Cost

&
Management Accounting

“TEST BOOK”

By

CA NAMIT ARORA SIR

“WORK HARD IN SMART WAY”

ALL THE BEST

CA. NAMIT ARORA
 INDEX
S. NO. TEST PAGE NO.

1 TEST 1 - MATERIALS COST 3–4

2 TEST 2 - LABOUR OR EMPLOYEE COST 5-6
3 TEST 3 - OVERHEADS OR INDIRECT COST 7–8
4 TEST 4 - COST SHEET AND UNIT COSTING 9 – 10
5 TEST 5 - JOB AND BATCH COSTING 11 – 13
6 TEST 6 - CONTRACT COSTING 14 – 15
7 TEST 7 - OPERATING OR SERVICE COSTING 16 – 17
8 TEST 8 - PROCESS OR OPERATION COSTING 18 – 19
9 TEST 9 - JOINT AND BY PRODUCTS 20 – 21
10 TEST 10 - BUDGETARY CONTROL 22 - 23
11 TEST 11 - STANDARD COSTING 24 - 25
12 TEST 12 - MARGINAL COSTING 26 – 27
13 TEST 13 - COST ACCOUNTING SYSYTEM 28 – 29
14 TEST 14 – RECONCILIATION STATEMENT 30 – 31
15 TEST 15 - ACTIVITY BASED COSTING 32 – 33
16 SAMPLE PAPER 1 34 – 38
17 SAMPLE PAPER 2 39 – 42

SOLUTION

18 SOLUTION TEST 1 - MATERIALS COST 43 – 45

19 SOLUTION TEST 2 - LABOUR OR EMPLOYEE COST 46 – 47
20 SOLUTION TEST 3 - OVERHEADS OR INDIRECT COST 48 – 51
21 SOLUTION TEST 4 - COST SHEET AND UNIT COSTING 52 – 54
22 SOLUTION TEST 5 - JOB AND BATCH COSTING 55 – 57
23 SOLUTION TEST 6 - CONTRACT COSTING 58 – 60
24 SOLUTION TEST 7 - OPERATING OR SERVICE COSTING 61 – 64
25 SOLUTION TEST 8 - PROCESS OR OPERATION COSTING 65 – 68
26 SOLUTION TEST 9 - JOINT AND BY PRODUCTS 69 – 70
27 SOLUTION TEST 10 - BUDGETARY CONTROL 71 – 73
28 SOLUTION TEST 11 - STANDARD COSTING 74 – 77
29 SOLUTION TEST 12 - MARGINAL COSTING 78 – 80
30 SOLUTION TEST 13 - COST ACCOUNTING SYSYTEM 81 – 85
31 SOLUTION TEST 14 – RECONCILIATION STATEMENT 86 – 87
32 SOLUTION TEST 15 - ACTIVITY BASED COSTING 88 – 90
33 SOLUTION SAMPLE PAPER 1 91 – 99
34 SOLUTION SAMPLE PAPER 2 100 – 107
 TEST 1 - MATERIALS COST 3

TEST 1 - MATERIALS COST

Question 1
A Company uses three raw materials A, B, and C for a particular product for which the following data apply:
Usage for one ROQ Price Delivery period (in weeks) ROL
RM Mini. level
unit of product (in kg) per kg Mini. Average Max. (in kg)
A 10 kg 10,000 0.10 1 2 3 8,000 -
B 4 kg 5,000 0.30 3 4 5 4,750 -
C 6 kg 10,000 0.15 2 3 4 - 2,000 kg

Weekly production varies from 175 to 225 units, averaging 200 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
(10 Marks)

Question 2
M/s Tubes Ltd. are the manufacturers of picture tubes for T.V. The following are the details of their operation
during 1997:
Average monthly market demand 2,000 Tubes
Ordering cost `100 per order
Inventory carrying cost 20% per annum
Cost of tubes `500 per tube
Normal usage 100 tubes per week
Minimum usage 50 tubes per week
Maximum usage 200 tubes per week
Lead time to supply 6 - 8 weeks

Compute from the above:

(1) Economic order quantity. If the supplier is willing to supply 1,500 units at a discount of 5%, is it
worth accepting?
(2) Maximum level of stock.
(3) Minimum level of stock.
(4) Re-order level.
(5+2+2+1= 10 Marks)

Question 3
IPL Limited uses a small casting in one of its finished products. The castings are purchased from a foundry.
IPL Limited purchases 54,000 castings per year at a cost of `800 per casting.
The castings are used evenly throughout the year in the production process on a 360-day-per-year
basis. The company estimates that it costs `9,000 to place a single purchase order and about `300 to carry
one casting in inventory for a year.
The high carrying costs result from the need to keep the castings in carefully controlled temperature
and humidity conditions, and from the high cost of insurance. Delivery from the foundry generally takes 6
days, but it can take as much as 10 days.
The days of delivery time and percentage of their occurrence are shown in the following tabulation:

Delivery time (days) : 6 7 8 9 10

Percentage of occurrence : 75 10 5 5 5

Required
(i) Compute the economic order quantity (EOQ).
(ii) Assume the company is willing to assume a 15% risk of being out of stock. What would be the safety
stock? The re-order point?
 TEST 1 - MATERIALS COST 4

(iii) Assume the company is willing to assume a 5% risk of being out of stock. What would be the safety
stock? The re-order point?
(iv) Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for one
year?
(v) Refer to the original data. Assume that using process re-engineering the company reduces its cost of
placing a purchase order to only `600. In addition, company estimates that when the waste and
inefficiency caused by inventories are considered, the true cost of carrying a unit in stock is `720 per
year.
a. Compute the new EOQ.
b. How frequently would the company be placing an order, as compared to the old purchasing
policy?
(2 + 1 + 1 + 2 + 4 = 10 Marks)

Question 4
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 -
06-01-20 Material Requisition-011 3,000 -
07-01-20 Purchase Order- 010 10,000 `9,750
10-01-20 Material Requisition-012 4,500 -
13-01-20 GRN-009 (against the Purchase Order- 009) 10,000 -
13-01-20 MRN-004 (against the Purchase Order- 009) 400 -
15-01-20 Material Requisition-013 2,200 -
24-01-20 Material Requisition-014 1,500 -
25-01-20 GRN-010 (against the Purchase Order- 010) 10,000 -
28-01-20 Material Requisition-015 4,000 -
31-01-20 Material Requisition-016 3,200 -

*GRN- Goods Received Note; **MRN- Material Returned Note

Based on the above data, you are required to calculate:

(a) Re-order level
(b) Maximum stock level
(c) Minimum stock level
(d) Prepare Store Ledger for the period January 2020 and determine the value of stock as on 31-01-
2020.
(e) Value of components used during the month of January, 2020.
(f) Inventory turnover ratio.
(10 Marks)
 TEST 2 - EMPLOYEE COST OR LABOUR COST 5

TEST 2 - EMPLOYEE COST OR LABOUR COST

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

Hourly rate of wages (guaranteed) `40.00

Average time for producing 1 piece by one worker 2 hours
based on the previous performance
(This may be taken as time allowed)
No. of working days in the month 25 days
No. of working hours per day for each worker 8 hours
Actual production during the month 1,250 units

Required:
1. Calculate effective rate of earnings per hour under Halsey scheme and Rowan scheme.
2. Calculate the savings to Mr. A in terms of direct labour cost per piece under the schemes.
3. Advise Mr. A about the selection of the scheme to fulfill his assurance.
(10 Marks)

Question 2
A skilled worker in XYZ Ltd. is paid a guaranteed wage rate of `30 per hour. The standard time per unit for a
particular product is 4 hours. Mr. P, a machine man, has been paid wages under the Rowan Incentive Plan
and he had earned an effective hourly rate of `37.50 on the manufacture of that particular product.
What could have been his total earnings and effective hourly rate, had he been put on Halsey
Incentive Scheme (50%)?
(5 Marks)

Question 3
Calculate the earning of A and B from the following particulars for a month and allocate the labour cost to
each job X, Y and Z:
A B
Basic wages `10,000 `16,000
Dearness Allowance 50% 50%
Contribution to Provident Fund (on basic wages) 8% 8%
Contribution to Employee State Insurance (on basic wages) 2% 2%
Overtime hours 10 hours -

The normal working hours for the month are 200. Overtime is paid at double the total of normal
wages and dearness allowance. Employer’s contributions to state insurance and provident fund are at equal
rates with employee’s contribution. The two workers were employed on jobs X, Y and Z in the following
proportions:
Jobs X Y Z
Workers A 40% 30% 30%
Workers B 50% 20% 30%

Overtime was done on job Y.

(10 Marks)
 TEST 2 - EMPLOYEE COST OR LABOUR COST 6
Question 4
The management of Moonshine Ltd wants to have an idea of the profit foregone as a result of labour
turnover last year.
Last year sales accounted to `33,00,000 and the P/V ratio was 20%. The total number of actual hours
worked by the direct labour force was 2,40,000. As a result of the delays by the personnel department in
filling vacancies due to labour turnover 25,000 potentially productive hours (excluding unproductive
training hours) were lost.
The actual direct labour hours included 40,000 hours attributable to training new recruits out of
which half of the hours were unproductive.

The costs incurred consequent on labour turnover revealed on analysis the following:

Settlement cost due to leaving `25,000

Recruitment costs `20,000
Selection costs `12,000
Training costs `18,000

Assuming that the potential production lost due to labour turnover could have been sold at prevailing
prices. Ascertain the profit foregone last year on account of labour turnover.
(5 Marks)
 TEST 3 - OVERHEADS 7

TEST 3 - OVERHEADS

Question 1
The ABC Company has the following account balances and distribution of direct charges on 31st March, 2017.
Production Department Services Departments
Total
Items Stores &
Amount Machine Shop Packing General Plant
maintenance
Allocated overheads:
Indirect labour 14,650 4,000 3,000 2,000 5,650
Maintenance materials 5,020 1,800 700 1,020 1,500
Misc. supplies 1,750 400 1,000 150 200
Superintendent’s salary 4,000 - - 4,000 -
Cost & payroll salary 10,000 - - 10,000 -
OH to be apportioned:
Power 8,000
Rent 12,000
Fuel & heat 6,000
Insurance 1,000
Taxes 2,000
Depreciation 1,00,000

The following data were compiled by means of the factory survey made in the previous year:
Floor space in Radiator No. of Investment in
Details H.P. hours
Sq. ft. sections employees `
Machine shop 2,000 45 20 6,40,000 3,500
Packing 800 90 10 2,00,000 500
General plant 400 30 3 10,000 -
Store & maintenance 1,600 60 5 1,50,000 1,000
Total 4,800 225 38 10,00,000 5,000

Expenses charged to the stores and maintenance departments are to be distributed to the other departments
by the following percentages:
Machine shop 50%; Packing 20%; General Plant 30%; General Plant overheads is distributed on the
basis of number of employees:

Requirements:
(a) Prepare an overhead distribution statement with supporting schedules to show computations and basis
of distribution including distribution of the service department expenses to producing department.
(b) Determine the service department distribution by the method of continued distribution. Carry through
3 cycles. Show all calculations to the nearest rupees.
(10 Marks)

Question 2
A manufacturing unit has purchased and installed a new machine of `12,70,000 to its fleet of 7 existing
machines. The new machine has an estimated life of 12 years and is expected to realise `70,000 as scrap at the
end of its working life.
Other relevant data are as follows:

(i) Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This includes 300 hours for
plant maintenance and 92 hours for setting up of plant.
(ii) Estimated cost of maintenance of the machine is `25,000 p.a.
(iii) The machine requires a special chemical solution, which is replaced at the end of each week (6 days in
a week) at a cost of `400 each time.
 TEST 3 - OVERHEADS 8
(iv) Four operators control operation of 8 machines and the average wages per person amounts to `420
per week plus 15% fringe benefits.
(v) Electricity used by the machine during the production is 16 units per hour at a cost of `3 per unit. No
current is taken during maintenance and setting up.
(vi) Departmental and general works overhead allocated to the operation during last year was `50,000.
During the current year it is estimated to increase 10% of this amount.

Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is productive.
(5 Marks)

Question 3
The total overhead expenses of a factory are `4,46,380. Taking into account the normal working of the factory,
overhead was recovered in production at `1.25 per hour. The actual hours worked were 2,93,104.
How would you proceed to close the books of accounts, assuming that besides 7,800 units produced of
which 7,000 were sold, there were 200 equivalent units in work-in-progress?
On investigation, it was found that 50% of the unabsorbed overhead was on account of increase in the
cost of indirect materials and indirect labour and the remaining 50% was due to factory inefficiency.

Also give the profit implication of the method suggested.

(10 Marks)

Question 4
E-books is an online book retailer. The Company has four departments. The two sales departments are
Corporate Sales and Consumer Sales. The two support departments are Administrative (Human resources,
Accounting) and Information systems. Each of the sales department conducts merchandising and marketing
operations independently.

The following data are available for October, 2003:

Departments Revenues Number of Employees Processing Time used
(in minutes)
Corporate Sales `16,67,750 42 2,400
Consumer Sales `8,33,875 28 2,000
Administrative - 14 400
Information systems - 21 1,400

Cost incurred in each of four departments for October, 2003 are as follows:
Corporate sales `12,97,751
Consumers sales `6,36,818
Administrative `94,510
Information systems `3,04,720

The company uses number of employees as a basis to allocate Administrative costs and processing time
as a basis to allocate Information systems costs.

Required:
(i) Allocate the support department costs to the sales departments using the direct method.
(ii) Rank the support departments based on percentage of their services rendered to other support
departments. Use this ranking to allocate support costs based on the step-down allocation method.
(iii) How could you have ranked the support departments differently?
(iv) Allocate the support department costs to two sales departments using the reciprocal allocation method.
(10 Marks)
 TEST 4 - COST SHEET & UNIT COSTING 9

TEST 4 - COST SHEET & UNIT COSTING

Question 1
A Ltd. Co. has capacity to produce 1,00,000 units of a product every month. Its works cost at varying levels of
production is as under:
Level Works cost per unit (`)
10% 400
20% 390
30% 380
40% 370
50% 360
60% 350
70% 340
80% 330
90% 320
100% 310

Its fixed administration expenses amount to `1,50,000 and fixed marketing expenses amount to
`2,50,000 per month respectively. The variable distribution cost amounts to `30 per unit.
It can market 100% of its output at `500 per unit provided it incurs the following further expenditure:
(a) It gives gift items costing Rs. 30 per unit of sale.
(b) It has lucky draws every month giving the first prize of Rs. 50,000; 2nd prize of `25,000; 3rd prize of
`10,000 and three consolation prizes of `5,000 each to customers buying the product.
(c) It spends `1,00,000 on refreshments served every month to its customers.
(d) It sponsors a television programme every week at a cost of `20,00,000 per month.
It can market 30% of its output at `550 per unit without incurring any of the expenses referred to in (a) to
(d) above.
Prepare a cost sheet for the month showing total cost and profit at 30% and 100% capacity level.
(5 Marks)

Question 2
M/s. Areeba Private Limited has a normal production capacity of 36,000 units of toys per annum. The
estimated costs of production are as under:
(a) Direct material `40 per unit
(b) Direct labour `30 per unit (subject to a minimum of `48,000 p.m.)
(c) Factory overheads:
Fixed `3,60,000 per annum
Variable `10 per unit
Semi variable `1,08,000 per annum up to 50% capacity and
additional `46,800 for every 20% increase in
capacity or any part thereof.
(d) Administrative overheads `5,18,400 per annum (fixed)
(e) Selling overheads `8 per unit
(f) Each unit of raw material yields scrap which is sold at the rate of `5 per unit.
(g) In year 2019, the factory worked at 50% capacity for the first three month but it was expected
that it would work at 80% capacity for the remaining nine month.
(h) During the first three months, the selling price per unit was `145.

You are required to:

(1) Prepare a cost sheet showing prime cost, works cost, cost of production and cost of sales.
(2) Calculate the selling price per unit for remaining nine month to achieve the total annual p rofit of
`8,76,600.
(10 Marks)
 TEST 4 - COST SHEET & UNIT COSTING 10

Question 3
DFG Ltd. manufactures leather bags for office and school purpose. The following information is related with
the production of leather bags for the month of September 2019.
(i) Leather sheets and cotton cloths are the main inputs, and the estimated requirement per bag is two
meters of leather sheets and one meter of cotton cloth. 2,000 meter of leather sheets and 1,000 meter
of cotton cloths are purchased at `3,20,000 and `15,000 respectively. Freight paid on purchases is
`8,500.
(ii) Stitching and finishing need 2,000 man hours at `80 per hour.
(iii) Other direct cost of `10 per labour hour is incurred.
(iv) DFG has 4 machines at a total cost of `22,00,000. Machine has a life of 10 years with a scrape value of
10% of the original cost. Depreciation is charged on straight line method.
(v) The monthly cost of administrative and sales office staffs are `45,000 and `72,000 respectively. DFG
pays `1,20,000 per month as rent for a 2400 sq. feet factory premises. The administrative and sales
office occupies 240 sq. feet and 200 sq. feet respectively of factory space.
(vi) Freight paid on delivery of finished bags is `18,000.
(vii) During the month 35 kg. of leather and cotton cuttings are sold at `150 per kg.
(viii) There is no opening and closing stocks for input materials. There is 100 bags in stock at the end of the
month.

