
Fixed overhead expenditure variance; (h) Fixed overhead volume variance; (i) Fixed overhead
capacity variance; and (j) Fixed overhead efficiency variance. Also RECONCILE the standard and
actual cost of production. (RTP Nov.’18)
Answer 20
(a) Material price variance:
= (Standard price – Actual Price) × Actual quantity
= (₹ 4 – ₹ 4.10) × 5,000 = ₹ 500 Adv.
(b) Material usagevariance:
= (Std. quantity for actual output – Actual qtty.) × Std. price
= (600 × 5 – 3,500) × 4 = ₹ 2,000 Adv.
(c) Labour Rate Variance:
= (Standard rate – Actual rate) × Actual hours
= (₹ 10 – ₹ 9) × 1,700 = ₹ 1,700 Fav.
(d) Labour Efficiency Variance:
= (Standard hours for actual output – Actual hours) × Standard rate
= (600 × 3 – 1,700) × ₹ 10
= ₹ 1,000 Fav.
(e) Variable Overhead Expenditure Variance
= (Actual Hours × Standard Rate) – Actual Overhead
= (1,700 ×₹ 1) – ₹ 1,900
= ₹ 200 Adv.
Variable Overhead Efficiency Variance:
= Std. hours for actual output – Actual hours) × Std. rate
= (600 × 3 – 1,700) × ₹ 1 = ₹ 100 Fav.
(g) Fixed Overhead Expenditure Variance:
= (Budgeted overhead – Actual overhead)
= (1,800 × 0.50 – 900) = Nil
(h) Fixed Overhead Volume Variance:
= (Std. hours for actual output – Budgeted hours) × Std. rate
= (600 × 3 – 1,800) × ₹ 0.50 = Nil
Fixed Overhead Capacity Variance:
= (Budgeted hours – Actual Hours) × Standard rate
= (1,800 – 1,700) × ₹ 0.50 = ₹ 50 Adv.
Fixed Overhead Efficiency Variance:
= (Std. hours for actual output – Actual hours) × Standard rate
13.26
= (600 × 3 – 1,700) × ₹ 0.50 = ₹ 50 Fav.

Verification: (₹ ) (₹ )
Overhead recovered: 600 units @ ₹ 4.50 2,700
Actual Overhead:
Variable 1,900
Fixed 900 2,800
100 Adv.
Variable expenditure variance 200 Adv
Variable Efficiency variance 100 Fav.
Fixed expenditure variance Nil
Fixed overhead volume variance Nil
100 Adv.
Standard Cost: 600 units @ ₹ 54.50 32,700
Actual Cost: 38,600
Less: Material Stock at standard cost: (1,500 × ₹ 4) 6,000 (32,600) 100 Fav.
Variances: Adv. (₹ ) Fav. (₹ )
Material price 500
Material usage 2,000
Labour rate 1,700
Labour efficiency 1,000
Variable expenditure 200
Variable efficiency 100
Total 2,700 2,800 100 Fav.
Question 21
LM Limited produces a product 'SX4' which is sold in a 10 Kg. packet. The standard cost card per
packet of 'SX4' is as follows:
(Rs.)
Direct materials 10 kg @ ₹ 90 per kg 900
Direct labour 8 hours @ ₹ 80 per hour 640
Variable Overhead 8 hours @ ₹ 20 per hour 160
Fixed Overhead 250
1,950
Budgeted output for a quarter of a year was 10,000 Kg. Actual output is 9,000 Kg. Actual costs for this
quarter are as follows:
(Rs.)
Direct Materials 8,900 Kg @ ₹ 92 per Kg. 8,18,800
Direct Labour 7,000 hours @ ₹ 84 per hour 5,88,000
Variable Overhead incurred 1,40,000
Fixed Overhead incurred 2,60,000
(i) Material Usage Variance
(ii) Material Price Variance
(iii) Material Cost Variance
(iv) Labour Efficiency Variance
Prakshal Shah | 8779794646 (v) Labour Rate Variance

13.27
(vi) Labour Cost Variance

(vii) Variable Overhead Cost Variance
(viii) Fixed Overhead Cost Variance
(RTP May ’21) (Same concept but different figures RTP Nov’20)
Answer 21
(i) Material Usage Variance = Std. Price (Std. Quantity – Actual Quantity)
= ₹ 90 (9,000 kg. – 8,900 kg.)
= ₹ 9,000 (Favorable)
(ii) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
= 8,900 kg. (₹ 90 – ₹ 92) = ₹ 17,800 (Adverse)
(iii) Material Cost Variance = Std. Material Cost – Actual Material Cost
= (SQ × SP) – (AQ × AP)
= (9,000 kg. × ₹ 90) – (8,900 kg. × ₹ 92)

= ₹ 8,10,000 – ₹ 8,18,800
= ₹ 8,800 (Adverse)
(iv) Labour Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)
= ₹ 80 A9,000/10 H8MN B – 7,000 hrs.
= ₹ 80 (7,200 hrs. – 7,000 hrs.)

= ₹ 16,000 (Favorable)
(v) Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)
= 7,000 hrs. (₹ 80 – ₹ 84)
= ₹ 28,000 (Adverse)
(vi) Labour Cost Variance = Std. Labour Cost – Actual Labour Cost
= (SH × SR) – (AH × AR)
= (7,200 hrs. × ₹ 80) – (7,000 hrs. × ₹ 84)
= ₹ 5,76,000 – ₹ 5,88,000
= ₹ 12,000 (Adverse)
(vii) Variable Cost Variance = Std. Variable Cost – Actual Variable Cost
= (7,200 hrs. × ₹ 20) – ₹ 1,40,000
= ₹ 4,000 (Adverse)
(viii) Fixed Overhead Cost Variance= Absorbed Fixed Overhead – Actual Fixed Overhead
) . 8
= >!
9,000 kgs.- Rs. 2,60,000
= ₹ 2,25,000 – ₹ 2,60,000 = ₹ 35,000 (Adverse)
Question 21
Baby Moon Ltd. uses standard costing system in manufacturing one of its product ‘Baby Cap’. The
details are as follows:
Direct Material 1 Meter @ ₹ 60 per meter ₹ 60
Direct Labour 2 hour @ ₹ 20 per hour ₹ 40

13.28
Variable overhead 2 hour @ ₹ 10 per hour ₹ 20
Total ₹ 120
During the month of August, 10,000 units of ‘Baby Cap’ were manufactured. Details are
as follows:
Direct material consumed 11,400 meters @ ₹ 58 per meter
Direct labour Hours ? @ ? ₹ 4,48,800
Variable overhead incurred ₹ 2,24,400
Variable overhead efficiency variance is ₹ 4,000 A. Variable overheads are based on Direct Labour
Hours.
You are required to CALCULATE the following Variances:
(a) Material Variances- Material Cost Variance, Material Price Variance and Material Usage
Variance.
(b) Variable Overheads variances- Variable overhead Cost Variance, Variable overhead Efficiency
Variance and Variable overhead Expenditure Variance.
(c) Labour variances- Labour Cost Variance, Labour Rate Variance and Labour Efficiency
Variance.(RTP Nov ’21) (Same concept different figures MTP 10 Marks Aug’18, Old & New
SM)
Answer 21
(i) Material Variances

Budget Std. for actual Actual
Quantity Price Amount Quantity Price Amount Quantity Price Amount
(Meter) (₹) (₹) (Meter) (₹) (₹) (Meter) (₹) (₹)
1 60 60 10,000 60 6,00,000 11,400 58 6,61,200
Material Cost Variance = (SQ × SP – AQ × AP)
= 6,00,000 – 6,61,200 = ₹ 61,200 (A)

Material Price Variance = (SP – AP) AQ
= (60 - 58) 11,400 = ₹ 22,800 (F)

Material Usage Variance = (SQ – AQ) SP
= (10,000 – 11,400) 60 = ₹ 84,000 (A)
(ii) Variable Overheads Variances Variable
overhead cost Variance
= Standard variable overhead – Actual Variable Overhead
= (10,000 units × 2 hours × ₹ 10) – 2,24,400 = ₹ 24,400 (A)
Variable overhead Efficiency Variance
= (Standard Hours – Actual Hours) × Standard Rate per Hour
Let Actual Hours be ‘X’, then:

(20,000 – X) × 10 = 4,000 (A)
2,00,000 – 10X = - 4,000
X = 2,04,000 ÷ 10
Therefore, Actual Hours (X) = 20,400

13.29
Variable overhead Expenditure Variance

= Variable Overhead at Actual Hours - Actual Variable Overheads
= 20,400 × ₹ 10 – 2,24,400 = ₹ 20,400 (A)

(iii) Labour variances
Budget Std. for actual Actual
Hours Rate Amount Hours Rate Amount Hours Rate Amount
(₹) (₹) (₹) (₹) (₹) (₹)
2 20 40 20,000 20 4,00,000 20,400 22* 4,48,800
*Actual Rate = ₹ 4,48,800 ÷ 20,400 hours = ₹ 22
Labour Cost Variance = (SH × SR) – (AH × AR)
= 4,00,000 – 4,48,800 = ₹ 48,800 (A)
Labour Rate Variance = (SR – AR) × AH
= (20 – 22) × 20,400 = ₹ 40,800 (A)
Labour Efficiency Variance = (SH – AH) × SR
= (20,000 – 20,400) × 20 = ₹ 8,000 (A)
Question 22
The standard output of a Product 'D' is 50 units per hour in manufacturing department of a Company
employing 100 workers. In a 40 hours week, the department produced 1,920 units of product 'D'
despite 5% of the time paid was lost due to an abnormal reason. The hourly wage rates actually paid
were ₹ 12.40, ₹ 12.00 and ₹ 11.40 respectively to Group 'A' consisting 10 workers, Group 'B' consisting
30 workers and Group 'C' consisting 60 workers. The standard wage rate per labour is same for all the
workers. Labour Efficiency Variance is given ₹ 480 (F).
(i) Total Labour Cost Variance.
(ii) Total Labour Rate Variance.
(iii) Total Labour Gang Variance.
(iv) Total Labour Yield Variance, and
(v) Total Labour Idle Time Variance.
(RTP May ’22, PYP 10 Marks July 21)
Answer 22
Working Notes:
1. Calculation of Standard Man hours
When 100 workers work for 1 hour, the standard output is 50 units.
:
Standard man hours per unit = = 2 hours per unit
8 r
2. Calculation of standard man hours for actual output:
= 1,920units x 2 hours = 3,840 hours.
3. Calculation of actual cost

Type of No of Actual Rate Amount Idle Hours (5% of Actual hours
Workers Workers Hours Paid (₹) (₹) hours paid) Worked
Group ‘A’ 10 400 12.40 4,960 20 380
Group ‘B’ 30 1,200 12 14,400 60 1,140
Group ‘C’ 60 2,400 11.40 27,360 120 2,280
13.30
100 4,000 46,720 200 3,800

4. Calculation of Standard wage Rate:
Labour Efficiency Variance = 480F
(Standard hours for Actual production – Actual Hours) x SR = 480F
(3,840 – 3,800) x SR = 480
Standard Rate (SR) = ₹ 12 per hour
(i) Total Labour Cost Variance

= (Standard hours x Standard Rate) – (Actual Hours x Actual rate)
= (3,840 x 12) – 46,720 = 640A
(ii) Total Labour Rate Variance
= (Standard Rate – Actual Rate) x Actual Hours
Group ‘A’ = (12 - 12.40) 400 = 160A
Group ‘B’ = (12 - 12) 1,200 = 0
Group ‘C’ = (12 – 11.40) 2,400 = 1,440F
1,280F
(iii) Total Labour Gang Variance
= Total Actual Time Worked (hours) × {Average Standard Rate per hour of
Standard Gang -Average Standard Rate per hour of Actual Gang@}
@ on the basis of hours worked
= 3,800 × (12- 3,840 X 12 / 3,800)

=0
[Note: As the number of workers in standard and actual is the same, there is no
difference in mix ratio, so labour gang variance will be NIL]
(iv) Total Labour Yield Variance
= Average Standard Rate per hour of Standard Gang × {Total Standard Time
(hours) - Total Actual Time worked (hours)}
= 12 x (3,840 – 3,800)
= 480F
(v) Total Labour idle time variance

= Total Idle hours x standard rate per hour
= 200 hours x 12
= 2,400A
This practical problem tested the basic knowledge of examinees on the topic of standard
costing requiring computation of various labour variances. Most of the examinees had just
written the formula of different variances. They did not understand how to calculate
standard hours for actual output. Performance of the examinees was poor.
Question 23
Ahaan Limited operates a system of standard costing in respect of one of its products 'AH1' which is
manufactured within a single cost centre. Details of standard per unit are as follows:
Prakshal Shah | 8779794646  The standard material input is 20 kilograms at a standard price of ₹ 24 per kilogram.
13.31
 The standard wage rate is ₹ 72 per hour and 5 hours are allowed to produce one unit.
 Fixed production overhead is absorbed at the rate of 100% of wages cost.
During the month of April 2022, the following was incurred:
 Actual price paid for material purchased @ ₹ 22 per kilogram.
 Total direct wages cost was ₹ 43,92,000
Fixed production overhead cost incurred was ₹ 45,00,000 Analysis of variances was as follows:
Variances Favourable Adverse

Direct material price ₹ 4,80,000 -
Direct material usage ₹ 48,000
Direct labour rate - ₹ 69,120
Direct labour efficiency ₹ 33,120 -
Fixed production overhead expenditure ₹ 1,80,000
You are required to CALCULATE the following for the month of April, 2022
(i) Material cost variance
(ii) Budgeted output (in units)

(iii) Quantity of raw materials purchased (in kilograms)
(iv) Actual output (in units)
(v) Actual hours worked
(vi) Actual wage rate per labour hour
(vii) Labour cost variance
(viii) Production overhead cost variance (RTP Nov’22)
Answer 23
i. Direct Material Cost Variance = Direct Material Price Variance + Direct Material Usage Variance
= ₹ 4,80,000 F + ₹ 48,000 F = ₹ 5,28,000 F
ii. Budgeted Output (units)

Fixed Production Overhead Expenditure Variance
= Budgeted Fixed Overhead - Actual Fixed Overheads
= Budgeted Output x Standard Overhead Rate - Actual Fixed Overheads
₹ 1,80,000 A = Budgeted Output x ₹ 360 (5 hrs @₹ 72) - ₹ 45,00,000
₹ 8, , t₹ , ,
Budgeted Output= ₹
= 12,000 units
iii. Quantity of Materials purchased (in kilograms)

Material Price Variance = Actual Usage (Standard Price per kg - Actual price per kg)
₹ 4,80,000 F = Actual Usage (₹ 24 -₹ 22)
₹ , , t₹ , ,
Actual usage in kgs = = 2,40,000 kgs
Actual Output (units)
Actual Direct Wages ₹ 43,92,000

Direct labour rate variance ₹ 69,120 A
Direct labour efficiency variance ₹ 33,120 F
Standard labour cost for actual output ₹ 43,56,000
uvêa^[a w^xdZ[ \d_v yd[ ^\vZ^w dZvzZv
Actual Output= uvêa^[a g^{` [^v` z`[ Ze|v
13.32
₹ , ,8 , t₹ , ,
= = 12,100 units
₹ A+ } 8B
Alternatively, let X be the actual quantity of output
Then, Standard Quantity of input for actual output 'X'

20X = SQ
Material cost variance = (SQ x SP) - (AQ x AP)
₹ 5,28,000 = (20 X x ₹ 24) - (2,40,000 kgs x ₹ 22)
480X = ₹ 52,80,000 + ₹ 5,28,000
480X = ₹ 58,08,000
₹8 , ,
X= = 12,100 units
iv. Actual hours worked

Labour Efficiency Variance = Standard Labour Rate (Standard time for actual output - Actual time)
₹ 33,120 F = ₹ 72 (5 hours x 12100 units - Actual time)
460 hours = 60,500 hours - Actual time

Actual time = 60,500 - 460 = 60,040 hours
v. Actual wage rate per hour

Actual Wages paid = ₹ 43,92,000
Actual hours worked = 60,040 hours
₹ ,? ,
Actual Wage rate per hour = = = ₹ 73.15 per hour
, ]dZ[_
vi. Production Overhead Cost Variance

= Actual Output x Standard overhead rate - Actual Overheads Incurred
= 12,100 units x₹ 360 - ₹ 45,00,000
= ₹ 43,56,000 - ₹ 45,00,000
= ₹ 1,44,000 A
Question 24
The standard cost of a chemical mixture is as follows : 60% of Material A @ ₹ 50 per kg 40% Material B
@ ₹ 60 per kg .
A standard loss of 25% on output is expected in production. The cost records for a period has shown the
following usage.
540 kg of Material A @ ₹ 60 per kg 260 kg of Material
B @ ₹ 50 per kg
The quantity processed was 680 kilograms of good product. From the above given information
Calculate:
(i) Material Cost Variance (ii) Material Price Variance
(iii) Material Usage Variance (iv) Material Mix Variance
(v) Material Yield Variance
(PYP Nov’19,10 Marks) (Same concept different figures Old & New SM)
Answer 24
Basic Calculation
Material Standard for 640 kg. output Actual for 680 kg. output
13.33
Qty. Rate Amount Qty Rate Amount

Kg. (₹ ) (₹ ) Kg. (₹ ) (₹ )
A 480 50 24,000 540 60 32,400
B 320 60 19,200 260 50 13,000
Total 800 43,200 800 45,400
Less: Loss 160 - - 120 - -
640 43,200 680 45,400
Std. cost of actual output = ₹ 43,200 × 680/640= ₹ 45,900 Calculation of Variances
(i) Material Cost Variance = (Std. cost of actual output – Actual cost)
= (45,900– 45,400)
= ₹ 500 (F)
(ii) Material Price Variance = (SP – AP) × AQ
Material A = (50 – 60) × 540 = ₹ 5400 (A)
Material B = (60 – 50)) × 260 =
₹ 2600 (F) MPV =
₹ 2800 (A)
(iii) Material Usage Variance (MUV) = (Std. Quantity for actual output – Actual Quantity) × Std. Price
Material A = 6 ; 5409 50 = Rs.1,500(A)
Material B = 6 ; 5409 60 = Rs.4,800(F)
MUV = ₹ 3,300 (F)

(iv) Material Mix Variance = SP × (RAQ – AQ)
A = ₹ 50× (480Kg – 540 Kg) = ₹ 3,000 (A)

B = ₹ 60 × (320 Kg. – 260 Kg.) = ₹ 3,600 (F)
Total = ₹ 3,000 (A) + ₹3,600 (F) = ₹ 600 (F)
(v) Material Yield Variance = SP × (SQ – RAQ)
A = ₹ 50 × (510 Kg. – 480 Kg) = ₹ 1,500 (F)

B = ₹ 60 × (340 Kg. – 320 Kg.) = ₹ 1,200 (F)
Total = ₹ 1,500 (F) + ₹ 1,200 (F) = ₹ 2,700 (F)
This was a numerical question relating to the topic ‘Standard Costing’. The question
required calculation of material variances. Performance of the examinees was average.
Question 25
A gang of workers normally consists of 30 skilled workers, 15 semi-skilled workers and 10 unskilled
workers. They are paid at standard rate per hour as under:
Skilled ₹ 70
Semi-skilled ₹ 65
Unskilled ₹ 50
In a normal working week of 40 hours, the gang is expected to produce 2,000 units of output. During
the week ended 31st March, 2019, the gang consisted of 40 skilled, 10 semi-skilled and 5 unskilled
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workers. The actual wages paid were at the rate of ₹ 75,₹ 60 and ₹ 52 per hour respectively. Four hours
were lost due to machine breakdown and 1,600 units were produced.
Calculate the following variances showing clearly adverse (A) or favourable (F)
(i) Labour Cost Variance (ii) Labour Rate Variance
(iii) Labour Efficiency Variance (iv) Labour Mix Variance
(v) Labour Idle Time Variance (PYP May ‘19, 10 Marks)
Answer 25
(i) Labour Cost Variance = Standard Cost – Actual Cost
= ₹ 1,14,400 – ₹ 1,54,400 = 40,000 (A)
(1,600*75 + 400*60 + 200 *52 = ₹ 1,54,400)

Or
Types of workers Standard Cost – Actual Cost Amount (₹)
Skilled Workers (30 x 40 x 70/2,000 x 1,600)- (40 x 40 x75)67,200-1,20,000 52,800 (A)
Semi- Skilled (15x40x65/2,000x 1,600)-(10x 40x60)31,200-24,000 7,200 (F)
Un-Skilled Workers (10x 40x 50/2,000x 1,600)-(5 x 40 x 52)16,000-10,400 5,600 (F)
Total 1,14,400-1,54,400 40,000 (A)
(ii) Labour Rate Variance
Types of workers Actual Hours × (Standard Rate -Actual Rate) Amount (₹)
Skilled Workers 1,600 hours × (₹ 70.00– ₹75.00) 8,000 (A)

Semi- Skilled 400 hours × (₹ 65.00 – ₹ 60.00) 2,000 (F)
Un-Skilled Workers 200 hours × (₹ 50.00 – ₹ 52.00) 400 (A)
Total ₹ 8,000 (A) + ₹ 2,000 (F) + ₹ 400 (A) 6,400 (A)
(iii) Labour Efficiency Variance
Types of workers Standard Rate × (Standard Hours –Actual Hours) Amount(₹ )
Skilled Workers ₹ 70.00 × (960 hours – 1,440 hours) 33,600 (A)

Semi- Skilled ₹ 65.00 × (480 hours – 360 hours) 7,800 (F)
Un-Skilled Workers ₹ 50.00 × (320 hours – 180 hours) 7,000 (F)
Total 33,600 (A) + 7,800 (F) + 7,000 (F) 18,800 (A)
Alternatively, labour efficiency can be calculated on basis of labour hours paid
Types of workers Standard Rate × (Standard Hours –Actual Hours) Amount(₹ )
Skilled Workers 70.00 × (960 hours – 1600 hours) 44,800 (A)

Semi- Skilled 65.00 × (480 hours – 400 hours) 5,200 (F)
Un-Skilled Workers 50.00 × (320 hours – 200 hours) 6,000 (F)
Total 33,600 (A) + 7,800 (F) + 7,000 (F) 33,600 (A)
(iv) Labour Mix Variance
= Total Actual Time Worked (hours) × {Average Standard Rate per hour of Standard Gang
Less Average Standard Rate per hour of Actual Gang}
@on the basis of hours worked
) . , , , . ) .+ 7 . ) . 87 . ) .8
= 1,980 hours 6,+ .
; ,? .
9
Or
Labour Mix Variance

13.35
Types of workers Std. Rate ? (Revised Actual Hours Worked

Actual Hours Worked) Amount (₹ )
Skilled Workers ₹ 70 × (1,080 hrs. – 1440 hrs.) 25,200 (A)
Semi- Skilled ₹ 65 × (540 hrs. – 360 hrs.) 11,700 (F)
Un Skilled Workers ₹ 50 × (360 hrs. – 180 hrs.) 9,000 (F)
Total ₹ 25,200 (A) + ₹ 11,700 (F) + ₹ 9,000 (F) 4,500 (A)
(v) Labour Idle Time Variance

Types of workers Standard Rate × (Hours Paid – Hours Worked) Amount (₹ )
Skilled Workers ₹70.00×(1,600hours–1,440hours) 11,200 (A)

Semi- Skilled ₹65.00× (400 hours –360 hours) 2,600 (A)
Un-Skilled Workers ₹50.00× (200hours –180 hours) 1,000 (A)
Total 11,200 (A) + 2,600 (A) + 1,000 (A) 14,800 (A)
Verification:
Labour Cost Variance
= Labour Rate Variance + Labour Efficiency Variance + Labour Idle Time Variance
= 6,400 (A) + 18,800 (A) + 14,800 (A) = ₹ 40,000 (A)
Labour Cost Variance
= Labour Rate Variance + Labour Efficiency Variance
= 6400(A) + 33600(A)= ₹ 40000(A)
In this case, labour idle time variance is a part of labour efficiency variance.
Working Notes:
Category Standard Cost Actual (1600 units) Revised Actual Hours
Hrs. Rate Amt. (₹ ) Hrs. Rate Amt. (₹ )

Skilled 960 70.00 67,200 1,440 1,08,000 1,080
(30 W x 40 x 1,600/2,000)
(40Wx36) 75.00 (1,980x6/11)
Semiskilled 480 65.00 31,200 360 21,600 540
(15Wx40 x
1,600/2,000) (10Wx36) 60.00 (1,980x3/11)
Unskilled 320(10Wx40 50.00 16,000 180 (5Wx36) 52.00 9,360 360
x1,600/2,000) (1,980x2/11)
Total 1,760 65 1,14,400 1,980 1,38,960 1,980
In this practical question related to ‘Standard Costing’ examinees were required to calculate
Labour Variances. Most of the examinees made a mistake in the calculation of Standard hours
for actual output. Below average performance was observed in this question.
Question 26
ABC Ltd. has furnished the following information regarding the overheads for the month of June 2020:
(i) Fixed Overhead Cost Variance ₹ 2,800 (Adverse)

(ii) Fixed Overhead Volume Variance ₹ 2,000 (Adverse)
(iii) Budgeted Hours for June, 2020 2,400 hours
(iv) Budgeted Overheads for June,2020 ₹ 12,000
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(v) Actual rate of recovery of overheads ₹ 8 Per Hour

From the above given information Calculate:
(1) Fixed Overhead Expenditure Variance
(2) Actual Overheads Incurred
(3) Actual Hours for Actual Production
(4) Fixed Overhead Capacity Variance
(5) Standard hours for Actual Production
(6) Fixed Overhead Efficiency Variance (PYP 10 Marks Nov 20)
Answer 26
(1) Fixed Overhead Expenditure Variance
= Budgeted Fixed Overheads – Actual Fixed Overheads
= ₹ 12,000 – ₹ 12,800 (as calculated below) = ₹ 800 (A)
(2) Fixed Overhead Cost Variance= Absorbed Fixed Overheads – Actual Fixed Overheads
2,800 (A) = ₹ 10,000 – Actual Overheads Actual
Overheads = ₹ 12,800
(3) Actual Hours for Actual Production = ₹ 12,800/ ₹8 = 1,600 hrs.

(4) Fixed Overhead capacity Variance
= Budgeted Fixed Overheads for Actual Hours– Budgeted Fixed Overheads
= ₹ 5 x 1600 hrs. – ₹ 12,000 = ₹ 4,000 (A)
(5) Standard Hours for Actual Production

= Absorbed Overheads/ Std. Rate
= ₹ 10,000/ ₹ 5 = 2,000 hrs.
(6) Fixed Overhead Efficiency Variance

= Absorbed Fixed Overheads – Budgeted Fixed Overheads for Actual Hours
= ₹ 10,000 – ₹ 5 x 1,600 hrs. = ₹ 2,000 (F)
Working Note:
(i) Fixed Overhead Volume Variance = Absorbed Fixed Overheads – Budgeted Fixed
Overheads
2,000 (A) = Absorbed Fixed Overheads – ₹12,000
Absorbed Fixed Overheads = ₹ 10,000
(ii) Standard Rate/ Hour = ₹ 5 (₹ 12,000/2,400 hrs.)
Question 27
Premier Industries has a small factory where 52 workers are employed on an average for 25 days a
month and they work 8 hours per day. The normal down time is 15%. The firm has introduced standard
costing for cost control. Its monthly budget for November, 2020 shows that the budgeted variable and
fixed overhead are ₹ 1,06,080 and ₹ 2,21,000 respectively.
The firm reports the following details of actual performance for November, 2020, after the end of the
month:

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Actual hours worked 8,100 hrs.

Actual production expressed in standard hours 8,800 hrs.
Actual Variable Overheads ₹ 1,02,000
Actual Fixed Overheads ₹ 2,00,000

(i) Variable Overhead Variances:
(a) Variable overhead expenditure variance.
(b) Variable overhead efficiency variance.
(ii) Fixed Overhead Variances:
(a) Fixed overhead budget variance.
(b) Fixed overhead capacity variance.
(c) Fixed overhead efficiency variance.
(iii) Control Ratios:
(a) Capacity ratio.
(b) Efficiency ratio.
(c) Activity ratio. (PYP 10 Marks Jan ‘21)
Answer 27
Workings:
Calculation of budgeted hours
Budgeted hours = (52 x 25 x 8) x 85% = 8,840 hours
(i) Variable overheads variance

(a) Variable overhead expenditure variance
= Std. overhead for Actual hours – Actual variable Overhead
) . , ,
=6 ,
8,1009- Rs. 1,02,000
= 4800 A
(b) Variable overhead efficiency variance

Std. rate per hour × (Std. hours for actual production – Actual hours)
) . , ,
= ,
(8,800 hours – 8,100 hours) = 8400F
(ii) Fixed overhead variances

(a) Fixed overhead budget variance
= Budgeted overhead – Actual overhead
= ₹ 2,21,000 – ₹ 2,00,000
= 21,000 F
(b) Fixed overhead capacity variance
= Std rate (Actual hours – budgeted hours)

) . , ,
= ,
A8,100 ; 8,840B = 18,500 A
(c) Fixed overhead efficiency variance

13.38
= Std rate x (Std hours for actual production – Actual hours)

) . , ,
= ,
A8,800 ; 8,100B
= 17,500 F
(iii) Control Ratios

(a) Capacity Ratio
Gc '~ :
= !" " :
100
,
= 100 = 91.63%
,
(b) Efficiency Ratio

F ' ' :
= 100
Gc '~ :
,
= ,
100 = 108.64%
(c) Activity Ratio

F ' ' :
= ! " :
100
,
= ,
100 = 99.55%
Question 28
Beta Ltd. is manufacturing Product N. This is manufactured by mixing two materials namely Material
P and Material Q. The Standard Cost of Mixture is as under:
Material P 150 ltrs. @ ₹ 40 per ltr.
Material Q 100 ltrs. @ ₹ 60 per ltr.

Standard loss @ 20 of total input is expected during production. The cost records for the period exhibit
following consumption: Material P 140 ltrs. @ ₹ 42 per ltr, Material Q 110 ltrs. @ ₹ 56 per ltr, Quantity
produced was 195 ltrs.
Calculate:
(i) Material Cost Variance
(ii) Material Usage Variance.
(iii) Material Price Variance (PYP 5 Marks May ‘18)
Answer 28
Workings:
Take the good output of 195 ltr. The standard quantity of material required for 195 ltr. of output is
?8
100 = 243.75 ltr.
Statement showing computation of Standard Cost/Actual Cost/ Revised Actual Quantity

Material Standard Cost Actual Cost
Quantity Rate Amount Quantity Rate Amount
[SQ] [SP] [SQ × SP] [AQ] [AP] [AQ × AP]

(Kg.) (₹) (₹) (Kg.) (₹) (₹)
A (60% of 146.25 40 5,850.00 140 42 5,880
243.75 ltr.)
B (40% of. 97.50 60 5,850.00 110 56 6,160
243.75 Kg.)
243.75 11,700.00 200 12,040
13.39
= Standard Quantity = Expected Consumption for Actual Output
AQ = Actual Quantity of Material Consumed

SP = Standard Price Per Unit
AP = Actual Price Per Unit
Computation of Variances:
(i) Material Cost Variance = SQ × SP – AQ × AP
A = ₹ 146.25 ltr. × ₹ 40– 140 ltr. × ₹ 42 = ₹ 30.00 (A) B =
₹ 97.50 ltr. × ₹ 60 – 110 ltr. × ₹ 56 = ₹ 310.00 (A)
Total = ₹ 30.00 (A) + ₹ 310.00 (A)
= ₹ 340.00 (A)
(ii) Material Usage Variance = SP × (SQ – AQ)
A = ₹ 40 × (146.25 ltr. –140 ltr.) = ₹ 250.00 (F) B
= ₹ 60 × (97.50 ltr. – 110 ltr.) = ₹ 750.00 (A)
Total = ₹ 250.00 (F) + ₹ 750.00 (A)
= ₹ 500.00 (A)
(iii) Material Price Variance = AQ × (SP – AP)
A = 140 Kg. × (₹ 40 – ₹ 42) = ₹ 280 (A) B
= 110 Kg. × (₹ 60 – ₹ 56) = ₹ 440 (F)
Total = ₹ 280 (A) + ₹ 440 (F)
= ₹ 160 (F)
Question 29
A manufacturing concern has provided following information related to fixed overheads:
Standard Actual
Output in a month 5000 units 4800 units
Working days in a month 25 days 23 days
Fixed overheads ₹ 5,00,000 ₹ 4,90,000
Compute:
i. Fixed overhead variance
ii. Fixed overhead expenditure variance
iii. Fixed overhead volume variance
iv. Fixed overhead efficiency variance (PYP Nov ‘18, 5 Marks)
Answer 29
Calculation of Variances:
(i) Fixed Overhead Variance: Standard fixed overhead – Actual fixed overhead
= ₹ [ (5,00,000÷5000) ×4800] – ₹ 4,90,000 = ₹ 10,000 (A)
(ii) Fixed Overhead Expenditure Variances:
Budgeted fixed overhead – Actual fixed overhead
= ₹ 5,00, 000 – ₹ 4,90, 000 = ₹ 10,000 (F)
(iii) Fixed Overhead Volume Variance: Standard fixed overhead – Budgeted fixed overhead
Prakshal Shah | 8779794646 = ₹ 4,80, 000 – ₹ 5,00, 000 = ₹ 20,000 (A)
13.40
(iv) Fixed Overhead efficiency Variance: Standard fixed overhead – Budgeted fixed
overhead for Actual days
= ₹ 4,80, 000 – [(₹ 5,00, 000÷25) ×23] = ₹ 20,000 (F)
In this numerical problem of standard costing to calculate Fixed Overhead variances,

average performance was observed. Some examinees failed to understand the concept
of Standard Cost for actual output.
Question 30
Discuss briefly some of the criticism which may be levelled against the Standard Costing System (PYP
5 Marks May’22)
Answer 30
Criticism of Standard Costing
(i) Variation in price: One of the chief problem faced in the operation of the standard costing system is
the precise estimation of likely prices or rate to be paid. The variability of prices is so great that even
actual prices are not necessarily adequately representative of cost. But the use of sophisticated
forecasting techniques should be able to cover the price fluctuation to some extent. Besides this, the
system provides for isolating uncontrollable variances arising from variations to be dealt with
separately.
(ii) Varying levels of output: If the standard level of output set for pre-determination of standard costs is
not achieved, the standard costs are said to be not realised. However, the statement that the capacity
utilisation cannot be precisely estimated for absorption of overheads may be true only in some
industries of jobbing type. In vast majority of industries, use of forecasting techniques, market
research, etc., help to estimate the output with reasonable accuracy and thus the variation is unlikely
to be very large. Prime cost will not be affected by such variation and, moreover, variance analysis
helps to measure the effects of idle time.
(iii) Changing standard of technology: In case of industries that have frequent technological changes
affecting the conditions of production, standard costing may not be suitable. This criticism does not
affect the system of standard costing. Cost reduction and cost control is a cardinal feature of standard
costing because standards once set do not always remain stable. They have to be revised.
(iv) Attitude of technical people: Technical people are accustomed to think of standards as physical
standards and, therefore, they will be misled by standard costs. Since technical people can be educated
to adopt themselves to the system through orientation courses, it is not an insurmountable difficulty.
(v) Mix of products: Standard costing presupposes a pre-determined combination of products both in
variety and quantity. The mixture of materials used to manufacture the products may vary in the long
run but since standard costs are set normally for a short period, such changes can be taken care of by
revision of standards.
(vi) Level of Performance: Standards may be either too strict or too liberal because they may be based on
(a) theoretical maximum efficiency, (b) attainable good performance or (c) average past performance.
To overcome this difficulty, the management should give thought to the selection of a suitable type of
standard. The type of standard most effective in the control of costs is one which represents an
attainable level of good performance.
(vii) Standard costs cannot possibly reflect the true value in exchange: If previous historical costs are
amended roughly to arrive at estimates for ad hoc purposes, they are not standard costs in the strict
sense of the term and hence they cannot also reflect true value in exchange. In arriving at standard
costs, however, the economic and technical factors, internal and external, are brought together and
analysed to arrive at quantities and prices which reflect optimum operations. The resulting costs,
therefore, become realistic measures of the sacrifices involved.
Prakshal Shah(viii) Fixation of standards may be costly: It may require high order of skill and competency. Small concerns,
| 8779794646
13.41
therefore, feel difficulty in the operation of such system.
Question 31
Y Lid manufactures "Product M" which requires three types of raw materials - "A", "B" & "C".
Following information related to 1st quarter of the F.Y. 2022-23 has been collected from its books of
accounts. The standard material input required for 1,000 kg of finished product 'M' are as under:
Material Quantity Std. Rate per Kg.

(Kg.) (₹)
A 500 25
B 350 45
C 250 55
1100
Standard Loss 100
Standard Output 1000
During the period, the company produced 20,000 kg of product "M" for which the actual quantity of
materials consumed and purchase prices are as under:
Material Quantity (Kg.) Purchase price per Kg. (₹)
A 11,000 23
B 7,500 48
C 4,500 60

(i) Material Cost Variance
(ii) Material Price Variance for each raw material and Product 'M'
(iii) Material Usage Variance for each raw material and Product 'M'
(iv) Material Yield Variance
Note: Indicate the nature of variance i.e. Favourable or Adverse. (PYP 10 Marks Nov 22)
Answer 31
Basic Calculations:
Standard for 20,000 kg. Actual for 20,000 kg.
Qty. Rate Amount Qty. Rate Amount
Kg. (₹) (₹) Kg. (₹) (₹)
A 10,000 25 2,50,000 11,000 23 2,53,000
B 7,000 45 3,15,000 7,500 48 3,60,000
C 5,000 55 2,75,000 4,500 60 2,70,000
Total 22,000 8,40,000 23,000 8,83,000
Calculation of Variances:
(i) Material Cost Variance = Std. Cost for actual output–Actual cost
MCV=8,40,000– 8,83,000 = ₹ 43,000(A)
(ii) Material Price Variance = (SP–AP) × AQ
A = (25 - 23) x 11,000 = 22,000 (F)
B = (45 – 48) x 7,500 = 22,500 (A)
C = (55 – 60) x 4,500 = 22,500 (A)
23000 (A)
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(iii) Material Usages Variance = (SQ–AQ) × SP A =

(10,000 – 11,000) x 25 = 25,000 (A) B = (7,000 –
7,500) x 45 = 22,500 (A) C = (5,000 – 4,500) x 55 =
27,500 (F)
20,000 (A)
(iv) Material Yield Variance = (SQ–RSQ*) × SP

A = (10,000 – 10,454.54) x 25 = 11,363.5(A)
B = (7,000 – 7,318.18) x 45 = 14,318.1(A)
C = (5,000 – 5,227.27) x 55 = 12,500(A)
38,181.6(A)
*Revised Standard Quantity (RSQ)

,
A= ,
X 23,000 = 10,454.54
+,
B= X 23,000 = 7,318.18
,
8,
C= ,
X 23,000 = 5,227.17
Material Yield Variance can also be Calculated as below
Material yield variance = Standard cost per unit (Actual yield – Standard yield)
) . , ,
Standard Cost per unit = ,
= Rs. 42
,
New Standard Yield = ,
X 23,000 = 20,909
Material yield variance = ₹ 42 (20,000 – 20,909)
= ₹ 38,178 (A)
Question 32
NC Limited uses a standard costing system for the manufacturing of its product ‘X’. The following
information is available for the last week of the month:
• 25,000 kg of raw material were actually purchased for ` 3,12,500. The expected output is 8 units of
product 'X' from each one kg of raw material. There is no opening and closing inventories. The
material price variance and material cost variance, as per cost records, are ` 12,500 (F) and ` 1800
(A), respectively.
• The standard time to produce a batch of 10 units of product 'X' is 15 minutes. The standard wage
rate per labour hour is 50. The company employs 125 workers in two categories, skilled and semi-
skilled, in a ratio of 60:40. The hourly wages actually paid were ` 50 per hour for skilled workers and
` 40 per hour for semiskilled workers. The weekly working hours are 40 hours per worker. Standard
wage rate is the same for skilled and semiskilled workers.
• The monthly fixed overheads are budgeted at ` 76,480 Overheads are evenly distributed throughout
the month and assume 4 weeks in a month. In the last week of the month, the actual fixed overhead
expenses were ` 19,500.
Required:
(i) Calculate the standard price per kg and the standard quantity of raw material.
(ii) Calculate the material usage variance, labour cost variance, and labour efficiency variance.
13.43
(iii) Calculate the fixed overhead cost variance, the fixed overhead expenditure variance and the
fixed overhead volume variance.
Note: Indicate the nature of variance i.e Favourable or Adverse. (PYP 10 Marks, May ‘23)
Answer 32
i) Calculation of Standard price per kg and the standard quantity of raw material:
Standard Price
Material Price Variance = Standard Cost of Actual Quantity – Actual Cost
12,500 (F) = (SP × AQ) – ` 3,12,500

12,500 (F) = (SP × 25,000) – ` 3,12,500
SP = ` 13
Standard Quantity
Material Cost Variance = Standard Cost – Actual Cost
1,800 (A) = SQ × `13 – ` 3,12,500
SQ = 23,900 kg.
ii) Calculation of Material Usage Variance, Labour Cost Variance and Labour Efficiency Variance
(a) Material Usage Variance = Standard Cost of Standard Quantity for
Actual Output – Standard Cost of
Actual
Quantity
= SQ × SP – AQ × SP
Or
= SP × (SQ – AQ)
= ` 13 × (23,900 kg. – 25,000 kg.)
= ` 14,300 (A)
(b) Labour Cost Variance = Standard Cost – Actual Cost
= (SH × SR) – (AH × AR)
= ` 2,39,000 – ` 2,30,000
= ` 9,000 (F)
(c) Labour Efficiency Variance= Standard Cost of Standard Time for
Actual Production – Standard Cost of
Actual Time
= (SH × SR) – (AH × SR)
Or
= (SH – AH) × SR
= ` 50 × [4,780 hrs. – 5,000 hrs.]
= ` 11,000 (A)
iii) Calculation of Fixed Overhead Cost Variance, Fixed Overhead Expenditure Variance and Fixed
Overhead Volume Variance:
(a) Fixed overhead cost variance = Standard Fixed Overheads – Actual
Fixed Overheads
= 18,279 – 19,500
13.44
= ` 1,221(A)
(b) Fixed Overhead Expenditure = Budgeted Fixed Overheads – Actual

Fixed Overheads
Variance = ` 19,120 – ` 19,500

= ` 380 (A)
(c) Fixed overhead volume variance = (Budgeted output – Actual Output) X

Budgeted rate per unit
= (2,00,000 – 1,91,200) 0.0956
= ` 8,800 x 0.0956
= ` 841 (A)
Alternative presentation to part (iii) (a) and (b)
i) Fixed Overhead Cost Variance:
= Overhead absorbed for actual production – Actual overhead incurred
?,
= , ,
x 1,91,200 – 19,500 = ` 1,221(A)
(ii) Fixed Overhead Volume Variance:
= Absorbed overhead – Budgeted overhead
?,
= x 1,91,200 – 19,120 = ` 841(A)
, ,
Working Notes:
1. Standard time to produce 10 units of product X is 15 minutes. Therefore, we can
manufacture 40 units in an hour.
Hours available in a week
125 Workers x 40 Hours = 5,000 hours
Therefore, budgeted output = 5,000 x 40 units per hour = 2,00,000 units
Alternatively
8
Budgeted time per unit = = 1.5 minutes
8, =: • "
So, Budgeted output = .8 • "
= 2,00,00 units
Actual output = 23,900 x 8 units = 1,91,200 units

. 8=
Standard hour for actual output = 1,91,200 = 4,780 Hrs
2.
Labour
Budget Revised standard Actual
Hours Rate ` Hours Rate ` Hours Rate `
5,000 50 2,50,000 4,780 50 2,39,000 Skilled 3000 50 1,50,000
Semi-
Skilled 2000 40 80,000
Prakshal Shah | 8779794646 5000 2,30,000
13.45
3.
Budget Actual
Units 2,00,000 1,91,200
Fixed Overheads 19,120 19,500
4. Standard Fixed overheads:

?,
×1,91,200 = `18,279
, ,
Budgeted rate per unit:

?,
, ,
= 0.0956`

14.1
Chapter 14
Marginal Costing
Question 1
NG Ltd. has an annual fixed cost of ₹ 98,50,000. In the year 2022-23, sales amounted to ₹7,80,60,000
as compared to ₹5,93,10,000 in the preceding year 2021-22. Profit in the year 2022-23 is ₹37,50,000
more than that in 2021-22.
Required:
(i) CALCULATE Break-even sales of the company.
(ii) DETERMINE profit/ loss on a forecasted sales volume of ₹8,20,00,000.
(iii) If there is a reduction in selling price by 10% in the financial year 2022-23 and company desires
to earn the same amount of profit as in 2021-22, COMPUTE the required sales amount? (MTP
5 Marks April ‘23, March ’19 & Sep ‘23)
Answer 1
(i) Break-even Sales =
. , ,
P/v Ratio = X 100 or, X 100
. , , , . , ,! ,
. , ,
Or, .!, , ,
X 100 or,20%
. , ,
Break-even Sales = " %
= Rs. 4,92,50,000
(ii) Profit/ loss = Contribution – Fixed Cost

= ₹8,20,00,000 × 20% - ₹98,50,000
= ₹1,64,00,000 – ₹98,50,000 = ₹65,50,000
(iii) To earn same amount of profit in 2022-23 as it was in 2021-22, the company has to earn the
same amount of contribution as it had earned in 2021-22.
Sales – Variable cost = Contribution equal to 2021-22 contribution
Contribution in 2021-22 = Sales in 2021-22 × P/V Ratio in 2021-22

= ₹5,93,10,000 × 20% = ₹1,18,62,000
Let the number of units to be sold in 2022-23 = X
Sales in 2022-23 – Variable cost in 2022-23 = Desired
Contribution 90 X – 80 X = ₹1,18,62,000
Or, 10 X = 1,18,62,000
Or, X = 11,86,200 units
Therefore, Sales amount required to earn a profit equal to 2021-22 profit
= ₹ 90 × 11,86,200 units = ₹ 10,67,58,000
Question 2
Yamuna Ltd. manufactures a product, currently utilizing 80% capacity, with a turnover of Rs.8,00,000 at
Rs.25 per unit. T he cost data are as under:
Material cost Rs.7.50 per unit, Labour cost Rs.6.25 per unit
Semi-variable cost (Including variable cost of Rs.3.75) per unit Rs.1,80,000.
Fixed cost Rs. 90,000 upto 80% level of output, beyond this an additional Rs. 20,000 will be incurred.
Calculate :
Chapter 14 Marginal Costing
14.2
(i) Activity level at Break-Even-Point

(ii) Number of units to be sold to earn a net income of 8% of sales
(iii) Activity level needed to earn a profit of Rs. 95,000. (MTP April ‘19, 5 Marks)
Answer 2
Working notes:
1. (i) Number of units sold at 80% capacity
. ", $
(ii) Number of units sold at 100% capacity x 100 = 40,000 units
2. Component of fixed cost included in semi -variable cost of 32,000 units.

Fixed cost = {Total semi-variable cost – Total variable cost }
= Rs.1,80,000 – 32,000 units × Rs.3.75
= Rs.1,80,000 – Rs.1,20,000
= Rs.60,000
3. (i) Total fixed cost at 80% capacity
= Fixed cost + Component of fixed cost included in semi —variable
cost (Refer to working note 2)
= Rs.90,000 + Rs.60,000 = Rs.1,50,000
(ii) Total fixed cost beyond 80% capacity
= Total fixed cost at 80% capacity + Additional fixed cost to be incurred
= Rs.1,50,000 + Rs.20,000 = Rs.1,70,000
4. Variable cost and contribution per unit
Variable cost per unit = Material cost + Labour cost + Variable cost component
in semi variable cost = Rs.7.50 + Rs.6.25 + Rs.3.75 = Rs.17.50
Contribution per unit = Selling price per unit – Variable cost per unit
= Rs.25 – Rs.17.50 = Rs.7.50
5. Profit at 80% capacity level
= Sales revenue – Variable cost – Fixed cost
= Rs.8,00,000 – Rs.5,60,000 (32,000 units × Rs.17.50) – Rs.1,50,000
= Rs.90,000
(i) Activity level at Break–Even Point
% .!, ,
Break-even point (units) = &$ ' $
= . .
= 20,000 units
(Refer to working notes 3 & 4)

( ) *+ ' ,$ -
Activity level at BEP = 0100 (Refer to
. . $ ! %% ' % / +
working note 1(ii))

= 20,000 units / 40,000 units × 100 = 50%
(ii) Number of units to be sold to earn a net income of 8% of sales

Let S be the number of units sold to earn a net income of 8% of sales.
Mathematically it means that : (Sales revenue of S units)
= Variable cost of S units + Fixed cost + Net income
Or, Rs.25S = Rs.17.5S + Rs.1,50,000 + 8/100 × (Rs.25S)
Or, Rs.25S = Rs.17.5S + Rs.1,50,000 + Rs.2S Or, S = (Rs.1,50,000/Rs.5.5) units
Or, S = 27,273 units.
(iii) Activity level needed to earn a profit of Rs. 95,000
The profit at 80% capacity level, is Rs. 90,000 which is less than the desired profit of Rs. 95,000,
14.3
therefore the needed activity level would be more than 80%. Thus the fixed cost to be taken
to determine the activity level needed should be Rs.1,70,000 (Refer to Working Note 3 (ii))
Units to be sold to earn a profit of Rs.95,000
= Fixed cost + Desired profit / Contribution per unit
= Rs. 1,70, 000 + Rs. 95, 000 / Rs. 7.5 = 35,333.33 units
Activity level needed to earn a profit of Rs.95,000
= 35,333.33 units / 40,000 units × 100 = 88.33%
Question 3
SK Ltd. engaged in the manufacture of tyres. Analysis of income statement indicated a profit of ₹150 lakhs
ona sales volumeof 50,000 units. The fixed cost is ₹ 850 lakhswhich appearsto be high. Existing sellingprice is
₹ 3,400 per unit. The company is considering to revise the profit target to ₹ 350 lakhs. You are required to
COMPUTE -
(i) Break-even point at existing levels in units and in rupees.
(ii) The number of units required to be sold to earn the target profit.
(iii) Profit with 15% increase in selling price and drop in sales volume by 10%.
(iv) Volume to be achieved to earn target profit at the revised selling price as calculated in (ii) above, if a
reduction of 8% in the variable costs and ₹ 85 lakhs in the fixed cost is envisaged. (MTP March ‘18, 10
Marks) (Same concept different figures RTP Nov’20)
Answer 3
Sales Volume 50,000 Units Computation of existing contribution
Particulars Per unit (₹ ) Total (₹in lakhs)
Sales 3,400 1,700
Fixed Cost 1,700 850
Profit 300 150
Contribution 2,000 1,000
Variable Cost 1,400 700
% . , , ,
(i) Break even sales in units = &$ ' $
= .",
42,500 units
Break even sales in rupees = 42,500 units x ₹ 3,400 = ₹ 1,445 lakhs

OR
",
P/V Ratio = ,1
0100 =58.82%
, , ,
B.E.P (in rupees) = = . "%
=Rs. 1,445 lakhs (approx.)
(ii) Number of units sold to achieve a target profit of ₹ 350 lakhs:
Desired Contribution = Fixed Cost + Target Profit

= 850 lakhs + 350 lakhs
= 1,200 lakhs
2 &$ !", , ,
Number of units to be sold = &$ ' $
= ",
=60,000units
(iii) Profit if selling price is increased by 15% and sales volume drops by 10%
Existing Selling Price per unit = ₹ 3,400

Revised selling price per unit = ₹ 3,400 × 115% = ₹ 3,910
Existing Sales Volume = 50,000 units
Revised sales volume = 50,000 units – 10% of 50,000 = 45,000 units.
14.4
Statement of profit at sales volume of 45,000 units @ ₹ 3,910 per unit

Particulars Per unit (₹ ) Total (₹ in lakhs)
Sales 3,910.00 1,759.50
Less: Variable Costs (1,400.00) (630.00)
Contribution 2,510.00 1,129.50
Less: Fixed Cost (850.00)
Profit 279.50
(iv) Volume to be achieved to earn target profit of ₹ 350 lakhs with revised selling price and
reduction of 8% in variable costs and ₹ 85 lakhs in fixed cost.
Revised selling price per unit = ₹ 3,910
Variable costs per unit existing = ₹ 1,400 Revised Variable Costs
Reduction of 8% in variable costs = ₹ 1,400 – 8% of 1,400
= ₹ 1,400 – ₹ 112 = ₹ 1,288
Total Fixed Cost (existing) = ₹ 850 lakhs
Reduction in fixed cost = ₹ 85 lakhs
Revised fixed cost = ₹ 850 lakhs – ₹ 85 lakhs = ₹ 765 lakhs
Revised Contribution (unit) = Revised selling price per unit – Revised
Variable Costs per units
Revised Contribution per unit = ₹ 3,910 – ₹ 1,288 = ₹ 2,622
Desired Contribution = Revised Fixed Cost + Target Profit
= ₹ 765 lakhs + ₹ 350 lakhs= ₹ 1,115 lakhs
No. of units to be sold = Desired Contribution = Rs. 1,115lakh /Rs. 2,622 =42,525 units
Question 4
Fixed Cost Rs. 1,20,000
Variable costs Rs. 3 per unit
Selling price Rs. 7 per unit
Output Rs. 50,000 unit42,525 units
CALCULATE the profit for each of the following situation with the above data:
(i) with the data above
(ii) with a 10% increase in output & sales.
(iii) with a 10% increase in fixed costs.
(iv) with a 10% increase in variable costs.
(v) with a 10% increase in selling price.
(vi) taking all the above situations. (MTP Aug. ‘18, 10 Marks)
Answer 4
(i) Rs.
Sales 50,000 units at Rs. 7 3,50,000
Variable cost 50,000 × 3 1,50,000
Contribution 50,000 × 4 2,00,000
Fixed costs 1,20,000
Profit 80,000
3 1
P/V ratio = 0 100 = 0 100 = 0 100 =57.14%
!," ,
BEP (units) = &$ ' $
= 1
=30,000 Units

14.5
BEP (Value) = 30,000 Units × 7 = Rs. 2,10,000

Profit Rs. 80,000 (as calculated above)
(ii) with a 10% increase in output & sales
i.e., 50,000+ 5,000 = 55,000 units
Contribution 55,000 × Rs. 4 per unit Rs. 2,20,000
Fixed costs Rs. 1,20,000
Profit Rs. 1,00,000
(iii) with a 10% increase in Fixed Cost
Contribution (50,000 ×Rs. 4 per unit) Rs. 2,00,000
Fixed cost (1,20,000+ 12,000 ) Rs. 1,32,000
Profit Rs. 68,000
(iv) with a 10% increase in variable costs
Selling price per unit 7.00
Less: variable cost (3+0.30) 3.30
Contribution per unit 3.70
Total contribution 50,000 × 3.70 1,85,000
Profit 65,000
(v) with a 10% increase in selling price
Selling price per unit (7.00+0.70) 7.70
Variable cost per unit 3.00
Contribution per unit 4.70
Total contribution 50,000 × Rs. 4.70 2,35,000
Profit 1,15,000
(vi) Effect of all the four above:-
Sales 55,000 × Rs. 7.70 per unit Rs. 4,23,500
Variable cost 55,000 × 3.30 Rs. 1,81,500
Contribution 55,000 × 4.40 Rs. 2,42,000
Fixed cost 1,20,000+ 12,000 Rs. 1,32,000
Profit Rs. 1,10,000
Note: It is assumed that the increase d output of 55,000 units has been sold.
Question 5
C.T. Ltd. manufactures and sells a single product X whose selling price is Rs. 100 per unit and the
variable cost is Rs. 60 per unit.
(i) If the Fixed Costs for this year are Rs. 24,00,000 and the annual sales are at 60% margin of safety, CALCULATE
the rate of net return on sales, assuming an income tax level of 40%.
(ii)For the next year, it is proposed to add another product line Y whose selling price would be Rs. 150
per unit and the variable cost Rs. 100 per unit. The total fixed costs are estimated at Rs. 28,00,000.
The sales mix of X : Y would be 5 : 3. COMPUTE the break- even sales in units for both the products.
(MTP Oct.‘19, 5 Marks) (Same concept different figures Old & New SM)
Answer 5
(i) Contribution per unit = Selling price – Variable cost
= Rs.100 – Rs.60
= Rs.40

14.6
Break-even Point =
."1, ,
.1
60,000 units
4% $ ( ) *+
Percentage Margin of Safety = 4% $
4% $ , $
Or, 60% = 4% $
∴ Actual Sales = 1,50,000 units

(Rs.)
Sales Value (1,50,000 units × Rs.100) 1,50,00,000
Less: Variable Cost (1,50,000 units ×Rs.60) 90,00,000
Less: Fixed Cost 24,00,000
Profit 36,00,000
Less: Income Tax @ 40% 14,40,000
Net Return 21,60,000
."!, ,
Rate of Net Return on Sales = 14.40% 6 0 1009
.!, , ,
(ii) Products
X (Rs.) Y (Rs.)
Variable Cost per unit 60 100
Contribution per unit 40 50
Composite contribution will be as follows:

Contribution per unit
=(40/8 0 5) + (50/8 0 3-
=25+18.75=Rs.43.75
." , ,
Break-even Sale = 64,000 units 6 9
.1 .
Break-even Sales Mix:
X (64,000 units × 5/8) = 40,000 units
Y (64,000 units × 3/8)= 24,000 units
Question 6
Arnav Ltd. is producing a single product, has the profit-volume ratio of 40%. The company wishes
to increase the selling price by 10% which will increase the variable cost by 5%. The fixed overheads
will increase from its present level of Rs.20,00,000 to Rs.30,00,000.
Required:
(i) Compute the company’s original break-even point sales and the break-even point sales after the increase.
(ii)Estimate the sales value for the firm to make a profit of Rs. 4,50,000 after the increase. (MTP Oct. ‘18, 5
Marks)
Answer 6
Workings:
Let us assume that the selling price before increment is ₹ 100, the other relevant details are as follows:
Particulars Before increase After increase
Selling Price 100 110
Variable Cost 60 63
Contribution 40 47
P/V Ratio 40% 42.73%
(i) Computation of Break-even point sales:
14.7
Break-even point sales = Fixed Overheads / P/V ratio