Prepare a cost sheet following functional classification for the month of September 2019.
(10 Marks)

Question 4
The following details are available from the books of R Ltd. for the year ending 31st March 2020:
Particulars Amount (`)
Purchase of raw materials 84,00,000
Consumable materials 4,80,000
Direct wages 60,00,000
Carriage inward 1,72,600
Wages to foreman and store keeper 8,40,000
Other indirect wages to factory staffs 1,35,000
Expenditure on research and development on new production technology 9,60,000
Salary to accountants 7,20,000
Employer’s contribution to EPF & ESI 7,20,000
Cost of power & fuel 28,00,000
Production planning office expenses 12,60,000
Salary to delivery staffs 14,30,000
Income tax for the assessment year 2019-20 2,80,000
Fees to statutory auditor 1,80,000
Fees to cost auditor 80,000
Fees to independent directors 9,40,000
Donation to PM-national relief fund 1,10,000
Value of sales 2,82,60,000
Position of inventories as on 01-04-2019:
Raw Material 6,20,000
WIP 7,84,000
Finished goods 14,40,000
Position of inventories as on 31-03-2020:
Raw Material 4,60,000
WIP 6,64,000
Finished goods 9,80,000

From the above information prepare a cost sheet for the year ended 31st March 2020.
(10 Marks)
 TEST 5 - JOB AND BATCH COSTING 11

TEST 5 - JOB AND BATCH COSTING

Question 1
The following data presented by the supervisor of a factory for a job.
` per unit
Direct Material 120
Direct Wages @ `4 per hour 60
(Departments A - 4 hrs., B - 7 hrs., C - 2 hrs & D - 2 hrs)
Chargeable Expenses 20
Total 200

Analysis of the profit and loss account for the year ended 31st March, 2019:
Particulars ` Particulars `
Material 2,00,000 Sales 4,30,000
Direct Wages
Dept. A 12,000
Dept. B 8,000
Dept. C 10,000
Dept. D 20,000 50,000
Special store items 6,000
Overheads
Dept. A 12,000
Dept. B 6,000
Dept. C 9,000
Dept. D 17,000 44,000
Gross profit c/d 1,30,000
4,30,000 4,30,000
Selling expenses 90,000 Gross profit b/d 1,30,000
Net profit 40,000
1,30,000 1,30,000

It is also to be noted that average hourly rates for all the four departments are similar.

Required:
(a) Prepare a job cost sheet.
(b) Calculate the entire revised cost using the above figures as the base.
(c) Add 20% profit on selling price to determine the selling price.
(5 Marks)

Question 2
A jobbing factory has undertaken to supply 200 pieces of a component per month for the ensuing six months.
Every month a batch order is opened against which materials and labour hours are booked at actual.
Overheads are levied at a rate per labour hour. The selling price contracted for is ` 8 per piece. From the
following data present the cost and profit per piece of each batch order and overall position of the order for
1,200 pieces.

Month Batch output Material cost (`) Direct wages (`) Direct labour hours
January 210 650 120 240
February 200 640 140 280
March 220 680 150 280
April 180 630 140 270
May 200 700 150 300
June 220 720 160 320
 TEST 5 - JOB AND BATCH COSTING 12

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
(5 Marks)

Question 3
In the current quarter, a company has undertaken two jobs. The data relating to these jobs are as under:

Job 1102 Job 1108

Selling price `1,07,325 `1,57,920

Profit as percentage on cost 8% 12%
Direct Materials `37,500 `54,000
Direct Wages `30,000 `42,000

It is the policy of the company to charge factory overheads as percentage on direct wages and selling
and administration overheads as percentage on factory cost.
The company has received a new order for manufacturing of a similar job. The estimate of direct
materials and direct wages relating to the new order is `64,000 and `50,000 respectively. A profit of 20% on
sales is required.

You are required to compute:

(i) The rates of Factory overheads and Selling and Administration overheads to be charged;
(ii) The Selling price of the new order.
(10 Marks)

Question 4
AP Ltd. received a job order for supply and fitting of plumbing materials. Following are the details related
with the job work:

Direct Materials: AP Ltd. uses a weighted average method for the pricing of materials issues.

Opening stock of materials as on 12th August 2020:

15mm GI Pipe, 12 units of (15 feet size) @ `600 each

20mm GI Pipe, 10 units of (15 feet size) @ ` 660 each
Other fitting materials, 60 units @ ` 26 each
Stainless Steel Faucet, 6 units @ ` 204 each
Valve, 8 units @ ` 404 each

Purchases:

On 16th August 2020:

20mm GI Pipe, 30 units of (15 feet size) @ ` 610 each

10 units of Valve @ ` 402 each

On 18th August 2020:

Other fitting materials, 150 units @ ` 28 each

 TEST 5 - JOB AND BATCH COSTING 13

Stainless Steel Faucet, 15 units @ ` 209 each

On 27th August 2020:

15mm GI Pipe, 35 units of (15 feet size) @ ` 628 each

20mm GI Pipe, 20 units of (15 feet size) @ ` 660 each
Valve, 14 units @ ` 424 each

Issues for the hostel job:

On 12th August 2020:

20mm GI Pipe, 2 units of (15 feet size)

Other fitting materials, 18 units

On 17th August 2020:

15mm GI Pipe, 8 units of (15 feet size)

Other fitting materials, 30 units

On 28th August 2020:

20mm GI Pipe, 2 units of (15 feet size)

15mm GI Pipe, 10 units of (15 feet size)
Other fitting materials, 34 units
Valve, 6 units

On 30th August 2020:

Other fitting materials, 60 units

Stainless Steel Faucet, 15 units

Direct Labour:

Plumber: 180 hours @ `100 per hour (includes 12 hours overtime)

Helper: 192 hours @ `70 per hour (includes 24 hours overtime)
Overtimes are paid at 1.5 times of the normal wage rate.

Overheads: Overheads are applied @ `26 per labour hour.

Pricing policy: It is company’s policy to price all orders based on achieving a profit margin of 25% on sales
price.

You are required to

(a) Calculate the total cost of the job.
(b) Calculate the price to be charged from the customer.
(10 Marks)
 TEST 6 - CONTRACT COSTING 14

TEST 6 - CONTRACT COSTING

Question 1
M/s. Bansals Construction Company Ltd. took a contract for `60,00,000 expected to be completed in three
years. The following particulars relating to the contract are available:
Particulars 2017 2018 2019
Materials 6,75,000 10,50,000 9,00,000
Wages 6,20,000 9,00,000 7,50,000
Transportation cost 30,000 90,000 75,000
Other expenses 30,000 75,000 24,000
Cumulative work certified 13,50,000 45,00,000 60,00,000
Cumulative work uncertified 15,000 75,000 -

Plant costing `3,00,000 was bought at the commencement of the contract. Depreciation was to be
charged at 25% per annum, on the written down value method. The contractee pays 75% of the value of work
certified as and when certified, and makes the final payment on completion of the contract.

You are required to make a contract account for three years and total estimated profit/loss from the
contract also prepare contractee’s A/c.
(10 Marks)

Question 2
A contractor has entered into a long term contract at an agreed price of `17,50,000 subject to an escalation
clause for materials and wages as spelt out in the contract and corresponding actual are as follows :
Standard Actual
Material
Quantity (tons) Rate (`) Quantity (tons) Rate (`)
A 5,000 50.00 5,050 48.00
B 3,500 80.00 3,450 79.00
C 2,500 60.00 2,600 66.00
Labour Hours Hourly Rate (`) Hours Hourly Rate (`)
X 2,000 70.00 2,100 72.00
Y 2,500 75.00 2,450 75.00
Z 3,000 65.00 3,100 66.00

Reckoning the full actual consumption of material and wages the company has claimed a final price of
`17,73,600.

Give your analysis of admissible escalation claim and indicate the final price payable.
(5 Marks)

Question 3
Brock Construction Ltd. commenced a contract on November 1, 2003. The total contract was for `39,37,500.
Actual expenditure for the period November 1, 2003 to October 31, 2004 and estimated expenditure for
November 1, 2004 to March 31, 2005 are given below:

01.11.03 to 31.10.04 01.11.04 to 31.03.05

(Actuals) (Estimated)

Materials issued 6,75,000 12,37,500

Labour:
Paid 4,50,000 5,62,500
Prepaid 25,000 Nil
Outstanding Nil 2,500
Plant purchased 3,75,000 Nil
 TEST 6 - CONTRACT COSTING 15

Expenses:
Paid 2,00,000 3,50,000
Outstanding 50,000 25,000
Plant returns to store 75,000 3,00,000
(Historical cost) (on 31.03.04) (on 31.03.05)
Work Certified 20,00,000 Full
Work Uncertified 75,000 Nil
Cash received 17,50,000 Full
Material at site 75,000 37,500

The plant is subject to annual depreciation @33-⅓% on written down value method. The contract is
likely to be completed on March 31, 2005.

Prepare the contract A/c. Determine the Notional profit on the contract for the year November, 2003
to October, 2004 and Estimated Profit.
(10 Marks)

Question 4
A contractor prepares his accounts for the year ending 31 st March each year. He commenced a contract
on 1st September, 2018. The following information relates to contract as on 31 st March, 2019:

Material sent to site `18,75,000

Wages paid `9,28,500
Wages outstanding at end `84,800
Sundry expenses `33,825
Material returned to supplier `15,000
Plant purchased `3,75,000
Salary of supervisor `15,000 per month
(devotes ⅓ of his time on contract)
Material at site as on 31.03.2019 `2,16,800

Some of material costing `10,000 was found unsuitable and was sold for `11,200. On 31.12.2018
plant which costs `25,000 was transferred to some other contract and on 31.01.2019 plant which costs
`32,000 was returned to stores. The plant is subject to annual depreciation @15% on written down value
method.

The contract price is `45,00,000. On 31 st March, 2019 two-third of the contract was completed.
The Architect issued certificate covering 50% of the contract price.

Prepare contract A/c and show the notional profit or loss as on 31 st March, 2019.
(10 Marks)
 TEST 7 - OPERATING OR SERVICE COSTING 16

TEST 7 - OPERATING COSTING OR SERVICE COSTING

Question 1
ABC Transport Company has been given a route 40 km long to run a bus. The bus costs the company a sum of
`10,00,000. It has been insured at 3% p.a. and the annual tax will amount to `20,000. Garage rent is `2,000
p.m. Annual repairs will be `20,000 and the bus is likely to last for 5 years. The driver's salary will be `3,000
p.m. and the conductor's salary will be `2,000 p.m. in addition to 10% of takings as commission (to be shared
by the driver and the conductor equally). Cost of stationery will be `1,000 p.m. Manager cum Accountant's
salary is `7,000 p.m. Petrol and oil will be `500 per 100 km. The bus will make 3 up and down trips carrying
on an average 40 passengers on each trip.
Assuming 15% profit on takings, calculate the buy fare to be charged from each passenger for one
side journey. The bus will run on an average 25 days in a month.
(10 Marks)

Question 2
A lodging home is being run in a small hill station with 100 single rooms. The home offers concessional rates
during six off-season months in a year. During this period, half of the full room rent is charged. The
management’s profit margin is targeted at 20% of the room rent. The following are the cost estimates and
other details for the year ending on 31st March 2017. [Assume a month to be of 30 days].
(a) Occupancy during the season is 80% while in the off- season it is 40% only.
(b) Total investment in the home is `200 lakhs of which 80% relate to buildings and balance for furniture
and equipment.
(c) 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
(d) Annual depreciation is to be provided for buildings @ 5% and on furniture and equipment @ 15% on
straight-line basis.
(e) Room attendants are paid `10 per room day on the basis of occupancy of the rooms in a month.
(f) Monthly lighting charges are `120 per room, except in four months in winter when it is `30 per room
and this cost is on the basis of full occupancy for a month.

You are required to work out the room rent chargeable per day both during the season and the off-
season months on the basis of the foregoing information.
(10 Marks)

Question 3
GTC has a lorry of 6-ton carrying capacity. It operates lorry service from city A to city B. It charges `2,400 per
ton from city ‘A’ to city ‘B’ and `2,200 per ton for the return journey from city ‘B’ to city ‘A’. Goods are also
delivered to an intermediate city ‘C’ but no concession or reduction in rates is given. Distance between the
city ‘A’ to ‘B’ is 300 km and distance from city ‘A’ to ‘C’ is 140 km.

In January 2020, the truck made 12 outward journeys for city ‘B’. The details of journeys are as follows:

Outward journey No. of journeys Load (in ton)

‘A’ to ‘B’ 10 6
‘A’ to ‘C’ 2 6
‘C’ to ‘B’ 2 4
Return journey No. of journeys Load (in ton)
‘B’ to ‘A’ 5 8
‘B’ to ‘A’ 6 6
‘B’ to ‘C’ 1 6
‘C’ to ‘A’ 1 0
 TEST 7 - OPERATING OR SERVICE COSTING 17
Annual fixed costs and maintenance charges are `6,00,000 and `1,20,000 respectively. Running charges
spent during January 2020 are `2,94,400 (includes `12,400 paid as penalty for overloading).

You are required to:

1. Calculate the cost as per (a) Commercial ton-kilometre. (b) Absolute ton-kilometre
2. Calculate Net Profit/ loss for the month of January, 2020.
(10 Marks)

Question 4
AD Higher Secondary School (AHSS) offers courses for 11th & 12th standard in three streams i.e. Arts,
Commerce and Science. AHSS runs higher secondary classes along with primary and secondary classes, but
for accounting purpose it treats higher secondary as a separate responsibility centre. The Managing
committee of the school wants to revise its fee structure for higher secondary students. The accountant of
the school has provided the following details for a year:
Amount (`)
Teachers’ salary (25 teachers × `35,000 × 12 months) 1,05,00,000
Principal’s salary 14,40,000
Lab attendants’ salary (2 attendants × `15,000 × 12 months) 3,60,000
Salary to library staff 1,44,000
Salary to peons (4 peons × `10,000 × 12 months) 4,80,000
Salary to other staffs 4,80,000
Examinations expenditure 10,80,000
Office & Administration cost 15,20,000
Annual day expenses 4,50,000
Sports expenses 1,20,000

Other information:
(a)
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 per year 180 hours 120 hours 240 hours 60 hours
Time spent by principal for administration 208 hours 312 hours 480 hours 1,400 hours
Teachers for 11 & 12 standard 4 5 6 10

(b) 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.
(c) There is another teacher who teaches mathematics for Science stream students also teaches business
mathematics to commerce stream students. She takes 1,100 classes a year, it includes 160 classes for
commerce students.
(d) One peon is fully dedicated for higher secondary section. Other peons dedicate their 15% time for
higher secondary section.
(e) All school students irrespective of section and age participates in annual functions and sports activities.

Required:
1. Calculate cost per student per annum for all three streams.
2. If the management decides to take uniform fee of `1,000 per month from all higher secondary students,
calculate stream wise profitability.
3. If management decides to take 10% profit on cost, compute fee to be charged from the students of all
three streams respectively.
(10 Marks)
 TEST 8 - PROCESS & OPERATION COSTING 18

TEST 8 - PROCESS & OPERATION COSTING

Question 1
From the following information for the month of October 2003, prepare Process III Account:

Opening WIP in Process III : 1,800 units at `27,000

Transfer from Process II : 47,700 units at `5,36,625
Transferred to Warehouse : 43,200 units
Closing WIP of Process III : 4,500 units
Units scrapped : 1,800 units
Direct material added in Process III : `1,77,840
Direct Wages : `87,840
Production overheads : `43,920

Degree of completion:
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 @ `6.75 per unit.
(10 Marks)

Question 2
Pharma Limited produces product ‘Glucodin’ which passes through two processes before it is completed and
transferred to finished stock. The following data relates to March, 2010:
Details Process I Process II Finished Stock
Opening Stock 1,50,000 1,80,000 4,50,000
Direct materials 3,00,000 3,15,000 -
Direct Wages 2,24,000 2,25,000 -
Factory overheads 2,10,000 90,000 -
Closing Stock 74,000 90,000 2,25,000
Inter process profit included in Opening stock NIL 30,000 1,65,000

Output of process I is transferred to Process II at 25 percent profit on the transfer price, whereas
output of process II is transferred to finished stock at 20 percent on transfer price. Stock in process is valued
at prime cost. Finished stock is valued at the price at which it is received from process II. Sales for the month
is `28,00,000.