- Before increase = Rs. 20,00,000 / 40% = Rs. 50,00,000
- After increase = Rs. 30,00,000 / 42.73% =Rs. 70,20,828(approx.)
(ii) Sales value to make a profit of Rs. 4,50,000:
<+ =2 . , , = .1, ,
= = Rs.80,73,953
1". %
Question 7
A company gives the following information:
Margin of Safety Rs.7,50,000
Total Cost Rs.7,75,000
Margin of Safety (Qty.) 15,000 units
Break Even Sales in Units 5,000 units
(i) Selling price per unit
(ii) Profit
(iii) Profit/ Volume Ratio
(iv) Break Even Sales (in Rupees)
(v) Fixed Cost (MTP 5 Marks May 20)
Answer 7
> / $' 3 $
(i) Selling Price per unit = > / ?$ /
. , ,
= = Rs. 50
! , $
(ii) Profit = Sales Value – Total Cost
= Selling price per unit × (BEP units + MoS units) – Total Cost
= Rs.50 × (5,000 + 15,000) units – Rs.7,75,000
= Rs.10,00,000 – Rs.7,75,000 = Rs.2,25,000
'
(iii) Profit/ Volume (P/V) Ratio = >4 / $' + $
× 100
."," ,
= . , ,
0 100= 30%
(iv) Break Even Sales (in Rupees) = BEP units × Selling Price per unit
= 5,000 units × Rs.50 = Rs.2,50,000
(v) Fixed Cost = Contribution – Profit
= Sales Value × P/V Ratio – Profit
= (Rs.10,00,000 × 30%) – Rs.2,25,000
= Rs.3,00,000 – Rs.2,25,000 = Rs. 75,000
Question 8
A company can make any one of the 3 products X, Y or Z in a year. It can exercise its option only at the
beginning of each year. Relevant information about the products for the next year is given below.
X Y Z
Selling Price (Rs. / unit) 100 120 120
14.8
Variable Costs (Rs. / unit) 60 90 70

Market Demand (unit) 3,000 2,000 1,000
Production Capacity (unit) 2,000 3,000 900
Fixed Costs (Rs.) 3,00,000
Required
COMPUTE the opportunity costs for each of the products. (MTP 5 Marks May 20, Old & New SM)
Answer 8
X Y Z
I. Contribution per unit (Rs.) 40 30 50
II. Units (Lower of Production / Market 2,000 2,000 900
Demand)
III. Possible Contribution (Rs.) [ I × II ] 80,000 60,000 45,000
IV. Opportunity Cost* (Rs.) 60,000 80,000 80,000
(*) Opportunity cost is the maximum possible contribution forgone by not producing alternative product i.e.
if Product X is produced then opportunity cost will be maximum of (Rs. 60,000 from Y, Rs. 45,000 from Z).
Question 9
CanCola, a zero sugar cold drink manufacturing Indian company, is planning to establish a subsidiary
company in Nepal to produce coconut flavoured juice. Based on the estimated annual sales of 60,000
bottles of the juice, cost studies produced the following estimates for the Nepalese subsidiary:
Total Annual Costs Percent of Total Annual
(₹) Cost which is variable
Material 2,70,000 100%
Labour 1,97,000 80%
Factory Overheads 1,20,000 60%
Administration Expenses 52,000 35%
The Nepalese production will be sold by manufacturer’s representatives who will receive a
commission of 9% of the sale price. No portion of the Indian office expenses is to be allocated to the
Nepalese subsidiary. You are required to-
(i) COMPUTE the sale price per bottle to enable the management to realize an estimated 20% profit on
sale proceeds in Nepal.
(ii) CALCULATE the break-even point in rupees value sales and also in number of bottles for the
Nepalese subsidiary on the assumption that the sale price is ₹ 14 per bottle. (MTP 10 Marks, Oct. 20,
Old & New SM)
Answer 9
(i) Computation of Sale Price Per Bottle
Output: 60,000 Bottles
(₹)
Variable Cost:
Material 2,70,000
Labour (₹ 1,97,000 × 80%) 1,57,600
Factory Overheads (₹1,20,000 × 60%) 72,000
Administrative Overheads (₹ 52,000 × 35%) 18,200
Commission (9% on ₹9,00,000 (Working Note -1) 81,000
Fixed Cost:
Labour (₹ 1,97,000 × 20%) 39,400
14.9
Factory Overheads (₹ 1,20,000 × 40%) 48,000

Administrative Overheads (₹ 52,000 × 65%) 33,800
Total Cost 7,20,000
Profit (20% of ₹ 9,00,000) 1,80,000
Sales Proceeds 9,00,000
Sales Price per bottle Rs. 9,00,000/60,000 15
(ii) Calculation of Break-even Point

Sales Price per Bottle = ₹ 14
Variable Cost per Bottle = Rs.5,93,400(Working note -2)/ 60,000bottels = Rs.

9.89
Contribution per Bottle = ₹ 14 − ₹ 9.89 = ₹ 4.11
Break -even Point (in number of Bottles) = Fixed cost / Contribution per bottle
= Rs. 1,21,000 / Rs. 4.11 = 29,489

Break- even Point (in Sales Value) = 29,489 Bottles × ₹14
= ₹ 4,12,846
Working Note
(1) Let the Sales Price be ‘X’
Commission = 9X/100
Profit = 20X/ 100
X = ₹ 2,70,000 + ₹1,57,600 + ₹ 72,000 + ₹ 18,200 + ₹ 39,400 + ₹ 48,000 + Rs. 33,800+ 9X/100 +20X/100
X = ₹ 6,39,000 + 9X/100 +20X/100
100X – 9X – 20X = 6,39,00,000
71X = 6,39,00,000
X = 6,39,00,000/71 = Rs. 9,00,000

(2)
Total Variable Cost (₹)
Material 2,70,000
Labour 1,57,600
Factory Overheads 72,000
Administrative Overheads 18,200
Commission [(60,000 Bottles × ₹ 14) × 9%] 75,600
5,93,400
Question 10
The following information has been obtained from the records of a manufacturing unit:
Rs. Rs.
Sales 80,000 units @ Rs. 50 40,00,000
Variable Overheads 4,00,000
14.10
Labour Charges 8,00,000

Fixed Overheads 7,20,000 35,20,000
Net Profit 4,80,000
CALCULATE:
(i) The number of units by selling which the company will neither lose nor gain anything.
(ii) The sales needed to earn a profit of 20% on sales.
(iii) The extra units which should be sold to obtain the present profit if it is proposed to reduce the
selling price by 20% and 25%.
The selling price to be fixed to bring down its Break-even Point to 10,000 units under present
conditions. (MTP 10 Marks March ’21)
Answer 10
Workings:
(1) Contribution per unit = Selling price per unit – Variable cost per unit
= Rs. 50 – {Rs. (16,00,000 + 4,00,000 + 8,00,000) ÷ 80,000 units}
= Rs. 50 – Rs. 35 = Rs. 15
(2) Profit-Volume (P/V) Ratio = Contribution per unit/Selling Price per Unit 0 100
= Rs. 15 /Rs.50 0 100 = 30%
Calculations:
(i) The number of units to be sold for neither loss nor gain i.e. Break-even units:
<+ . ," ,
= &$ ' $
= .!
= 48,000 Units
(ii) The sales needed to earn a profit of 20% on sales:

As we know S = V + F + P
(S = Sales; V = Variable Cost; F = Fixed Cost; P = Profit) Suppose Sales units are x then
Rs. 50x = Rs. 35 x + Rs. 7,20,000 + Rs. 10x
Rs. 50x – Rs. 45x = Rs. 7,20,000
. ," ,
Or, X = .
= 1,44,000 units
Therefore, Sales needed = 1,44,000 units  Rs. 50 = Rs. 72,00,000 to earn a profit of 20% on sales.
(iii) Calculation of extra units to be sold to earn present profit of Rs.4,80,000 under the following
proposed selling price:
When selling price is reduced by
20% 25%
(Rs.) (Rs.)
Selling price per unit 40.00 37.50
(Rs. 50 × 80%) (Rs. 50 × 75%)
Desired Contribution:
Fixed Overheads 7,20,000 7,20,000
Desired Profit 4,80,000 4,80,000
12,00,000 12,00,000
(a) Sales unit for desired contribution
2,40,000 units 4,80,000 units
14.11
ABCDEBF GHIJEDKLJDHI Rs. 12,00,000/Rs. 5 Rs. 12,00,000/Rs.

@ N
GHIJEDKLJDHI MBE LIDJ 2.5
(b) Units presently sold 80,000 units 80,000 units

(c) Extra units to be sold {(a) – (b)} 1,60,000 units 4,00,000 units
(iv) Sales price to bring down BEP to 10,000 units:
B.E.P (Units) =
&$ ' $
Or, Contribution per unit = Rs. 7,20,000/10,000 units = Rs. 72
So, Sales Price (per unit) = Variable Cost + Contribution

= Rs. 35 + Rs. 72 = Rs. 107
Question 11
Following data is available from the costing department of Aarya Ltd. which manufactures and
markets a single product:
Material Rs. 32 per unit Fixed Cost (Rs.) Rs. 10,00,000
Conversion Cost (Variable) Rs. 24 per unit Present Sales (units) 90,000
Dealer’s Margin (10% of Rs. 8 per unit Capacity Utilization 60 %
Sales)
Selling Price Rs. 80 per unit
There is acute competition in the market, thus extra efforts are necessary to enhance the sales.
For this, following suggestions have been proposed:
(i) Reducing selling price by 5 per cent.
(ii) Increasing dealer's margin by 20 per cent over the existing rate.
Which of these two suggestions would you RECOMMEND, if the company desires to maintain the
present profit? GIVE REASONS. (MTP 10 Marks, April’21)
Answer 11
Workings:
Statement Showing Profit on Sale of 90,000 units
(Rs.) (Rs.)
Selling Price per unit 80
Less: Variable Cost per unit
Material 32
Conversion Cost 24
Dealers’ Margin 8 64
Contribution per unit 16
Total Contribution (90,000 units × Rs. 16) 14,40,000
Less: Fixed Cost 10,00,000
Profit 4,40,000
In both the proposed suggestions, the fixed costs remain unchanged. Therefore, the present profit
of Rs. 4,40,000 can be maintained by maintaining the total contribution at the present level i.e. Rs.
14,40,000.
(i) Reducing Selling Price by 5%
New Selling Price (Rs. 80 − 5% of Rs. 80) = Rs. 76 New
Dealer's Margin (10% of Rs. 76) = Rs. 7.60 New
14.12
Variable Cost (Rs. 32 + Rs. 24 + Rs. 7.60) = Rs. 63.60 New

Contribution per unit (Rs. 76 − Rs. 63.60) = Rs. 12.40
O &$ P$
Level of sales required for present level of Profits = . Q &$ ' $
.!1,1 ,
= .!".1
= 1,16,129 units
(ii) Increasing Dealer’s Margin by 20%
New Dealer’s Margin after increasing it by 20% = Rs. 8 + (20% of Rs. 8)
= Rs. 9.60
New Variable Cost (Rs. 32 + Rs. 24 + Rs. 9.60) = Rs. 65.60
Contribution (Rs. 80 − Rs. 65.60) = Rs. 14.40
O &$ P$
Level of sales required for present level of Profits =
. Q &$ ' $
.!1,1 ,
= .!1.1
= 1,00,000 units
Conclusion:
The second proposal, i.e., increasing the Dealer's Margin is recommended because:
1. The contribution per unit is higher which is Rs. 14.40 in comparison to Rs. 12.40 in the first
proposal; and
2. The sales (in units) required to earn the same level of profit are lower. They are at 1,00,000
units as against 1,16,129 units in the first proposal. This means a lower sales effort and less
finance would be required for implementing proposal (ii) as against proposal (i). Of course,
under proposal (ii) the company can earn higher profits than at present level if it can
increase its sales beyond 1,00,000 units.
Question 12
DISCUSS basic assumptions of Cost Volume Profit analysis. (MTP 5 Marks, April ’21, Old & New SM)
Answer 12
Assumptions of Cost Volume Profit analysis:
1. Changes in the levels of revenues and costs arise only because of changes in the number of product
(or service) units produced and sold – for example, the number of television sets produced and sold
by Sony Corporation or the number of packages delivered by Overnight Express. The number of
output units is the only revenue driver and the only cost driver. Just as a cost driver is any factor that
affects costs, a revenue driver is a variable, such as volume, that causally affects revenues.
2. Total costs can be separated into two components; a fixed component that does not vary with
output level and a variable component that changes with respect to output level. Furthermore,
variable costs include both direct variable costs and indirect variable cos ts of a product. Similarly,
fixed costs include both direct fixed costs and indirect fixed costs of a product
3. When represented graphically, the behaviours of total revenues and total costs are linear (meaning
they can be represented as a straight line) in relation to output level within a relevant range (and
time period).
4. Selling price, variable cost per unit, and total fixed costs (within a relevant range and time period)
are known and constant.
5. The analysis either covers a single product or assumes that the proportion of different products
when multiple products are sold will remain constant as the level of total units sold changes.
6. All revenues and costs can be added, subtracted, and compared without taking into account the
14.13
time value of money.
Question 13
Amy Ltd. manufacture and sales its product RM. The following figures have been collected from cost
records of last year for the product RM:
Elements of Cost Variable Cost portion Fixed Cost
Direct Material 30% of Cost of Goods Sold --
Direct Labour 15% of Cost of Goods Sold --
Factory Overhead 10% of Cost of Goods Sold ₹ 3,45,000
Administration Overhead 2% of Cost of Goods Sold ₹ 1,06,500
Selling & Distribution Overhead 4% of Cost of Sales ₹ 1,02,000
Last Year, 7,500 units were sold at ₹185 per unit. From the given information, DETERMINE the
followings:
(i) Break-even Sales (in rupees)
(ii) Profit earned during last year
(iii) Margin of safety (in %)
(iv) Profit if the sales were 10% less than the actual sales.
(Assume that Administration Overhead is related with production activity) (MTP 10 Marks, Oct ’21, RTP
May ’20)
Answer 13
1. Working Notes:
(1) Calculation of Cost of Goods Sold (COGS):
COGS = DM + DL + FOH + AOH
COGS = {0.3 COGS + 0.15 COGS + (0.10 COGS + ₹ 3,45,000) +
(0.02 COGS + ₹ 1,06,500)}
Or, COGS = 0.57 COGS + ₹ 4,51,500
Or COGS = Rs. 4,51,500 / 0.43 = ₹ 10,50,000

Calculation of Cost of Sales (COS):
COS = COGS + S&DOH
COS = COGS + (0.04 COS + ₹ 1,02,000)
Or COS = ₹ 10,50,000 + (0.04 COS + ₹ 1,02,000)
Or, COS = ₹ 11,52,000 / 0.96= ₹ 12,00,000

Calculation of Variable Costs:
Direct Material- (0.30 × ₹ 10,50,000) ₹ 3,15,000
Direct Labour- (0.15 × ₹ 10,50,000) ₹ 1,57,500
Factory Overhead- (0.10 × ₹ 10,50,000) ₹ 1,05,000
Administration OH- (0.02 × ₹ 10,50,000) ₹ 21,000
Selling & Distribution OH (0.04 × ₹ 12,00,000) ₹ 48,000
₹ 6,46,500
(2) Calculation of total Fixed Costs:

Factory Overhead ₹ 3,45,000
Administration OH ₹ 1,06,500
Selling & Distribution OH ₹ 1,02,000
14.14
₹ 5,53,500
Calculation of P/V Ratio:
&$ 3 &
P/V Ratio = 0 100 = 0 100
, .! 0 , $ - . ,1 ,
= .! 0 , $
0 100
.! , , . ,1 ,
= .! , ,
0 100 = 53.41%
. , ,
(i) Break- Even Sales = = .1!%
= Rs. 10,36,323
(ii) Profit earned during the last year

= (Sales – Total Variable Costs) – Total Fixed Costs
= (₹ 13,87,500 - ₹ 6,46,500) - ₹ 5,53,500
= ₹ 1,87,500
( ) +
(iii) Margin of Safety (%) = ×100 = 25.31%
(iv) Profit if the sales were 10% less than the actual sales:
Profit = 90% (₹ 13,87,500 - ₹ 6,46,500) - ₹ 5,53,500
= ₹ 1,13,400
Question 14
A factory can produce 1,80,000 units per annum at its 60% capacity. The estimated costs of
production are as under:
Direct material ₹ 50 per unit
Direct employee cost ₹ 16 per unit
Indirect expenses:
- Fixed ₹ 32,50,000 per annum
- Variable₹ 10 per unit
- Semi-variable ₹ 40,000 per month up to 50% capacity and ₹ 15,000 for
every 20% increase in the capacity or part thereof.
If production program of the factory is as indicated below and the management desires to ensure a
profit of ₹10,00,000 for the year, DETERMINE the average selling price at which each unit should be
quoted:
First three months of the year- 50% of capacity;
Remaining nine months of the year- 75% of capacity. (MTP 5 Marks Nov ’21)
Answer 14
Statement of Cost
First three Remaining nine months Total (₹)
months (₹) (₹)
37,500 1,68,750 units 2,06,250 units
units
Direct material 18,75,000 84,37,500 1,03,12,500
Direct employee cost 6,00,000 27,00,000 33,00,000
Indirect- variable 3,75,000 16,87,500 20,62,500
expenses
Indirect – fixed expenses 8,12,500 24,37,500 32,50,000
Indirect- semi-variable
expenses
14.15
- For first three 1,20,000 1,20,000

months @ ₹
40,000 p.m.
- For remaining 6,30,000 6,30,000
nine months @
₹ 70,000* p.m.
Total cost 37,82,500 1,58,92,500 1,96,75,000
Desired profit - - 10,00,000
Sales value - - 2,06,75,000
Average selling price per 100.24
unit
* ₹ 40,000 for 50% capacity + ₹ 15,000 for 20% increase in capacity + ₹ 15,000 for 5% increase in
capacity (because cost is increased for every 20% increase in capacity or part thereof)
Question 15
A Limited manufactures three different products and the following information has been collected
from the books of accounts:
Products
S T U
Sales Mix 25% 35% 40%
Selling Price ₹ 600 ₹ 800 ₹ 400
Variable Cost ₹ 300 ₹ 400 ₹ 240
Total Fixed Costs ₹ 36,00,000
Total Sales ₹ 1,20,00,000
The company has currently under discussion, a proposal to discontinue the manufacture of Product U
and replace it with Product M, when the following results are anticipated:
Products
S T M
Sales Mix 40% 35% 25%
Selling Price ₹ 600 ₹800 ₹600
Variable Cost ₹ 300 ₹400 ₹300
Total Fixed Costs ₹ 36,00,000
Total Sales ₹1,28,00,000
Required
(i) Compute the PV ratio, total contribution, profit and Break-even sales for the existing
product mix.
(ii) Compute the PV ratio, total contribution, profit and Break-even sales for the proposed
product mix. (MTP 10 Marks Nov ’21, RTP May ’21 & May ’22) (Same concept different
Answer 15
i. Computation of PV ratio, contribution and break-even sales for existing product mix
Products
Total
S T U
Selling Price (₹) 600 800 400
Less: Variable Cost (₹) 300 400 240
Contribution per unit (₹) 300 400 160
P/V Ratio (Contribution/Selling price) 50% 50% 40%
14.16
Sales Mix 25% 35% 40%

Contribution per rupee of sales
12.5% 17.5% 16% 46%
(P/V Ratio × Sales Mix)
Present Total Contribution (₹ 1,20,00,000 × 46%) ₹55,20,000
Less: Fixed Costs ₹36,00,000
Present Profit ₹19,20,000
Present Break Even Sales (₹ 36,00,000/0.46) ₹ 78,26,087
ii. Computation of PV ratio, contribution and break-even sale for proposed product mix
Products
S T M Total
Selling Price (₹) 600 800 600
Less: Variable Cost (₹) 300 400 300
Contribution per unit (₹) 300 400 300
P/V Ratio (Contribution/Selling price) 50% 50% 50%
Sales Mix 40% 35% 25%
Contribution per rupee of sales
20% 17.5% 12.5% 50%
(P/V Ratio x Sales Mix)
Proposed Total Contribution (₹1,28,00,000 x 50%) ₹64,00,000
Less: Fixed Costs ₹36,00,000
Proposed Profit ₹28,00,000
Proposed Break Even Sales (₹36,00,000/0.50) ₹72,00,000
Question 16
Maximum Production capacity of KM (P) Ltd. is 28,000 units per month. Output at different levels
along with cost data is furnished below:
Particulars of Costs Activity Level
16,000 units 18,000 units 20,000 units
Direct Material ₹ 12,80,000 ₹ 14,40,000 ₹ 16,00,000
Direct labour ₹ 17,60,000 ₹ 19,80,000 ₹ 22,00,000
Total factory overheads ₹ 22,00,000 ₹ 23,70,000 ₹ 25,40,000
You are required to Calculate the selling price per unit at an activity level of 24,000 units by
considering profit at the rate of 25% on sales. (MTP March‘18, 5 Marks)
Answer 16
Computation of Overheads
% / <+
Variable Overhead per unit = % + / +
" , , "", , " ,1 , " , ,
= ! , ! ,
or " , ! ,
!, ,
= Rs. 85 per unit
"
Fixed Overhead
Activity level = 16,000 units
Particulars Amount (₹ )
Total factory overheads 22,00,000
Less: Variable overheads 16,000 units @ ₹ 85 per unit (13,60,000)
Fixed Overhead 8,40,000
Computation of Costs at Activity Level 24,000 units
Per Unit (₹) Amount (₹ )
Direct Material (12,80,000/16,000) 80.00 19,20,000
Direct Labour (17,60,000/16,000) 110.00 26,40,000

14.17
Variable Overhead (As calculated above) 85.00 20,40,000

Fixed Overhead 8,40,000
Computation of Selling Price at activity level 24,000 units
Profit required is 25% on selling price, hence cost will be 75%.
" 0 1,1 ,
Therefore desired profit = = Rs. 24,80,000
Cost of 24,000 units 74,40,000

Desired Profit 24,80,000
Total Sales 99,20,000
Alternatively
O 1,1 ,
Total Sales = 0 100 = 0 100 =Rs. 99,20,000
O ," ,
Selling Price per unit = RS ST UVWX
= "1,
=Rs. 413.33
Question 17
At budget activity of 80% of total capacity, a company earns a P/V ratio of 30% and a profit of 15% of
total sales. Due to covid pandemic resulting in poor demand, the company has to reduce its selling price
by 10%. The company was able to achieve a production and sales volume for the year equivalent to 50%
of total capacity. The sales value at this level was ₹ 27,00,000 at a reduced price of ₹ 18 per unit. Due to
reduction in production, the actual variable cost went up by 5% of the budget.
(i) PREPARE statement of profitability at budget and actual activity.
(ii) FIND P/V ratio and BES (in ₹ and unit of the actual sales activity). (MTP 10 Marks March ‘22)
Answer 17
Actual Sales ₹ 27,00,000
Actual Selling Price per unit 18
Actual units (50%)
" , ,
( ! )
1,50,000
Therefore, budgeted units (80%)
(1,50,000 X )
2,40,000
Budgeted Selling Price ( 18 / 90%)

20
,",1 , Y" -,! . - , ,

Budgeted Variable Cost per unit = ",1 , $
= ",1 , $
= Rs. 14
(i) Statement of profitability at budget and actual activity

Particulars Budget (80%) Actual (50%)
Units 2,40,000 1,50,000
Sales (₹) (a) 48,00,000 27,00,000
Variable cost (₹) (b) 33,60,000 22,05,000
Contribution (₹) (c = a - b) 14,40,000 4,95,000
Fixed cost (₹) (d) 7,20,000 7,20,000
Profit (₹) (e = c – d) 7,20,000 (2,25,000)
14.18
(ii) Calculation of P/V ratio and BES

&$
P/V ratio = Z100
1, ,
=" , ,
Z 100 = 18.33%
," ,
Break Even Sales (in Rs.) = = = Rs. 39,27,987
! . %
," ,
Break Even Sales (In Units) = &$ ' $
= . ∗
= 2,18,182 Units
1, ,
∗ GHIJEDKLJDHI Per unit = = !, ,, $
= 3.3 per unit
Question 18
Company manufacture and sell 3 types of mobile handset. It also manufactures wireless charger for
mobile. The company has worked out following estimates for next year.
Annual Demand Selling Price Material cost Labour cost
(in units) (₹ per unit) (₹ per unit) (₹ per unit)
X5 5,000 8,000 2,000 1,000
X6 4,000 9,000 2,500 1,500
X7 3,000 12,000 3,000 2,000
Wireless Charger 15,000 1,500 300 200
To encourage the sale of wireless charger a discount of 10% in its price is being offered if it were to
be purchased along with mobile. It is expected that customer buying mobile will also buy the
wireless charger. The company factory has an effective capacity of 35,000 labour hours. The labour
is paid @ ₹ 500 per hour. Overtime of labour has to be paid at double the normal rate. Other variable
cost work out to be 50% of direct labour cost and fixed cost is ₹ 1,00,00,000. There will be no
inventory at the end of the year. PREPARE statement of profitability. (MTP 10 Marks April ’22)
Answer 18
Calculation of Labour overtime hours
Total hours required for production
X5 (5,000 x 2 hrs) 10,000
X6 (4,000 x 3 hrs) 12,000
X7 (3,000 x 4 hrs) 12,000
Wireless Charger (15,000 x 0.40 hrs) 6,000
40,000
Hours available (35,000)
Overtime 5,000
Statement of Profitability
Sales
X5 (5,000 x 8,000) 4,00,00,000
X6 (4,000 x 9,000) 3,60,00,000
X7 (3,000 x 12,000) 3,60,00,000
Wireless Charger [(12,000 x 1,350) + (3,000 x 2,07,00,000 13,27,00,000
1,500)
Less: Variable cost

14.19
Material:
X5 (5,000 x 2,000)
X6 (4,000 x 2,500)
X7 (3,000 x 3,000)
Wireless Charger (15,000 x 300) 3,35,00,000
Labour:
X5 (5,000 x 1,000)
X6 (4,000 x 1,500)
X7 (3,000 x 2,000)
Wireless Charger (15,000 x 200)
Overtime (5,000 x 1,000) 2,50,00,000
Other variable overheads 1,25,00,000 7,10,00,000
Contribution 6,17,00,000
Less: Fixed Cost 1,00,00,000
Profit 5,17,00,000
Question 19
PS Limited is a manufacturing company and is operating at 75% capacity utilization. The PV ratio at this
level of activity is 40%.
The flexible budget drafted by the company for two levels of activity is given below:
Capacity utilization (75 %) Capacity utilization (100 %)
Amount in ₹ (Lakhs) Amount in ₹ (Lakhs)
Direct materials 180 240
Direct wages 120 160
Power and fuel 12 16
Repairs and maintenance 18 21
Consumables 21 28
Supervision 20 20
Indirect labour 36 42
Administrative expenses 21 21
Selling expenses 18 18
Depreciation 54 54

i. CALCULATE the profit earned by PS Limited at 75% level of activity.
ii. CALCULATE the break-even level of activity. (MTP 10 Marks Sep’22)
Answer 19
Calculation of Semi Variable component
Repairs and Maintenance (₹) Indirect labour (₹)
At 75% capacity 18,00,000 36,00,000
At 100% capacity 21,00,000 42,00,000
Variable component for 25% 3,00,000 6,00,000
Hence variable cost at 75% 3,00,000 x 75/25=9,00,000 6,00,000 x 75/25 =
18,00,000
Fixed cost at 75% capacity 18,00,000 – 9,00,000 = 9,00,000 36,00,000 –
18,00,000=18,00,000
Segregation of Fixed and Variable cost
14.20
75% 100% VC at 75% FC at 75%

Power and fuel 12 16 12
Repairs and maintenance 18 21 9 9
Consumables 21 28 21
Supervision 20 20 20
Indirect labour 36 42 18 18
Administrative expenses 21 21 21
Selling expenses 18 18 18
Depreciation 54 54 54
Total 500 620 360 140
(i) Calculation of profit earned at 75% capacity
Given PV ratio = 40%, Hence variable cost would be 60%
If variable cost is ₹ 360 lakhs then sales would be 360/ 0.60 = ₹ 600 lakhs
Less: Variable cost = ₹ 360 lakhs

Less: Fixed cost = ₹ 140 lakhs
Profit = ₹ 100 lakhs
(ii) Break-even level of activity
BEP Sales = FC/ P/V ratio = 140 /0.40 = ₹ 350 lakhs
Question 20
Answer the following:
A company makes 1,500 units of a product for which the profitability statement is given below:
(₹)
Sales 1,20,000
Direct Materials 30,000
Direct Labour 35,000
Variable Overheads 15,000
Fixed Cost 16,800
Profit 22,200
After the first 500 units of production, the company has to pay a premium of ₹ 5 per unit towards
overtime labour. The premium so paid has been included in the direct labour cost of ₹ 35,000 given
above.
You are required to COMPUTE the Break-even point. (MTP 5 Marks Oct’22)
Answer 20
Data / Unit 1– 501 –
500 1,500
(Rs.) (Rs.)
Sales (Rs.1,20,000 / 1,500 units) 80 80
Direct Material (Rs.30,000 / 1,500 units) 20 20
Direct Labour* 20 25
Variable Overheads (Rs.15,000 / 1,500 units) 10 10
Contribution 30 25
Contribution at 500 units = Rs. 15,000

14.21
Fixed Cost = Rs. 16,800

Shortfall = Rs. 1,800
No. of units to recover shortfall = 72 units (Rs. 1,800 / Rs.25)
Break Even Point = 572 units (500 units + 72
units)
(*)
Let X be the Direct Labour per unit up to 500 units. Total Direct Labour-
500X + 1,000 × (X + 5) = 35,000
1,500X + 5,000 = 35,000
X = 20
Therefore, up to 500 units the Direct Labour is Rs. 20. After 500 units it is Rs. 25.
Question 21
LNP Ltd. and MNT Ltd. are engaged in manufacturing of identical products. Existing revenue and
cost data is as follows:
LNP Ltd. (₹) MNT Ltd. (₹)

Sales 13,60,000 17,00,000
Variable Cost 10,88,000 10,20,000
Fixed Cost 1,72,000 5,80,000

(i) Break-even point (in Value) for each company
(ii) Sales at which each company will earn a profit of ₹ 5,00,000
(iii) Sales at which both companies will have same profits. (MTP 10 Marks March ‘23)
Answer 21
Income Statement
LNP Ltd. MNT Ltd.
(₹) (₹)
Sales (Rs.) 13,60,000 17,00,000
Less: Variable Cost 10,88,000 10,20,000
Contribution 2,72,000 6,80,000
&$
20% 40%
P.V. Ratio ( Z 100-
Fixed Cost (₹) 1,72,000 5,80,000

Profit (₹) 1,00,000 1,00,000
(i) Break even point = .3.