You are required to prepare Process I A/c, Process II A/c, and Finished Stock A/c showing the profit
element at each stage.
(10 Marks)

Question 3
A company manufacturing chemical solution that passes through a number of processes uses FIFO method to
value WIP and Finished goods. At the end of the month of September, a fire occurred in the factory and some
papers containing records of the process operations for the month were destroyed. The company desires to
prepare process account for the month during which the fire occurred. Some information could be gathered
as to operating activities as under:

 Opening work-in process at the beginning of the month of 1,100 litres, 40% complete for labour and 60%
for overheads. Opening WIP was valued at `48,260.
 Closing WIP at the end of the month was 220 litres, 40% complete for labour and 30% for overheads.
 Normal loss is 10% of input and total losses during the month were 2,200 litres partly due to fire damage.
Assume degree of completion of abnormal loss is 100%.
 TEST 8 - PROCESS & OPERATION COSTING 19
 Output sent to Finished goods warehouse was 5,900 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 `53 for the month consisting:
Raw materials `35
Labour `8
Overheads `10
Total `53

You are required to:

(1) The quantity (in litres) of raw materials input during the month.
(2) Calculate the quantity (in litres) of normal loss and abnormal loss/gain experienced in the month.
(3) Calculate the value of raw materials, labour and overheads added to the process during the month.
(4) Prepare process account for the month.
(10 Marks)

Question 4
‘Healthy Sweets’ is engaged in the manufacturing of jaggery. Its process involve sugarcane crushing for juice
extraction, then filtration and boiling of juice along with some chemicals and then letting it cool to cut solidified
jaggery blocks.
The main process of juice extraction (Process I) is done in conventional crusher, which is then filtered
and boiled (Process II) in iron pots. The solidified jaggery blocks are then cut, packed and dispatched. For
manufacturing 10 kg of jaggery, 100 kg of sugarcane is required, which extracts only 45 litre of juice.

Following information regarding Process –I has been obtained from the manufacturing department of
Healthy Sweets for the month of January, 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
Direct Labour `2,00,000
Overheads `6,00,000
Abnormal Loss 1,000 kg
Degree of completion:
Sugarcane 100%
Labour and overheads 80%
Closing work-in process 9,000 litre
Degree of completion:
Sugarcane 100%
Labour and overheads 80%
Extracted juice transferred for filtering and boiling 39,500 litre
(Consider mass of 1 litre of juice equivalent to 1 kg)

You are required to prepare using average method:

1. Statement of equivalent production,
2. Statement of cost,
3. Statement of distribution cost, and
4. Process I Account.
(10 Marks)
 TEST 9 - JOINT PRODUCTS & BY PRODUCTS 20

TEST 9 - JOINT PRODUCTS & BY PRODUCTS

Question 1
A Company produces two joint products P and Q in 70 : 30 ratio from basic raw materials in department A.
The input output ratio of department A is 100 : 85. Product P can be sold at the split of stage or can be
processed further at department B and sold as product AR. The input output ratio is 100 : 90 of department B.
The department B is created to process product P only and to make it product AR.

The selling prices per kg are as under:

Product P `85
Product Q `290
Product AR `115

The production will be taken up in the next month.

Raw materials 8,00,000 Kgs
Purchase price `80 per Kg

Department A Department B
(In Lakh) (In Lakh)
Direct materials 35.00 5.00
Direct labour 30.00 9.00
Variable overheads 45.00 18.00
Fixed overheads 40.00 32.00
Total 150.00 64.00

Selling Expenses:
Product P `24.60 lakh
Product Q `21.60 lakh
Product AR `16.80 lakh

Required
(i) Prepare a statement showing the apportionment of joint costs.
(ii) State whether it is advisable to produce product AR or not.
(10 Marks)

Question 2
A company manufactures one main product (M1) and two by-products B1 and B2 for the month of January
2013, following details are available:

Total Cost upto Separation Point `2,12,400

Particulars M1 B1 B2
Cost after separation - `35,000 `24,000
No. of units produced 4,000 1,800 3,000
Selling price per units `100 `40 `30
Estimated net profit as percentage to sales value - 20% 30%
Estimated selling expenses as percentage to sales value 20% 15% 15%

There are no beginning or closing inventories.

Prepare statement showing:

I. Allocation of joint cost; and
II. Product-wise and overall profitability of the company for January 2013.
(10 Marks)
 TEST 9 - JOINT PRODUCTS & BY PRODUCTS 21
Question 3
‘Buttery Butter’ is engaged in the production of Buttermilk, Butter and Ghee. It purchases processed cream
and let it through the process of churning until it separates into buttermilk and butter. For the month of
January, 2020, ‘Buttery Butter’ purchased 50 Kilolitre processed cream @ `100 per 1000 ml. Conversion cost
of `1,00,000 were incurred upto 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:

Production (in Sales Quantity (in Selling price per Litre/Kg
Products
Kilolitre/tonne) Kilolitre/tonne) (`)
Buttermilk 28 28 30
Butter 20 - -
Ghee 16 16 480

All 20 tonne of butter were further processed at an incremental cost of `1,20,000 to yield 16 Kilolitre of Ghee.
There was no opening or closing inventories of buttermilk, butter or ghee in January, 2020.

Required:
(a) Show how joint cost would be apportioned between Buttermilk and Butter under Estimated Net
Realisable Value method.
(b) ‘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?
(5 Marks)

Question 4
NN Manufacturing company uses joint production process that produces three products at the split off point.
Joint productions costs during September were `8,40,000. Product information for September was as follows:
Particulars Product A Product B Product C
Units produced 1,500 3,000 4,500
Units sold 2,000 6,000 7,500
Sales prices:
At the split-off `100 - -
After further processing `150 ` 175 `50
Costs to process after split-off `1,50,000 `1,50,000 `1,50,000

Assume that product C is treated as a by-product and the company accounts for the by-product at net
realizable value as a reduction of joint cost. Assume also that Product B & C must be processed further before
they can be sold. Find out the total cost of Product A in September if joint cost allocation is based on net
realizable values.
(5 Marks)
 TEST 10 - BUDGET AND BUDGETARY CONTROL 10.22

TEST 10 - BUDGET AND BUDGETARY CONTROL

Question 1
The Budget manager of Jaypee Electricals Ltd. is preparing a flexible budget for the accounting year
commencing from 1st April, 2017. Normal capacity of production of the company is 1,25,000 units.
The company produces one product, a component - PEEKAY. Direct material costs `7 per unit. Direct
labour averages `2.50 per hour and requires 1.60 hours to produce on unit of PEEKAY. Salesmen are paid a
commission of `1 per unit sold.
Fixed selling and administration expenses amount to `85,000 per year. Manufacturing overhead has
been estimated in the following amounts under specified conditions of volume:

Particulars 1,20,000 units 1,50,000 units

Indirect materials 2,64,000 3,30,000
Indirect Labour 1,50,000 1,87,500
Inspection 90,000 1,12,500
Maintenance 84,000 1,02,000
Supervision 1,98,000 2,34,000
Depreciation (Plant &Equipment) 90,000 90,000
Engineering services 94,000 94,000
Total Manufacturing Overhead 9,70,000 11,50,000

Prepare a budget of total cost at 1,40,000 units of output.

(10 Marks)

Question 2
Jigyasa Ltd. is drawing a production plan for its two products Minimax (MM) and Heavyhigh (HH) for the year
2017-18. The company’s policy is to hold closing stock of finished goods at 25% of the anticipated volume of
sales of the succeeding month. The following are the estimated data for two products:
Minimax (MM) Heavyhigh (HH)
Budgeted production (in units) 1,80,000 1,20,000
Direct material per unit `220.00 `280.00
Direct labour per unit `130.00 `120.00
Other manufacturing expenses `4,00,000 `5,00,000

The estimated units to be sold in the first four months of the year 2017-18 are as under:
April May June July
Minimax (MM) 8,000 10,000 12,000 16,000
Heavyhigh (HH) 6,000 8,000 9,000 14,000

You are required to:

(a) Prepare a production budget for the first quarter in month-wise.
(b) Present production cost budget for first quarter.
(5 Marks)

Question 3
Concorde Ltd. manufactures two products using two types of materials and one grade of labour. Shown below
is an extract from the company’s working papers for the next month’s budget:
Product A Product B
Budgeted sales (in units) 2,400 3,600
Budgeted material consumption per unit (in kg):
Material X 5 3
Material Y 4 6
 TEST 10 - BUDGET AND BUDGETARY CONTROL 10.23
Standard labour hours allowed per unit of product 3 5

Material X and Material Y cost `4 and `6 per kg and labours are paid 25 per hour. Overtime premium
is 50% and is payable, if a worker works for more than 40 hours a week. There are 180 direct workers.
The target productivity ratio (or efficiency ratio) for the productive hours worked by the direct
workers in actually manufacturing the products is 80%. In addition the non-productive down-time is budgeted
at 20% of the productive hours worked.
There are four 5-days weeks in the budgeted period and it is anticipated that sales and production will
occur evenly throughout the whole period.

It is anticipated that stock at the beginning of the period will be:

Product A 400 units
Product B 200 units
Material X 1,000 kg
Material Y 500 kg

The anticipated closing stocks for the budgeted period are as below:
Product A 4 days sales
Product B 5 days sales
Material X 10 days consumption
Material Y 6 days consumption

Calculate the Materials Purchase Budget and Wages Budget for the direct workers, showing the
quantities and values, for the month.
(10 Marks)

Question 4
K Ltd. produces and markets a very popular product called ‘X’. The company is interested in presenting its
budget for the second quarter of 2020.

The following information are made available for this purpose:

(a) It expects to sell 1,50,000 bags of ‘X’ during the second quarter of 2020 at the selling price of `1,200 per
bag.
(b) Each bag of ‘X’ requires 2.5 mtr. of raw material ‘Y’ and 7.5 mtr. of raw – material ‘Z’.
(c) Stock levels are planned as follows:
Particulars Beginning of Quarter End of Quarter
Finished Bags of ‘X’ (Nos.) 45,000 33,000
Raw – Material ‘Y’ (mtr) 96,000 78,000
Raw – Material ‘Z’ (mtr) 1,71,000 1,41,000
Empty Bag (Nos.) 1,11,000 84,000

(d) ‘Y’ cost `160 per mtr., ‘Z’ costs `30 per mtr. and ‘Empty Bag’ costs `110 each.
(e) It requires 9 minutes of direct labour to produce and fill one bag of ‘X’. Labour cost is `70 per hour.
(f) Variable manufacturing costs are `60 per bag. Fixed manufacturing costs `40,00,000 per quarter.
(g) Variable selling and administration expenses are 5% of sales and fixed administration and selling
expenses are `3,75,000 per quarter.

Required
1. Prepare a production budget for the said quarter in quantity.
2. Prepare a raw material purchase budget for ‘Y’, ‘Z’ and ‘Empty Bags’ for the said quarter in quantity as
well as in rupees.
3. Compute the budgeted variable cost to produce one bag of ‘X’.
(10 Marks)
 TEST 11 - STANDARD COSTING 24

TEST 11 - STANDARD COSTING

Question 1
NPX Ltd. uses standard costing system for manufacturing of its product X. Following is the budget data given
in relation to labour hours for manufacture of 1 unit of Product X:
Labour Hours Rate (`)
Skilled 2 6
Semi-Skilled 3 4
Un-Skilled 5 3
Total 10 -

In the month of January, 2020, total 10,000 units were produced following are the details:
Labour Hours Rate (`) Amount (`)
Skilled 18,000 7 1,26,000
Semi-Skilled 33,000 3.5 1,15,500
Un-Skilled 58,000 4 2,32,000
Total 1,09,000 - 4,73,500

Actual Idle hours (abnormal) during the month:

Skilled 500
Semi-Skilled 700
Un-skilled 800
Total 2,000

Calculate:
(a) Labour Variances.
(b) Also show the effect on Labour Rate Variance if 5,000 hours of Skilled Labour are paid @ `5.5 per hour
and balance were paid @ `7 per hour.
(10 Marks)

Question 2
The following information was obtained from the records of a manufacturing unit using standard costing
system.
Particulars Standard Actual
Production 4,000 units 3,800 units
Working Days 20 21
Machine hours 8,000 hours 7,800 hours
Fixed Overhead `4,00,000 `3,90,000
Variable Overhead `1,20,000 `1,20,000

You are required to calculate the following overhead variance:

(a) Variable overhead variances
(b) Fixed overhead variances
(10 Marks)

Question 3
Following data is extracted from the books of XYZ Ltd. for the month of January, 2020:

1. Estimation:
Particulars Quantity (kg.) Price (`) Amount (`)
Material A 800 ? -
Material B 600 30.00 18,000
 TEST 11 - STANDARD COSTING 25
Normal loss was expected to be 10% of total input materials.

2. Actuals: 1480 kg of output produced.

Particulars Quantity (kg.) Price (`) Amount (`)
Material A 900 ? -
Material B ? 32.50 -
59,825

3. Other Information:
Material Cost Variance `3,625 (F)
Material Price Variance `175 (F)

You are required to calculate:

(a) Standard Price of Material A;
(b) Actual Quantity of Material B;
(c) Actual Price of Material A;
(d) Revised standard quantity of Material A and Material B; and
(e) Material Mix Variance.
(10 Marks)

Question 4
Paras Synthetics uses Standard costing system in manufacturing of its product ‘Star 95 Mask’. The details are
as follows;

Direct Material 0.50 Meter @ `60 per meter `30

Direct Labour 1 hour @ `20 per hour `20
Variable overhead 1 hour @ `10 per hour `10
Total `60

During the month of August, 2020 10,000 units of ‘Star 95 Mask’ were manufactured. Details are as follows:

Direct material consumed 5,700 meters @ `58 per meter

Direct labour Hours ? @ ? `2,24,400
Variable overhead incurred `1,12,200

Variable overhead efficiency variance is ` 2,000 A. Variable overheads are based on Direct Labour Hours.

You are required to calculate the missing data and all the relevant Variances.
(10 Marks)
 TEST 12 - MARGINAL COSTING 26

TEST – 12 MARGINAL COSTING

Question 1
X Ltd. supplies spare parts to an air craft company Y Ltd. The production capacity of X Ltd. facilitates
production of any one spare part for a particular period of time. The following are the cost and other
information for the production of the two different spare parts A and B:
Per unit Part A Part B
Alloy usage 1.6 kgs. 1.6 kgs.
Machine Time: Machine A 0.6 hrs. 0.25 hrs.
Machine Time: Machine B 0.5 hrs. 0.55 hrs.
Target Price (`) 145 115

Total hours available for Machine A: 4,000 hours and for Machine B: 4,500 hours. Alloy available is 13,000
kgs @ `12.50 per kg. Variable overheads per machine hours for Machine A: `80 and for Machine B: `100
Required
1. Identify the spare part which will optimize contribution at the offered price.
2. If Y Ltd. reduces target price by 10% and offers ` 60 per hour of unutilized machine hour, what will be
the total contribution from the spare part identified above?
(10 Marks)

Question 2
Wonder ltd manufactures a single product, ZEST. The following figures relate to ZEST for a one year period:
Activity Level 50% 100%
Sales and production (units) 400 800
Sales `8,00,000 `16,00,000
Production costs:
Variable `3,20,000 `6,40,000
Fixed `1,60,000 `1,60,000
Selling and distribution costs:
Variable `1,60,000 `3,20,000
Fixed `2,40,000 `2,40,000

The normal level of activity for the year is 800 units. Fixed costs are incurred evenly throughout the
year and actual fixed costs are the same as budgeted. There were no stocks of ZEST at the beginning of the
year. In the first quarter, 220 units were produced and 160 units were sold.