.!. ".
LNP Ltd. = " %
= Rs. 8,60,000
. , ,
MNT Ltd. = = Rs. 14,50,000
1 %
(ii) Sales value to earn a profit of ₹ 5,00,000
=2
Sales = .3.
!. ". = , ,
LNP Ltd. = = Rs. 33,60,000
1 %
, , = , ,
MNT Ltd. = = Rs. 27,00,000
1 %

14.22
(iii) Sales value at which both companies will earn same profit
Let S = Sales value and P = Profit
Sales – Variable cost = Fixed cost + Profit
or, Contribution = Fixed cost + Profit
LNP Ltd.:
20% S = ₹1,72,000 + P
or, 0.20S = ₹ 1,72,000 + P................................................ (i)
MNT Ltd.
40% S = ₹5,80,000 + P
or, 0.40S = ₹ 5,80,000 + P............................................(ii)
By solving these equations, we will get the value of ‘S’ and ‘P’
0.20S = 1,72,000 + P
0.40S = 5,80,000 + P
- - -
- 0.20S = -4,08,000
or, S = ₹ 20,40,000
Putting the value of ‘S’ in equation no. (i) we will get the value of ‘P’
0.20 × 20,40,000 = 1,72,000 + P
or, P = ₹2,36,000
Therefore, at Sale value of ₹20,40,000 both the companies will earn same profit of ₹ 2,36,000
Question 22
The following figures are related to KG Limited for the year ending 31st March, 2023:
Sales - 48,000 units @ ₹ 400 per unit; P/V Ratio 25% and Break-even Point 50% of sales.
(i) Profit earned for the year
(ii) Units to be sold to earn a target net profit of ₹ 22,00,000 for a year.
(iii) Number of units to be sold to earn a net income of 25% on cost.[MTP 5 Marks April ‘23]
Answer 22
Break- even point (in units) is 50% of sales i.e. 24,000 units.
Hence, Break- even point (in sales value) is 24,000 units × ₹ 400 = ₹ 96,00,000
(i) Break even Sales = \
Or, Rs. 96,00,000 = " %
Or, Fixed Cost = ₹ 96,00,000 × 25%

= ₹ 24,00,000
So Fixed Cost for the year is ₹ 24,00,000
(ii) Contribution for the year = (48,000 units × ₹ 400) × 25%
= ₹ 48,00,000
Profit for the year = Contribution – Fixed Cost

14.23
= ₹48,00,000 - ₹ 24,00,000
= ₹ 24,00,000
(iii) Target net profit is ₹22,00,000
Hence, Target contribution = Target Profit + Fixed Cost
= ₹ 22,00,000 + ₹ 24,00,000
= ₹ 46,00,000
Contribution per unit = 25% of ₹ 400 = ₹ 100 per unit
.1 , ,
No. of units = .! ' $
= 46,000 units
So, 46,000 units to be sold to earn a target net profit of ₹ 22,00,000 for a year.
(iv) Let desired total Sales (Number of units × Selling price) be x then desired profit is
25% on Cost or 20% on Sales i.e. 0.2 x
=2
Desired Sales = \
]
."1, , = ."
= " %
or, 0.25 x = ₹ 24,00,000 + 0.2 x

or, 0.05 x = ₹ 24,00,000
or, x = ₹ 4,80,00,000
₹ 1, , ,
No. of units to be sold = .1
= 1,20,000 units
Question 23
T Ltd., produces and sells 95,000 units of ‘X’ in a year at its 80% production capacity. The selling price of
product is ₹ 8 per unit. The variable cost is 75% of sales price per unit. The fixed cost is ₹ 3,50,000. The
company is continuously incurring losses and management plans to shut -down the plant. The fixed cost
is expected to be reduced to ₹ 1,30,000. Additional costs of plant shut- down are expected at ₹ 15,000.
Should the plant be shut-down? Find the shut-down point in units and also in percentage of capacity
level of production. (MTP 5 Marks ,Oct ’23)
Answer 23
Statement Showing “Operating Loss”
If Plant is Continued If Plant is Shutdown
Sales 7,60,000 ---
Less: Variable Cost 5,70,000 ---
Contribution 1,90,000 ---
Less: Fixed Cost 3,50,000 1,30,000
Less: Additional Cost --- 15,000
Operating Loss 1,60,000 1,45,000
Decision on Shut Down
A comparison of loss figures (indicated as above) points out that loss is reduced by ₹15,000
(₹ 1,60,000 - ₹ 1,45,000) if plant is shut down.
→ Accordingly, plant should be Shut Down.
. , , .!,1 ,
Shut Down Point = = 1,02,500 units
. .
Capacity Level at Shut Down Point (%)

14.24
At 100% Level – Production Capacity

, _
= 1,18,750 6 .
9
Capacity Level at Shut Down Point
!, ", _
= 86.32% 6!,! , _
9
Question 24
A company manufactures four products. The annual demand for products, selling prices and variable
production costs are as follows:
Product P Q R S
Demand (Units) 1,20,000 1,86,000 1,71,000 99,000
₹ ₹ ₹ ₹
Selling price/unit 23.88 28.68 55.08 47.88
Direct Material/Unit 10.08 13.20 30.48 24.96
Direct Labour/unit 4.08 4.08 6.72 6.36
Variable 1.44 1.44 2.40 2.16
overheads/unit
Other data:
(i) The variable overheads are absorbed on a machine hour basis at a rate of ₹ 1.20 per machine
hour.
(ii) Fixed overheads total ₹ 46,84,000 per annum.
(iii) Production capacity available 8,15,000 machine hours per annum.
(iv) Products P, Q and R can be bought-in at ₹ 21.36 per unit, ₹ 24 per unit and ₹ 48 per unit
respectively.
You are required to calculate Best product mix and Profitability statement for the year. (MTP 10 Marks,
Oct ‘23)
Answer 24
(i) Statement Showing “Calculation of Contribution/ unit”
P Q R S
(₹) (₹) (₹) (₹)
Selling Price …(A) 23.88 28.68 55.08 47.88
Variable Cost
Direct Material 10.08 13.20 30.48 24.96
Direct Labour 4.08 4.08 6.72 6.36
Variable Overheads 1.44 1.44 2.40 2.16
Total Variable Cost …(B) 15.60 18.72 39.60 33.48
Contribution per unit …(A) - (B) 8.28 9.96 15.48 14.40
(ii) Calculation of Machine Hours/ unit
Machine Hours per unit 1.20 1.20 2.00 1.80
(iii) Machine Hours Required
Machine Hours per unit 1,44,000* 2,23,200% 3,42,000@ 1,78,200#

Total 8,87,400
* - (1,20,000 × 1.2); % - (1,86,000 × 1.2); @ - (1,71,000 × 2); # - (99,000 × 1.8)

14.25
(iv) Total Machine Hours Available 8,15,000. Hence, it is a key factor. Product ‘S’ is to be
manufactured, since it is not available with sub-contractor/ market.
(v) Statement Showing “Make or Buy for Products P, Q, R”
P Q R
(₹) (₹) (₹)
Sub-Contractor/ Buy Price 21.36 24.00 48.00
Less: Variable Manufacturing Cost 15.60 18.72 39.60
Saving in Cost 5.76 5.28 8.40
Saving in Cost per machine hour 4.8 4.4 4.20
Ranking I II III
(vi) Statement Showing “Best Product Mix”

Product Units Machine Hour/ Total Machine
Unit Hours
S 99,000 1.8 1,78,200
P 1,20,000 1.2 1,44,000
Q 1,86,000 1.2 2,23,200
R (Balance) 1,34,800 2.0 2,69,600
Total 8,15,000
Balance quantity of R to be purchased 36,200 units (1,71,000 – 1,34,800).

(vii) Profitability Statement
Product No of Units Contribution/unit Total Cont.

(₹) (₹)
P (Mfg) 1,20,000 8.28 9,93,600
Q (Mfg) 1,86,000 9.96 18,52,560
R (Mfg) 1,34,800 15.48 20,86,704
R (Buy) 36,200 7.08 2,56,296
(₹55.08 - ₹48.00)
S (Mfg) 99,000 14.40 14,25,600
Total Contribution 66,14,760
Less: Fixed Overheads 46,84,000
Net Profit 19,30,760
Question 25
PVC Ltd sold 55,000 units of its product at ₹ 375 per unit. Variable costs are ₹ 175 per unit
(manufacturing costs of ₹ 140 and selling cost ₹ 35 per unit). Fixed costs are incurred uniformly
throughout the year and amount to ₹ 65,00,000 (including depreciation of ₹ 15,00,000). There is no
beginning or ending inventories.
Required:
(i) Compute breakeven sales level quantity and cash breakeven sales level quantity.
(ii) Compute the P/V ratio.
(iii) Compute the number of units that must be sold to earn an income (EBIT) of ₹ 5,00,000.
(iv) Compute the sales level achieve an after-tax income (PAT) of ₹ 5,00,000, assume 40% corporate tax rate.
(RTP Nov’19)(Same concept different figures RTP May’19, Old & New SM)
Answer 25

14.26
(i) Contribution = ₹ 375 - ₹ 175 = ₹ 200 per unit.

àbcd efgh qg.rs,tt,ttt
Break Even Sales Quantity = efihjaklhafi mnjoai pcj liah
= qg.utt = 32,500 units
engv àbcd efgh qg.st,tt,ttt
Cash Break even Sales Qty = efihjaklhafi mnjoai pcj liah
= qg.utt = 25,000 units
efihjaklhafi/liah qg.utt
(ii) P/V Ratio = xnycg pjazc/liah
0 {tt = qg.|}s 0 {tt = 53.33%
(iii) No. of units that must be sold to earn an Income (EBIT) of ‘5,00,000
=2 *(~O + , , = , ,
&$ • ' $
= "
= 35,000 units
(iv) After Tax Income(PAT)= ₹ 5,00,000 Tax rate = 40%
qg.s,tt,ttt
Desired level of Profit before tax = rt
0 {tt =
àbcd efghg
Rs. 8,33,333 =
Estimate Sales Level = p/€qnhaf
Or, ,•D‚BF GHCJ ƒ ABCDEBF „EH…DJ /GHIJEDKLJDHI MBE LIDJ 0 †B‡‡DIˆ MED‰B MBE LIDJ-
= Rs. 65,00,000+Rs. 8,33,333 / 53.33% = Rs. 1,37,50,859
Question 26
A company sells its product at ₹ 15 per unit. In a period, if it produces and sells 8,000 units, it incurs a
loss of ₹ 5 per unit. If the volume is raised to 20,000 units, it earns a profit of ₹ 4 per unit. Calculate
break-even point both in terms of rupees as well as in units. (RTP Nov.’18, Old & New SM)
Answer 26
We know that S – V = F + P (S - Sales, V - Variable cost, F - Fixed cost and P - Profit/loss)
Suppose variable cost = x per unit Fixed
Cost = y
When sales is 8,000 units, then
15x 8,000-8,000 x=y -40,000.................... (1)
When sales volume raised to 20,000 units, then
15 x 20,000 - 20,000 x = y + 80,000.............. (2)
Or, 1,20,000 – 8,000 x = y – 40,000.............. (3)
And 3,00,000 – 20,000 x = y + 80,000.............. (4)
From (3) & (4) we get x = ₹ 5. Variable cost per unit = ₹ 5
Putting this value in 3rd equation: 1,20,000 – (8,000 x 5) = y 40,000 or y = ₹ 1,20,000
Fixed Cost = ₹ 1,20,000
3 ! " "
P/V ratio = = !
0100 = = 66 %
Suppose break-even sales = x
15x – 5x = 1,20,000 (at BEP, contribution will be equal to fixed cost) x = 12,000 units.
Or Break-even sales in units = 12,000
Break-even sales in rupees = 12,000 x ₹ 15 = ₹ 1,80,000
Question 27
A company manufactures two types of herbal product, A and B. Its budget shows profit figures after
apportioning the fixed joint cost of ₹ 15 lacs in the proportion of the numbers of units sold. The budget
for 2018, indicates:
A B
Profit (₹ ) 1,50,000 30,000
14.27
Selling Price / unit ( ₹ ) 200 120

P/V Ratio (%) 40 50
Required:
Compute the best option among the following, if the company expects that the number of units to be sold
would be equal.
(i) Due to exchange in a manufacturing process, the joint fixed cost would be reduced by 15% and the
variables would be increased by 7½ %.
(ii) Price of A could be increased by 20% as it is expected that the price elasticity of demand would be
unity over the range of price.
(iii) Simultaneous introduction of both the option, viz, (i) and (ii) above. (RTP May’18]
Answer 27
Option (i)
Increase in profit when due to change in a manufacturing process there is reduction in joint fixed cost
and increase in variable costs.
(Rs.)
Revised Contribution from 12,000 units of A due to 7.5% increase in 8,52,000

Variable Cost {12,000 units × ( ₹ 200 – ₹ 129)}
Revised Contribution from 12,000 units of B due to 7.5% increase in 6,66,000
Variable Cost {12,000 units × (₹ 120 – ₹ 64.50)}
Total Revised Contribution 15,18,000
Less: Fixed Cost (₹ 15,00,000 – 15% × ₹ 15,00,000) 12,75,000
Revised Profit 2,43,000
Less: Existing Profit 1,80,000
Increase in Profit 63,000
Option (ii)
Increase in profit when the price of product A increased by 20% and the price elasticity of its
demand would be unity over the range of price.
Budgeted Revenue from Product A (12,000 units × ₹ 200) 24,00,000
Revised Demand (in units) (₹ 24,00,000 / ₹ 240) 10,000
Revised Contribution (in ₹ ) [10,000 units × ( ₹ 240 – ₹ 120)] 12,00,000
Less: Existing Contribution (12,000 units × ₹ 80) 9,60,000
Increase in Profit (Contribution) 2,40,000
*Note: Since Price Elasticity of Demand is 1, therefore the Revenue in respect of Products will remain
same.
Option (iii)
Increase in profit on the simultaneous introduction of above two options.
(Rs.)
Revised Contribution from Product A [10,000 units × ( ₹ 240 – ₹ 129)] 11,10,000
Revised Contribution from Product B [12,000 units × ( ₹ 120 – ₹ 64.50)] 6,66,000
Total Revised Contribution 17,76,000
Less: Revised Fixed Cost 12,75,000
Revised Profit 5,01,000
Less: Existing Profit 1,80,000
Increase in Profit 3,21,000
A comparison of increase in profit figures under above three options clearly indicates that the option (iii)
14.28
is the best as it increases the profit of the concern by ₹ 3,21,000.

Note: The budgeted profit / (loss) for 201 8 in respect of products A and B should be ₹ 2,10,000 and (₹
30,000) respectively instead of ₹ 1,50,000 and ₹ 30,000.
Workings
1. Contribution per unit of each product:
Product
A (₹ ) B (₹ )
Contribution per unit 80 60
(Sales ×P/V Ratio) (₹200 × 40%) (₹ 120 × 50%)
2. Number of units to be sold:
Total Contribution – Fixed Cost = Profit
Let x be the number of units of each product sold, therefore:
(80x +60x) –₹15,00,000 = ₹ 1,50,000 + ₹ 30,000
Or x = 12,000 units
Question 28
A company has three factories situated in North, East and South with its Head Office in Mumbai. The
Management has received the following summary report on the operations of each factory for a
period:
(₹ in ‘000)
Factory Sales Profit

Actual Over / (Under) Actual Over / (Under)
Budget Budget
North 1,100 (400) 135 (180)
East 1,450 150 210 90
South 1,200 (200) 330 (110)
CALCULATE the following for each factory and for the company as a whole for the period:
(i) Fixed Cost
(ii) Break-even Sales(RTP Nov ’21, Old & New SM)
Answer 28
Computation of Profit Volume Ratio
(₹ in ‘000)
Sales Profit P/V Ratio

(Change in
Factory
Actual Over / Budgeted Actual Over / Budget

(Under) Sales (Under) Profit profit / Change
Budget Budget in Sales)
North 1,100 (400) 1,500 135 (180) 315 45%

East 1,450 150 1,300 210 90 120 60%
South 1,200 (200) 1,400 330 (110) 440 55%
(i) Computation of Fixed Costs (₹ in ‘000)

Factory Actual Sales P/V Ratio Contribution Actual Fixed Cost
Profit
(1) (2) (3) = (1) × (2) (4) (5) = (3) - (4)
North 1,100 45% 495 135 360
14.29
East 1,450 60% 870 210 660

South 1,200 55% 660 330 330
Total 3,750 2,025 675 1,350
(ii) Computation of Break-Even Sales
Factory Fixed Cost (a) P/V Ratio (b) Break-even Sales

(a) / (b)
North 360 45% 800
East 660 60% 1,100
South 330 55% 600
2,500
Break –even Sales (Company as whole) = Fixed Cost/ Composite P/V Ratio*
= Rs. 13,50,000/54%
= Rs. 25,00,000
*Composite P/V Ratio = Total Contribution/ Total Actual Sales = 2,025 / 3,750 = 54%
Question 29
a) RPP Manufacturers is approached by an international customer for one-time special order similar to one
offered to its domestic customers. Per unit data for sales to regular customers is provided below:
Direct material ₹ 693
Direct labour ₹ 315
Variable manufacturing support ₹ 504
Fixed manufacturing support ₹ 1092
Total manufacturing costs ₹ 2604
Markup (50%) ₹ 1302
Targeted selling price ₹ 3906
It is provided that RPP Manufacturers has excess capacity. Required:
(i) WHAT is the full cost of the product per unit?
(ii) WHAT is the contribution margin per unit?
(iii) WHICH costs are relevant for making the decision regarding this one-time special order? WHY?
(iv) For RPP Manufacturers, WHAT is the minimum acceptable price of this one- time-special order only
(v) For this one-time-only special order, SHOULD RPP Manufacturers consider a price of ₹ 2100 per
unit? WHY or why not?
(vi) The lab corner of New life Hospital Trust operates two types of specialist MRI scanning machine-
MR10 and MR59. Following details are estimated for the next period:
Machine MR10 MR59
Running hours 1,100 2,000
(₹) (₹)
Variable running costs excluding special technology 68,750 1,60,000
Fixed Costs 50,000 2,43,750
b) A brain scan is normally carried out on machine type MR10. This task uses special technology costing ₹
100 each and takes four hours of machine time. Because of the nature of the process, around 10% of the
scans produce blurred and therefore useless results.
Required:
• CALCULATE the total cost of a satisfactory brain scan on machine type MR10.
14.30
• Brain scans can also be done on machine type MR59 and would take only 1.8 hours per scan with a
reduced reject rate of 6%. However, the cost of the special technology would be ₹ 137.50 per scan.
ADVISE which type should be used, assuming sufficient capacity is available on both types of
machines. Consider fixed costs will remain unchanged. (RTP Nov’22)
Answer 29
a) (i) Full cost of the product per unit
Fixed manufacturing support ₹ 1092
Total manufacturing costs ₹ 2604
(ii) Contribution margin per unit
Selling price ₹ 3906
Less: Variable costs
Contribution margin per unit ₹ 2394
(iii) Costs for decision making are those costs that differ between alternatives, which in this
situation are the incremental costs.
Total incremental costs ₹ 1512
(iv) Minimum acceptable price would be the incremental costs in the short term i.e. ₹ 1512
(v) Yes, RPP Manufacturers may consider a price of ₹ 2100 per unit because this price is greater
than the minimum acceptable price.
b) (i)
Particulars (₹)
Variable cost per running hour of Machine MR10 62.50
(₹ 68,750/1100 hours)
Fixed cost (₹ 50,000/1100 hours) 45.46
Cost of brain scan on Machine MR10: (₹)
Variable machine cost (4 hours × ₹ 62.50) 250.00
Special technology 100.00
Total variable cost 350.00
Fixed machine cost (4 hours × ₹ 45.46) 181.84
Total cost of a scan 531.84
Total cost of a satisfactory scan (₹ 531.84/0.9) 590.93
(ii) It is given that fixed cost will remain unchanged and thus they are not relevant for the decision. The
relevant costs would be the incremental costs of an additional scan:
Machine MR10: (₹)

Variable cost per scan 350.00
Variable cost per satisfactory scan (₹ 350/0.9) 388.89
14.31
Machine MR59: (₹)

Variable machine cost per scan (₹ 1,60,000 / 2000 hours × 144.00
1.8 hours)
Special technology 137.50
Variable cost per scan 281.50
Variable cost per satisfactory scan (₹ 281.50/0.94) 299.47
(vii) The relevant costs per satisfactory scan are cheaper on Machine MR59 and therefore brain scans
should be undertaken on said machine.
Question 30
The following data are available from the budget records of Finesign Women's Handbag Company for
the forthcoming budget period.
₹
Selling Price per unit 1000
Variable cost per unit:
Cost of Material used 750.00
Sales commission 50.00
Total Variable Cost 800.00
Annual fixed expenses:
Rent 7,00,000
Salaries 11,00,000
Other fixed expenses 5,00,000
Total Fixed Cost 23,00,000
Although the firm manufactures Bags with different styles, they have identical purchase costs and
selling price.
Requirement:
(a) What is the annual break-even point both in terms of units and value?
(b) If the store manager is paid 1 per cent commission on sales, what would be the annual break-
even point both in terms of units and value?
(c) If the firm decides to pay a fixed salary of ₹ 9,00,000 in lieu of sales commission, what would be
the annual break-even point in terms of units and value.
Considering break-even point in requirement (a), If the stores manager is paid 2 per cent
commission on each bag sold in excess of the break-even point, what would be the profit if 20000
bags were sold. (RTP May 23)
Answer 30
' $ 3 & ' $
(a) P/V ratio : % ' $
X 100
!
= X100
!
!
= X 100
!
"
= X 100 = 20%
!
4 $
Annual BEP in Units: &$ ' $
." , ,
= ."
= 11,500 units
4 $
Annual BEP in Value :
14.32
." , ,
." %
= 11,500 units
(b) Revised P/V ratio and BEP:

commission on sales per unit= 1% of 1,000= ₹10
! , = =! -
So, P/V ratio : !
!
=! X 100 = 19%
4 $
BEP in terms of units = &$ ' $
." , ,
= !
= 12,106 units
4 $
BEP in terms of value :
/3
." , ,
= ! %
= Rs. 1,21,05,263
(c) Break-even point under fixed salary plan:

&$ ' $ ! "
P/V ratio : ' % ' $
= !
X 100 = ! Z 100 =25%
Revised fixed cost:

Original fixed cost ₹ 23,00,000
Proposed fixed salary ₹ 9,00,000
Total ₹ 32,00,000
4 $
BEP in terms of units = &$ ' $
", ,
= "
= 12,800 units
4 $
BEP in terms of value :
. ", ,
= " %
= 1,28,00,000
(d) Annual break-even point under requirement (a) is 11,500 units.

Margin of safety at sales volume of 20,000 unit of bags (20,000 – 11,500) = 8500 units
Contribution on sales beyond break-even sales: Revised contribution per unit: 200 – (2% of 1000)
= 180 Profit = Margin of safety (in units) × Contribution per unit = 8500 × 180 = ₹ 15,30,000
Question 31
(a) A dairy product company manufacturing baby food with a shelf life of one year furnishes the
following information:
(i) On 1st April, 2023, the company has an opening stock of 20,000 packets whose variable
cost is ₹ 180 per packet.
(ii) In 2022-23, production was 1,20,000 packets and the expected production in 2023-24 is
1,50,000 packets. Expected sales for 2023-24 is 1,60,000 packets.
(iii) In 2022-23, fixed cost per unit was ₹ 60 and it is expected to increase by 10% in 2023-24.
The variable cost is expected to increase by 25%. Selling price for 2023-24 has been fixed
at ₹ 300 per packet.
You are required to calculate the Break-even volume in units for 2023-24.
(b) The M-Tech Manufacturing Company is presently evaluating two possible processes for the
manufacture of a toy. The following information is available:
14.33
Particulars Process A (₹) Process B (₹)

Sales price per unit 20 20
Total fixed costs per year 30,00,000 21,00,000
Anticipated sales (Next year, in units) 4,00,000 4,00,000
Suggest:
1. Identify the process which gives more profit.
2. Would you change your answer as given above, if you were informed that the capacities
of the two processes are as follows:
A - 6,00,000 units; B - 5,00,000 units? (RTP Nov ’23)
Answer 31
Working Notes:
(a)
Particulars 2022-23 (₹) 2023-24 (₹)

Fixed Cost 72,00,000 79,20,000
(₹ 60 × 1,20,000 (110% of ₹
units) 72,00,000)
Variable Cost 180 225
(125% of ₹ 180)
Calculation of Break-even Point (in units):
Since, shelf life of the product is one year only, hence, opening stock is to be sold first.
(₹
)
Total Contribution required to recover total fixed cost in 79,20,000
2023- 24 and to reach break-even volume.
Less: Contribution from opening stock 24,00,000
{20,000 units × (₹ 300 – ₹ 180)}
Balance Contribution to be recovered 55,20,000
Units to be produced to get balance contribution

. ," ,
= . .""
= 73,600 packets.
Break-even volume in units for 2023-24

Packets
From 2023-24 production 73,600
Add: Opening stock from 2022-23 20,000
93,600
(b) Comparative Profitability Statements

Particulars Process- A (₹) Process- B (₹)
Total Contribution 32,00,000 24,00,000
(₹ 8 × 4,00,000) (₹ 6 × 4,00,000)
Less: Total fixed costs 30,00,000 21,00,000
Profit 2,00,000 3,00,000
14.34
Capacity (units) 4,30,000 5,00,000

Total Contribution at full capacity 34,40,000 30,00,000
(₹ 8 × 4,30,000) (₹ 6 × 5,00,000)
Fixed Cost 30,00,000 21,00,000
Profit 4,40,000 9,00,000
Process - B gives more profit.
(2)
Particulars Process- A (₹) Process- B (₹)
*Capacity (units) 6,00,000 5,00,000
Total contribution 48,00,000 30,00,000
(₹ 8 × 6,00,000) (₹ 6 × 5,00,000)
Fixed Cost 30,00,000 21,00,000
Profit 18,00,000 9,00,000
Process-A be chosen.
*Note: It is assumed that capacity produced equals sales.
Question 32
When volume is 4000 units, average cost is ?
3.75 per unit. When volume is 5000 units, average cost is ₹ 3.50 per unit. The Break-Even point is 6000
units. Calculate: - (i) Variable Cost per unit (ii) Fixed Cost and (iii) Profit Volume Ratio. (PYP Nov’19,5
Marks)
Answer 32
evnioc ai Šfhny efgh
(i) Variable cost per unit = evnioc ai liahg
,qg.|.st s,ttt liahg-,qg.|.}s ‹,ttt liahg-
= s,ttt ‹,ttt
qg.{},stt qg.{s,ttt
= = Rs. 2,500/1000 = Rs. 2.5
{,ttt
(ii) Fixed cost = Total Cost – Variable cost (at 5,000 units level)
= ₹ 17,500 – ₹ 2.5 × 5,000 = ₹ 5,000
(iii) Contribution
. ,
Per unit = = = 0.833
(* , $ - , $
&$ ' $ .
P/V Ratio = ' % ' $
= ". = .
= 25%
This was a numerical question relating to the topic ‘Marginal costing’ to ascertain information
based on change in volume, average cost per unit and breakeven point. Most of the examinees
were unable to calculate the fixed cost; hence they could not calculate the P/V ratio.
Performance of the examinees was average.
Question 33
PJ Ltd manufactures hockey sticks. It sells the products at ₹ 500 each and makes a profit of ₹ 125 on
each stick. The Company is producing 5000 sticks annually by using 50% of its machinery capacity.
The cost of each stick is as under:
Direct Material ₹ 150
14.35
Direct Wages ₹ 50
Works Overhead ₹ 125 (50% fixed)
Selling Expenses ₹ 150 (25% variable)
The anticipation for the next year is that cost will go up as under:
Fixed Charges : 10%
Direct Wages 20%
Direct Material 5%
There will not be any change in selling price.
There is an additional order for 2000 sticks in the next year.
Calculate the lowest price that can be quoted so that the Company can earn the same profit as it
earned in the current year ? (PYP Nov’19,10 Marks)
Answer 33
Selling Price = ₹ 500
Profit = ₹ 125
No of Sticks = 5,000
Particular Current Year Next Year
(₹) (₹)
Direct Material 150 157.50
(150 + 5%)
Direct Wages 50 60
(50+20%)
Works Overheads 62.50 62.5
(125 × 50%)
Selling Expenses 12.50 12.5
(50 × 25%)
Total Variable Cost 275 292.50
Fixed Cost (62.5 × 5,000) = 3,12,500; (37.5 × 5,000) = 5,00,000 5,50,000
1,87,500
Let: Lowest Price Quoted = K
Now, Sales = Target Profit (5,000 units × ₹ 125) + Variable Cost + Fixed Cost Or, = (5,000 × 500) + (2,000
× K) = 6,25,000 + 20,47,500 + 5,50,000 Or, K = ₹ 361.25
So, Lowest Price that can be quoted to earn the profit of ₹ 6,25,000 (same as current year) is ₹ 361.25
This was a numerical problem from the topic ‘Marginal Costing’. Question required
calculation of lowest price to be quoted for additional order in order to earn the same
profit as last year. Performance of majority of the examinees was above average.
Question 34
M/s Gaurav Private Limited is manufacturing and selling two products :’BLACK’ and ‘WHITE’ at selling
price of ₹ 20 and ₹ 30 respectively. The following sales strategy has been outlined for the financial year
2019-20:
(i) Sales planned for the year will be ₹ 81,00,000 in the case of ‘BLACK’ and ₹ 54,00,000 in the case
of ‘WHITE’.
(ii) The selling price of ‘BLACK’ will be reduced by 10% and that of ‘WHITE’ by 20%.
(iii) Break-even is planned at 70% of the total sales of each product.
14.36
(iv) Profit for the year to be maintained at ₹ 8,26,200 in the case of ‘BLACK’ and ₹ 7,45,200 in the case
of ‘WHITE’. This would be possible by reducing the present annual fixed cost of ₹ 42,00,000
allocated as ₹ 22,00,000 to ‘BLACK’ and ₹ 20,00,000 to ‘WHITE’
(i) Number of units to be sold of ‘BLACK’ and ‘WHITE’ to Break even during the financial year 2019-
20.
(ii) Amount of reduction in fixed cost product-wise to achieve desired profit mentioned at (iv)
above. (PYP May ‘19, 5 Marks)
Answer 34
(i) Statement showing Break Even Sales
Particulars Black White
Sales Planned 81,00,000 54,00,000
Selling Price (₹ ) 18 24
Number of Units to be sold 4,50,000 2,25,000
Break Even sales (in Units),70% of total sales 3,15,000 1,57,500
Or
Break Even sales (in ₹),70% of total sales 56,70,000 37,80,000
(ii) Statement Showing Fixed Cost Reduction
Profit to be maintained ( ₹ ) 8,26,200 7,45,200
Margin of Safety (70% of Sales) ( ₹ ) 24,30,000 16,20,000
PVR (Profit/ Margin of Safety) x 100 34% 46%
Contribution (Sales x 34% or 46%) (₹ ) 27,54,000 24,84,000
Less: Profit (₹ ) 8,26,200 7,45,200
Revised Fixed Cost (₹ ) 19,27,800 17,38,800
Present Fixed Cost ( ₹ ) 22,00,000 20,00,000
Reduction in Fixed Cost 2,72,200 2,61,200
This was a numerical question on ‘Marginal Costing’. Examinees easily calculated the BEP,
but failed to calculate the reduction in fixed cost, due to lack of conceptual clarity on this
topic. The performance in this sub part the question was below Average.
Question 35
What are the limitations of marginal costing? (PYP May ‘19, 5 Marks)
Answer 35
Limitations of Marginal Costing
(i) Difficulty in classifying fixed and variable elements: It is difficult to classify exactly the expenses into fixed
and variable category. Most of the expenses are neither totally variable nor wholly fixed. For example,
various amenities provided to workers may have no relation either to volume of production or time
factor.
(ii) Dependence on key factors: Contribution of a product itself is not a guide for optimum profitability unless
it is linked with the key factor.
(iii) Scope for Low Profitability: Sales staff may mistake marginal cost for total cost and sell at a price; which
will result in loss or low profits. Hence, sales staff should be cautioned while giving marginal cost.
(iv) Faulty valuation: Overheads of fixed nature cannot altogether be excluded particularly in large
contracts, while valuing the work-in- progress. In order to show the correct position fixed overheads
have to be included in work-in-progress.
(v) Unpredictable nature of Cost: Some of the assumptions regarding the behaviour of various costs are not
necessarily true in a realistic situation. For example, the assumption that fixed cost will remain static
14.37
throughout is not correct. Fixed cost may change from one period to another. For example, salaries bill
may go up because of annual increments or due to change in pay rate etc. The variable costs do not
remain constant per unit of output. There may be changes in the prices of raw materials, wage rates
etc. after a certain level of output has been reached due to shortage of material, shortage of skilled
labour, concessions of bulk purchases etc.
(vi) Marginal costing ignores time factor and investment: The marginal cost of two jobs may be the same but
the time taken for their completion and the cost of machines used may differ. The true cost of a job
which takes longer time and uses costlier machine would be higher. This fact is not disclosed by
marginal costing.
(vii) Understating of W-I-P: Under marginal costing stocks and work in progress are understated.
In this theoretical question on limitations of ‘Marginal Costing’. Most of the examinees failed
to mention the limitations correctly. Poor performance of the candidate was observed.
Overall performance in this question was below average.
Question 36
A manufacturing company is producing a product 'A' which is sold in the market at ₹ 45 per unit.
The company has the capacity to produce 40000 units per year. The budget for the year 2018-19
projects a sale of 30000 units.
The costs of each unit are expected as under:
₹
Materials 12
Wages 9
Overheads 6
Margin of safety is ₹ 4,12,500.
(i) calculate fixed cost and break-even point.
(ii) calculate the volume of sales to earn profit of 20% on sales.
(iii) if management is willing to invest ₹ 10,00,000 with an expected return of 20%, calculate units to be
sold to earn this profit.
(iv) Management expects additional sales if the selling price is reduced to ₹ 44. Calculate units to be sold to
achieve the same profit as desired in above (iii). (PYP Nov ‘18, 10 Marks)
Answer 36
Margin of Safety = /3
= Rs. 4,12,500
Œ•STŽW
•‘’,“”•”–- = Rs.4,12,500
•
•‘
—˜ = 4,12,500
•‘
Profit = 1,65,000 OR P/V = (18/45) x 100 =40%

(i) Fixed Cost
Profit = (Sales × P/V Ratio) – Fixed Cost
!
1,65,000 = 6,30,000 0 45- 0 1 9 – Fixed cost
Or Fixed Cost = 5,40,000 – 1,65,000

= ₹ 3,75,000
OR
14.38
Profit = Contribution – Fixed Cost = ₹ 5,40,000 - ₹ 3,75,000 = ₹ 1,65,000

P/VRatio= 18/45 = 40%
Break-even Point = Total Sales – Margin of Safety
= ₹ (30,000 × 45) – 4,12,500
= 13,50,000 – 4,12,500 = ₹ 9,37,500
Or
, , , ,
BEP = —˜ = = ₹ 9,37,500 OR 20833.33 Units
1 %
•‘
(ii) Let’s assume, Sales Volume = S unit so total sales value is 45 S and
Contribution is 45 S - 27 S = 18 S
Now, Contribution = Fixed Cost + Desired Profit 18 S =
3,75,000 + 9 S (20% of 45 S)
Or, 9S = 3,75,0000
, ,
So, S = Units
, , 1
Volume of sales = = ₹ 18,75,000 OR 41666.67 Units
So, ₹ 18,75,000 sales are required to earn profit on 20% of sales
(iii) Contribution = Fixed Cost + Desired Profit

18S = 3,75,000 + Return on Investment
18S = 3,75,000 + 2,00,000
, ,
S = !
Units = 31,945 Units(approx.)
So, 31,945 Units to be sold to earn a return of ₹ 2,00,000.
(iv) Revised Contribution = Fixed Cost +
Desired Profit 17S = 3,75.000 +
2,00,000
, ,
S = !
Units
S = 33,824 units (approx.)
Additional Sales to be sold to achieve the same profit is 33,824 Units.
This question was related to Marginal costing, Most of the examinees performed well and
obtained 6-8 marks out of 10 marks.
Overall performance in this question was very good.
Question 37
Following figures have been extracted from the books of M/s. RST Private Limited:
Financial Year Sales (₹ ) Profit/Loss (₹ )
2016-17 4,00,000 15,000(loss)
2017-18 5,00,000 15,000 (Profit)
(i) Profit Volume Ratio
(ii) Fixed Costs
(iii) Break Even Point
14.39
(iv) Sales required to earn a profit of ₹ 45,000.

(v) Margin of Safety in Financial Year 2017-18. (PYP May ‘18, 5 Marks)
Answer 37
Sales (₹) Profit (₹)
Year 2016 4,00,000 15,000 (loss)
Year 2017 5,00,000 15,000 (profit)
Difference 1,00,000 30,000
2 % ' ,
(i) P/V Ratio = 2 %
0 100 š !, ,
0 100=30%
(₹ )
(ii) Contribution in 2016 (4,00,000 x 30%) 1,20,000

Add: Loss 15,000
Fixed Cost* 1,35,000
*Contribution = Fixed cost + Profit
∴Fixed cost = Contribution – Profit
!, ,
(iii) Break-even point = = %
= Rs. 4,50,000
(iv) Sales to earn a profit of ₹ 45,000
=2 ' !, , =1 ,
%
= ₹6,00,000
(v) Margin of safety in 2017 –18

Margin of safety = Actual sales – Break-even sales
= 5,00,000 – 4,50,000 = ₹ 50,000.
Question 38
PH Gems Ltd. is manufacturing readymade suits. It has annual production capacity of 2,000 pieces.
The Cost Accountant has presented following information for the year to the management:
Particulars Amount (₹ ) Amount (₹)

Sales 1,500 pieces @ ₹ 1,800 per piece 27,00,000
Direct Material 5,94,200
Overheads (40% Fixed) 11,97,000 22,33,800
Net Profit 4,66,300
Evaluate following options:
i. If selling price is increased by ₹ 200, the sales will come down to 60% of the total annual capacity.
Should the company increase its selling price?
ii. The company can earn a profit of 20% on sales if the company provide TIEPIN with ready-made suit.
The cost of each TIEPIN is ₹ 18. Calculate the sales to earn a profit of 20% on sales. (PYP May ‘18, 10
Marks)
Answer 38
(i) Evaluation of Option (i)
Selling Price = ₹ 1800 + ₹ 200 = ₹ 2,000 Sales = 2000 x 60% = 1200 Pieces
14.40
(₹ )
Sales (1,200 pieces @ ₹ 2,000) 24,00,000
Less: Direct Material (Rs. 5,94,200 / 1,500 units 0 1,200) 4,75,360

Direct Labour (Rs. 4,42,600/1,500 units 0 1,200) 3,54,080
Variable Overhead (Rs. 11,97,000 0 60% /1,500 LIDJC 0 1,200 5,74,560
Less: Fixed cost (Rs. 11,97,000x40%) 4,78,800
Profit 5,17,200
If price has been increased by 11.11% (increases by 200 on 1,800) sales goes down by 20% (decreased by 300 on
1,500). Change in demand is greater than change in price. Since the variable costs are still same profit has been
arose to ₹ 5,17,200 in-spite of high elasticity of demand. PH gems would not be able to sustain this policy on
account of change if any in variable costs.
(ii) Evaluation of Option (ii)
(Rs.)
Sales 1,800.00
Less: Direct Material (Rs. 5,94,200 / 1,500) 396.13

Cost of Tie PIN 18.00
Direct Labour (Rs. 4,42,600 / 1,500) 295.07
.!!, , 0 %-
Variable Overheads ( 478.80
!,
Contribution 612.00
P/V Ratio (₹ 612/1800x100) 34.0%
Sales to required earn a profit of 20%
Sales = ₹ 4,78,800 + 0.20 of Sales
34.00%
Sales = ₹ 34,20,000 or 1,900 units (₹ 34,20,000/1800)
To earn profit 20% on sales of readymade suit (along with TIE PIN) company has to sold 1,900 units
i.e. 95% of the full capacity. This sales level of 1,900 units is justified only if variable cost is constant.
Any upside in variable cost would impact profitability, to achieve the desired profitability. Production
has to be increased but the scope is limited to 5% only.
Question 39
Moon Ltd. produces products 'X', 'Y' and 'Z' and has decided to analyse it's production mix in respect
of these three products - 'X', 'Y' and 'Z'.
You have the following information:
X Y Z
Direct Materials ₹ (per unit) 160 120 80
Variable Overheads ₹ (per unit) 8 20 12
Direct labour :
Departments: Rate per Hour (₹) Hours per Hours per Hours per
unit unit unit
X Y Z
14.41
Department-A 4 6 10 5
Department-B 8 6 15 11
From the current budget, further details are as below :
X Y Z
Annual Production at present (in units) 10,000 12,000 20,000
Estimated Selling Price per unit (₹) 312 400 240
Sales departments estimate of possible sales in the 12,000 16,000 24,000
coming year (in units)
There is a constraint on supply of labour in Department-A and its manpower cannot be
increased beyond its present level.
Required:
(i) Identify the best possible product mix of Moon Ltd.
(ii) Calculate the total contribution from the best possible product mix. (PYP 5 Marks Nov 20, Old &
New SM)
Answer 39
(i) Statement Showing “Calculation of Contribution/ unit”
Particulars X Y Z
(₹) (₹) (₹)
Selling Price (A) 312 400 240
Variable Cost:
Direct Labour
Dept. A (Rate x Hours) 24 40 20
Dept. B (Rate x Hours) 48 120 88
Variable Overheads 8 20 12
Total Variable Cost (B) 240 300 200
Contribution per unit (A - B) 72 100 40
Hours in Dept. A 6 10 5
Contribution per hour 12 10 8
Rank I II III
Existing Hours = 10,000 x 6hrs. + 12,000 x 10 hrs. + 20,000 x 5 hrs. = 2,80,000 hrs. Best possible
product mix (Allocation of Hours on the basis of ranking)
Produce ‘X’ = 12,000 units

Hours Required = 72,000 hrs (12,000 units × 6 hrs.)
Balance Hours Available = 2,08,000 hrs (2,80,000 hrs. – 72,000
hrs.)
Produce ‘Y’ (the Next Best) = 16,000 units
Hours Required = 1,60,000 hrs (16,000 units × 10 hrs.)
Balance Hours Available = 48,000 hrs (2,08,000 hrs. – 1,60,000
hrs.)
Produce ‘Z’ (balance) = 9,600 units (48,000 hrs./ 5 hrs.)
(ii) Statement Showing “Contribution”
Product Units Contribution/ Unit (₹) Total Contribution (₹)
X 12,000 72 8,64,000
14.42
Y 16,000 100 16,00,000

Z 9,600 40 3,84,000
Total 28,48,000
Question 40
Differentiate between "Marginal and Absorption Costing". (PYP 5 Marks Nov 20)
Answer 40
Difference between Marginal costing and Absorption costing
S. Marginal costing Absorption costing
No.
1. Only variable costs are considered for Both fixed and variable costs are considered
product costing and inventory for product costing and
valuation. inventory valuation.
2. Fixed costs are regarded as period Fixed costs are charged to the cost of
costs. The Profitability of different production. Each product bears a reasonable
products is judged by their P/V ratio. share of fixed cost and thus the profitability
of a product is influenced
by the apportionment of fixed costs.
3. Cost data presented highlight the total Cost data are presented in conventional
contribution of each product. pattern. Net profit of each product is
determined after subtracting fixed cost
along with their variable costs.
4. The difference in the magnitude of The difference in the magnitude of opening
opening stock and closing stock does stock and closing stock affects the unit cost
not affect the unit cost of of production due to the
production. impact of related fixed cost.
5. In case of marginal costing the cost In case of absorption costing the cost per
per unit remains the same, unit reduces, as the production increases
irrespective of the production as it is as it is fixed cost which reduces, whereas,
valued at variable cost the variable cost
remains the same per unit.
Question 41
During a particular period, ABC Ltd has furnished the following data:
Sales ₹ 10,00,000
Contribution to sales ratio 37% and Margin of safety is 25% of sales.
A decrease in selling price and decrease in the fixed cost could change the "contribution to sales
ratio" to 30% and "margin of safety" to 40% of the revised sales. Calculate:
(i) Revised Fixed Cost.
(ii) Revised Sales and
(iii) New Break-Even Point. (PYP 5 Marks Jan ‘21)
Answer 41
Contribution to sales ratio (P/V ratio) = 37%
Variable cost ratio = 100% - 37% = 63%
Variable cost = ₹ 10,00,000 x 63% = ₹ 6,30,000
After decrease in selling price and fixed cost, sales quantity has not changed. Thus, variable cost
is ₹ 6,30,000.

14.43
Revised Contribution to sales = 30%
Thus, Variable cost ratio = 100% - 30% = 70%
Thus, Revised sales = Rs. 6,30,000 / 70% = Rs. 9,00,000
Revised, Break-even sales ratio = 100% - 40% (revised Margin of safety) = 60%
(i) Revised fixed cost = revised breakeven sales x revised contribution to

sales ratio
= ₹ 5,40,000 (₹ 9,00,000 x 60%) x 30%
= ₹ 1,62,000
(ii) Revised sales = ₹ 9,00,000 (as calculated above)

(iii) Revised Break-even point = Revised sales x Revised break-even sales ratio
= ₹ 9,00,000 x 60%
= ₹ 5,40,000
Question 42
Two manufacturing companies A and B are planning to merge. The details are as follows:
A B
Capacity utilisation (%) 90 60
Sales (₹) 63,00,000 48,00,000
Variable Cost (₹) 39,60,000 22,50,000
Fixed Cost (₹) 13,00,000 15,00,000
Assuming that the proposal is implemented, calculate:

(i) Break-Even sales of the merged plant and the capacity utilization at that stage.
(ii) Profitability of the merged plant at 80% capacity utilization.
(iii) Sales Turnover of the merged plant to earn a profit of ₹ 60,00,000.
(iv) When the merged plant is working at a capacity to earn a profit of ₹ 60,00,000, what percentage
of increase in selling price is required to sustain an increase of 5% in fixed overheads. (PYP 10
Marks Jan 21)
Answer 42
Workings:
1. Statement showing computation of Breakeven of merged plant and other required information
S. Plan A Plant B Merged
No. Particulars Before After Before After Plant
(90%) (100%) (60%) (100%) (100%)
(₹) (₹) (₹) (₹) (₹)
(i) Sales 63,00,000 70,00,000 48,00,000 80,00,000 1,50,00,000
(ii) Variable cost 39,60,000 44,00,000 22,50,000 37,50,000 81,50,000
(iii) Contribution (i - ii) 23,40,000 26,00,000 25,50,000 42,50,000 68,50,000
(iv) Fixed Cost 13,00,000 13,00,000 15,00,000 15,00,000 28,00,000
(v) Profit (iii - iv) 10,40,000 13,00,000 10,50,000 27,50,000 40,50,000
2. PV ratio of merged plant =
&$ . , ,
0 100 = !, , ,
0 100 = 45.67%

14.44
àbcd efgh
(i) Break even Sales of merged plant = •
qnhaf
€
qg.už,tt,ttt
= ‹s.r}%
= Rs. 61,30,939.34(approx..)
qg.r{,|t,Ÿ|Ÿ.|‹
Capacity utilization = !, , ,
0 10C = 40.88%
(ii) Profitability of the merged plant at 80% capacity utilization
= (₹ 1,50,00,000 x 80%) x P/v ratio – fixed cost
= ₹ 1,20,00,000 x 45.67% – ₹ 28,00,000
= ₹ 26,80,400
(i) Sales to earn a profit of ₹ 60,00,000

=2 '
Desired sales =
." , , = . , ,
= 1 . %
= ₹ 1,92,68,666 (approx.)
(ii) Increase in fixed cost

= ₹ 28,00,000 x 5% = ₹ 1,40,000
Therefore, percentage increase in sales price

qg.{,‹t,ttt
= .!, ", ,
0 100 = 0.726%(approx..)
Question 43
XYZ Ltd. is engaged in the manufacturing of toys. It can produce 4,20,000 toys at its 70% capacity on
per annum basis. Company is in the process of determining sales price for the financial year 2020-
21. It has provided the following information:
Direct Material ₹ 60 per unit Direct
Labour ₹ 30 per unit
Indirect Overheads:
Fixed ₹ 65,50,000 per annum
Variable ₹ 15 per unit
Semi-variable ₹ 5,00,000 per annum up to 60% capacity and ₹ 50,000 for every
5% increase in capacity or part thereof up to 80% capacity and
thereafter ₹ 75,000 for every 10% increase in capacity or part
thereof.
Company desires to earn a profit of ₹ 25,00,000 for the year. Company has planned that the factory
will operate at 50% of capacity for first six months of the year and at 75% of capacity for further three
months and for the balance three months, factory will operate at full capacity.
(1) Determine the average selling price at which each of the toy should be sold to earn the desired
profit.
(2) Given the above scenario, advise whether company should accept an offer to sell each Toy at:
(a) ₹ 130 per Toy
(b) ₹ 129 per Toy (PYP10 Marks Jan 21)
14.45
Answer 43
(1) Statement of Cost
For first 6 For further For remaining Total
months 3 months 3 months
6,00,000 x 6,00,000 x 6,00,000 x
6/12 x 50% 3/12 x 75% 3/12
= 1,50,000 = 1,12,500 = 1,50,000 4,12,500
units units units units
Direct Material 90,00,000 67,50,000 90,00,000 2,47,50,000
Direct labour 45,00,000 33,75,000 45,00,000 1,23,75,000
Indirect – Variable Expenses 22,50,000 16,87,500 22,50,000 61,87,500
Indirect – Fixed Expenses 32,75,000 16,37,500 16,37,500 65,50,000

Indirect Semi-variable
expenses
- For first six months @ 2,50,000
5,00,000 per annum
- For further three months @ 1,62,500
6,50,000* per annum
- For further three months @ 2,12,500 6,25,000
8,50,000** per annum
Total Cost 1,92,75,000 1,36,12,500 1,76,00,000 5,04,87,500
Desired Profit 25,00,000
Sales value 5,29,87,500
Average Sales price per Toy 128.45
* ₹ 5,00,000+ [3 times (from 60% to 75%) x 50,000] = ₹ 6,50,000
** ₹ 6,50,000+ [1 time (from 75% to 80%) x 50,000] + [2 times (from 80% to 100%)
× 75,000] = ₹ 8,50,000
(2) (a) Company Should accept the offer as it is above its targeted sales price of ₹ 128.45
per toy.
(b) Company Should accept the offer as it is above its targeted sales price of ₹ 128.45
per toy.
Question 44
LR Ltd. is considering two alternative methods to manufacture a new product it intends to market.
The two methods have a maximum output of 50,000 units each and produce identical items with a
selling price of ₹ 25 each. The costs are:
Method-1 Method-2
Semi-Automatic Fully-Automatic
(₹) (₹)
Fixed costs 1,00,000 3,00,000
(1) Cost Indifference Point in units. Interpret your results.
(2) The Break-even Point of each method in terms of units. (PYP 5 Marks July ’21)
Answer 44
14.46
(i) Cost Indifference Point

Method-1 and Method-2
(₹)
Differential Fixed Cost (I) ₹ 2,00,000
(₹ 3,00,000 – ₹ 1,00,000)
Differential Variable Costs (II) ₹5
(₹ 15 – ₹ 10)
Cost Indifference Point (I/II) 40,000
(Differential Fixed Cost / Differential Variable Costs per unit)
Interpretation of Results
At activity level below the indifference points, the alternative with lower fixed costs and higher
variable costs should be used. At activity level above the indifference point, alternative with higher
fixed costs and lower variable costs should be used.
No. of Product Alternative to be Chosen
Product ≤ 40,000 units Method-1, Semi-Automatic
Product ≥ 40,000 units Method-2, Automatic
(ii) Break Even point (in units)

Method-1 Method-2
BEP (in units) = 1,00,000 / (25-15)= 3,00,000 / (25-15)
10,000 = 20,000
&$ ' $
This practical problem was based on Marginal Costing which required calculation of cost
indifference point between two methods and interpretation of the result. Question also
required calculation of BEP under both methods. Most of the examinees failed to interpret
the cost indifference point. Performance of the examinees was average.
Question 45
What is Margin of Safety? What does a large Margin of Safety indicates? How can you calculate
Margin of Safety? (PYP 5 Marks July 21)
Answer 45
Margin of Safety: The margin of safety can be defined as the difference between the expected level of
sale and the breakeven sales.
The larger the margin of safety, the higher is the chances of making profits.
The Margin of Safety can be calculated by identifying the difference between the projected sales and
breakeven sales in units multiplied by the contribution per unit. This is possible because, at the breakeven
point all the fixed costs are recovered and any further contribution goes into the making of profits.
Margin of Safety = (Projected sales – Breakeven sales) in units x contribution per unit
It also can be calculated as:
Margin of Safety =

14.47
Examinees were required to explain margin of safety. Performance of the examinees was
above average.
Question 46
A Z company has prepared its budget for the production of 2,00,000 units. The variable cost per unit
is ₹ 16 and fixed cost is ₹ 4 per unit. The company fixes its selling price to fetch a profit of 20% on total
cost.
(i) Present break-even sales (in ₹ and in quantity).
(ii) Present profit-volume ratio.
(iii) Revised break-even sales in ₹ and the revised profit-volume ratio, if it reduces its selling price by
10%.
(iv) What would be revised sales- in quantity and the amount, if a company desires a profit increase
of 20% more than the budgeted profit and selling price is reduced by 10% as above in point (iii).
(PYP 10 Marks Dec ‘21)
Answer 46
Variable Cost per Unit=₹16
Fixed Cost per Unit =₹ 4, Total Fixed Cost= 2,00,000 units x ₹ 4 = ₹8,00,000
Total Cost per Unit =₹20
Selling Price per unit = Total Cost + Profit = Rs. 20+Rs. 4 = Rs. 24
Contribution per unit = Rs. 24- Rs. 16 = Rs. 8
. , ,
(i) Present Break- even Sales (Quantity) = &$ • ' $
= .
Present Break –even Sales(Rs.) = 1,00,000 units X Rs. 24 = Rs. 24,00,000
(ii) Present P/V Ratio = 8/24 X 100 = 33.33%
(iii) Revised Selling Price per unit = Rs. 24 – 10% of Rs. 24 = Rs. 21.60
Revised Contribution per unit = Rs. 21.60 – Rs. 16 = Rs. 5.60

, ,
Revised Break-even point (Rs.) = = = Rs. 30,85,705
" . " %
Or
. , ,
Revised Break-even point (units) = &$ • ' $
= .
= 1,42,857
Revised Break-even point (₹) = 1,42,857 units x ₹ 21.60 = ₹ 30,85,711
(iv) Present profit =₹ 8,00,000
Desired Profit = 120% of ₹ 8,00,000 =₹ 9,60,000 Sales to

earn a profit of ₹ 9,60,000
Total contribution required = 8.00.000 + 9,60,000 = ₹ 17,60,000

14.48
=2 , , = , ,
= = 3,14,286 units
&$ ' $ .
B¡DCBF Sales (in Rs.) = 3,14,286 units X Rs. 21.60 = Rs. 67,88,578
This Numerical problem based on the concept of Marginal costing. First three parts of the
question were answered in the correct line. In the fourth part, many examinees failed to
calculate amount of desired contribution. Performance of the examinees was good.
Question 47
Top-tech a manufacturing company is presently evaluating two possible machines for the
manufacture of superior Pen-drives. The following information is available:
Particulars Machine A Machine B
Selling price per unit ₹ 400.00 ₹ 400.00
Variable cost per unit ₹ 240.00 ₹ 260.00
Total fixed costs per year ₹ 350 lakhs ₹ 200 lakhs
Required:
(i) Recommend which machine should be chosen?
(ii) Would you change your Answer, if you were informed that in near future demand will be
unlimited and the capacities of the two machines are as follows?
Machine A - 12,00,000 units Machine B - 12,00,000 units Why?(PYP 5 Marks May’22)
Answer 47
Machine-A Machine-B Total
A Selling price per unit (₹) 400 400
B Variable cost per cost (₹) 240 260
C Contribution per unit (₹) [A-B] 160 140
D Units 8,00,000 10,00,000
E Total contribution (₹ [C×D] 12,80,00,000 14,00,00,000 26,80,00,000
F Fixed Cost (₹) 3,50,00,000 2,00,00,000 5,50,00,000
G Profit [E-F] (₹) 9,30,00,000 12,00,00,000 21,30,00,000
H Profit per unit [G÷D] (₹) 116.25 120.00
(i) Machine B has the higher profit of ₹2,70,00,000 than the Machine-A. Further, Machine-B’s fixed cost
is less than the fixed cost of Machine-A and higher capacity. Hence, Machine B be recommended.
Note: This Question can also be solved as below:
Indifferent point = Difference in fixed cost / difference in variable cost per unit
= 1,50,00,000 / 20 = 7,50,000 units
At the level of demand 7,50,000 units both machine options equally profitable. If demand below
7,50,000 units, select machine B (with lower FC).
If demand above 7,50,000 units, select machine A (with lower VC).
(ii) When the capacities of both the machines are same and demand for the product is unlimited,
calculation of profit will be as follows:
Machine-A Machine-BTotal
Contribution per unit (₹) 160 140
Units 12,00,000 12,00,000
Total contribution (₹) [A×B] 19,20,00,000 16,80,00,000 36,00,00,000
14.49
Fixed Cost (₹) 3,50,00,000 2,00,00,000 5,50,00,000

Profit [C-E] (₹) 15,70,00,000 14,80,00,000 30,50,00,000
Profit per unit [E÷B] (₹) 130.83 123.33
Yes, the preference for the machine would change because now, Machine A is having higher contribution
and higher profit, hence recommended.
Question 48
UV Limited started a manufacturing unit from 1st October 2021. It produces designer lamps and sells
its lamps at ₹ 450 per unit. During the quarter ending on 31st December, 2021, it produced and sold
12,000 units and suffered a loss of ₹ 35 per unit. During the quarter ending on 31st March, 2022, it
produced and sold 30,000 units and earned a profit of ₹ 40 per unit.