Required:
(a) What would be the fixed production costs absorbed by ZEST if absorption costing is used?
(b) What would be the under/over-recovery of overheads during the period?
(c) What would be the profit using absorption costing?
(d) What would be the profit using marginal costing?
(e) Why is there a difference between the answers to (c) and (d)?
(10 Marks)

Question 3
SHA Limited provides the following trading results:
Year Sales Profit
2012-13 `25,00,000 10% of Sale
2013-14 `20,00,000 8% of Sale

You are required to calculate:

 TEST 12 - MARGINAL COSTING 27
(1) Fixed Cost
(2) Break Even Point
(3) Amount of profit, if sale is `30,00,000
(4) Sale, when desired profit is `4,75,000
(5) Margin of Safety at a profit of `2,70,000
(5 Marks)

Question 4
Prisha Limited manufactures three different products and the following information has been collected from
the books of accounts:
Products
A B C
Sales Mix 40% 35% 25%
Selling Price `300 `400 `200
Variable Cost `150 `200 `120
Total Fixed Costs `18,00,000
Total Sales `60,00,000

The company has currently under discussion, a proposal to discontinue the manufacture of Product C and
replace it with Product E, when the following results are anticipated:
Products
A B E
Sales Mix 45% 30% 25%
Selling Price `300 `400 `300
Variable Cost `150 `200 `150
Total Fixed Costs `18,00,000
Total Sales `64,00,000

Required:
(a) Calculate the total contribution to sales ratio and present break-even sales at existing sales mix.
(b) Calculate the total contribution to sales ratio and present break-even sales at proposed sales mix.
(c) State whether the proposed sales mix is accepted or not?
(10 Marks)
 TEST 13 - COST ACCOUNTING SYSTEM 28

TEST – 13 COST ACCOUNTING SYSTEM

Question 1
Acme Manufacturing Co. Ltd. opens the costing records, with the balances as on 1st July, 2017 as follows:
Name of Account Dr. Cr.
Material Control A/c 1,24,000 -
Work-in-process 62,500 -
Finished Goods A/c 1,24,000 -
Production Overheads A/c 8,400 -
Administration Overhead - 12,000
Selling and Distribution Overhead A/c 6,250 -
Cost Ledger Control A/c - 3,13,150
Total 3,25,150 3,25,150

The following are the transactions for the quarter ended 30th September 2017:
Particulars `
Materials purchased 4,80,100
Materials issued to jobs 4,77,400
Materials to works maintenance 41,200
Materials to administration office 3,400
Materials to selling department 7,200
Wages direct 1,49,300
Wages indirect 65,000
Transportation for indirect materials 8,400
Production overheads 2,42,250
Absorbed production overheads 3,59,100
Administration overheads 74,000
Administration allocation to production 52,900
Administration allocation to sales 14,800
Sales overheads 64,200
Sales overheads absorbed 82,000
Finished goods produced 9,58,400
Finished goods sold 9,77,300
Sales realisation 14,43,000

Make up the various accounts as you envisage in the Cost Ledger and prepare a Trial Balances as at
30th September, 2017.
(10 Marks)

Question 2
The following balances were extracted from a company's ledger as on 31st December 1997:
Name of Account Dr. Cr.
Raw materials control A/c 48,836 -
Work in progress Control A/c 14,745 -
Finished Stock Ledger Control A/c 21,980 -
Cost ledger control A/c - 85,561
Total 85,561 85,561

Further transactions took place during the following quarter as follows:

Direct wages 18,370
Factory overhead allocated to WIP 11,786
Goods Finished at cost 36,834
Raw materials purchased 22,422
Cost of goods sold 42,000
Raw materials issued to production 17,000
 TEST 13 - COST ACCOUNTING SYSTEM 29
Raw materials credited by suppliers 1,000
Inventory audit raw material losses 1,300
WIP rejected (with no scrap value) 1,800
Customer's return (at cost) of finished goods 3,000

Prepare all the ledger accounts in cost ledger. (10 Marks)

Question 3
The following figures have been extracted from the cost records of a manufacturing unit:
Stores:
Opening balance 32,000
Purchases of materials 1,58,000
Transfer from work-in-progress 80,000
Issues to work-in-progress 1,60,000
Issues to repairs 20,000
Deficiencies found in stock-taking 6,000
Work-in-progress:
Opening balance 60,000
Direct wages applied 65,000
Overheads applied 2,40,000
Closing balance of WIP 45,000
Entire output is sold at a profit of 10% on actual cost from work-in-progress.
Wages incurred 70,000
Overhead incurred 2,50,000
Items not included in cost records:
Income from investment 10,000
Loss on sale of capital assets 20,000
Draw up Store Control account, Work-in-progress Control account, Costing Profit and Loss account,
Profit and Loss account and Reconciliation statement.
(10 Marks)

Question 4
The following information is available from a company's records for March, 2016:
(a) Opening balance of Creditors Account `25,000
(b) Closing balance of Creditors Account `40,000
(c) Payment made to Creditors `5,80,000
(d) Opening balance of Stores Ledger Control Account `40,000
(e) Closing balance of Stores Ledger Control Account `65,000
(f) Wages paid (for 8,000 hours) 20% relate to indirect workers `4,00,000
(g) Various indirect expenses incurred `60,000
(h) Opening balance of WIP Control Account `50,000
(i) Inventory of WIP at the end includes:
Material worth `35,000
Labour hours booked 400 hours
(j) Budgeted:
Overhead cost `20,80,000
Labour hours 1,04,000
(k) Factory overhead is charged to production at budgeted rate based on direct labour hours.

You are required to prepare Creditors A/c, Stores Ledger Control A/c, WIP Control A/c, Wages Control
A/c and Factory Overhead Control A/c.
(10 Marks)
 TEST 14 - RECONCILIATION STATEMENT 30

TEST – 14 RECONCILIATION STATEMENT

Question 1
M/s Sellwell Ltd. has furnished you the following information from the financial books for the year ended 31st
December 2016:
M/s Sellwell Ltd.
Profit & Loss Account
(For the year ended 31st December 2016)
Particulars Amount Particulars Amount
To Opening finished goods 8,750 By Sales (10,250 units) 3,58,750
(500 units × `17.50 per unit) By Closing finished goods 6,250
To Direct Materials Consumed 1,30,000 (250 units × `25 per unit)
To Direct Wages 75,000
To Gross profit 1,51,250
3,65,000 3,65,000
To Factory overheads 47,375 By Gross profit 1,51,250
To Administration overheads 53,000 By Interest 125
To Selling expenses 27,500 By Rent received 5,000
To Bad debts 2,000
To Preliminary expenses 2,500

To Net profit 24,000

1,56,375 1,56,375

The cost sheet shows:

(a) The cost of materials as `13 per unit.
(b) The labour cost as `7.50 per unit.
(c) The factory overheads are absorbed at 60% of labour cost.
(d) The administration overheads (related to production) are absorbed at 20% of factory cost.
(e) Selling expenses ate charged at `3 per unit.
(f) The opening stock of finished goods is valued at `22.50 per unit.

You are required to prepare:

(1) The cost sheet showing elements of cost (use FIFO method for stock valuation),
(2) The statement showing the reconciliation of profit or loss as shown by the cost accounts with the profit
as shown by the financial accounts.
(10 Marks)

Question 2
A manufacturing company disclosed a net loss of `3,47,000 as per their cost accounts for the year ended March
31, 2003. The financial accounts however disclosed a net loss of `5,10,000 for the same period.
The following information was revealed as a result of scrutiny of the figures of both the sets of
accounts:
(a) Factory overheads under-absorbed 40,000
(b) Administration overheads over-absorbed 60,000
(c) Depreciation charged in financial accounts 3,25,000
(d) Depreciation charged in cost accounts 2,75,000
(e) Interest on investments not included in cost accounts 96,000
(f) Income-tax provided 54,000
(g) Interest on loan funds in financial accounts 2,45,000
(h) Transfer fees (credited in financial books) 24,000
(i) Stores adjustment (credited in financial books) 14,000
(j) Dividend received 32,000
 TEST 14 - RECONCILIATION STATEMENT 31
Prepare a Memorandum Reconciliation Account.
(5 Marks)

Question 3
R Limited showed a net loss of `35,400 as per their cost accounts for the year ended 31st March, 2012.
However, the financial accounts disclosed a net profit of `67,800 for the same period.
The following information were revealed as a result of scrutiny of the figures of cost accounts and
financial accounts:
(1) Administrative overhead under recovered 25,500
(2) Factory overhead over recovered 1,35,000
(3) Depreciation under charged in Cost Accounts 26,000
(4) Dividend received 20,000
(5) Loss due to obsolescence charged in Financial Accounts 16,800
(6) Income tax provided 43,600
(7) Bank interest credited in Financial Accounts 13,600
(8) Value of opening stock:
In Cost Accounts 1,65,000
In Financial Accounts 1,45,500

(9) Value of closing Stock:

In Cost Accounts 1,25,000
In Financial Accounts 1,32,000

(10) Goodwill written- off in Financial Accounts 25,000

(11) Notional rent of own premises charged in Cost Accounts 60,000
(12) Provision for doubtful debts in Financial Accounts 15,000

Prepare a reconciliation statement by taking costing net loss as base.

(5 Marks)
 TEST 15 - ACTIVITY BASED COSTING 32

TEST – 15 ACTIVITY BASED COSTING

Question1
G-2020 Ltd. is a manufacturer of a range of goods. The cost structure of its different products is as follows:
Particulars A B C
Direct Material per unit 50 40 40
Direct Labour per unit (`10 per hour) 30 40 50
Production Overheads 30 40 50
Total Cost per unit 110 120 140
Quantity Produced (in units) 10,000 20,000 30,000

G-2020 Ltd. was absorbing overheads on the basis of direct labour hours. A newly appointed management
accountant has suggested that the company should introduce ABC system and has identified cost drivers and
cost pools as follows:
Activity Cost Pool Cost Driver Associated Cost
Stores Receiving Purchase Requisitions `2,96,000
Inspection Number of Production Runs `8,94,000
Dispatch Orders Executed `2,10,000
Machine Setup Number of Setups `12,00,000

The following information is also supplied:

Particulars A B C
No. of Setups 360 390 450
No. of Orders Executed 180 270 300
No. of Production Runs 750 1,050 1,200
No. of Purchase Requisitions 300 450 500

You are required to calculate activity based production cost of all the three products.
(10 Marks)

Question 2
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 2019-20 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 2019-20:

Activity Description of activity Total Cost Cost-allocation base

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-stocking
and ongoing restocking time
Customer Support Assistance provided to customers `15,36,000 15,36,000 items sold
including check-out
 TEST 15 - ACTIVITY BASED COSTING 33
Required:
1. 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.
2. 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.
(10 Marks)

Question 3
BABYSOFT is a global brand created by Bio-organic Ltd. The company manufactures three ranges of beauty
soaps i.e. BABYSOFT- Gold, BABYSOFT- Pearl, and BABYSOFT- Diamond. The budgeted costs and production
for the month of December, 2020 are as follows:

BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Diamond

Production (Units) 4,000 3,000 2,000
Resources per Unit: Qty Rate Qty Rate Qty Rate
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 minutes `10/hour 40 minutes `10/hour 60 minutes `10/hour

Bio-organic Ltd. followed an Absorption Costing System and absorbed its production overheads, to its
products using direct labour hour rate, which were budgeted at `1,98,000.

Now, Bio-organic Ltd. is considering adopting an Activity Based Costing system. For this, additional
information regarding budgeted overheads and their cost drivers is provided below:

Particulars (`) Cost drivers

Forklifting cost 58,000 Weight of material lifted
Supervising cost 60,000 Direct labour hours
Utilities 80,000 Number of Machine operations

The number of machine 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:

1. Prepare a statement showing the unit costs and total costs of each product using the absorption costing
method.
2. Prepare a statement showing the product costs of each product using the ABC approach.
3. State what are the reasons for the different product costs under the two approaches?
(10 Marks)
 SAMPLE PAPER 1 34

SAMPLE PAPER 1
Question No. 1 is compulsory.
Answer any four questions out of the remaining five questions.
Working notes should form part of the answer.

(4 × 5 = 20 Marks)
1. Answer the followings:

(a) SHA Limited provides the following trading results:

Year Sales Profit

2012-13 `25,00,000 10% of Sale
2013-14 `20,00,000 8% of Sale

You are required to calculate:

(i) Fixed Cost
(ii) Break Even Point
(iii) Amount of profit, if sale is `30,00,000
(iv) Sale, when desired profit is `4,75,000
(v) Margin of Safety at a profit of `2,70,000

(b) RST Limited has received an offer of quantity discount on its order of materials as under:

Price per tonne Tonnes number

`9,600 Less than 50
`9,360 50 and less than 100
`9,120 100 and less than 200
`8,880 200 and less than 300
`8,640 300 and above

The annual requirement for the material is 500 tonnes. The ordering cost per order is `12,500 and
the stock holding cost is estimated at 25% of the material cost per annum.

Required
(i) Compute the most economical purchase level.
(ii) Compute EOQ if there are no quantity discounts and the price per tonne is `10,500.

(c) AK Limited produces and sells a single product. Sales budget for calendar year 2012 by quarters is as
under:
Quarters I II III IV
No. of units to be sold 18,000 22,000 25,000 27,000

The year is expected to open with an inventory of 6,000 units of finished products and close with
inventory of 8,000 units. Production is customarily scheduled to provide for 70% of the current quarter’s
sales demand plus 30% of the following quarter demand. The budgeted selling price per unit is `40.

The standard cost details for one unit of the product are as follows:
Variable Cost : `34.50 per unit.
Fixed Overheads : 2 hours 30 minutes @ `2 per hour
Fixed overheads are based on a budgeted production volume of 1,10,000 direct labour hours for the year,
fixed overheads are evenly distributed through-out the year.

You are required to:

 SAMPLE PAPER 1 35

(i) Prepare Quarterly Production Budget for the year.

(ii) In which quarter of the year, company expected to achieve break-even point.

(d) A manufacturing company has disclosed net loss of `48,700 as per their cost accounting records for
the year ended 31st March, 2014. However their financial accounting records disclosed net profit of
`35,400 for the same period.
A scrutiny of data of both the sets of books of accounts revealed the following informations:
(i) Factory overheads under absorbed `30,500
(ii) Administrative overheads over absorbed `65,000
(iii) Depreciation charged in financial accounts `2,25,000
(iv) Depreciation charged in cost accounts `2,70,000
(v) Income tax provision `52,400
(vi) Transfer fee (credited in financial accounts) `10,200
(vii) Obsolescence loss charged in financial accounts `20,700
(viii) Notional rent of own premises charged in cost accounts `54,000
(ix) Value of opening stock:
(a) In cost accounts `1,38,000
(b) In financial accounts `1,15,000
(x) Value of closing stock:
(a) In cost accounts `1,22,000
(b) In financial accounts `1,12,500

Prepare a Memorandum Reconciliation Account by taking costing loss as base.

2. (a) PQR pens Ltd. manufactures two products ‘Gel Pen’ and ‘Ball Pen’. It furnishes the following data for
the year 2017:
Total Number of Total Number of
Product Annual Output (Units) Total Machine 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 cost 5,79,988
Purchase related cost 5,04,992

Calculate the overhead cost per unit of each Product: Gel Pen and Ball Pen on the basis of:
(1) Traditional method of charging overheads
(2) Activity based costing method and
(3) Find out the difference in cost per unit between both the methods.
(10 Marks)

(b) PQR Construction Ltd. commenced a contract on April 1, 2009. The total contract was for `27,12,500.
Actual expenditure in 2009-10 and estimated expenditure in 2010-11 are given below:

2009-10 2010-11
Particulars
Actual Estimated
Materials issued 4,56,000 8,14,000
Labour paid 3,05,000 3,80,000
Labour outstanding at end 24,000 37,500
Plant purchased 2,25,000 -
Expenses paid 1,00,000 1,75,000
 SAMPLE PAPER 1 36

Expenses outstanding at the end - 25,000

Expenses prepaid at the end 22,500 -
Plant returned to stores 75,000 1,50,000
(at historical cost) (on 31.12.2010)
Materials at site 30,000 75,000
Work-in-progress certified 12,75,000 Full
Work-in-progress uncertified 40,000 -
Cash received 10,00,000 Full

The plant is subject to annual depreciation @ 20% of WDV cost. The contract is likely to be
completed on December 31, 2010.

Required:
(i) Prepare the Contract A/c for the year 2009-10.
(ii) Estimate the profit on the contract for the year 2009-10.
(10 Marks)

3. (a) A building can be constructed by engaging a gang of workers in 100 working days of eight hours each
as per details given below:

Standard data:
Skilled Semi-skilled Unskilled
No. of workers in the gang 6 8 6
Standard rate of wage per hour `25 `20 `16

Actual completion of the work however took 104 days of eight hours each. This includes 16 hours of
stoppages due to heavy rains. The actual number of workers engaged and the actual rates paid are given
below:
Skilled Semi-skilled Unskilled
Number of workers engaged 8 6 6
Actual wage rate per hour `30 `24 `16

Calculate:
(a) Labour Cost Variances;
(b) Labour Rate Variance;
(c) Labour Efficiency Variance;
(d) Labour Mix Variance;
(e) Labour Yield Variance;
(f) Idle Time Variance.
(10 Marks)

(b) Modern Machines Ltd. have three production departments (A, B, and C) and two service departments (D
and E). From the following figures extracted from the records of the company, calculate the overhead rate
per labour hour:

Indirect Materials `15,000 Rent, Rates and Taxes `10,000

Indirect Wages `10,000 Electric Power for Machinery `15,000
Depreciation on Machinery `25,000 Electric Power for Lighting `500
Depreciation on Buildings `5,000 General Expenses `15,000
Production Departments Service Departments
Items
A B C D E
Direct materials 20,000 10,000 19,000 6,000 5,000
Direct wages 15,000 15,000 4,000 2,000 4,000
Area (Square Meters) 15,000 10,000 10,000 5,000 10,000
Book value of machinery 60,000 1,00,000 40,000 25,000 25,000
 SAMPLE PAPER 1 37

Machine capacity (H.P.) 50 60 30 5 5

Labour hours worked 5,000 5,000 2,000 1,000 2,000
No. of light points 15 10 10 5 10

The expenses of service departments D and E are to be apportioned as follows:

A B C D E
Expenses of department D: 40 20 30 - 10
Expenses of department E: 30 30 40 - -
(10 Marks)

4. (a) 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:
Process Finished Stock
Particulars
A (`) B (`) (`)
Opening Stock 5,000 5,500 10,000
Direct Materials 9,000 9,500
Direct Wages 5,000 6,000
Factory Overheads 4,600 2,030
Closing Stock 2,000 2,490 5,000
Inter-process profit included in opening stock - 1,000 4,000

Output of Process A is transferred to Process B at 25% profit on the transfer price and output of
Process B is transferred to finished stock at 20% profit on the transfer price. Stock in process is valued at
prime cost. Finished stock is valued at the price at which it is received from Process B. Sales during the
period are `75,000.
Prepare the Process cost accounts and Finished stock account showing the profit element at each
stage.
(10 Marks)

(b) Calculate the earning of A and B from the following particulars for a month and allocate the labour
cost to each job X, Y and Z:
A B
Basic wages `10,000 `16,000
Dearness Allowance 50% 50%
Contribution to Provident Fund (on basic wages) 8% 8%
Contribution to Employee State Insurance (on basic wages) 2% 2%
Overtime hours 10 hours -
The normal working hours for the month are 200. Overtime is paid at double the total of normal
wages and dearness allowance. Employer’s contributions to state insurance and provident fund are at equal
rates with employee’s contribution. The two workers were employed on jobs X, Y and Z in the following
proportions:
Jobs x y z
Workers A 40% 30% 30%
Workers A 50% 20% 30%
Overtime was done on job Y.
(10 Marks)

5. (a) Following information has been extracted from the cost records of XYZ Pvt. Ltd:

Stores:
Opening balance 54,000
Purchase 2,88,000
Transfer from WIP 1,44,000
 SAMPLE PAPER 1 38

Issue to work-in-process 2,88,000

Issue for repairs 36,000
Deficiency found in stock 10,800

Work-in-process:
Opening balance 1,08,000
Direct wages applied 1,08,000
Overhead charged 4,32,000
Closing balance 72,000

Finished Production: Entire production is sold at a profit of 15% on cost from Work-in-process.

Wages paid 1,26,000

Overhead incurred 4,50,000

Draw the Stores Ledger Control A/c, Work-in-progress Control A/c, Overheads Control A/c and
Costing Profit and Loss A/c.
(10 Marks)

(b) M/s. Areeba private limited has a normal production capacity of 36,000 units of toys per annum.
The estimated costs of production are as under:

(A) Direct material `40 per unit

(B) Direct labour `30 per unit (subject to a minimum of `48,000 p.m.)
(C) Factory overheads:
Fixed `3,60,000 per annum
Variable `10 per unit
Semi variable `1,08,000 per annum up to 50% capacity and additional
`46,800 for every 20% increase in capacity or any part
thereof.
(D) Administrative overheads `5,18,400 per annum (fixed)
(E) Selling overheads `8 per unit
(F) Each unit of raw material yields scrap which is sold at the rate of `5 per unit.
(G) In year 2019, the factory worked at 50% capacity for the first three month but it was expected
that it would work at 80% capacity for the remaining nine month.
(H) During the first three months, the selling price per unit was `145.

You are required to:

(1) Prepare a cost sheet showing prime cost, works cost, cost of production and cost of sales.
(2) Calculate the selling price per unit for remaining nine month to achieve the total annual profit of
`8,76,600.
(10 marks)

6. Answer any Four of the followings: (4 × 5 = 20 Marks)

(a) Explain ‘Just In Time’ (JIT) approach of inventory management.

(b) Define Zero Base Budgeting and mention its various stages.
(c) Mention and explain types of responsibility centres.
(d) How are By-products treating in costing?
(e) Explain:
(i) Opportunity Cost.
(ii) FIFO and LIFO method of stores issue.
 SAMPLE PAPER 2 39

SAMPLE PAPER 2
Question No. 1 is compulsory.
Answer any four questions out of the remaining five questions.
Working notes should form part of the answer.

(4 × 5 = 20 Marks)
1. Answer the followings:

(a) M/s. SD Private Limited commenced a contract on 1st July, 2017 and the company closes its account
for the year on 31st March every year. The following information relates to the contract as on 31st March 2018:
Material issued `9,48,000
Direct wages `4,57,200
Prepaid direct wages as on 31.03.2018 `1,08,000
Administration charges `7,20,000
A supervisor, who is paid `50,000 per month, has devoted two-third of his time to this contract. A plant
costing `7,85,270 has been on the site for 185 days, its working life is estimated at 9 years and its scrap value
is `75,000.
The contract price is `42,00,000. On 31.03.18 two-third of the contract was completed. The architect
issued certificate covering 50% of the contract price and contractor has been paid `15,75,000 on account.
Assuming 365 days in a year.
You are required to:
(a) Prepare Contract Account showing works cost.
(b) Calculate Notional Profit or Loss as on 31st March 2018.

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

(c) Journalise the following transactions assuming cost and financial accounts are integrated:
(i) Materials issued:
Direct `3,25,000
Indirect `1,15,000
(ii) Allocation of wages (25% indirect) `6,50,000
(iii) Under/Over absorbed overheads:
Factory (Over) `2,50,000
Administration (Under) `1,75,000
(iv) Payment to Sundry Creditors `1,50,000
(v) Collection from Sundry Debtors `2,00,000

(d) The books of Adarsh Manufacturing Company present the following data for the month of April, 2017.
Direct labour cost `17,500 being 175% of works overheads. Cost of goods sold excluding administrative
expenses `56,000. Inventory accounts showed the following opening and closing balances:
April 1 April 30
Raw materials 8,000 10,600
Works in progress 10,500 14,500
Finished Goods 17,600 19,000

Other data are:

Selling expenses 3,500
General and administration expenses 2,500
 SAMPLE PAPER 2 40
Sales of the month 75,000

You are required to:

(1) Compute the value of materials purchased.
(2) Prepare a cost statement showing the various elements of cost and also the profit earned.

2. (a) X Ltd. is committed to supply 24,000 bearings per annum to Y Ltd. on a steady basis. It is estimated that
it costs 10 paise as inventory holding cost per bearing per month and that the set up cost per run of bearing
manufacture is `324.
(i) What should be the optimum run size for bearing manufacture?
(ii) Assuming that the company has a policy of manufacturing 6,000 bearings per run, how much
extra costs the company would be incurring as compared to the optimum run suggested in (a)
above?
(iii) What is the minimum inventory holding cost?
(10 Marks)

(b) A product passes through three processes A, B, and C. The normal wastage and actual output of each
process is as follows:
Process Actual Output Normal Loss
Process A 9,500 units 3%
Process B 9,100 units 5%
Process C 8,100 units 8%

Wastage of Process A was sold 25 Paise per unit, that of Process B at 50 Paise per unit and that of
Process C at `1 per unit. 10,000 units were issued to Process A in the beginning of October 2016 at a cost of `1
per unit the other expenses were as follows:

Name of Expenses Process A (`) Process B (`) Process C (`)

Sundry Materials 1,000 1,500 500
Labour 5,000 8,000 6,500
Direct expenses 1,050 1,188 2,009

Selling and distribution expenses are `850 and sale value per unit is `6.00.
Prepare all accounts.
(10 Marks)

3. (a) A Company uses three raw materials A, B, and C for a particular product for which the following data
apply:
Usage for one ROQ Price per Delivery period (in weeks) ROL Mini.
RM
unit of product (in kg) kg Mini. Average Max. (in kg) level
A 10 kg 10,000 0.10 1 2 3 8,000 -
B 4 kg 5,000 0.30 3 4 5 4,750 -
C 6 kg 10,000 0.15 2 3 4 - 2,000 kg

Weekly production varies from 175 to 225 units, averaging 200 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
(10 Marks)

(b) A company is considering three alternative proposals for conveyance facilities for its sales personnel who
have to do considerable travelling approximately 20,000 Kms every year. The proposals are as follows:
(i) Purchase and maintain it’s own fleet of cars. The average cost of a car is `6,00,000.
 SAMPLE PAPER 2 41
(ii) Allow the executive to use his own car and reimburse expenses at the rate of `10 per kilometer
and also bear insurance costs.
(iii) Hire cars from an agency at `1,80,000 per year per car. The Company will have to bear costs of
petrol, taxes and tyres.

The following further details are available:

(a) Petrol `6 per km.
(b) Repairs and maintenance `0.20 per km.
(c) Tyres `0.12 per km.
(d) Insurance `1,200 per car per annum.
(e) Taxes `800 per car per annum.
(f) Life of the car 5 years with annual mileage of 20,000 kms.
(g) Resale value `80,000 at the end of the fifth year.

Work out the relative costs of three proposals and rank them.
(10 Marks)

4. (a) RST Limited is presently operating at 50% capacity and producing 30,000 units. The entire output is sold
at a price of `200 per unit. The cost structure at 50% level of activity is as under:
Direct Material `75 per unit
Direct Wages `25 per unit
Variable Overheads `25 per unit
Direct Expenses `15 per unit
Factory Expenses (25% Fixed) `20 per unit
Selling and Distribution Expenses (80% Variable) `10 per unit
Office and Administrative Expenses (100% Fixed) `5 per unit

The company anticipates that the variable costs will go up by 10% and fixed costs will go up by 15%.

You are required to prepare an Expense Budget, on the basis of marginal cost for the company at 50%
and 60% level of activity and find out the profit at respective levels.
(10 Marks)

(b) A Ltd produces ‘M’ as a main product and gets two by products ‘P’ and ‘Q’ in the course of processing.
Following information are available for the month of October 2017:
Particulars M P Q
Cost after separation - `60,000 `30,000
No. of units produced 4,500 2,500 1,500
Selling price per units `170 `80 `50
Estimated net profit as percentage to sales value - 30% 25%

The joint cost upto separation point amounts to `2,50,000. Selling expenses amounting to 85,000 are to be
apportioned to the three products in the ratio of sales units. There are no beginning or closing inventories.

Prepare statement showing:

(i) Allocation of joint cost;
(ii) Product-wise and overall profitability and
(iii) Advise the company regarding results if the by product ‘P’ is not further processed and is sold at the
point of separation at `60 per unit without incurring selling expenses.
(10 Marks)

5. (a) The following information has been provided by a company:

No of units produced and sold 6,000 units
Standard labour rate per hour `8
 SAMPLE PAPER 2 42
Standard hours required for 6,000 units ?
Actual hours required 17,094 hours
Labour efficiency 105.3%
Labour rate variance `68,376 A

You are required to calculate:

(i) Actual labour rate per hour
(ii) Standard hours required for 6,000 units
(iii) Labour efficiency variance
(iv) Standard labour cost per unit
(v) Actual labour cost per unit
(10 Marks)

(b) ABC Ltd. manufactures a single product and absorbs the production overheads at a pre-determined rate
of `10 per machine hour. At the end of financial year 1998-99, it has been found that actual production
overheads incurred were `6,00,000. It included `45,000 on account of 'written off' obsolete stores and `30,000
being the wages paid for the strike period under an award.

The production and sales data for the year 1998-99 is as under:
Production:
Finished goods 20,000 units
Work-in-progress 8,000 units
(50% complete in all respects)
Sales:
Finished goods 18,000 units

The actual machine hours worked during the period were 48,000. It has been found that one third of the under
absorption of production overheads was due to lack of production planning and the rest was attributable to
normal increase in costs.

You are required to:

(i) Calculate the amount of under absorption of production overheads during the year 1998-99 and
(ii) Show the accounting treatment of under absorption of production overheads.
(10 Marks)

6. Answer any Four of the followings: (4 × 5 = 20 Marks)

(a) Explain ‘Job Costing’ and ‘Batch Costing’.

(b) Why are cost and management accounting information required by the staff at operational level?
Describe.
(c) A company gives the following information:
Margin of safety : `3,75,000
Total cost : `3,87,500
Margin of safety in units : 15,000 units
Break even sales in units : 5,000 units
You are required to calculate:
(i) Selling price per unit, (ii) Profit, (iii) Profit/Volume ratio, (iv) Break even sales (in `), (v) Fixed
cost

(d) Explain integrated accounting system and state its advantages.

(e) What are the limitations of marginal costing?
 SOLUTION TEST 1 - MATERIALS COST 43

SOLUTION TEST 1 - MATERIALS COST

Solution 1
(i) Minimum stock of A = ROL – (Average usage × Average lead time)
= 8,000 kg – [(200 units × 10 kg) × 2 weeks] = 4,000 kg

(ii) Maximum stock of B = ROL – (Minimum usage × Minimum lead time) + ROQ
= 4,750 – [(175 units × 4 kg) × 3 weeks] + 5,000
= 9,750 – 2,100 = 7,650 kg

(iii) Re-order Level of C = Minimum stock of C + (Average usage × Average lead time)
= 2,000 + [(200 units × 6kg) × 3 weeks] = 5,600 kg

(iv) Average level of A = Minimum stock level + ½ ROQ

= 4,000 + ½ × 10,000
= 4,000 + 5,000 = 9,000 kg
Or
Minimum stock + Maximum stock
=
2
4,000 + 16,250
= = 10,125 kg
2
Working Notes:
Max. Stock of A = ROL (Minimum usage × Minimum re-order period) + ROQ
= 8,000 kg – [(175 units × 10 kg) × 1 week] + 10,000 = 16,250 kg

Solution 2
2AO 2× *5,200× 100
(1) EOQ = = = 102 tubes approx.
C 500× 20%

*A = Annual usage of tubes = Normal usage per week × 52 week

= 100 tubes × 52 weeks = 5,200 tubes.

Statement Showing Net Benefit

Particulars `
(A) Cost (when order size 102 tubes)
Purchase Cost 5,200 tubes @ 500 per tube 26,00,000
Ordering Cost (5,200/102 × 100) 5,098
Carrying Cost (102 × 500 × ½ × 20%) 5,100
Total Cost (A) 26,10,198
(B) Cost (when order size 1,500 units)
Purchase Cost 5,200 tubes @ 475 (500 × 95%) per tube 24,70,000
Ordering Cost (5,200/1500 × 100) 347
Carrying Cost (1,500 × 475 × ½ × 20%) 71,250
Total Cost (B) 25,41,597
Net benefit (A- B) 68,601

*At EOQ, the total ordering cost & total carrying cost are always equal, but in the above answer there is a
marginal difference between the two figures because of approximation made in arriving at the figure of EOQ.

Advice: Yes, M/s Tubes Ltd. should accept the discount offer.