(i) Total fixed cost incurred by UV ltd. per quarter.
(ii) Break Even sales value (in rupees)
Calculate Profit, if the sale volume reaches 50,000 units in the next quarter (i.e., quarter ending on
30th June, 2022). (PYP 5 Marks May’22)
Answer 48
Quarter ending 31st Quarter ending 31st March,
December, 2021 (₹) 2022(₹)
Sales (No. of units sold x ₹ 450 per unit) 54,00,000 1,35,00,000
Profit (Loss) (4,20,000) 12,00,000
[12,000 × 35] [30,000 × 40]
¢£¤V¥¦ ŽV §•STŽW
P/V Ratio= 0 100
! ," ,
∴ !, ,
0 100=20%
(i) Fixed Cost = Sales × P/V ratio – profit

= ₹ 1,35,00,000 × 20% – 12,00,000
= ₹ 15,00,000
Alternative Presentation for the calculation of Fixed cost

Quarter ending Quarter ending 31st
31stDecember, 2021(₹) March, 2022(₹)
Sales (No. of units sold x ₹ 450 per 54,00,000 1,35,00,000
unit)
Profit (Loss) (4,20,000) 12,00,000
[12,000 × 35] [30,000 × 40]
Total cost 58,20,000 1,23,00,000
VC per unit = (1,23,00,000 – 58,20,000) / (30,000 – 12,000)
= 64,80,000 / 18,000 =₹ 360 per unit
Fixed cost = TC – VC , 58,20,000 (360 x12,000 units) ₹15,00,000
Fixed cost
0 100
„/± E²JDH

14.50
! , ,
=₹75,00,000
" %
(i) Profit, if sales reach 50,000 units for the quarter ending 30th June, 2022
(₹)
Sales (50,000 × ₹ 450) 2,25,00,000
Less: Variable cost 1,80,00,000
Less: Fixed cost 15,00,000
Profit 30,00,000
Question 49
ABC Ltd sells its Product ‘Y’ at a price of ₹ 300 per unit and its variable cost is ₹ 180 per unit. The fixed
costs are ₹ 16,80,000 per year uniformly incurred throughout the year. The Profit for the year is ₹
7,20,000.
(i) BEP in value (₹) and units.
(ii) Margin of Safety
(iii) Profits made when sales are 24,000 units.
(iv) Sales in value (₹) to be made to earn a net profit of ₹ 10,00,000 for the year. (PYP 5 Marks Nov
22)
Answer 49
(i) Calculation of BEP in value
% 3 & !
P/V ratio = = = 40%
% ! , ,
Break Even Point in Value ( ₹) = = 1 %
= Rs. 42,00,000
]
% ! , ,
Break Even Point in Units = &$
= !" %
= 14,000 Units
.1", ,
(Alternatively , = 14000 Units)
•jf³ah },ut,ttt
(ii) Margin of Safety (in Amount) = • = ‹t%
= Rs. 18,00,000
jnhaf
€
Margin of safety may also be calculated by deducting BEP sales from present sale. Present sale is
₹ 60,00,000 i.e. (16,80,000 + 7,20,000)/40%.
•jf³ah },ut,ttt
Margin of Safety (in Units) = efihjaklhafi pcj liah = {ut
= 6,000 units
(iii) Profit when sales are 24,000 units

Particular (₹)
Contribution (24,000 X 120) 28,80,000
Less: Fixed cost 16,80,000
Profit 12,00,000
(iv) Sales in value to earn a net profit of ₹10,00,000

% =2 ' ! , , =! , ,
= 1 %
= Rs. 67,00,000
]
Question 50
14.51
An agriculture based company having 210 hectares of land is engaged in growing three different
cereals namely, wheat, rice and maize annually. The yield of the different crops and their selling
prices are given below:
Wheat Rice Maize
Yield (in kgs per 2,000 500 100
hectare)
Selling Price (₹ per kg) 20 40 250
The variable cost data of different crops are given below:

(All figures in ₹ per kg)
Crop Labour Packing Other variable
charges Materials expenses
Wheat 8 2 4
Rice 10 2 1
Maize 120 10 20
The company has a policy to produce and sell all the three kinds of crops. The maximum and
minimum area to be cultivated for each crop is as follows:
Crop Maximum Area (in Minimum Area (in
hectares) hectares)
Wheat 160 100
Rice 50 40
Maize 60 10

(i) Rank the crops on the basis of contribution per hectare.
(ii) Determine the optimum product mix considering that all the three cereals are to be
produced.
(iii) Calculate the maximum profit which can be achieved if the total fixed cost per annum
is ₹ 21,45,000. (PYP 10 Marks Nov 22)
(Assume that there are no other constraints applicable to this company)
Answer 50
Statement showing Ranking of crops on the basis of Contribution per hectare
Sl. No Particulars Wheat Rice Maize
(I) Sales price per kg (₹) 20 40 250
(II) Variable cost* per kg (₹) 14 13 150
(III) Contribution per kg (₹) 6 27 100
(IV) Yield (in kgs per hectare) 2,000 500 100
(V) Contribution per hectare (₹) 12,000 13,500 10,000
(VI) Ranking II I III
*Variable cost = Labour Charges +Packing Material+ Other Variable Expenses
Therefore, to maximize profits, the order of priority of production would be Rice,

Wheat and Maize.
(ii) & (iii) Statement showing optimum product mix considering that all the three cereals
are to be produced and maximum profit thereof
Sl. Particulars Wheat Rice Maize Total
No.
(i) Minimum Area (in hectare) 100 40 10 150
(ii) Remaining area (in hectare) 60
14.52
(iii) Distribution of remaining area 50 10 - 60

based on ranking considering
Maximum area
(iv) Optimum mix (in hectare) 150 50 10 210
(v) Contribution per hectare (₹) 12,000 13,500 10,000
(vi) Total contribution (₹) 18,00,000 6,75,000 1,00,000 25,75,000
(vii) Fixed cost (₹) 21,45,000
(viii) Maximum Profit (₹) 4,30,000
Optimum Product Mix and calculation of maximum profit earned by company can also
be presented as below
(ii) Optimum Product Mix:
Particular Area Yield Total Production (in
(in hectares) (kg per kgs)
hectare)
(a) Maximum of Rice 50 500 25000
(b) Minimum of Maize 10 100 1000
(c) Balance of Wheat 150 2000 300000
210 326000
(iii) Calculation of maximum profit earned by the company:

Production Contribution Total
(in kgs) (₹ per kg) contribution
(₹)
(a) Rice 25,000 24 6,75,000
(b) Maize 1,000 100 1,00,000
(c) Wheat 3,00,000 6 18,00,000
Total contribution 25,75,000
Less: Total Fixed Cost per (21,45,000)
annum
Maximum profits earned by 4,30,000
the company
Question 51
MNP Company Limited produces two products 'A' and 'B'. The relevant cost and sales data per unit of
output is as follows.
(₹) (₹)
Direct material 55 60
Direct labour 35 45
Variable factory overheads 40 20
The availability of machine hours is limited to 55,000 hours for the month. The monthly demand for
product ‘A’ and product 'B' is 5,000 units and 6,000 units, respectively. The fixed expenses of the
company are ₹1,40,000 per month. Variable factory overheads are ₹ 4 per machine hour. The
company can produce both products according to the market demand.
Required:
Calculate the product mix that generates maximum profit for the company in the situation and also
calculate profit of the company. (PYP 5 Marks, May ‘23)
14.53
Answer 51
₹ ₹
Variable cost:
Direct Material 55 60
Direct labour 35 45
Variable factory overheads 40 20
130 125
Contribution 50 50
Machine hour (p.u.) 10 5
Contribution per hour 5 10
Rank II I
Calculation of Product Mix
Hours available 55,000

Product B (6000 x 5) 30,000
Balance Hours 25,000
Product A (2500 x 10) 25,000
Balance Hours 0
Calculation of Profit
₹
Contribution
A 2500 units x 50
B 6000 units x 50 4,25,000
Less: Fixed cost (1,40,000)
Profit 2,85,000

15.1
Chapter 15
Budget & Budgetary Control
Question 1
CALCULATE (i) Efficiency ratio (ii) Activity Ratio (iii) Capacity Ratio. The relevant data is as below:
Budgeted Production 1,44,000 units Standard Hours per unit 12 Actual Production 1,20,000 units
Actual Working Hours 12,00,000 (MTP 5 Marks March ’23 ,Aug ’18 )( Same concept different figures
MTP Oct ’19 5 Marks)
Answer 1
(i) Efficiency Ratio = X 100

, , .
= , , ,
X 100 = 120%
(ii) Activity Ratio = X 100

, ,
= , , !
X 100 = 83.34%
(iii) Capacity Ratio = X 100

, ,
= , , !
X 100 = 69.45%
Question 2
Following data is available for ABC Ltd.:
Standard working hours 8 hours per day of 5 days per
week
Maximum Capacity 60 employees
Actual working 50 employees
Actual hours expected to be worked per four week 8,000 hours
Standard hours expected to be earned per four week 9,600·hours
Actual hours worked in the four week period 7,500 hours
Standard hours earned in the four week period 8,800 hours
The related period is of four weeks. Calculate the following Ratios:
(i) Efficiency Ratio
(ii) Activity Ratio
(iii) Standard Capacity Usage Ratio
(iv) Actual Capacity Usage Ratio
(v) Actual Usage of Budgeted Capacity Ratio (PYP 5 Marks May ’19)
Answer 2
(i) Efficiency Ratio:
#,#
= " = " = 117.33%
$,%
(ii) Activity Ratio:

#,#
= " = #, " = 110%
(iii) Standard Capacity Usage Ratio:

#,#
=& '. ( ( )
" = *,+ " = 83.33%
(iv) Actual Capacity Usage Ratio:

Chapter 15 Budget & Budgetary Control
15.2
$,%
=& '. ( , )
" = *,+ " = 78.125%
(v) Actual Usage of Budgeted Capacity Ratio:

$,%
= " = #, " = 93.75%
Working Notes:
1. Maximum Capacity in a budget period
= 60 Employees × 8 Hrs. × 5 Days × 4 Weeks = 9,600 Hrs.
2. Budgeted Hours (Hrs)
3. Actual Hrs. = 7,500 Hrs. (given)
4. Standard Hrs. for Actual Output = 8,800 Hrs.
Question 3
SP Ltd. has prepared budget for the coming year for its two products A and B.
Product A (₹) Product B (₹)
Production & Sales unit 6,000 units 9,000 units
Raw material cost per unit 60.00 42.00
Direct labour cost per unit 30.00 18.00
Variable overhead per unit 12.00 6.00
Fixed overhead per unit 8.00 4.00
Selling price per unit 120.00 78.00
After some marketing efforts, the sales quantity of the Product A & B can be increased by 1,500 units
and 500 units respectively but for this purpose the variable overhead and fixed overhead will be
increased by 10% and 5% respectively for the both products.
You are required to PREPARE flexible budget for both the products:
(i) Before marketing efforts
(ii) After marketing efforts (MTP 5 Marks April ’23 & March ’19, RTP May ’19)
Answer 3
(i) Flexible Budget before marketing efforts:
6,000 units 9,000 units
Per unit Total Per unit Total
Sales 120.00 7,20,000 78.00 7,02,000
Raw material cost 60.00 3,60,000 42.00 3,78,000
Direct labour cost per unit 30.00 1,80,000 18.00 1,62,000
Variable overhead per unit 12.00 72,000 6.00 54,000
Fixed overhead per unit 8.00 48,000 4.00 36,000
Total cost 110.00 6,60,000 70.00 6,30,000
Profit 10.00 60,000 8.00 72,000
(ii) Flexible Budget after marketing efforts:

7,500 units 9,500 units
Per unit Total Per unit Total
15.3
Sales 120.00 9,00,000 78.00 7,41,000

Raw material cost 60.00 4,50,000 42.00 3,99,000
Direct labour cost per unit 30.00 2,25,000 18.00 1,71,000
Variable overhead per unit 13.20 99,000 6.60 62,700
Fixed overhead per unit 6.72 50,400 3.98 37,800
Total cost 109.92 8,24,400 70.58 6,70,500
Profit 10.08 75,600 7.42 70,500
Question 4
Soya B Limited is presently operating at 50% capacity and producing 50,000 units. The entire output
is sold at a price of Rs. 180 per unit. The cost structure at the 50% level of activity is as under:
(₹)
Direct Material 60 per unit
Direct Wages 20 per unit
Variable Overheads 20 per unit
Direct Expenses 12 per unit
Factory Expenses (30% fixed) 16 per unit
Selling and Distribution Exp. (85% variable) 10 per unit
Office and Administrative Exp. (100% fixed) 6 per unit
The company anticipates that the variable costs will go up by 20% and fixed costs will go up by 10%.
You are required to prepare an Expense budget, based on marginal cost for the company at 50%,75%
and 100% level of activity and find out the profits at respective levels. (MTP 10 Marks March ’23,
March ’18) (Same concepts different figures MTP 10 Marks May’20, Old & New SM)
Answer 4
Expense Budget of Soya B Ltd. for the period
50,000 75,000 1,00,000
Per units units units
unit
(₹) Amount (₹) Amount (₹) Amount (₹)
Sales (A) 180 90,00,000 1,35,00,000 1,80,00,000
Less: Variable Costs:
- Direct Material 72 36,00,000 54,00,000 72,00,000
- Direct Wages 24 12,00,000 18,00,000 24,00,000
- Variable Overheads 24 12,00,000 18,00,000 24,00,000
- Direct Expenses 14.4 7,20,000 10,80,000 14,40,000
- Variable factory expenses
13.44 6,72,000 10,08,000 13,44,000
(70% of Rs 16 p.u.)x 120%
- Variable Selling & Dist.
exp. 10.2 5,10,000 7,65,000 10,20,000
(85% of Rs 10 p.u.)x120%
Total Variable Cost (B) 158.04 79,02,000 1,18,53,000 1,58,04,000
Contribution (C) = (A – B) 21.96 10,98,000 16,47,000 21,96,000
Less: Fixed Costs:
- Office and Admin. exp.
-- 3,30,000 3,30,000 3,30,000
(100%)
- Fixed factory exp. (30%) -- 2,64,000 2,64,000 2,64,000
- Fixed Selling & Dist. exp.
-- 82,500 82,500 82,500
(15%)
15.4
Total Fixed Costs (D) -- 6,76,500 6,76,500 6,76,500

Profit (C – D) -- 4,21,500 9,70,500 15,19,500
Question 5
Explain the difference between fixed budget and flexible budget. (MTP Aug. ‘18, 5 Marks, MTP 5 Marks
Apr’22, Old & New SM)
Answer 5
Difference between Fixed and Flexible Budgets:
S. No. Fixed Budget Flexible Budget
1. It does not change with actual volume of It can be re-casted on the basis of
activity achieved. Thus it is known as rigid activity level to be achieved. Thus it
or inflexible budget. is not rigid.
2. It operates on one level of activity and It consists of various budgets for
under one set of conditions. It assumes that different levels of activity.
there will be no change in the prevailing
conditions, which is unrealistic.
3. Here as all costs like - fixed, variable and Here analysis of variance provides
semi-variable are related to only one level useful information as each cost is
of activity so variance analysis does not analysed according to its behaviour.
give useful information.
4. If the budgeted and actual activity levels Flexible budgeting at different levels
differ significantly, then the aspects like cost of activity facilitates the
ascertainment and price fixation do not give ascertainment of cost, fixation of
a correct picture. selling price and tendering of
quotations.
5. Comparison of actual performance with It provides a meaningful basis of
budgeted targets will be meaningless comparison of the actual
specially when there is a difference performance with the budgeted
between the two activity levels. targets.
Question 6
V Ltd. produces and markets a very popular product called ‘X’. The company is interested in presenting
its budget for the second quarter of 2019.
The following information are made available for this purpose:
(i) It expects to sell 50,000 bags of ‘X’ during the second quarter of 2019 at the selling price of Rs. 900 per bag.
(ii) Eachbag of ‘X’requires2.5kgs.of a raw –material called ‘Y’ and 7.5kgs. of raw –material called‘Z’.
(iii) Stock levels are planned as follows:
Particulars Beginning of Quarter End of Quarter
Finished Bags of ‘X’ (Nos.) 15,000 11,000
Raw – Material ‘Y’ (Kgs.) 32,000 26,000
Raw – Material ‘Z’ (Kgs.) 57,000 47,000
Empty Bag (Nos.) 37,000 28,000
(iv) ‘Y’ cost Rs.120 per Kg., ‘Z’ costs Rs.20 per Kg. and ‘Empty Bag’ costs Rs.80 each.
(v) It requires 9 minutes of direct labour to produce and fill one bag of ‘X’. Labour cost is Rs.50 per hour.
(vi) Variablemanufacturing costs are Rs.45 per bag. Fixed manufacturing costs Rs.30,00,000 per quarter.
(vii) Variable selling and administration expenses are 5% of sales and fixed administration and selling expenses
are Rs.20,50,000 per quarter.
Required
(i) PREPARE a production budget for the said quarter.
(ii) PREPARE a raw – material purchase budget for ‘Y’, ‘Z’ and ‘Empty Bags’ for the said quarter in quantity
15.5
as well as in rupees.
(iii) COMPUTE the budgeted variable cost to produce one bag of ‘X’.
(iv) PREPARE a statement of budgeted net income for the said quarter and show both per unit and total
cost data. (MTP Oct. ’19 & April ’23 10 Marks) (Same concept different figures Old & New SM)
Answer 6
(i) Production Budget of ‘X’ for the Second Quarter
Particulars Bags (Nos.)
Budgeted Sales 50,000
Add: Desired Closing stock 11,000
Total Requirements 61,000
Less: Opening stock 15,000
Required Production 46,000
(ii) Raw–Materials Purchase Budget in Quantity as well as in Rs. for 46,000 Bags of ‘X’
Particulars ‘Y’ ‘Z’ Empty Bags
Kgs. Kgs. Nos.
Production Requirements 2.5 7.5 1.0
Per bag of ‘X’
Requirement for Production 1,15,000 3,45,000 46,000
(46,000 × 2.5) (46,000 × 7.5) (46,000 ×1)
Add: Desired Closing Stock 26,000 47,000 28,000
Total Requirements 1,41,000 3,92,000 74,000
Less: Opening Stock 32,000 57,000 37,000
Quantity to be purchased 1,09,000 3,35,000 37,000
Cost per Kg./Bag Rs.120 Rs.20 Rs.80
Cost of Purchase (Rs.) 1,30,80,000 67,00,000 29,60,000
(iii) Computation of Budgeted Variable Cost of Production of 1 Bag of ‘X’
Particulars (Rs.)
Raw – Material
Y 2.5 Kg @120 300.00
Z7.5Kg.@20 150.00
Empty Bag 80.00
Direct Labour (Rs.50× 9 minutes / 60 minutes) 7.50
Variable Manufacturing Overheads 45.00
Variable Cost of Production per bag 582.50
(iv) Budgeted Net Income for the Second Quarter
Particulars Per Bag (Rs.) Total (Rs.)
Sales Value (50,000 Bags) 900.00 4,50,00,000
Less: Variable Cost:
Production Cost 582.50 2,91,25,000
Admn. & Selling Expenses (5% of Sales Price) 45.00 22,50,000
Budgeted Contribution 272.50 1,36,25,000
Less: Fixed Expenses:
Manufacturing 30,00,000
Admn. & Selling 20,50,000
Budgeted Net Income 85,75,000
15.6
Question 7
EXPLAIN the stages in Zero-based budgeting (MTP 5 Marks, May 2020)
Answer 7
Zero-based budgeting (ZBB) involves the following stages:
(i) Identification and description of Decision packages
(ii) Evaluation of Decision packages
(iii) Ranking (Prioritisation) of the Decision packages
(iv) Allocation of resources
(v) Identification and description of Decision packages: Decision packages are the programmes or activities for
which decision is required to be taken. The programmes or activities are described for technical
specifications, financial impact in the form of cost benefit analysis and other issues like environmental,
regulatory, social etc.
(vi) Evaluation of Decision packages: Once Decision packages are identified and described, it is evaluated against
factors like synchronisation with organisational objectives, availability of funds, regulatory requirement etc.
(vii) Ranking (Prioritisation) of the Decision packages: After evaluation of the decision packages, it is ranked on
the basis priority of the activities. Because of this prioritization feature ZBB is also known as Priority-based
Budgeting.
(viii) Allocation of resources: After ranking of the decision packages, resources are allocated for decision
packages. Budgets are prepared like it is done first time without taking reference to previous budgets
Question 8
DESCRIBE objectives of Budgetary Control System. (MTP 5 Marks Oct ’20)
Answer 8
Objectives of Budgetary Control System
1. Portraying with precision the overall aims of the business and determining targets of performance
for each section or department of the business.
2. Laying down the responsibilities of each of the executives and other personnel so that everyone
knows what is expected of him and how he will be judged. Budgetary control is one of the few ways in
which an objective assessment of executives or department is possible.
3. Providing a basis for the comparison of actual performance with the predetermined targets and
investigation of deviation, if any, of actual performance and expenses from the budgeted figures. This
naturally helps in adopting corrective measures.
4. Ensuring the best use of all available resources to maximise profit or production, subject to the
limiting factors. Since budgets cannot be properly drawn up without considering all aspects usually
there is good co-ordination when a system of budgetary control operates.
5. Co-ordinating the various activities of the business, and centralising control and yet enabling
management to decentralise responsibility and delegate authority in the overall interest of the
business.
6. Engendering a spirit of careful forethought, assessment of what is possible and an attempt at it. It
leads to dynamism without recklessness. Of course, much depends on the objectives of the firm and
the vigour of its management.
7. Providing a basis for revision of current and future policies.
8. Drawing up long range plans with a fair measure of accuracy.
9. Providing a yardstick against which actual results can be compared.

15.7
Question 9 (Includes concepts of Cost Sheet)

The information of Z Ltd. for the year ended 31 st March 2021 is as below:
Amount (Rs.)
Variable factory overhead 9,50,000
Fixed factory overhead 12,00,000
Other variable costs 6,00,000
Other fixed costs 4,00,000
Profit 8,50,000
Sales 70,00,000
During the year, the company manufactured two products, X and Y, and the output and cost were:
X Y
Selling price per unit (Rs.) 600 550
Direct material per unit (Rs.) 140 157.50
Direct wages per unit (Rs.) 90 132.50
Variable factory overheads are absorbed as a percentage of direct wages and other variable costs are
computed as:
Product X – Rs. 40 per unit and Product Y- Rs. 70 per unit.
For the FY 2021-22, it is expected that demand for product X and Y will fall by 20% & 10% respectively.
It is also expected that direct wages cost will raise by 20% and other fixed costs by 10%. Products will
be required to be sold at a discount of 20%.
(i) PREPARE profitability statement for the FY 2020-21 and PREPARE a budget for the FY 2021-22. (MTP
10 Marks March ’21) (RTP Nov ’20)
Answer 9
(i) Product-wise Profitability Statement for the FY 2020-21:
Particulars Product-X (Rs.) Product-Y (Rs.) Total
(Rs.)
Selling price per unit 600 550
Sales value 48,00,000 22,00,000 70,00,000
Direct material 11,20,000 6,30,000 17,50,000
(Rs.140 × 8,000 units) (Rs.157.50 × 4,000
units)
Direct wages 7,20,000 5,30,000 12,50,000
(Rs.90 × 8,000 units) (Rs.132.5 × 4,000 units)
Variable factory 5,47,200 4,02,800 9,50,000
overheads* (76% of Rs. 7,20,000) (76% of Rs. 5,30,000)
Other variable costs 3,20,000 2,80,000 6,00,000
(Rs.40 × 8,000 units) (Rs.70 × 4,000 units)
Contribution 20,92,800 3,57,200 24,50,000

15.8
Fixed factory - - 12,00,000

overheads
Other fixed costs - - 4,00,000
Profit 8,50,000
* Percentage absorption of variable factory overhead on the basis of direct wages
*,% ,
= " = 76%
,% ,
Preparation of Budget for the FY 2021-22:
Particulars Product-X (Rs.) Product-Y (Rs.) Total (Rs.)
(8,000 units × 80%) (4,000 units × 90%)
Selling price per unit 480 440
(Rs.600 × 80%) (Rs.550 × 80%)
Sales value 30,72,000 15,84,000 46,56,000
Direct material 8,96,000 5,67,000 14,63,000
(Rs.140 × 6,400 units) (Rs.157.50 × 3,600 units)
Direct wages per unit 6,91,200 5,72,400 12,63,600
(Rs.108 × 6,400 units) (Rs.159 × 3,600 units)
Variable factory 5,25,312 4,35,024 9,60,336
overheads (76% of Rs.6,91,200) (76% of Rs.5,72,400)
Other variable costs 2,56,000 2,52,000 5,08,000
(Rs.40 × 6,400 units) (Rs.70 × 3,600 units)
Contribution 7,03,488 (2,42,424) 4,61,064
Fixed factory overheads - - 12,00,000
Other fixed costs (110% of - - 4,40,000
Rs.4,00,000)
Profit/ (Loss) (11,78,936)
Question 10 (Includes concepts of Standard Costing)

Tricon Co. furnishes the following information for the month of September, 2020.
Particulars Budget Details Static Budget Actual
Units produced & Sold 4,000 3,200
(Rs.) (Rs.)
Direct Material 3 kg p.u. @ Rs. 30 per 3,60,000 3,10,000
kg.
Direct Labour 1 hr. p.u. @ Rs. 72 per 2,88,000 2,25,600
hr.
Variable Overhead 1 hr. p.u. @ Rs. 44 per 1,76,000 1,47,200
hr.
Fixed Overhead 1,80,000 1,68,000
Total Cost 10,04,000 8,50,800
Sales 12,00,000 8,96,000
Profit 1,96,000 45,200
During the month 10,000 kg. of materials and 3,100 direct labour hours were utilized.
Required:
(i) PREPARE a flexible budget for the month.
15.9
(ii) DETERMINE the material usage variance and the direct labour rate variance for the actual vs the
flexible budget. (MTP 10 Marks, April ‘21)
Answer 10
(i) Statement Showing “Flexible Budget for 3,200 units Activity Level”
(Rs.) (Rs.)
Sales (Rs. 12,00,000 x 3,200 units) 9,60,000
4,000 units
Less: Variable Cost
Direct Material (3,200 units × 3 kg. p.u. × Rs. 30 per kg.) 2,88,000
Direct Labour (3,200 units × 1 hr. p.u. × Rs. 72 per hr.) 2,30,400
Variable Overhead (3,200 units × 1 hr. p.u. × Rs. 44 per hr.) 1,40,800 (6,59,200)
Less: Fixed Overhead 1,80,000
Profit 1,20,800
(ii) Computation of Variances
Material Usage Variance = Standard Cost of Standard Quantity for Actual Production –
Standard Cost of Actual Q u a n t i t y
= (SQ × SP) – (AQ × SP)
Or
= (SQ – AQ) × SP
= [(3,200 units × 3 kg.) – 10,000 kg.] × Rs. 30.00
= Rs. 12,000 (A)
Labour Rate Variance = Standard Cost of Actual Time – Actual Cost
= (SR × AH) – (AR × AH)
Or
= (SR – AR) × AH
= [(Rs. 72- Rs. 2,25,600/3,100 hrs.) x 3,100 hrs.]
= Rs. 2,400 (A)
Question 11
DESCRIBE the steps necessary for establishing a good budgetary control system. (MTP 5 Marks, April
’21, Old & New SM)
Answer 11
The following steps are necessary for establishing a good budgetary control system:
1. Determining the objectives to be achieved, over the budget period, and the policy or policies that
might be adopted for the achievement of these objectives.
2. Determining the activities that should be undertaken for the achievement of the objectives.
3. Drawing up a plan or a scheme of operation in respect of each class of activity, in quantitative as well
as monetary terms for the budget period.
4. Laying out a system of comparison of actual performance by each person, or department with the
relevant budget and determination of causes for the variation, if any.
5. Ensuring that corrective action will be taken where the plan has not been achieved and, if that is not
possible, for the revision of the plan.
Question 12
DEFINE Zero Based Budgeting and mention its various stages. (MTP 5 Marks, Oct ’21, PYP Nov’19 5
Marks)
15.10
Answer 12
Zero-based Budgeting: (ZBB) is an emergent form of budgeting which arises to overcome the
limitations of incremental (traditional) budgeting system. Zero- based Budgeting (ZBB) is defined as ‘a
method of budgeting which requires each cost element to be specifically justified, although the activities to which
the budget relates are being undertaken for the first time, without approval, the budget allowance is
zero’.
ZBB is an activity based budgeting system where budgets are prepared for each activities rather than
functional department. Justification in the form of cost benefits for the activity is required to be given.
The activities are then evaluated and prioritized by the management on the basis of factors like
synchronization with organizational objectives, availability of funds, regulatory requirement etc.
ZBB is suitable for both corporate and non-corporate entities. In case of non-corporate entities like
Government department, local bodies, not for profit organizations, where these entities need to justify
the benefits of expenditures on social programmers like mid-day meal, installation of street lights,
provision of drinking water etc.
ZBB involves the following stages:
(i) Identification and description of Decision packages
(ii) Evaluation of Decision packages
(iii) Ranking (Prioritisation) of the Decision packages
(iv) Allocation of resources

This was a theoretical question based on stages of ZBB. Poor performance was observed.
Most of the examinees failed to mention the stages of ZBB.
Question 13
T Ltd manufactures and sells a single product and has estimated sales revenue of ₹1,51,20,000
during the year based on 20% profit on selling price. Each unit of product requires 6 kg of material A
and 3 kg of material B and processing time of 4 hours in machine shop and 2 hours in assembly shop.
Factory overheads are absorbed at a blanket rate of 20% of direct labour. Variable selling &
distribution overheads are ₹30 per unit sold and fixed selling & distribution overheads are estimated
to be ₹34,56,000.
The other relevant details are as under:
Purchase Price: Material A ₹80 per kg
Materials B ₹50 per kg
Labour Rate: Machine Shop ₹70 per hour

Assembly Shop ₹35 per hour
Finished Stock Material A Material B
Opening Stock 2,500 units 7,500 kg 4,000 kg
Closing Stock 3,000 units 8,000 kg 5,500 kg
Required
(i) CALCULATE number of units of product proposed to be sold and selling price per unit,
(ii) PREPARE Production Budget in units and
(iii) PREPARE Material Purchase Budget in units. (MTP 10 Marks Nov ’21) (RTP May ’21)
Answer 13
Workings
Statement Showing “Total Variable Cost for the year”

15.11
Particulars Amount
(₹)
Estimated Sales Revenue 1,51,20,000
Less: Desired Profit Margin on Sale @ 20% 30,24,000
Estimated Total Cost 1,20,96,000
Less: Fixed Selling and Distribution Overheads 34,56,000
Total Variable Cost 86,40,000
Statement Showing “Variable Cost per unit”
Particulars Variable Cost p.u. (₹)
Direct Materials:
480
B: 3 Kg. @ ₹50 per kg. 150
Labour Cost:
Machine Shop: 4 hrs. @ ₹70 per hour 280
Assembly Shop: 2 hrs. @ ₹35 per hour 70
Factory Overheads: 20% of (₹280 + ₹70) 70
Variable Selling & Distribution Expenses 30
Total Variable Cost per unit 1,080
(i) Calculation of number of units of product proposed to be sold and selling price per unit:
Number of Units Sold = Total Variable Cost / Variable Cost per unit
= ₹ 86,40,000 / ₹ 1,080
= 8,000 units
Selling Price per unit = Total Sales Value / Number of Units Sold
= ₹ 1,51,20,000 / 8,000 units
= ₹ 1,890
(ii) Production Budget (units)
Particulars Units
Budgeted Sales 8,000
Add: Closing Stock 3,000
Total Requirements 11,000
Less: Opening Stock (2,500)
Required Production 8,500
(iii) Materials Purchase Budget (Kg.)