(2) Maximum Level of Stock = ROL + Re-order quantity -(Min. Usage x Min. Re-order Period)
= 1,600 tubes + 102 tubes - (50 tubes per week × 6 weeks)
= 1,402 tubes
 SOLUTION TEST 1 - MATERIALS COST 44

(3) Minimum Level of Stock = Re-order Level- (Normal Usage x Average Re-order Period)
= 1,600 tubes – (100 tubes per week × 7 weeks)
= 900 tubes

(4) Reorder Level = Maximum Consumption × Maximum Re-order Period

= 200 tubes per week × 8 weeks = 1,600 tubes

Solution 3
(i) Computation of economic order quantity (EOQ):
2AO 2×54,000× 9,000
EOQ = = = 1,800 castings
C 300

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

Safety stock = Safety stock for one day = 54,000/360 days = 150 castings
Re-order point = Safety Stock + (Average lead time × Average consumption per day)
= 150 + (6 Days ×150 castings per day) = 1,050 castings

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

Safety stock = Safety stock for three days = 150 × 3 days = 450 castings
Re-order point = 450 castings + 900 castings = 1,350 castings

(iv) Total cost of ordering = (54,000/1,800) × `9,000 = `2,70,000

Total cost of carrying = (450 × 300) + (1,800 × ½ × 300) = `4,05,000

(v) (a) Computation of new EOQ :

2×54000× 600
EOQ = = 300 castings
720
(b) Total number of orders to be placed in a year:
360 days
= = 2 Days
180 orders

Each order is to be placed after 2 days while under old purchasing policy each order is placed after 12 days.
54,000
*No. of orders placed = = 180 orders
3,000

Solution 4
(a) Re-order level = Maximum usage × Maximum lead time
= 4,500 units × 21 days = 94,500 units

(b) 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

(c) 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

(d) Store Ledger for the month of January 2020: (Weighted Average Method)
Receipts Issue Balance
Date GRN/M Amt. MRN/ Amt. Amt.
Units Rate Units Rate Units Rate
RN (‘000) MR (‘000) (‘000)
 SOLUTION TEST 1 - MATERIALS COST 45

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
13-01-20 009 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 14,200 units of stock as on 31-01-2020 (‘000) = `1,39,001

(e) 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

(f) Inventory Turnover Ratio = Value of materials used ÷ Average stock value
= 1,81,061 ÷ (1,39,001+34,335)/2
= 1,81,061 ÷ 86,668 = 2.09 times

Working notes:
1. Calculation of consumption rate:
Maximum component usage = 4,500 units (Material requisition on 10-01-20)
Minimum component usage = 1,500 units (Material requisition on 24-01-20)

Date Material Requisition number Units

06-01-2020 11 3,000
10-01-2020 12 4,500 (Maximum)
15-01-2020 13 2,200
24-01-2020 14 1,500 (Minimum)
28-01-2020 15 4,000
31-01-2020 16 3,200

2. Calculation of lead time (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 13-01-2020)

3. Reorder Quantity = 10,000 units (observed)

 SOLUTION TEST 2 - EMPLOYEE COST OR LABOUR COST 46

SOLUTION TEST 2 - EMPLOYEE COST OR LABOUR COST

Solution 1
1. Computation of effective rate of earnings under the Halsey and Rowan schemes:

Total earnings under Halsey scheme = (AH × R) + 50% (SH – AH) × R

= (2,000 × `40) + 50% (2,500 – 2,000) × `40
= `90,000

Total earnings under Rowan scheme = (AH × R) + AH × (SH – AH) × R

SH
= (2,000 × `40) + 2,000 × (2,500 – 2,000) × `40
2,500
= `96,000

Effective rate under Halsey Plan = `90,000 ÷ 2,000 hours = `45 per hour
Effective rate under Rowan Plan = `96,000 ÷ 2,000 hours = `48 per hour

Actual hours (AH) = 10 workers × 25 days × 8 hours per day

= 2,000 hours
Standard hours (SH) = 1,250 units × 2 hours per unit = 2,500 hours

2. Savings to Mr. A in terms of direct labour cost per piece:

Direct labour cost per unit:

Under time wages = 2 hours × `40 per hour = `80 per unit
Under Halsey Plan = `90,000 ÷ 1,250 units = `72 per unit
Under Rowan Plan = `96,000 ÷ 1,250 units = `76.8 per unit

Savings of direct labour cost per unit under:

Halsey Plan = `80 – `72 = `8.00 per unit

Rowan Plan = `80 – `76.80 = `3.20 per unit

3. Advise to Mr. A about the selection of the scheme to fulfill assurance: Halsey scheme brings more savings
to Mr. A but the other scheme viz. Rowan fulfils the promise of 20% increase over the present earnings of
`40 per hour by paying effectively `48 per hour. Hence, Rowan Plan should be adopted.

Solution 2
The following equation can be made:
Effective Earnings per hour = [(AH × R) + AH/SH (SH - AH) × R] ÷ AH
37.50 = [30 AH + AH/4 (4 - AH) × 30] ÷ AH
37.50 AH = 30 AH + AH/4 (4 - AH) × 30
7.50 AH = AH/4 (4 - AH) × 30
7.50 AH = AH (4 - AH) × 7.50
1 = 4 - AH
AH = 3 hours

Total earnings and effective hourly rate of skilled worker under Halsey Incentive Scheme:

Total earnings = (AH × R) + 50% (SH – AH) × R

= (3 × 30) + 50% (4 – 3) × 30 = `105
 SOLUTION TEST 2 - EMPLOYEE COST OR LABOUR COST 47
Effective hourly rate = Total earning ÷ hours worked
= `105 ÷ 3 hours = `35

Solution 3
Statement Showing Earning of Worker A and B
Particulars A B
Basic Wages 10,000 16,000
Dearness Allowance (50% of Basic) 5,000 8,000
Overtime Wages (W.N.) 1,500 -
Gross Wages Earned 16,500 24,000
Less: Employee’s Contribution to Provident Fund (8% of basic) (800) (1,280)
Less: Employee’s Contribution ESI (2% of basic) (200) (320)
Net Wages Earned 15,500 22,400

Statement Showing Labour Cost Chargeable to Jobs

Particulars Job X Job Y Job Z
Worker A:
Ordinary Wages 16,000 in 4 : 3 : 3 6,400 4,800 4,800
Overtime 1,500 for Job Y - 1,500 -
Worker B:
Ordinary Wages 25,600 in 5 : 2 : 3 12,800 5,120 7,680
Labour Cost chargeable 19,200 11,420 12,480

Working Note:
1. Statement Showing Labour Cost Excluding Overtime
Particulars A B
Basic Wages 10,000 16,000
Dearness Allowance (50% of Basic) 5,000 8,000
Add: Employer’s Contribution to Provident Fund (8% of basic) 800 1,280
Add: Employer’s Contribution ESI (2% of basic) 200 320
Net Wages Earned 16,000 25,600

2. Overtime wages of worker A = (15,000 ÷ 200 hours) × 10 hours × 2 = 1,500

Solution 4
Statement Showing Profit Foregone on Account of Labour Turnover
Particulars Amount
Contribution Foregone (25,000 hours + 20,000 hours) × `3 per hour 1,35,000
Settlement Cost due to leaving 25,000
Recruitment Costs 20,000
Selection Costs 12,000
Training Costs 18,000
Profit Foregone 2,10,000

Working Notes:
1. Calculation of productive hours:
Actual hours worked 2,40,000
Less: Unproductive training hours (½ of 40,000 hours) (20,000)
Actual productive hours 2,20,000
2. Contribution earned per productive hours:
Sales value 33,00,000
Contribution (20% of 33,00,000) 6,60,000
Contribution per productive hour (6,60,000 ÷ 2,20,000) `3.00
 SOLUTION TEST 3 - OVERHEADS 48

SOLUTION TEST 3 - OVERHEADS

Solution 1
(a) Overhead Distribution Statement
Production Department Services Departments
Total
Items Stores &
Amount Machine Shop Packing General Plant
maintenance
Allocated overheads:
Indirect labour 14,650 4,000 3,000 2,000 5,650
Maintenance materials 5,020 1,800 700 1,020 1,500
Misc. supplies 1,750 400 1,000 150 200
Superintendent’s salary 4,000 - - 4,000 -
Cost & payroll salary 10,000 - - 10,000 -
Apportioned overheads 1,29,000 77,720 25,800 2,830 22,650
(see schedule below)
Total 1,64,420 83,920 30,500 20,000 30,000

Statement of Apportioned Expenses

Production Department Services Departments
Items Basis Stores &
Machine Shop Packing General Plant
maintenance
Power H.P. hours 5,600 800 - 1,600
Rent Floor space 5,000 2,000 1,000 4,000
Fuel & heat Radiator secs. 1,200 2,400 800 1,600
Insurance Investment 640 200 10 150
Taxes Investment 1,280 400 20 300
Depreciation Investment 64,000 20,000 1,000 15,000
Total - 77,720 25,800 2,830 22,650

(b) Distribution of Service Department Expenses

Production Department Services Departments
Items Basis Machine General Stores &
Packing
Shop Plant maintenance
Total Expenses [as per (a)] 83,920 30,500 20,000 30,000
Re-apportionment:
Expenses of General plant 20 : 10 : 5 11,429 5,714 (20,000) 2,857
Expenses of Stores & maintenance 50 : 20 : 30 16,429 6,571 9,857 (32,857)
Expenses of General plant 20 : 10 : 5 5,633 2,816 (9,857) 1,408
Expenses of Stores & maintenance 50 : 20 : 30 704 282 422 (1,408)
Expenses of General plant 20 : 10 : 5 241 121 (422) 60
Expenses of Stores & maintenance 50 : 20 43 17 - (60)
Total - 1,18,399 46,021 - -

Solution 2
Total Cost
Machine Hour Rate = Productive Hours

(a) Setting up time is unproductive = 2,72,116 ÷ 2,200 = `123.69 per hour

(b) Setting up time is productive = 2,72,116 ÷ 2,292 = `118.72 per hour

Statement Shoeing Total Cost Related to Machine

Particulars Amount
 SOLUTION TEST 3 - OVERHEADS 49
(A) Standing charges/ Fixed costs
Depreciation [(`12,70,000 – 70,000) × 1/12 years] 1,00,000
Operators wages and fringe benefits [(`420 × 324/6 × 4 × 1/8) + 15%] 13,041
Departmental and general overheads [(`50,000 + 10%) × 1/8] 6,875
Total (A) 1,19,916
(B) Running charges/ Variable costs
Maintenance 25,000
Electricity (16 units × 2,200 hours × `3) 1,05,600
Special oil (`400 × 324/6) 21,600
Total (B) 1,52,200
Total Cost (A + B) 2,72,116

Solution 3
Calculation of Unabsorbed Overheads:
Particulars Amount
Actual overhead incurred 4,46,380
Less: overhead absorbed (OH recovery ` per hour × Actual hours worked)
`1.25 × 2,93,104 Hours 3,66,380
Unabsorbed OH 80,000

Unabsorbed OH on account of increase in cost (80,000 × 50%) 40,000

Unabsorbed OH on account of factory inefficiency (80,000 × 50%) 40,000

Treatment of Unabsorbed OH & its implication on Profit:

(i) The unabsorbed OH on account of increase in cost of indirect material & labour of `40,000 should be
adjusted in the cost books by applying positive supplementary rates.

Unbsorbed OH
Supplementary Rate =
Equivalent completed units of Production

Where, Equivalent completed units are as under:

Unit sold 7,000

Units in closing stock of Finished Goods (7,800-7,000) 800
Equivalent WIP units 200
Total Equivalent Completed Units 8,000 units

40,000
Supplementary Rate = = `5 per unit
8,000 Units

The unabsorbed OH of `40,000 should be applied by using supplementary rate of `5 per equivalent
completed unit proportionately on the basis of equivalent completed unit among Cost of Sales A/c, Stock of
Finished Goods A/c, & WIP A/c as under:
Equivalent completed Share of unabsorbed
Items Rate
units overheads
Cost of Sales A/c 7,000 `5 `35,000
Stock of Finished 800 `5 `4,000
WIP A/c 200 `5 `1,000
Total `40,000

The above treatments of unabsorbed OH will reduce the profit by `35,000, the amount by which the
cost of sales has been increased. Moreover, the value of stock of Finished Goods & WIP will increase by `4,000
& `1,000 respectively.
 SOLUTION TEST 3 - OVERHEADS 50
(ii) The unabsorbed OH of `40,000 due to factory inefficiency being in the nature of abnormal loss should
be changed to costing P/L A/c & thereby the profit would be reduced by `40,000.

Solution 4
(i) Statement Showing Allocation of support department costs to the sales departments
(By using the Direct Method)
Sales departments Support departments
Particulars Basis
Corporate Consumer Admin IS
Total overheads 12,97,751 6,36,818 94,510 3,04,720
Apportionment of Expenses:
Administrative Dept No. of 56,706 37,804 (94,510) -
(42:28) employees
Information system Processing 1,66,211 1,38,509 - (3,04,720)
(2,400:2,000) time
Total - 15,20,668 8,13,131 - -

(ii) Ranking of support departments based on percentage of their services rendered to other support
departments:
 21  100 
 Administration support department provides 23.077%   services to Information systems
 42  28  21 
support department. Thus 23.077% of `94,510 = `21,810

 Information system support department provides 8.33% of its services to Administration support
department. Thus 8.33% of `3,04,720 = `25,383.

Statement Showing Allocation of Support Departments Costs

(By using step-down allocation method)
Sales departments Support departments
Particulars Basis
Corporate Consumer Admin IS
Total overheads 12,97,751 6,36,818 94,510 3,04,720
Apportionment of Expenses:
Administrative Dept No. of 43,620 29,080 (94,510) 21,810
([Link]) employees
Information system Processing 1,78,107 1,48,423 - (3,26,530)
(2,400:2,000) time
Total - 15,19,478 8,14,321 - -

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

 Allocation of information systems overheads as first (`25,383 provided to administrative).

 Allocated administrative overheads as second (`21,810 provided to information systems).

(iv) Statement Showing the Allocation of Support Department Costs to the Sales Departments
(Using reciprocal allocation method/Equation method)
Sales departments Support departments
Particulars Basis
Corporate Consumer Admin IS
Total overheads 12,97,751 6,36,818 94,510 3,04,720
Apportionment of Expenses:
Administrative Dept [Link] 56,425 37,617 (1,22,254) 28,212
Information system [Link] 1,66,466 1,38,722 27,744 (3,32,932)
Total - 15,20,642 8,13,157 - -
 SOLUTION TEST 3 - OVERHEADS 51
Working notes:
a. Percentage of services provided by each service department to other service department and sales
departments
Administrative to Information system = 21/91
Information system to Administrative = 4/48 or 1/12

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

AD = `94,510 + 1/12 IS
IS = `3,04,720 + 21/91 AD

AD = `94,510 + 1/12 (`3,04,720 + 21/91 AD)

AD = `94,510 + `25,393 + 0.01923 AD
0.98077 AD = `1,19,903
AD = `1,22,254
IS = `3,04,720 + 21/91 × 1,22,254 = `3,32,932
 SOLUTION TEST 4 - COST SHEET & UNIT COSTING 52

SOLUTION TEST 4 - COST SHEET & UNIT COSTING

Solution 1
A Ltd. Co
Cost Sheet (for the month)
30% 100%
Particulars
(30,000 units) (1,00,000 units)
Works Cost @ `380/`310 per unit 1,14,00,000 3,10,00,000
Administrative overheads (Fixed) 1,50,000 1,50,000
Cost of Production 1,15,50,000 3,11,50,000
Fixed marketing expenses 2,50,000 2,50,000
Variable distribution cost @ `30 per unit 9,00,000 30,00,000
Additional expenses:
Gifts @ `30 per unit - 30,00,000
Customers prizes - 1,00,000
Refreshment - 1,00,000
Sponsorship cost - 20,00,000
Cost of Sales 1,27,00,000 3,96,00,000
Profit 38,00,000 1,04,00,000
Sales @ `550/`500 per unit 1,65,00,000 5,00,00,000
At 100% capacity utilization, profit of A Ltd Company is `1,04,00,000 whereas at 30% profit is only
`38,00,000. Therefore, it is advisable to the company to work at 100% capacity and incur special marketing
cost.

Solution 2
(1) Cost Sheet
Particulars First 3 Months Next 9 Months Total
Number of Units (W.N. 1) 4,500 21,600 26,100
Raw Materials @ `40 per unit 1,80,000 8,64,000 10,44,000
Less: Sale of Scrap of Material @ `5 per unit (22,500) (1,08,000) (1,30,500)
Raw Materials Consumed 1,57,500 7,56,000 9,13,500
Direct Labour (W.N. 2) 1,44,000 6,48,000 7,92,000
Prime Cost 3,01,500 14,04,000 17,05,500
Factory Overheads:
Fixed 90,000 2,70,000 3,60,000
Variable @ `10 per unit 45,000 2,16,000 2,61,000
Semi Variable (W.N. 3) 27,000 1,51,200 1,78,200
Works Cost 4,63,500 20,41,200 25,04,700
Administrative Overheads 1,29,600 3,88,800 5,18,400
Cost of Production 5,93,100 24,30,000 30,23,100
Selling and Distribution OH @ `8 per unit 36,000 1,72,800 2,08,800
Cost of Sales 6,29,100 26,02,800 32,31,900

(2) Statement Showing Selling Price Per Unit

Particulars Amount
Sales Value for First Three Months (4,500 × 145) 6,52,500
Less: Cost of Sales for First Three Months (6,29,100)
Profit for First Three Months 23,400

Required Profit from Next Nine Months (8,76,600 – 23,400) 8,53,200

Cost of Sales for Next Nine Months 26,02,800
Sales Value for Next Nine months 34,56,000
÷ Number of Units for Next Nine Months ÷ 21,600
Selling Price Per Unit for Next Nine Months `160.00
 SOLUTION TEST 4 - COST SHEET & UNIT COSTING 53

Working Notes:
1. Calculation of production per annum:
50% for 3 months (36,000 units × 50% × 3/12) = 4,500 units
80% for 9 months (36,000 units × 80% × 9/12) = 21,600 units
Total production for the year = 26,100 units

2. Calculation of Labour cost:

First Three Months (4,500 × 30 or 48,000 × 3) whichever is higher = 1,44,000
Next Nine Months (21,600 × 30 or 48,000 × 9) whichever is higher = 6,48,000

3. Calculation of Semi-variable cost:

First Three Months (1,08,000 × 3/12) = 27,000
Next Nine Months [(1,08,000 + 46,800 + 46,800) × 9/12] = 1,51,200

Note: Administrative overheads is assumed to be related to production (student may take different
assumption).

Solution 3
Cost Sheet for the month of September 2019
Particulars Total Cost Cost Per Unit
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
Direct wages (`80 × 2,000 hours) 1,60,000 160.00
Direct expenses (`10 × 2,000 hours) 20,000 20.00
Prime Cost 5,23,500 523.50
Factory overheads:
Depreciation on machines {(`22,00,000×90%)÷120 months} 16,500 16.50
Apportion cost of factory rent {(1,20,000 ÷ 2,400) × 1,960} 98,000 98.00
Works Cost 6,38,000 638.00
Less: Realisable value of cuttings (`150×35 kg.) (5,250) (5.25)
Cost of Production 6,32,750 632.75
Less: Closing stock of bags (100 bags × `632.75) (63,275) -
Cost of Goods Sold 5,69,475 632.75
Administrative Overheads:
Staff salary 45,000 50.00
Apportioned rent {(1,20,000 ÷ 2,400) × 240} 12,000 13.33

Selling and Distribution Overheads:

Staff salary 72,000 80.00
Apportioned rent {(1,20,000 ÷ 2,400) × 200} 10,000 11.11
Freight paid on delivery of bags 18,000 20.00
Cost of Sales 7,26,475 807.19
Working Note:
1. Factory space = Total space – space occupied by Administrative and Sales office
= 2,400 - 240 – 200 = 1,960 sq. feet
2. Units Produced = Main input raw material used ÷ Main material consumption for 1 unit output
= 2,000 meter leather ÷ 2 meter = 1,000 bags

3. Units sold = Units produced – Closing units

= 1,000 – 100 = 900 bags
 SOLUTION TEST 4 - COST SHEET & UNIT COSTING 54

Solution 4
Cost Sheet of R Ltd.
(for the year ended at 31st March, 2020)
Particulars Amount (`) Amount (`)
Material Consumed:
Raw materials purchased 84,00,000
Add: Carriage inward 1,72,600
Add: Opening stock of raw materials 6,20,000
Less: Closing stock of raw materials (4,60,000) 87,32,600

Direct employee (labour) cost:

Direct wages 60,00,000
Employer’s Contribution towards PF & ESIS 7,20,000 67,20,000

Direct expenses:
Consumable materials 4,80,000
Cost of power & fuel 28,00,000 32,80,000
Prime Cost 1,87,32,600
Works/ Factory overheads:
Wages to foreman and store keeper 8,40,000
Other indirect wages to factory staffs 1,35,000 9,75,000
Gross Factory Cost 1,97,07,600
Add: Opening value of WIP 7,84,000
Less: Closing value of WIP (6,64,000)
Factory Cost 1,98,27,600
Research & development cost paid for improvement in 9,60,000
production process
Production planning office expenses 12,60,000
Cost of Production 2,20,47,600
Add: Opening stock of finished goods 14,40,000
Less: Closing stock of finished goods (9,80,000)
Cost of Goods Sold 2,25,07,600
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

Selling and Distribution Overheads:

Salary to delivery staffs 14,30,000
Cost of Sales 2,58,57,600
Add: Profit (b.f.) 24,02,400
Sales 2,82,60,000

Notes: Income tax and Donation to PM National Relief Fund is avoided in the cost sheet.
 SOLUTION TEST 5 - JOB AND BATCH COSTING 55

SOLUTION TEST 5 - JOB AND BATCH COSTING

Solution 1
Job Cost Sheet
Particulars Amount
Direct Materials 120.00
Direct Wages:
Department A (4 hours × `4) 16.00
Department B (7 hours × `4) 28.00
Department C (2 hours × `4) 8.00
Department D (2 hours × `4) 8.00
Chargeable Expenses 20.00
Prime Cost 200.00
Overheads:
Department A @ 100% of direct wages 16.00
Department B @ 75% of direct wages 21.00
Department C @ 90% of direct wages 7.20
Department D @ 85% of direct wages 6.80
Works Cost 251.00
Selling Expenses @ 30% on works cost 75.30
Total Cost 326.30
Profit @ 20% on selling price or 25% on cost 81.575
Sales 407.875

Working note:
(1) Calculation of recovery rate of Overheads:
Recovery rate of overheads = (Overheads ÷ Direct Wages) × 100
Department A = (12,000 ÷ 12,000) × 100 = 100% of direct wages
Department B = (6,000 ÷ 8,000) × 100 = 75% of direct wages
Department C = (9,000 ÷ 10,000) × 100 = 90% of direct wages
Department D = (17,000 ÷ 20,000) × 100 = 85% of direct wages

(2) Calculation of recovery rate of Selling Expenses:

Recovery rate of Selling OH = (Selling expenses ÷ Works Cost) × 100
= {90,000 ÷ (4,30,000 – 1,30,000)} × 100
= 30% of works cost

Solution 2
Statement Showing Cost and Profit
Particulars Jan. Feb. March April May June Total
Batch output (in units) 210 200 220 180 200 220 1,230
Sales value (`) 1,680 1,600 1,760 1,440 1,600 1,760 9,840
Material cost (`) 650 640 680 630 700 720 4,020
Direct wages (`) 120 140 150 140 150 160 860
Chargeable expenses (`) 600 672 672 621 780 800 4,145
Total cost 1,370 1,452 1,502 1,391 1,630 1,680 9,025
Profit per batch (`) 310 148 258 49 (30) 80 815
Total cost per unit (`) 6.52 7.26 6.83 7.73 8.15 7.64 7.34
Profit per unit (`) 1.48 0.74 1.17 0.27 (0.15) 0.36 0.66
 SOLUTION TEST 5 - JOB AND BATCH COSTING 56

Overall position of the order for 1,200 units:

Sales value of 1,200 units @ `8 per unit `9,600
Total cost of 1,200 units @ `7.34 per unit `8,808
Profit `792

Charg eable expenses

Note: Chargeable expenses = × Direct labour hours for batch
Direct labour hour for the month

Solution 3
(i) Computation of rates of factory overheads and selling and administration overheads to be charged:
Let % of factory overheads to direct wages be F and % of selling and administrative overheads to factory cost
be A
Jobs Cost Sheet
Particulars Job 1102 Job 1108
Direct materials 37,500 54,000
Direct wages 30,000 42,000
Prime cost 67,500 96,000
Factory overheads 30,000F 42,000F
Factory cost 67,500+30,000F 96,000+42,000F
Selling and Administration overheads (67,500+30,000F)A (96,000+42,000F)A
Total cost (67,500+30,000F)(1+A) (96,000+42,000F)(1+A)

* Computation of total cost of jobs:

1,07,325
Total cost of Job 1102 when 8% is the profit on cost = × 100 = `99,375
108%
1,57,920
Total cost of Job 1108 when 12% is the profit on cost = × 100 = `1,41,000
112%

Since the total cost of jobs 1102 and 1108 are equal to `99,375 and `1,41,000 respectively, therefore, we
have the following equations:
(67,500 + 30,000F) (1 + A) = `99,375 (1)
(96,000 + 42,000F) (1 + A) = `1,41,000 (2)
Or
67,500 + 30,000F + 67,500 A + 30,000FA = `99,375
96,000 + 42,000F + 96,000 A + 42,000FA = `1,41,000
Or
30,000F + 67,500A + 30,000FA = `31,875 (3)
42,000F + 96,000A + 42,000FA = `45,000 (4)
On solving (3) and (4) we get:
A = 0.25 or 25% on factory cost
F = 0.40 or 40% on direct wages

(ii) Selling Price of the New Order:

Particulars Amount
Materials 64,000
Productive Wages 50,000
Prime Cost 1,14,000
Factory Overheads (40% Of 50,000) 20,000
Factory Cost 1,34,000
Selling And Admin Overheads (25% Of 1,34,000) 33,500
Total Cost 1,67,500
Profit (20% On Sales Or 25% On Cost) 41,875
Sale Price 2,09,375
 SOLUTION TEST 5 - JOB AND BATCH COSTING 57

Solution 4
(a) Statement Showing Total Cost of the Job
Particulars Amount
Direct material cost:
15mm GI Pipe (WN 1) 11,051.28
20mm GI Pipe (WN 2) 2,588.28
Other fitting materials (WN 3) 3,866.07
Stainless steel faucet [{(6 × 204 + 15 × 209) ÷ 21 units } × 15 units] 3,113.57
Valve [{(8 × 404 + 10 × 402 + 14 × 424) ÷ 32 units } × 6 units] 2,472.75

Direct wages
Plumber [(180 hours × `100) + (12 hours × `50)] 18,600
Helper [(192 hours × `70) + (24 hours × `35)] 14,280

Overheads [`26 × (180 + 192) hours] 9,672

Total Cost 65,643.95

(b) Price to be charged = Total Cost + 25% Profit on Job Price

= 65,643.95 ÷ 75% = `87,525,27

Working Notes:
1. Cost of 15mm GI Pipe:
Date Calculation Amount (`)
17.08.20 8 units × `600 4,800
28.07.20 {(4 units × `600 + 35 units × `628) ÷ 39 units} × 10 units 6,251.28
11,051.28

2. Cost of 20mm GI Pipe:

Date Calculation Amount (`)
12.08.20 2 units × `660 1,320
28.08.20 {(8 units × `660 + 30 units × `610 + 20 units × `660) ÷ 58 units} × 2 units 1,268.28
2,588.28

3. Cost of Other fitting materials:

Date Calculation Amount (`)
12.08.20 18 units × `26 468
17.08.20 30 units × `26 780
28.08.20 {(12 units × `26 + 150 units × `28) ÷ 162 units} × 34 units 946.96
30.08.20 {(12 units × `26 + 150 units × `28) ÷ 162 units} × 60 units 1,671.11
3,866.07
 SOLUTION TEST 6 - CONTRACT COSTING 58

SOLUTION TEST 6 - CONTRACT COSTING

Solution 1
Contract Account (2017)
Particulars Amount Particulars Amount
To Materials 6,75,000 By Work-in-progress:
To Wages 6,20,000 Work Certified 13,50,000
To Transport Cost 30,000 Work Uncertified 15,000
To Other Expenses 30,000 By Notional Loss 65,000
To Depreciation (25% of 3,00,000) 75,000
14,30,000 14,30,000

Contract Account (2018)

Particulars Amount Particulars Amount
To Opening WIP 13,65,000 By Work-in-progress:
(13,50,000 + 15,000) Work Certified 45,00,000
To Materials 10,50,000 Work Uncertified 75,000
To Wages 9,00,000
To Transport Cost 90,000
To Other Expenses 75,000
To Depreciation 56,250
[25% of (3,00,000 – 75,000)]
To Notional Profit 10,38,750
45,75,000 45,75,000

Contract Account (2019)

Particulars Amount Particulars Amount
To Opening WIP 45,75,000 By Contractee’s A/c 60,00,000
(45,00,000 + 75,000) By Notional Loss 3,66,187
To Materials 9,00,000
To Wages 7,50,000
To Transport Cost 75,000
To Other Expenses 24,000
To Depreciation 42,187
[25% of (2,25,000 – 56,250)]
63,66,187 63,66,187

Costing Profit & Loss A/c (2017 to 2019)

Particulars Amount Particulars Amount
2017 To Notional Loss 65,000
2018 By Notional Profit 10,38,750
2019 To Notional Loss 3,66,187

To Estimated Profit from the 6,07,563

Contract
10,38,750 10,38,750

Contractee's Account for 2017 And 2019

Particulars Amount Particulars Amount
2017 By Bank A/c 10,12,500
To Balance c/d 10,12,500 (75% of 13,50,000)
10,12,500 10,12,500
2018 By Balance b/d 10,12,500
 SOLUTION TEST 6 - CONTRACT COSTING 59

To Balance c/d 33,75,000 By Bank A/c 23,62,500

(75% of 45,00,000 – 10,12,500)
33,75,000 33,75,000
2019 By Balance b/d 33,75,000
To Contract A/c 60,00,000 By Bank A/c 26,25,000
(60,00,000 – 33,75,000)
60,00,000 60,00,000

Solution 2
Statement Showing Escalation Claim
Particulars `
(A) Materials:
A [5,000 tons × (48 - 50)] (10,000)
B [3,500 tons × (79 - 80)] (3,500)
C [2,500 tons × (66 - 60)] 15,000
Total (A) 1,500
(B) Labour:
X [2,000 hours × (72 - 70)] 4,000
Y [2,500 hours × (75 - 75)] -
Z [3,000 hours × (66 - 65)] 3,000
Total (B) 7,000
Total Escalation Claim (A + B) 8,500

Final Price Payable = `17,50,000 + `8,500

= `17,58,500

Solution 3
Contract A/c
(01.11.03 to 31.10.04)
Particulars Amount Particulars Amount
To Materials issued 6,75,000 By WIP:
To Labour 4,50,000 Value of work certified 20,00,000
Less: Prepaid (25,000) 4,25,000 Cost of work uncertified 75,000
To Plant depreciation By Materials at site 75,000
(3,00,000 + 75,000 × 5/12) × 33-⅓% 1,10,417

To Expenses paid 2,00,000

Add: Outstanding 50,000 2,50,000
To Notional profit 6,89,583

21,50,000 21,50,000

Calculation of estimated profit:

Estimated profit = Contract price – Total cost (Total cost = cost to date + *further
estimated cost)
= 39,37,500 – (13,85,417 + 22,17,778)
= 3,34,305

*Further estimated cost = Materials + Labour + Expenses + Depreciation

= (75,000 + 12,37,500 – 37,500) + (5,62,500 + 25,000 + 2,500) +
(3,50,000 - 50,000 + 25,000) + [(3,00,000 – 33-⅓%) × 5/12 × 33-⅓%]
= 22,17,778
 SOLUTION TEST 6 - CONTRACT COSTING 60

Solution 4
Contract Account
For the period 01.09.18 to 31.03.19
Particulars ` Particulars `
To Materials sent to site 18,75,000 By Material returned to supplier 15,000
To Wages paid 9,28,500 By Materials at site 2,16,800
Add: Outstanding wages 84,800 10,13,300 By Cost of Materials sold 10,000
To Sundry expenses 33,825 By Works Cost c/d(b.f.) 27,46,400
To Supervisor’s salary 35,000
(15,000 × 7 month × ⅓)
To Depreciation (WN 2) 31,075
29,88,200 29,88,200
To Works Cost b/d 27,46,400 By WIP:
To Notional Profit 1,90,200 Work Certified 22,50,000
Work uncertified (WN 1) 6,86,600
29,36,600 29,36,600

Working Notes:

(1) Calculation of cost of work uncertified:

Contract Completed = ⅔ or 66-⅔%

Cost of ⅔ Contract = 27,46,400
3
∴ Cost of Work Uncertified = 27,46,400 × 2 × 16-⅔% = 6,86,600

7 4
(2) Depreciation = 3,18,000 × 15% × 12 + 25,000 × 15% × 12 + 32,000 ×
5
15% × 12
= 31,075
 SOLUTION TEST 7 - OPERATING OR SERVICE COSTING 61

SOLUTION TEST 7 - OPERATING COSTING OR SERVICE COSTING

Solution 1
Operating Cost Sheet
Particulars Amount
(A) Standing Charges:
Depreciation per month (10,00,000 ÷ 5 Years × 1/12) 16,667
Insurance per month [(10,00,000 × 3%) × 1/12] 2,500
Annual Tax for one month (20,000 × 1/12) 1,666
Garage Rent 2,000
Manager-cum accountant’s salary 7,000
Driver’s salary 3,000
Conductor’s salary 2,000
Total (A) 34,833
(B) Running Charges:
Stationery 1,000
Petrol and oil (500/100 × 6,000 kms) 30,000
Commission @ 10% of collections ‘WN’ 9,000
Total (B) 40,000
(C) Maintenance Charges:
Repairs and maintenance (20,000 × 1/12) 1,667
Total (C) 1,667
Total operating cost (A + B + C) 76,500
Add: Profit @ 15% of collections 13,500
Collections (WN 3) 90,000
÷ Total Passenger-kms ÷ 2,40,000
Fare for per passenger-km `0.375
Fare for per passenger-single side (0.375 × 40) `15.00