Particulars Material Material
A B
Requirement for Production 51,000 25,500
(8,500 units × 6 Kg.) (8,500 units × 3 Kg.)
Add: Desired Closing Stock 8,000 5,500
Total Requirements 59,000 31,000
Less: Opening Stock (7,500) (4,000)
Quantity to be purchased 51,500 27,000
Question 14
15.12
Nakata Ltd a Vehicle manufacturer has prepared sales budget for the next few months, and the
following draft figures are available:
Month No. of vehicles
October 40,000
November 35,000
December 45,000
January 60,000
February 65,000
To manufacture a vehicle a standard cost of Rs.5,71,400 is incurred and sold through dealers at
a uniform selling price of Rs.8,57,100 to customers. Dealers are paid 15% commission on selling
price on sale of a vehicle. Apart from other materials four units of Part - X are required to
manufacture a vehicle. It is a policy of the company to hold stocks of Part-X at the end of each
month to cover 40% of next month’s production. 48,000 units of Part-X are in stock as on 1st
October.
There are 9,500 nos. of completed vehicles are in stock as on 1st October and it is policy to have
stocks at the end of each month to cover 20% of the next month’s sales.
You are required to
(i) PREPARE Production budget (in nos.) for the month of October, November, December and
January.
(ii) PREPARE a Purchase budget for Part-X (in units) for the months of October, November and
December.
(iii) CALCULATE the budgeted gross profit for the quarter October to December. (MTP 10 Marks April
’19, MTP 10 Marks Oct’22 & Oct ‘23, RTP May ’20)
Answer 14
(i) Preparation of Production Budget (in units)
October November December January
Demand for the month (Nos.) 40,000 35,000 45,000 60,000
Add: 20% of next month’s demand 7,000 9,000 12,000 13,000
Less: Opening Stock (9,500) (7,000) (9,000) (12,000)
Vehicles to be produced 37,500 37,000 48,000 61,000
(ii) Preparation of Purchase budget for Part-X
October November December
Production for the month (Nos.) 37,500 37,000 48,000
Add: 40% of next month’s 14,800 19,200 24,400
production (40% of 37,000) (40% of 48,000) (40% of 61,000)
52,300 56,200 72,400
No. of units required for 2,09,200 2,24,800 2,89,600
production (52300 × 4 units) (56200 × 4 units) (72,400 × 4 units)
Less: Opening Stock (48,000) (59,200) (76,800)
(14800 × 4 units) (19200 × 4 units)
No. of units to be purchased 1,61,200 1,65,600 2,12,800
(ii) Budgeted Gross Profit for the Quarter October to December
October November December Total
Sales in nos. 40,000 35,000 45,000 1,20,000
Net Selling Price per unit* 7,28,535 7,28,535 7,28,535
Sales Revenue (Rs. in lakh) 2,91,414 2,54,987.25 3,27,840.75 8,74,242
Less: Cost of Sales (Rs. in lakh) 2,28,560 1,99,990.00 2,57,130.00 6,85,680
15.13
(Sales unit × Cost per unit)

Gross Profit (Rs. in lakh) 62,854 54,997.25 70,710.75 1,88,562
* Net Selling price unit = Rs. 8,57,100 – 15% commission on Rs. 8,57,100
= Rs.7,28,535.
Question 15
A firm has a total capacity of producing 1,00,000 units of an item. The budgeted expenses at this level
of activity are as under:
Per unit (₹)

Direct Materials 650
Direct Wages 325
Direct Expenses 125
Variable overheads 50
Fixed Production Overheads 25
Selling and Distribution Overheads (20% fixed) 25
Administrative Expenses (100% fixed) 60
Total 1,260
The selling price is ₹ 1,750 per unit and is anticipated to remain constant.
You are required to PREPARE a flexible budget, on the basis of marginal costing, for 60,000 and 75,000
units of output level showing the profit and P/V Ratio. (MTP 10 Marks Sep’22)
Answer 15
Workings -
1. Fixed Production overheads (given) = ₹ 25 per unit
So, at 1,00,000 units capacity, it will be ₹ 25,00,000 (1,00,000 units x ₹ 25)
2. Selling and distribution overheads:
Given (1,00,000 units x ₹ 25) = ₹ 25,00,000
So, Fixed component = ₹ 25,00,000 x 20% = ₹ 5,00,000
Hence, variable component = ₹ 25,00,000 - ₹ 5,00,000 = ₹ 20,00,000
Variable per unit = ₹ 20,00,000/1,00,000 units

= ₹ 20 per unit
Flexible Budget
Particulars Per unit (₹) Output Level
60,000 units (₹) 75,000 units (₹)
Sales (A) 1,750 10,50,00,000 13,12,50,000
Variable costs:
Direct Material 650 3,90,00,000 4,87,50,000
Direct Wages 325 1,95,00,000 2,43,75,000
Direct expenses 125 75,00,000 93,75,000
Variable overheads 50 30,00,000 37,50,000
Selling and distribution overheads 20 12,00,000 15,00,000
Total Variable cost (B) 1,170 7,02,00,000 8,77,50,000
Contribution (C = A - B) 3,48,00,000 4,35,00,000
Fixed costs:
Production overheads 25,00,000 25,00,000
Administrative overheads 60,00,000 60,00,000
15.14
Selling and distribution overheads 5,00,000 5,00,000

Total Fixed cost (D) 90,00,000 90,00,000
Profit (C-D) 2,58,00,000 3,45,00,000
P/V Ratio = (₹ 3,48,00,000/₹ 10,50,00,000) x 100 = 33.143%
OR
P/V Ratio = (₹ 4,35,00,000/₹ 13,12,50,000) x 100 = 33.143%
Question 16
STATE the advantages of Zero-based budgeting. (MTP 5 Marks March ’23) (RTP Nov ’20 & May ’18)
Answer 16
The advantages of zero-based budgeting are as follows:
 It provides a systematic approach for the evaluation of different activities and ranks them in order of
preference for the allocation of scarce resources.
 It ensures that the various functions undertaken by the organization are critical for the achievement
of its objectives and are being performed in the best possible way.
 It provides an opportunity to the management to allocate resources for various activities only after
having a thorough cost-benefit-analysis. The chances of arbitrary cuts and enhancement are thus
avoided.
 The areas of wasteful expenditure can be easily identified and eliminated.
 Departmental budgets are closely linked with corporation objectives.
 The technique can also be used for the introduction and implementation of the system of ‘management
by objective.’ Thus, it cannot only be used for fulfillment of the objectives of traditional budgeting but it can also
be used for a variety of other purposes.
Question 17
KLM Limited has prepared its expense budget for 50,000 units in its factory for the year 2019-20 as
detailed below:
(‘per unit)
Direct Materials 125
Direct Labour 50
Variable Overhead 40
Direct Expenses 15
Selling Expenses (20% fixed) 25
Factory Expenses (100% fixed) 15
Administration expenses (100% fixed) 8
Distribution expenses (85% variable) 20
Total 298
PREPARE an expense budget for the production of 35,000 units and 70,000 units. (RTP Nov’19)
Answer 17
Expense Budget of KLM Ltd.
Particulars 50,000 Units(₹ ) 35,000 Units(₹ ) 70,000 Units (₹ )
Direct Material 62,50,000 43,75,000 87,50,000
(50,000 x 125) (35,000 x 125) (70,000 x 125)
Direct Labour 25,00,000 17,50,000 35,00,000
(50,000x 50) (35,000x 50) (70,000x 50)
20,00,000 14,00,000 28,00,000 (70,000x
Variable Overhead (50,000 x 40) (35,000 x 40) 40)
15.15
Direct Expenses 7,50,000 5,25,000 10,50,000

(50,000 x 15) (35,000 x 15) (70,000x 15)
Selling Expenses (Variable)* 10,00,000 (50,000 7,00,000 14,00,000
x 20) (35,000 x 20) (70,000x 20)
Selling Expenses (Fixed)*(5 x 50,000) 2,50,000 2,50,000 2,50,000
Factory Expenses (Fixed)(15 x 50,000) 7,50,000 7,50,000 7,50,000

Administration Expenses (Fixed)(8 x 4,00,000 4,00,000 4,00,000
50,000)
Distribution Expenses (Variable)** 8,50,000 5,95,000 11,90,000
(17 x 50,000) (17 x 35,000)
(17 x 70,000)
Distribution Expenses (Fixed)**(3 x 1,50,000 1,50,000 1,50,000
50,000)
1,49,00,000 1,08,95,000 2,02,40,000
*Selling Expenses: Fixed cost per unit = ₹ 25 x 20% = ₹ 5

Fixed Cost = ₹ 5 x 50,000 units = ₹ 2,50,000
Variable Cost Per unit = ₹ 25 – ₹ 5 = ₹ 20
**Distribution Expenses: Fixed cost per unit = ₹ 20 x 15% = ₹ 3
Fixed Cost = ₹ 3 x 50,000 units = ₹ 1,50,000
Variable cost per unit = ₹ 20 – ₹ 3 = ₹ 17
Question 18
Gaurav Ltd. is drawing a production plan for its two products Minimax (MM) and Heavy high (HH) for
the year 20X8-X9. The company’s policy is to hold closing stock of finished goods at 25% of the
anticipated volume of sales of the succeeding month. The following are the estimated data for two
products:
Minimax (MM) Heavy high (HH)
Budgeted Production units 1,80,000 1,20,000
(₹ ) (₹ )
Direct material cost per unit 220 280
Direct labour cost per unit 130 120
Manufacturing overhead 4,00,000 5,00,000
The estimated units to be sol d in the first four of the year 20X8-X9 are as under
month June July
April May
Minimax 8,000 10,000 12,000 16,000
Heavy high 6,000 8,000 9,000 14,000
PREPARE production budget for the first quarter in month wise. (RTP Nov.’18, Old & New SM)
Answer 18
Production budget of Product Minimax and Heavy high (in units)
April May June Total
MM HH MM HH MM HH MM HH
Sales 8,000 6,000 10,000 8,000 12,000 9,000 30,000 23,000
Add: Closing Stock
(25% of next month’s sale 2,500 2,000 3,000 2,250 4,000 3,500 9,500 7,750
Less: Opening Stock 2,000* 1,500* 2,500 2,000 3,000 2,250 7,500 5,750
Production units 8,500 6,500 10,500 8,250 13,000 10,250 32,000 25,000
*Opening stock of April is the closing stock of March, which is as per company’s policy 25% of next
month’s sale.
Production Cost Budget
15.16
Element of cost Rate (₹ ) Amount (₹)

MM HH MM HH
(32,000 units) (25,000 units)
Direct Material 220 280 70,40,000 70,00,000
Direct Labour 130 120 41,60,000 30,00,000
Manufacturing Overhead
(4,00,000/ 1,80,000 × 32,000) 71,111
(5,00,000/ 1,20,000 × 25,000) 1,04,167
1,12,71,111 1,01,04,167
Question 19
G Ltd. manufactures two products called ‘M’ and ‘N’. Both products use a common raw material Z. The
raw material Z is purchased @ ₹ 36 per kg from the market. The company has decided to review
inventory management policies for the forthcoming year.
The following information has been extracted from departmental estimates for the year ended 31st March
2018 (the budget period):
Product M Product N
Sales (units) 28,000 13,000
Finished goods stock increase by year-end 320 160
Post-production rejection rate (%) 4 6
Material Z usage (per completed unit, net of wastage) 5 kg 6 kg
Material Z wastage (%) 10 5
Additional information:
- Usage of raw material Z is expected to be at a constant rate over the period.
- Annual cost of holding one unit of raw material in stock is 11% of the material cost.
- The cost of placing an orders is ₹ 320 per order.
- The management of G Ltd. has decided that there should not be more than 40 orders in a year for the
raw material Z.
Required:
(i) PREPARE functional budgets for the year ended 31st March 2018 under the following headings:
(a) Production budget for Products M and N (in units).
(b) Purchases budget for Material Z (in kgs and value).
(ii) CALCULATE the Economic Order Quantity for Material Z (in kgs).
(iii) If there is a sole supplier for the raw material Z in the market and the supplier do not sale more
than 4,000 kg. of material Z at a time. Keeping the management purchase policy and production
quantity mix into consideration, CALCULATE the maximum number of units of Product M and N that
could be produced. (RTP May’18) (MTP 10 Marks Sep ’23)
Answer 19
(i) (a) Production Budget (in units) for the year ended 31st March 2016
ProductM Product N
Budgeted sales (units) 28,000 13,000
Add: Increase in closing stock 320 160
No. good units to be produced 28,320 13,160
Post production rejection rate 4% 6%
No. of units to be produced 29,500 14,000
28,320/0.96 13,160/0.94
(a) Purchase budget (in kgs and value) for Material Z
ProductM Product N
No. of units to be produced 29,500 14,000
15.17
Usage of Material Z per unit of production 5 kg. 6 kg.

Material needed for production 1,47,500 kg. 84,000 kg
Materials to be purchased 1,63,889kg. 88,421 kg
, $,% # ,
- .*
.- .*%
.
Total quantity to be purchased 2,52,310 kg.
Rate per kg. of Material Z ₹ 36
Total purchase price ₹ 90,83,160
(ii) Calculation of Economic Order Quantity for Material Z
0"0,10,234 56."78.204 39,;<,;=,444
EOQ = / 78.29"33%
=/ 78.2.>9
= 6,385.72 kg.
(iii) Since, the maximum number of order per year cannot be more than 40 orders and the maximum
quantity per order that can be purchased is 4,000 kg. Hence, the total quantity of Material Z that can be
available for production:
= 4,000 kg. × 40 orders = 1,60,000 kg.
Product M Product N
Material needed for production to 1,03,929kg. 56,071 kg.
maintain the same production mix 1,60,000 " 1,63,889 (1,60,000" 88,421/
/2,52,310 2,52,310)
Less: Process wastage 10,393 kg. 2,804 kg.
Net Material available for
production 93,536 kg. 53,267 kg.
Units to be produced 18,707 units 8,878 units
(93,536 kg. / 5kg.) (53,267 kg. / 6kg.)
Question 20
The accountant of manufacturing company provides you the following details for year 2019- 20:
Particulars (₹)
Fixed factory overheads 16,00,000
Variable factory overheads 16,00,000
Other variable costs 12,80,000
Other fixed costs 12,80,000
Profit 18,40,000
Sales 1,20,00,000
During the year, the company manufactured two products A and B and the output and costs were:
Particulars A B
Output (units) 2,00,000 1,00,000
Selling price per unit ₹ 32.00 ₹ 56.00
Direct materials per unit ₹ 8.00 ₹ 12.00
Direct wages per unit ₹ 4.00 ₹ 8.00
Variable factory overhead is absorbed as a percentage of direct wages. Other variable costs have
been computed as: Product A ₹ 4.00 per unit; and B ₹ 4.80 per unit.
During 2020-21, it is expected that the demand for product A will fall by 25% and for B by 50%. It is
decided to manufacture a new product C, the cost for which is estimated as follows:

15.18
Particulars Product C
Output (units) 2,00,000
Selling price per unit ₹ 28.00
Direct materials per unit ₹ 6.40
Direct wages per unit ₹ 4.00
It is anticipated that the other variable costs per unit of Product C will be same as for product A.
PREPARE a budget to present to the management, showing the current position and the position for
2020-21. COMMENT on the comparative results. (RTP Nov ’21, Old & New SM)
Answer 20
Budget Showing Current Position and Position for 2020-21
Position for 2019-20 Position for 2020-21
A B Total A B C Total
(A+B) (A+B+C)
Sales (units) 2,00,000 1,00,000 – 1,50,000 50,000 2,00,000 –
(₹) (₹) (₹) (₹) (₹) (₹) (₹)
(A) Sales 64,00,000 56,00,000 1,20,00,000 48,00,000 28,00,000 56,00,000 1,32,00,000
Direct Material 16,00,000 12,00,000 28,00,000 12,00,000 6,00,000 12,80,000 30,80,000
Direct wages 8,00,000 8,00,000 16,00,000 6,00,000 4,00,000 8,00,000 18,00,000
Factory overhead 8,00,000 8,00,000 16,00,000 6,00,000 4,00,000 8,00,000 18,00,000
(variable)
Other variable costs 800,000 4,80,000 12,80,000 6,00,000 240,000 8,00,000 16,40,000
(B) Marginal Cost 40,00,000 32,80,000 72,80,000 30,00,000 16,40,000 36,80,000 83,20,000
(C) Contribution (A- B) 24,00,000 23,20,000 47,20,000 18,00,000 11,60,000 19,20,000 48,80,000
Fixed costs
16,00,000 16,00,000
– Factory
– Others 12,80,000 12,80,000
(D) Total fixed cost 28,80,000 28,80,000
Profit (C – D) 18,40,000 20,00,000
Comments: Introduction of Product C is likely to increase profit by ₹ 1,60,000 (i.e. from ₹ 18,40,000 to ₹
20,00,000) in 2020-21 as compared to 2019-20 even if the demand for Product A & B falls. Therefore,
introduction of product C is recommended.
Question 21
Maharatna Ltd., a public sector undertaking (PSU), produces product A. The company is in process of
preparing its revenue budget for the year 2022. The company has the following information which can
be useful in preparing the budget:
(i) It has anticipated 12% growth in sales volume from the year 2021 of 4,20,000 tonnes.
(ii) The sales price of ₹23,000 per tonne will be increased by 10% provided Wholesale Price Index (WPI)
increases by 5%.
(iii) To produce one tonne of product A, 2.3 tonnes of raw material are required. The raw material cost
is ₹4,500 per tonne. The price of raw material will also increase by 10% if WPI increase by 5%.
(iv) The projected increase in WPI for 2022 is 4%

(v) A total of 6,000 employees works for the company. The company works 26 days in a month.
(vi) 85% of employees of the company are permanent and getting salary as per 5- year wage agreement.
The earnings per manshift (means an employee cost for a shift of 8 hours) is ₹ 3,000 (excluding
terminal benefits). The new wage agreement will be implemented from 1st July 2022 and it is
expected that a 15% increase in pay will be given.
15.19
(vii) The casual employees are getting a daily wage of ₹ 850. The wages in linked to Consumer Price Index
(CPI). The present CPI is 165.17 points and it is expected to be 173.59 points in year 2022.
(viii) Power cost for the year 2021 is ₹ 42,00,000 for 7,00,000 units (1 unit = 1 Kwh). 60% of power is used
for production purpose (directly related to production volume) and remaining are for employee
quarters and administrative offices.
(ix) During the year 2021, the company has paid ₹ 60,00,000 for safety and maintenance works. The
amount will increase in proportion to the volume of production.
(x) During the year 2021, the company has paid ₹ 1,20,000 for the purchase of diesel to be used in car
hired for administrative purposes. The cost of diesel will increase by 15% in year 2022.
(xi) During the year 2021, the company has paid ₹ 6,00,000 for car hire charges (excluding fuel cost). In
year 2022, the company has decided to reimburse the diesel cost to the car rental company. Doing
this will attract 5% GST on Reverse Charge Mechanism (RCM) basis on which the company will not
get GST input credit.
(xii) Depreciation on fixed assets for the year 2021 is ₹ 80,40,00,000 and it will be 15% lower in 2022.
Required: From the above information PREPARE Revenue (Flexible) budget for the year 2022 and also
show the budgeted profit/ loss for the year. (RTP May ’22)
Answer 21
Revenue Budget (Flexible Budget) of Maharatna Ltd. for the Year 2022
Particulars PY 2021 CY 2022
A Sales Volume (Tonnes) 4,20,000 4,70,400
[112%×4,20,000]
B Selling Price per tonne (₹) 23,000 23,000
(₹ in lakh) (₹ in lakh)
C Sales value [A×B] 96,600 1,08,192
D Raw material Cost:
(i) Qty. of Material 9,66,000 10,81,920
[2.3 tonnes × A] (tonnes)
(ii) Price per tonne (₹) 4,500 4,500
(iii) Total raw material cost (₹ in 43,470 48,686.40
lakh) [(i)×(ii)]
E Wages & Salary Cost:
(i) Wages to casual employees (15% × 2,386.80 2,508.47
6,000 = 900 employees) [900 × 26 × 12 × [900 × 26 × 12 ×
₹ 850] ₹ 893.33]
(ii) Salary to permanent employees (85% 47,736 51,316.20
× 6,000 = 5,100 employees) [5100 × 26 × 12 × [(5100 × 26 × 6 ×
₹ 3,000] ₹ 3,000) + (5100 × 26
× 6 × ₹ 3,450)]
(iii) Total wages & salary [(i)+(ii)] 50,122.80 53,824.67
F Power cost:
(i) For production (units) 4,20,000 4,70,400
[60% × 7,00,000] [112% × 4,20,000]
(ii) For employees & offices (units) [40% 2,80,000 2,80,000
× 7,00.000]
(iii) Total Power consumption (units) 7,00,000 7,50,400
[(i)+(ii)]
(iv) Power rate per unit (₹) 6.00 6.00
[₹42,00,000 ÷ 7,00,000]
(v) Total power cost [(iii)×(iv)] 42 45.024
15.20
G Safety and maintenance Cost 60 67.20

[112% × 60,00,000]
H Diesel cost 1.2 -
I Car Hire charge:
(i) Car hire charge 6 6
(ii) Fuel reimbursement cost - 1.38
[115% × 1.2]
(iii) GST@5% on RCM basis - 0.369
[5%×(i+ii)]
(iv) Total Car hire charge cost [(i)+(ii)+(iii)] 6 7.749
J Depreciation 8,040 6,834
[85% × 8040]
K Total Cost [Sum of D to J] 1,01,742 1,09,465.043
L Profit/ (Loss) [C-L] (5,142) (1273.043)
Question 22
Following information is available for DK and Co.:
Standard working hours 9 hours per day of 5 days per week
Maximum capacity 50 employees
Actual working 40 employees
Actual hours expected to be worked per four week 7,200 hours
Std. hours expected to be earned per four weeks 9,000 hours
Actual hours worked in the four- week period 6,750 hours
Standard hours earned in the four- week period 7,875 hours.
The related period is of 4 weeks. In this period there was a one special day holiday due to national event.
You are required to CALCULATE the following ratios:
(i) Efficiency Ratio
(ii) Activity Ratio
(iii) Calendar Ratio
(iv) Standard Capacity Usage Ratio
(v) Actual Capacity Usage Ratio
(vi) Actual Usage of Budgeted Capacity Ratio (RTP Nov’22, Old & New SM)
Answer 22
Maximum Capacity in a budget period
Budgeted Hours
Actual Hrs.
= 6,750 Hrs
Standard Hrs. for Actual Output
= 7,875 Hrs.
Budget No. of Days
= 20 Days (4 Weeks x 5 Days) Actual No. of Days
= 20 – 1 = 19 Days
IJKLMKNM ONP ;,=;1 RSTNP
i. Efficiency Ratio=IJKLMKNM ONP " 100 Q 9,;14 UVWX8 " 100= 116.67%
IJKLMKNM ONP ;,=;1 RSTNP

ii. Activity Ratio= " 100 Q " 100= 109.375%
YTMZ[J[M ONP ;,044 UVWX8
\]K^_K`_[ aSNb^LZ MKcP 3> def8

iii. Calendar Ratio= YTMZ[J[M aSNb^LZ MKcP " 100 Q 04 def8×100 = 95%
15.21
iv. Standard Capacity Usage Ratio

YTMZ[J[M OSTNP ;,044 RSTNP
=gKh.iSPP^`_[ RSTNP ^L JR[ `TMZ[J[M i[N^SM " 100 Q >,444 UVWX8 100= 75%
\jJTK_ OSTNP aSNb[M 9,;14 RSTNP

v. Actual Capacity Usage Ratio= YTMZ[J[M RSTNP
" 100 Q ;,044 UVWX8 100=93%
Question 23
EDF Ltd. produces two products using Skilled labour and two types of materials. Shown below the
information for the next month’s budget:
Product- A Product-B
Budgeted sales (in units) 4,080 6,120
Budgeted material consumption per unit
(in kg): Material-X 8.5 5.1
Material-Y 6.8 10.2
Standard labour hours allowed per unit of 5.1 8.5
product
Material-X and Material-Y cost `8 and `10 per kg and labours are paid `30 per hour. Overtime premium
is 75% and is payable, if a worker works for more than 45 hours a week. There are 400 direct workers.
The target efficiency ratio for the productive hours worked by the direct workers in actually
manufacturing the products is 85%. In addition the non-productive down-time is budgeted at 15% of
the productive hours worked.
There are four 6-days weeks in the budgeted period and it is anticipated that sales and production will
occur evenly throughout the whole period.
It is anticipated that stock at the beginning of the period will be:
Product-A 550 units
Product-B 350 units
Material-X 1,200 kgs.
Material-Y 600 kgs.
The anticipated closing stocks for budget period are as below:
Product-A 5 days sales
Product-B 5 days sales
Material-X 10 days consumption
Material-Y 3 days consumption
Required:
CALCULATE the Material Purchase Budget and the Wages Budget for the direct workers, showing the
quantities and values, for the next month. (RTP May 23, Old & New SM) (Same concepts different
figures MTP 10 Marks Oct’18)
Answer 23
Number of days in budget period = 4 weeks × 6 days = 24 days Number of units to be produced
Product-A (units) Product-B (units)
Budgeted Sales 4,080 6,120
Add: Closing stock 850 1275
4,080 lmnop 6,120 lmnop
k t 5 urspv k t 5 urspv
24 qrsp 24 qrsp
Less.: Opening Stock 550 350

15.22
4,380 7,045
(i) Material Purchase
Budget
Material-X (Kg.) Material-Y (Kg.)
Material required:
Product-A 37,230 29,784
(4,380 units × 8.5 kg.) (4,380 units × 6.8 kg.)
Product-B 35,930 71,859
(7,045 units × 5.1 kg.) (7,045 units × 10.2 kg.)
73,160 1,01,643
30,483 21,176
Add: Closing stock
73,160 xyp. 1,01,643 xyp.
k t 10 qrspv k t 5 urspv
24 qrsp 24 qrsp
Less: Opening stock 1,200 600
Quantity to be purchased 1,02,443 1,22,219
Rate per kg. of Material 8 10
Total Cost 8,19,541 12,22,186

(ii) Wages Budget
Product-A (Hours) Product-B (Hours)
Units to be produced 4,380 7,045
Standard hours allowed per unit 5.1 8.5
Total Standard Hours 22,338 59,883
allowed
Productive hours required for 00,22= RSTNP 1>,==2 RSTNP
=1%
X 26,280 X 70,450
production =1%
Add: Non-Productive down time 3942 10568

hours (15% of 26,280 hours) (15% of 70,450 hours)
Hours to be paid 30,222 81,018
Total Hours to be paid = 1,11,240
Hours to be paid at normal rate 72000
(4 weeks × 45 hours × 400
workers) =
Hours to be paid at premium 39,240
rate
Total wages to be paid = ` 21,60,000 + ` 20,60,100 = ` 42,20,100
= (72,000 hours × `30 + 39,240
hours × ` 52.5)
Question 24
XY Co. Ltd manufactures two products viz., X and Y and sells them through two divisions, East and
West. For the purpose of Sales Budget to the Budget Committee, following information has been
made available for the year 2022-23:
Budgeted Sales Actual Sales
Product
East Division West Division East Division West Division
X 400 units at ` 9 600 units at ` 9 500 units at ` 9 700 units at ` 9
15.23
Y 300 units at ` 21 500 units at ` 21 200 units at ` 21 400 units at ` 21

Adequate market studies reveal that product X is popular but underpriced. It is expected that if the
price of X is increased by ` 1, it will, find a ready market. On the other hand, Y is overpriced and if
the price of Y is reduced by ` 1 it will have more demand in the market. The company management
has agreed for the aforesaid price changes. On the basis of these price changes and the reports of
salesmen, following estimates have been prepared by the Divisional Managers:
Percentage increase in sales over budgeted sales
Product East Division West
Division
X + 10% + 5%
Y + 20% + 10%
With the help of intensive advertisement campaign, following additional sales (over and above the
above-mentioned estimated sales by Divisional Mangers) are possible:
Product East Division West
Division
X 60 units 70 units
Y 40 units 50 units
You are required to prepare Sales Budget for 2023-24 after incorporating above estimates and also
show the Budgeted Sales and Actual Sales of 2022-23. (RTP Nov ’23)
Answer 24
Statement Showing Sales Budget for 2023-24
Product X Product Y Total
Division Qty. Rate (`) Amt. (`) Qty. Rate (`) Amt. (`) Amt. (`)
East 5001 10 5,000 4003 20 8,000 13,000
4
West 7002 10 7,000 600 20 12,000 19,000
Total 1,200 12,000 1,000 20,000 32,000
Workings
1. 400 × 110% + 60 = 500 units
2. 600 × 105% + 70 = 700 units
3. 300 × 120% + 40 = 400 units
4. 500 × 110% + 50 = 600 units
Statement Showing Sales Budget for 2022-23
Division Product X Product Y Total
Qty. Rate (`) Amt. (`) Qty. Rate (`) Amt. (`) Amt. (`)
East 400 9 3,600 300 21 6,300 9,900
West 600 9 5,400 500 21 10,500 15,900
Total 1,000 9,000 800 16,800 25,800
Statement Showing Actual Sales for 2022-23

Product Product Total
Division X Y
Qty. Rate Amt. (`) Qty Rate Amt. (`) Amt. (`)
(`) . (`)
East 500 9 4,500 200 21 4,200 8,700
West 700 9 6,300 400 21 8,400 14,700
Total 1,200 10,800 600 12,600 23,400

15.24
Question 25
G Ltd. manufactures a single product for which market demand exists for additional quantity. Present
sales of ₹ 6,00,000 utilises only 60% capacity of the plant. The following data are available:
(1) Selling price : ₹ 100 per unit
(2) Variable cost : ₹ 30 per unit
(3) Semi-variable expenses : ₹ 60,000 fixed + ₹ 5 per unit
(4) Fixed expenses : ₹ 1,00,000 at present level, estimated to
increase by 25% at and above 80%
capacity.
You are required to prepare a flexible budget so as to arrive at the operating profit at 60%, 80% and
100% levels. (PYP 5 Marks Nov ‘20)
Answer 25
Flexible Budget
Activity Level 60% 80% 100%
(₹) (₹) (₹)
Sales @ ₹ 100 per unit 6,00,000 8,00,000 10,00,000
Variable Cost 2,10,000 2,80,000 3,50,000

(@ ₹ 35 (₹ 30 + ₹ 5) per unit)
Contribution (A) 3,90,000 5,20,000 6,50,000
Fixed Cost (part of semi-variable cost) 60,000 60,000 60,000
Other Fixed Cost 1,00,000 1,25,000 1,25,000
Total Fixed Cost (B) 1,60,000 1,85,000 1,85,000
Operating Profit (A – B) 2,30,000 3,35,000 4,65,000
Question 26
What are the important points an organization should consider if it wants to adopt Performance
Budgeting?". (PYP 5 Marks Nov 20)
Answer 26
For an enterprise that wants to adopt Performance Budgeting, it is thus imperative that:
 the objectives of the enterprise are spelt out in concrete terms.
 the objectives are then translated into specific functions, programmes, activities and tasks for
different levels of management within the realities of fiscal constraints.
 realistic and acceptable norms, yardsticks or standards and performance indicators should be
evolved and expressed in quantifiable physical units.
 a style of management based upon decentralised responsibility structure should be adopted, and
an accounting and reporting system should be developed to facilities monitoring, analysis and
review of actual performance in relation to budgets
Question 27
State the limitations of Budgetary Control System. (PYP 5 Marks Jan ‘21)
Answer 27
Limitations of Budgetary Control System
Points Description
15.25
1. Based on Estimates Budgets are based on a series of estimates, which are based on
the conditions prevalent or expected at the time budget is
established. It requires revision in plan if conditions change.
2. Time factor Budgets cannot be executed automatically. Some preliminary
steps are required to be accomplished before budgets are
implemented. It requires proper attention and time of
management. Management must not expect too much during
the initial development period.
3. Co-operation Staff co-operation is usually not available during the initial
Required budgetary control exercise. In a decentralised organisation,
each unit has its own objective and these units enjoy some
degree of discretion. In this type of organisation structure,
coordination among different units is required. The success of
the budgetary control depends upon willing co-operation and
teamwork,
4. Expensive The implementation of budget is somewhat expensive. For
successful implementation of the budgetary control, proper
organisation structure with responsibility is prerequisite.
Budgeting process start from the collection of information to
for preparing the budget and performance analysis. It
consumes valuable resources (in terms of qualified manpower,
equipment, etc.) for this purpose; hence, it is an expensive
process.
5. Not a substitute for Budget is only a managerial tool and must be intelligently applied
management for management to get benefited. Budgets are not a substitute
for good management.
6. Rigid document Budgets are sometime considered as rigid documents. But in
reality, an organisation is exposed to various uncertain internal
and external factors. Budget should be flexible enough to
incorporate ongoing developments in the internal and external
factors affecting the very purpose of the budget.
Question 28
PSV Ltd. manufactures and sells a single product and estimated the following related information
for the period November, 2020 to March, 2021.
Particulars November, December, January, February, March,
2020 2020 2021 2021 2021
Opening Stock of Finished 7,500 3,000 9,000 8,000 6,000
Goods (in Units)
Sales (in Units) 30,000 35,000 38,000 25,000 40,000

Selling Price per unit (in 10 12 15 15 20
₹)
 Closing stock of finished goods at the end of March, 2021 is 10,000 units.
 Each unit of finished output requires 2 kg of Raw Material 'A' and 3 kg of Raw Material 'B'.
You are required to prepare the following budgets for the period November, 2020 to March, 2021 on
monthly basis:
(i) Sales Budget (in ₹)
(ii) Production budget (in units) and
(iii) Raw material Budget for Raw material 'A' and 'B' separately (in units) (PYP 10 Marks July 21)

15.26
Answer 28
i. Sales Budget (in ₹)
Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total
Sales (in Units) 30,000 35,000 38,000 25,000 40,000 1,68,000
Selling Price per
unit (₹) 10 12 15 15 20 -
Total Sales (₹) 3,00,000 4,20,000 5,70,000 3,75,000 8,00,000 24,65,000
ii. Production Budget (in units)
Sales 30,000 35,000 38,000 25,000 40,000 1,68,000
Add: Closing stock of
3,000 9,000 8,000 6,000 10,000 36,000
finished goods
Total quantity required 33,000 44,000 46,000 31,000 50,000 2,04,000
Less: Opening stock of
7,500 3,000 9,000 8,000 6,000 33,500
finished goods
Units to be produced 25,500 41,000 37,000 23,000 44,000 1,70,500
iii. Raw material budget (in units)

For Raw material ‘A’
Units to be produced: (a) 25,500 41,000 37,000 23,000 44,000 1,70,500
Raw material consumption 2 2 2 2 2 -
p.u. (kg.): (b)
Total raw material 51,000 82,000 74,000 46,000 88,000 3,41,000
consumption (Kg.): (a × b)
For Raw material ‘B’
Units to be 25,500 41,000 37,000 23,000 44,000 1,70,500
produced: (a)
Raw material 3 3 3 3 3 -
consumption p.u.
(kg.): (b)
Total raw material 76,500 1,23,000 1,11,000 69,000 1,32,000 5,11,500
consumption (Kg.): (a
× b)
Question 29
What are the cases when a flexible budget is found suitable? (PYP 5 Marks May ’19)
Answer 29
Flexible budgeting may be resorted to under following situations:
(i) In the case of new business venture due to its typical nature it may be difficult to forecast the
demand of a product accurately.
(ii) Where the business is dependent upon the mercy of nature e.g., a person dealing in wool trade may
have enough market if temperature goes below the freezing point.
(iii) In the case of labour-intensive industry where the production of the concern is dependent upon the
availability of labour.
Suitability for flexible budget:
1. Seasonal fluctuations in sales and/or production, for example in soft drinks industry;
15.27
2. a company which keeps on introducing new products or makes changes in the design of its products
frequently;
3. industries engaged in make-to-order business like ship building;
4. an industry which is influenced by changes in fashion; and
5. General changes in sales.

In this theoretical question on suitability of ‘Flexible Budget’, most of the examinees didn’t
understand area and conditions where the flexible budget is applicable. Poor performance
of the examinees was observed.
Question 30
Why is 'Zero Base Budgeting' (ZBB) considered superior to 'Traditional Budgeting'? Explain. (PYP 5
Marks May ’18)
Answer 30
Zero based budgeting is superior to traditional budgeting: Zero based budgeting is superior to
traditional budgeting in the following manner:
 It provides a systematic approach for evaluation of different activities.
 It ensures that the function undertaken are critical for the achievement of the objectives.
 It provides an opportunity for management to allocate resources to various activities after a
thorough – cost benefit analysis.
 It helps in the identification of wasteful expenditure and then their elimination. If facilitates the
close linkage of departmental budgets with corporate objectives.
 It helps in the introduction of a system of Management by Objectives
Question 31
An electronic gadget manufacturer has prepared sales budget for the next few months. In this
respect, following figures are available:
Months Electronic gadgets' sales
January 5000 units
February 6000 units
March 7000 units
April 7500 units
May 8000 units
To manufacture an electronic gadget, a standard cost of ₹ 1,500 is incurred and it is sold through
dealers at an uniform price of ₹ 2,000 per gadget to customers. Dealers are given a discount of 15%
on selling price.
Apart from other materials, two units of batteries are required to manufacture a gadget. The
company wants to hold stock of batteries at the end of each month to cover 30% of next month's
production and to hold stock of manufactured gadgets to cover 25% of the next month's sale.
3250 units of batteries and 1200 units of manufactured gadgets were in stock on 1st January.
Required:
(i) Prepare production budget (in units) for the month of January, February, March and April.
(ii) Prepare purchase budget for batteries (in units) for the month of January, February and March and
calculate profit for the quarter ending on March. (PYP 10 Marks Nov ‘18)
Answer 31
(i) Preparation of Production Budget (in Units)
15.28
January February March April May

Sales 5,000 6,000 7,000 7,500 8,000
Add: Closing stock (25% of 1,500 1,750 1,875 2,000
next month’s sales)
Less: Opening Stock (1200) (1500) (1750) (1875)
Production of electronic 5,300 6,250 7,125 7,625
Gadgets
(ii) Preparation of Purchase budget
January February March April
Consumption/production of Batteries (@ 2 per 10,600 12,500 14,250 15,250
Gadget)
Add: Closing Stock (30% of next month’s 3750 4275 4575
production)
Less: Opening Stock 3,250 3,750 4275
Purchase of Batteries 11,100 13,025 14,550
Statement Showing Profit
Jan. Feb. March Total
Sales (A) 5,000 6,000 7,000 18,000
Selling Price per unit* ₹. 2,000 ₹. 2,000 ₹. 2,000 ₹. 2,000
Less: Discount @15% of 300 300 300 300
selling price
Less: Standard 1500 1500 1500 1500
cost of
Manufacturing per
gadget Cost
Profit (B) (selling Price- 200 200 200 200
discount- cost)
Total Profit (A × B) ₹.10,00,000 ₹.12,00,000 ₹.14,00,000 ₹.36,00,000

This was a simple numerical problem on preparation of production budget, purchase
budget and for calculation of profit for the quarter ending on 31 st March. Majority of
examinees have calculated production units correctly but failed to calculate purchase units
and profit for the quarter ending. Performance in the sub part was below average.
Question 32
The Accountant of KPMR Ltd. has prepared the following budget for the coming year
2022 for its two products ‘AYE’ and ‘ZYE’:
Particulars Product ‘AYE’ Product ‘ZYE’
Production and Sales (in Units) 4,000 3,000
Amount (in ₹) Amount (in ₹)
Direct Material per unit 80 70
Direct Labour per unit 40 35
Variable Overhead per unit 20 25
Fixed Overhead per unit 10 10
After reviewing the above budget, the management has called the marketing team for suggesting
some measures for increasing the sales. The marketing team has suggested that by promoting the
products on social media, the sales quantity of both the products can be increased by 5%. Also, the
selling price per unit will go up by 10%. But this will result in increase in expenditure on variable
15.29
overhead and fixed overhead by 20% and 5% respectively for both the products.
You are required to prepare flexible budget for both the products:
(i) Before promotion on social media,
(ii) After promotion on social media. (PYP 5 Marks Dec ’21)
Answer 32
(i) Flexible Budget (before promotion)
Particulars Product ‘AYE’ Product ‘ZYE’ Total
Production & Sales (units) 4,000 3,000
Amount (₹) Amount (₹) Amount (₹)

A. Sales Value 8,00,000 5,40,000 13,40,000
(₹ 200×4,000) (₹ 180×3,000)
B. Direct Materials 3,20,000 2,10,000 5,30,000
(₹ 80 × 4,000) (₹70 × 3,000)
C. Direct labour 1,60,000 1,05,000 2,65,000
(₹ 40 × 4,000) (₹ 35 × 3,000)
D. Variable Overheads 80,000 75,000 1,55,000
(₹ 20 × 4,000) (₹ 25 × 3,000)
E. Total Variable Cost 5,60,000 3,90,000 9,50,000
(B+C+D)
F. Contribution (A-E) 2,40,000 1,50,000 3,90,000
G. Fixed Overhead 40,000 30,000 70,000
(₹10 × 4,000) (₹10 × 3,000)
H. Profit (F-G) 2,00,000 1,20,000 3,20,000
Profit per unit 50 40
(ii) Flexible Budget (after promotion)
Particulars Product ‘AYE’ Product ‘ZYE’ Total
Production & Sales 4,200 3,150
(units) (4,000×105%) (3,000×105%)
Amount (₹) Amount (₹) Amount (₹)
A. Sales Value 9,24,000 6,23,700 15,47,700
(₹ 220 × 4,200) (₹ 198 × 3,150)
B. Direct Materials 3,36,000 2,20,500 5,56,500
(₹ 80 × 4,200) (₹ 70 × 3,150)
C. Direct labour 1,68,000 1,10,250 2,78,250
(₹ 40 × 4,200) (₹ 35 × 3,150)
D. Variable Overheads 1,00,800 94,500 1,95,300
(₹ 24 × 4,200) (₹ 30 × 3,150)
E. Total Variable Cost 6,04,800 4,25,250 10,30,050
(B+C+D)
F. Contribution (A-E) 3,19,200 1,98,450 5,17,650
G. Fixed Overhead 42,000 31,500 73,500
(₹ 40,000 × (₹ 30,000 ×
105%) 105%)
H. Profit (F-G) 2,77,200 1,66,950 4,44,150
Profit per unit 66 53
15.30

This Numerical question on Flexible Budget by segregating cost into fixed and variable.
Many examinees faced hardship to understand the concept of fixed cost when the level of
production changed; hence fixed overheads cost was not calculated correctly in the second
part of the question. Performance of the examinees was average.
Question 33
What is ‘Budgetary Control System’ and discuss the components of the same. (PYP 5 Marks Dec ’21,
Old & New SM)
Answer 33
Budgetary Control System: It is the system of management control and accounting in which all the
operations are forecasted and planned in advance to the extent possible and the actual results
compared with the forecasted and planned results.
Components of Budgetary Control System: The policy of a business for a defined period is represented
by the master budget, the detailed components of which are given in a number of individual budgets
called functional budgets. These functional budgets are broadly grouped under the following heads:
1. Physical budgets: Those budgets which contain information in quantitative terms such as the
physical units of sales, production etc. This may include quantity of sales, quantity of production,
inventories, and manpower budgets are physical budgets.
2. Cost budgets: Budgets which provides cost information in respect of manufacturing,
administration, selling and distribution, etc. for example, manufacturing costs, selling costs,
administration cost, and research and development cost budgets are cost budgets.
3. Profit budgets: A budget which enables the ascertainment of profit. For example, sales budget,
profit and loss budget, etc.
4. Financial budgets: A budget which facilitates in ascertaining the financial position of a concern,
for example, cash budgets, capital expenditure budget, budgeted balance sheet etc.

This theory question on Budgetary Control and its components. Majority of the examinees
had not answered in the correct line. Performance of the examinees was below average.
Question 34
SR Ltd. is a manufacturer of Garments. For the first three months of financial year 2022-23
commencing on 1st April 2022, production will be constrained by direct labour. It is estimated that
only 12,000 hours of direct labour hours will be available in each month.
For market reasons, production of either of the two garments must be at least 25% of the production
of the other. Estimated cost and revenue per garment are as follows:
Shirt (₹) Short (₹)
Sales price 60 44
Raw Materials
Fabric @12 per metre 24 12
Dyes and cotton 6 4
Direct labour @ 8 per hour 8 4
Fixed Overhead @ 4 per hour 4 2
Profit 18 22
From the month of July 2022 direct labour will no longer be a constraint. The company expects to be
able to sell 15,000 shirts and 20,000 shorts in July, 2022. There will be no opening stock at the
beginning of July 2022. Sales volumes are expected to grow at 10% per month cumulatively
thereafter throughout the year. Following additional information is available:
 The company intends to carry stock of finished garments sufficient to meet 40% of the next
15.31
month's sale from July 2022 onwards.

 The estimated selling price will be same as above.
Required:
I. Calculate the number of shirts and shorts to be produced per month in the first quarter of
financial year 2022-2023 to maximize company's profit.
II. Prepare the following budgets on a monthly basis for July, August and September 2022:
(i) Sales budget showing sales units and sales revenue for each product.
(ii) Production budget (in units) for each product. (PYP 10 Marks May’22)
Answer 34
Calculation of number of shirts & shorts to be produced per month:
Contribution per labour hour:
Shirts (₹) Shorts (₹)
A Sales Price per unit 60 44
B Variable Cost:
- Raw materials 30 16
- Direct labour 8 4
38 20
C Contribution per unit [A-B] 22 24
Labour hour per unit 1 hour 0.5 hour
Contribution per labour hour [C÷D] 22 48
Production plan for the first three months:
Since, Shorts has the higher Contribution per labour hour, it will be made first. Shirts will be 25% of
Shorts. The quantity will be determined as below:
Let the Quantity of Shorts be X and Shirts will be 0.25 X, then
(Qty. of Shorts × labour hour per unit) + (Qty. of Shirts × labour hour per unit) = Total labour hours
available
Or, (X × 0.5 hour) + (0.25X × 1 hour) = 12,000 hours
Or, 0.5X + 0.25X = 12,000 Or, 0.75X = 12,000
Or, X = 12,000÷0.75
= 16,000 units of Shorts
Therefore, for Shirts = 25% of 16,000 units
= 4,000 units
Production per month for the first quarter will be:
Shorts- 16,000 units & Shirts- 4,000 units
II. (i) Sales Budget for the month of July, August & September 2022:
July 2022 August 2022 September 2022
Shirts Shorts Shirts Shorts Shirts Shorts
A Sales demand 15,000 20,000 16,500 22,000 18,150 24,200
B Selling price per 60 44 60 44 60 44

unit (₹)
C Sales Revenue (₹) 9,00,000 8,80,000 9,90,000 9,68,000 10,89,000 10,64,800
(ii) Production budget for the month of July, August & September 2022:
July 2022 August 2022 September 2022 October 2022
Shirts Shorts Shirts Shorts Shirts Shorts Shirts Shorts
Opening 0 0 6,600 8,800 7,260 9,680
stock
Sales 15,000 20,000 16,500 22,000 18,150 24,200 19,965 26,620
demand
Closing stock 6,600 8,800 7,260 9,680 7,986 10,648
Production 21,600 28,800 17,160 22,880 18,876 25,168
15.32
[B+C-A]
Question 35
Define Budget Manual. What are the salient features of Budget Manual? (PYP 5 Marks Nov 22) (RTP
May ’21 & Nov ’19, MTP 5 Marks Nov’21, Old & New SM)
Answer 35
Budget Manual: The budget manual is a booklet specifying the objectives of an organisation in relation
to its strategy. The budget is made to decide how much an organisation would earn and spend and in
what manner. In the budget, the organisation sets its priorities too.
Effective budgetary planning relies on the provision of adequate information to the individuals
involved in the planning process. Many of these information needs are contained in the budget
manual. A budget manual is a collection of documents that contains key information for those involved
in the planning process .
CIMA London defines budget manual as, 'A document which sets out the responsibilities of the persons
engaged in, the routines of, and the forms and records required for, budgetary control'.
Contents of a budget manual: Typical budget manual may include the following:
(i) A statement regarding the objectives of the organisation and how they can be achieved through
budgetary control;
(ii) A statement about the functions and responsibilities of each executive, both regarding
preparation and execution of budgets;
(iii) Procedures to be followed for obtaining the necessary approval of budgets. The authority of
granting approval should be stated in explicit terms. Whether, one two or more signatures are
required on each document should be clearly stated;
(iv) A form of organisation chart to show who are responsible for the preparation of each functional
budget and the way in which the budgets are interrelated.
(v) A timetable for the preparation of each budget.
(vi) The manner of scrutiny and the personnel to carry it out;
(vii) Reports, statements, forms and other record to be maintained.
(viii) The accounts classification to be employed. It is necessary that the framework within which the
costs, revenue and other financial accounts are classified must be identical both in the accounts
and budget department.
(ix) The reporting of the remedial action.
(x) The manner in which budgets, after acceptance and issuance, are to be revised or amended, these
are included in budgets and on which action can be taken only with the approval of top
management
(xi) This will prevent the formation of a ‘bottleneck’ with the late preparation of one budget
holding up the preparation of all others.
(xii) Copies of all forms to be completed by those responsible for preparing budgets, with explanations
concerning their completion.
(xiii) A list of the organization’s account codes, with full explanations of how to use them.
(xiv) Information concerning key assumptions to be made by managers in their budgets, for example
the rate of inflation, key exchange rates, etc.
(Any four points)

15.33
Question 36
PQR Limited manufactures three products - Product X, Product Y and Product Z. The output for the
current year is 2,50,000 units of Product X, 2,80,000 units of Product Y and 3,20,000 units of Product
Z respectively.
Selling price of Product X is 1.25 times of Product Z whereas Product Y can be sold at double the price
at which product Z can be sold. Product Z can be sold at a profit of 20% on its marginal cost.
Other information are as follows:
Direct Material Cost (Per unit) ` 20 ` 20 ` 20
Direct Wages Cost (per unit) ` 16 ` 24 ` 16
Raw material used for manufacturing all the three products is the same. Direct Wages are paid @ ` 4
per labour hour,
Total overhead cost of the company is ` 52,80,000 for the year, out of which ` 1 per labour hour is
variable and the rest is fixed.
In the next year it is expected that sales of product X and product Z will increase by 12% and 15%
respectively and sale of product Y will decline by 5%. The total overhead cost of the company for the
next year is estimated at ` 55,08,000. The variable cost of ` 1 per labour hour remains unchanged.
It is anticipated that all other costs will remain same for the next year and there is opening and
closing stock. Selling Price per unit of each product will remain unchanged in the next year.
Required:
Prepare a budget showing the current position and the position for the next year clearly indicating
the total product-wise contribution and profit for the company as a whole. (PYP 10 Marks, May ‘23)
Answer 36
i) Budget showing current position of total product wise contribution and profitability
Particulars Product Product Product Total (`)
X (`) Y (`) Z (`)
A Direct material cost (per unit) 20 20 20
B Direct wages cost 16 24 16
(per unit)
C Variable overhead per unit 4 6 4
(Refer WN-1)
D Total variable cost/ Marginal cost per 40 50 40
unit [A+B+C]
E Add: Profit [20% of D] - - 8
F Selling price unit [D+E] - - 48
G Price weight 1.25 2 1
H Selling price per unit [Selling price of 60 96 48
Product Z × G]
I Contribution per 20 46 8
unit [H-D]
J Quantity to be sold 2,50,000 2,80,000 3,20,000
K Total Contribution 50,00,000 1,28,80,000 25,60,000 2,04,40,000
[J×I]

15.34
L Fixed Overheads [Refer WN-1] 13,20,000

M Profit 1,91,20,000
Working Notes:
1. Segregation of Overheads into variable and fixed in current year
Particulars Product X Product Y Product Z Total (`)

(`) (`) (`)
A Total overhead cost - - - 52,80,000
B Labour hour per unit 4 6 4
[Direct wages Cost ÷
Re.1]
C Quantity produced 2,50,000 2,80,000 3,20,000
D Total variable 10,00,000 16,80,000 12,80,000 39,60,000
overhead cost [B×C]
E
Fixed overhead cost 13,20,000
[A-D]
ii) Budget showing next year’s position of total product wise contribution and profitability
(`) (`) (`)
A Selling price per unit 60 96 48
B Contribution per unit 20 46 8
C Quantity to be sold 2,80,000 2,66,000 3,68,000
[112% of [95% of [115% of
2,50,000] 2,80,000] 3,20,000]
D Total Contribution [B×C] 56,00,000 1,22,36,000 29,44,000 2,07,80,000
Fixed Overheads [Refer WN- 13,20,000
2]
Profit 1,94,60,000
Working Notes:
2. Segregation of Overheads into variable and fixed in next year
(`) (`) (`)
A Total overhead cost - - - 55,08,000
B Labour hour per unit 4 6 4
[Direct wages Cost ÷
Re.1]
C Quantity produced 2,80,000 2,66,000 3,68,000
D Total variable 11,20,000 15,96,000 14,72,000 41,88,000
overhead cost [B×C]
E Fixed overhead cost [A-D] 13,20,000


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CA Intermediate

Prakshal Shah | 8779794646

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3 KEEP GOING WITH THE

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3. What is the benefit of Chapter-wise?

4. What does amended for the latest attempt mean?

6. What if a new attempt is added post my purchase?

7. What does N/A mean?

*This is on an average based on the last 11 attempts

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21 MTPs: March’18, April’18, Aug’18, Oct’18, May’19, April’19, Oct’19,

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EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

(iii) Area It only deals with cost It is wider in scope as it includes

Industry or Product Cost Unit Basis

Industry or Product Cost Unit Basis

Engineering Contract, job

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EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

(v) Assembly of bicycles

(iii) Decentralized branches of an organization. Profit Centre

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

It was a theoretical question requiring examinees to specify the type of responsibility

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

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EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

(iii) Cost is ascertained for a single product. Unit/ Single/Output costing

Project Metro Rail project, Road projects etc.

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Bin Card Stores Ledger

√2 𝑋 𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑜𝑓 "𝐷𝑒𝑒′ 2𝑋34,400 𝑘𝑔.𝑋 𝑅𝑠.720

(ii) Re- Order level:

(iii) Minimum consumption per day of raw material ‘Dee’:

IV Average Inventory 1,497kg./2 = 748.5kg. 1,697kg./2 = 848.5kg.

VI Total Cost Rs. 29,434.20 Rs. 29,714.20

5 C 7.65% 2,10,000 7.57%

Relevant Cost of this order quantity Rs.

Different in cost on account of this error = 3,690 – 2,826 = Rs. 864

Purchase Cost 3,60,000 Purchase cost 4,000 × 86 3,44,000

Total cost 3,63,690 3,68,000

2×𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 𝑓𝑜𝑟 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 ×𝑂𝑟𝑑𝑒𝑖𝑛𝑔 𝑐𝑜𝑠𝑡

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3. It often serves the purpose of a It cannot replace a bill of material.

4 It can be used for the It is useful in arriving historical cost only.

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(ii) Frequency of placing orders for procurement:

Quantity per order (E.O.Q) = 2,000 kg.

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

(i) COMPUTE the economic order quantity

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ii.Evaluation of Profitability of Different Options of Order Quantity

(B) When Quantity Discount of 8% is accepted

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

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3. EOQ = √2 × 40,000𝑘𝑔𝑠.× 𝑅𝑠. 1,000 /𝑅𝑠. 20 = 2,000 kgs.

= 1,000 kg. + 40,000kg.×36days