Working Notes:
1: Total travelling of bus in one month = 2 × No of round trips daily × Distance one way × No of
days
= 2 × 3 × 40 × 25
= 6,000 kms

2: Passenger-kms per month = No of kms travelled per month × No of passengers

= 6,000 × 40
= 2,40,000 passenger-kms

3: Total collections = Operating cost (excluding commission on collections)

+ 10% for commission + 15% for profit
= 67,500 + 25% of collections
= `90,000

Solution 2
Statement Showing Per Day Chargeable Rent
Particulars `
Staff salary 5,5,0000
Repairs to building 2,61,000
Laundry charges 80,000
Interior 1,75,000
Miscellaneous expenses 1,90,800
Depreciation:
On Building (`200 lakhs × 80% × 5%) 8,00,000
On Furniture (`200 lakhs × 20% × 15%) 6,00,000
 SOLUTION TEST 7 - OPERATING OR SERVICE COSTING 62
Room attendant's wages:
In Season (100 rooms × 80% × 30 days × 6 months × `10) 1,44,000
In Off-Season (100 rooms × 40% × 30 days × 6 months × `10) 72,000
Lighting charges:
Season & Non Winter (100 rooms × 80% × 6 months × `120) 57,600
Off-Season & Non Winter (100 rooms × 40% × 2 months × `120) 9,600
Off-Season & Winter (100 rooms × 40% × 4 months × `30) 4,800

Total Cost 29,44,800

Add: Profit @ 20% on Room rent or 25% on Cost 7,36,200
Total Rent to be Charged 36,81,000
÷ Equivalent Off-Season room days ÷ 36,000
Rent for one room per day in Off-Season `102.25
Rent for one room per day in Season (`102.25 × 2) `204.50

Working Notes:

Equivalent Off –Season room days = 100 × 80% × 30 days × 6 months × 2 (double of Off-Season) +
100 × 40% × 30 days × 6 months × 1
= 14,400 × 2 + 7,200 × 1 = 36,000 Room days

Solution 3
1. (a) Cost per commercial ton-km = Total Operating cost ÷ Total Commercial ton-kms
= 3,42,000 ÷ 44,862
= `7.62

1. (b) Cost per absolute ton-km = Total Operating cost ÷ Total Absolute ton-kms
= 3,42,000 ÷ 44,720
= `7.65

Working Notes:
(i) Statement of Total Monthly Cost
(For the month of January, 2020)
Particulars Amount
Fixed cost (6,00,000 ÷ 12) 50,000
Maintenance charges (1,20,000 ÷ 12) 10,000
Running charges (2,94,400 – 12,400) 2,82,000
Total Operating Cost 3,42,000

(ii) Calculation of commercial ton-kms:

Total distance = 12 journeys × 300 kms × 2 (two way) = 7,200

Total weight = 12 journeys × 6 ton + 2 journeys × 4 ton + 5 journeys × 8 ton + 6

Journeys × 6 ton + 1 journey × 6 ton = 162 ton

Commercial ton-km = Total distance × Average weight

= 7,200 kms × (162 tons ÷ 26 journeys) = 44,862

(iii) Calculation of absolute ton-kms:

A to B = (10 journeys × 300 kms × 6 tons) + {2 journeys × [(140 kms × 6 tons)
+ (160 kms × 4 tons)]} = 20,960

B to A = (5 journeys × 300 kms × 8 tons) + (6 journeys × 300 kms × 6 tons) + {1

journey × [(160 kms × 6 tons) + (140 kms × Nil tons)]}
= 23,760
 SOLUTION TEST 7 - OPERATING OR SERVICE COSTING 63

Absolute ton-km = 20,960 + 23,760 = 44,720

2. Statement of Profit
(For the month of January, 2016)
Particulars Amount
Receipts:
From outward journey (12 journeys × 6 tons × `2,400) 1,72,800
From return journey (5 journeys × 8 tons × `2,200) + (7 journeys × 6 tons × `2,200) 1,80,400
Total Receipts 3,53,200
Less: Total operating cost (3,42,000)
Less: Penalty paid for overloading (12,400)
Net Loss for the month (`1,200)

Notes:
(1) For the purpose of computation of absolute ton-kms both types of loads must be considered viz.
normal load and over load.
(2) Fine is an abnormal item it will not form part of cost. It is to be debited to profit and loss account.
(3) No concession or reduction in rates for any delivery of goods at station ‘C’.

Solution 4
1. Statement of Cost per Student
Particulars Arts (`) Commerce (`) Science (`) Total (`)
Teachers’ salary 16,80,000 21,00,000 25,20,000 63,00,000
(35,000×12×4) (35,000×12×5) (35,000×12×6)
Re-apportionment of salary:
of Economics teacher (84,000) 84,000 - -
of Mathematics teacher - 61,091 (61,091) -
Principal’s salary 1,24,800 1,87,200 2,88,000 6,00,000
Lab assistants’ salary - - 1,72,800 1,72,800
Salary to library staff 43,200 28,800 57,600 1,29,600
Salary to peons 31,636 94,909 47,455 1,74,000
Examination expenses 86,400 2,59,200 1,29,600 4,75,200
Salary to other staffs 38,400 1,15,200 57,600 2,11,200
Office & Administration expenses 1,21,600 3,64,800 1,82,400 6,68,800
Annual Day expenses 36,000 1,08,000 54,000 1,98,000
Sports expenses 9,600 28,800 14,400 52,800
Total Cost per annum 20,87,636 34,32,000 34,62,764 89,82,400
÷ Number of Students ÷ 120 ÷ 360 ÷ 180 ÷ 660
Cost per student per annum 17,397 9,533 19,238 13,610

2. Statement of Profitability
Particulars Arts (`) Commerce (`) Science (`) Total (`)
No. of students 120 360 180 660
Total Fees @ 12,000 per student p.a. 14,40,000 43,20,000 21,60,000 79,20,000
Less: Total Cost per annum (20,87,636) (34,32,000) (34,62,764) (89,82,400)
Total Profit/ (Loss) per annum (6,47,636) 8,88,000 (13,02,764) (10,62,400)

3. Statement Showing Fees to be Charged to Earn a 10% Profit on Cost

Particulars Arts (`) Commerce (`) Science (`)
Cost per student per annum 17,397 9,533 19,238
Add: Profit @10% 1,740 953 1,924
Fees per annum 19,137 10,486 21,162
Fees per month 1,595 874 1,764
 SOLUTION TEST 7 - OPERATING OR SERVICE COSTING 64
Working Notes:
(a) 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 (`) (84,000) 84,000 (61,091) 61,091
(`4,20,000 ÷ 1,040) × 208 (`4,20,000 ÷ 1,100) × 160

(b) Principal’s salary has been apportioned on the basis of time spent by him for administration of classes.
(c) Lab attendants’ salary has been apportioned on the basis of lab classes attended by the students.
(d) Salary of library staffs are apportioned on the basis of time spent by the students in library.
(e) Salary of Peons are apportioned on the basis of number of students. The peons’ salary allocable to
higher secondary classes is calculated as below:
Particulars Amount (`)
Peon dedicated for higher secondary (1 peon × 10,000 × 12 months) 1,20,000
Add: 15% of other peons’ salary {15% of 3 peons × 10,000 × 12 months) } 54,000
Total 1,74,000

(f) Examination expenditure has been apportioned taking number of students into account (It may also be
apportioned on the basis of number of examinations).
(g) Salary to other staffs, office & administration cost, Annual day expenses and sports expenses are
apportioned on the basis of number of students.
 SOLUTION TEST 8 - PROCESS & OPERATION COSTING 65

SOLUTION TEST 8 - PROCESS & OPERATION COSTING

Solution 1
Statement of Equivalent Production (FIFO Method)
Materials A Materials B Labour & OH
Particulars Units
% Eq. Unit % Eq. Unit % Eq. Unit
Opening units:
Used for Completed Units 1,800 - - 20 360 40 720
Units Introduced:
Used for Completed Units 41,400 100 41,400 100 41,400 100 41,400
Used for Closing WIP 4,500 100 4,500 70 3,150 50 2,250
Normal Loss 2,250 - - - - - -
Less: Abnormal Gain (450) 100 (450) 100 (450) 100 (450)
Total 49,500 - 45,450 - 44,460 - 43,920

Statement of Cost
Elements Cost Equivalent Units Cost Per Unit
Materials A 5,36,625 – 15,187 = 5,21,438 45,450 11.4728
Materials B 1,77,840 44,460 4.00
Labour 87,840 43,920 2.00
Overheads 43,920 43,920 1.00
18.4728

Statement of Evaluation
Particulars Elements Eq. Units Cost Per Unit Total
Units Transferred:
Current Period Cost Materials A 41,400 11.4728 4,74,973
Materials B 41,760 4.00 1,67,040
Labour, Overhead 42,120 2.00 + 1.00 1,26,360
Add: Cost of Opening WIP 27,000
(Used in completed units) 7,95,373

Closing WIP Materials A 4,500 11.4728 51,628

Materials B 3,150 4.00 12,600
Labour, Overhead 2,250 2.00 + 1.00 6,750
70,978

Abnormal Gain All 450 18.4728 8,313

Process III Account

Particulars Units ` Particulars Units `
To Opening WIP 1,800 27,000 By Normal Loss 2,250 15,187
To Process II Account 47,700 5,36,625 (5% of 45,000 units)
To Direct Materials 1,77,840 By Process IV A/c 43,200 7,95,373
To Direct Labour 87,840 By closing WIP 4,500 70,978
To Production Overhead 43,920
To Abnormal Gain 450 8,313
49,950 8,81,538 49,950 8,81,538

Working note

Production units = Opening units + Units transferred from process II - Closing units
= 1,800 units + 47,700 units - 4,500 units = 45,000 units
 SOLUTION TEST 8 - PROCESS & OPERATION COSTING 66
Solution 2
Process I A/c
Particulars Total Cost Profit Particulars Total Cost Profit
To Balance b/d 1,50,000 1,50,000 - By Process II 10,80,000 8,10,000 2,70,000
To Materials 3,00,000 3,00,000 - A/c
To Wages 2,24,000 2,24,000 -
Prime Cost 6,74,000 6,74,000 -
- Closing Stock (74,000) (74,000) -
6,00,000 6,00,000 -
To Factory OH 2,10,000 2,10,000 -
Total Cost 8,10,000 8,10,000 -
To Profit 2,70,000 - 2,70,000
10,80,000 8,10,000 2,70,000 10,80,000 8,10,000 2,70,000

Process II A/c
Particulars Total Cost Profit Particulars Total Cost Profit
To Balance b/d 1,80,000 1,50,000 30,000 By Finished 22,50,000 15,15,000 7,35,000
To Process I A/c 10,80,000 8,10,000 2,70,000 Stock A/c
To Materials 3,15,000 3,15,000 -
To Wages 2,25,000 2,25,000 -
Prime Cost 18,00,000 15,00,000 3,00,000
- Closing Stock (90,000) (75,000) *(15,000)
17,10,000 14,25,000 2,85,000
To Factory OH 90,000 90,000 -
Total Cost 18,00,000 15,15,000 2,85,000
To Profit 4,50,000 - 4,50,000
22,50,000 15,15,000 7,35,000 22,50,000 15,15,000 7,35,000

3,00,000
Profit element in closing stock = × 90,000 = 15,000
18,00,000

Finished Stock A/c

Particulars Total Cost Profit Particulars Total Cost Profit
To Balance b/d 4,50,000 2,85,000 1,65,000 By Sales 28,00,000 16,48,500 11,51,500
To Process II 22,50,000 15,15,000 7,35,000 A/c or
- Closing Stock (2,25,000) (1,51,500) *(73,500) Costing p
COGS 24,75,000 16,48,500 8,26,500 & L A/c
To Profit 3,25,000 - 3,25,000
28,00,000 16,48,500 11,51,500 28,00,000 16,48,500 11,51,500

7,35,000
Profit element in closing stock = × 2,25,000 = 73,500
22,50,000

Solution 3
(1) Calculation of quantity of raw materials input during the month:

Raw materials input = Output of Finished goods + Closing WIP + Losses – Opening WIP
= 5,900 + 220 + 2,200 – 1,100 = 7,220 litres

(2) Calculation of quantity of normal loss and abnormal loss or gain:

Normal loss = 10% of Input
= 10% of 7,220 = 722 litres
Abnormal loss = Actual loss – Normal loss
= 2,200 – 722 = 1,478 litres
 SOLUTION TEST 8 - PROCESS & OPERATION COSTING 67
(3) Statement of Material, Labour and Overheads added during the month
Particulars Materials Labour Overheads
Cost per equivalent units 35 8 10
Number of equivalent units 6,498 7,026 6,784
Cost of equivalent units 2,27,430 56,208 67,840
Add: Scrap value of normal loss units (722 × 20) 14,440 - -
Total value added 2,41,870 56,208 67,840

(4) Process A/c

Particulars Units ` Particulars Units `
To Opening WIP 1,100 48,260 By Normal Loss 722 14,440
To Materials 7,220 2,41,870 By Finished Output 5,900 3,12,340
To Labour 56,208 (4,800 × 35 + 5,460 × 8 +
To Overheads 67,840 5,240 × 10 + 48,260)
By Abnormal Loss 1,478 78,334
(1,478 × 53)
By WIP Closing 220 9,064
(220×35 + 88×8 + 66×10)
8,320 4,14,178 8,320 4,14,178

Working Note:
Statement of Equivalent Production
Materials Labour Overheads
Particulars Units
% E. Units % E. Units % E. Units
Opening Units:
Used for Completed Units 1,100 - - 60 660 40 440
Current Units:
Used for Completed Units 4,800 100 4,800 100 4,800 100 4,800
Normal loss 722 - - - - - -
Abnormal loss 1,478 100 1,478 100 1,478 100 1,478
Closing WIP 220 100 220 40 88 30 66
Total 8,320 - 6,498 - 7,026 - 6,784

Solution 4
1. Statement of Equivalent Production (Average Cost Method)
Materials Labour & OH
Particulars Total Units
% Unit % Unit
Units Completed 39,500 100 39,500 100 39,500
Normal loss 55,000 - - - -
Abnormal Loss 1,000 100 1,000 80 800
Closing WIP 9,000 100 9,000 80 7,200
Total 1,04,500 - 49,500 - 47,500

2. Statement of Cost
Elements Total Cost Equivalent Units Cost Per Unit
Materials 50,000 + 5,00,000 = 5,50,000 49,500 11.111
Labour 15,000 + 2,00,000 = 2,15,000 47,500 4.526
Overheads 45,000 + 6,00,000 = 6,45,000 47,500 13.579
29.216

3. Statement of Distribution of Cost

Particulars Elements Eq. Units Cost Per Unit Total
Units Completed All 39,500 29.216 11,54,032
 SOLUTION TEST 8 - PROCESS & OPERATION COSTING 68

Abnormal Loss Materials 1,000 11.111 11,111

Labour, Overheads 800 4.526 + 13.579 14,484
25,595 + 18

Closing WIP Materials 9,000 11.111 99,999

Labour, Overheads 7,200 4.526 + 13.579 1,30,356
2,30,355

4. Process I Account
Particulars Units ` Particulars Units `
To Opening WIP 4,500 1,10,000 By Normal Loss @55% 55,000 -
To Sugarcane introduced 1,00,000 5,00,000 of 1,00,000 kgs.
To Direct Labour 2,00,000 By Process II A/c 39,500 11,54,032
To Overhead 6,00,000 By Abnormal Loss A/c 1,000 25,613
By Closing WIP 9,000 2,30,355
1,04,500 14,10,000 1,04,500 14,10,000
 SOLUTION TEST 9 - JOINT PRODUCTS & BY PRODUCTS 69

SOLUTION TEST 9 - JOINT PRODUCTS & BY PRODUCTS

Solution 1
(i) Statement Showing Apportionment of Joint Cost
Product AR Product Q
Particulars
(` in Lakh) (` in Lakh)
Sales value at split-off-point (P and Q) (4,76,000 × 85) (2,04,000 × 290)
404.60 591.60
Less: Selling expenses if sold at split-off-point (24.60) (21.60)
Net sales at split-off-point 380.00 570.00
Share of joint cost of `790 lakh (in 380 : 570) 316.00 474.00

(ii) Statement Showing Further Processing Decision

Incremental Revenue (` in Lakh) Incremental Cost (` in Lakh) Situation Decision
492.66 – 404.60 = 88.06 64 + 16.80 – 24.60 = 56.20 IR > IC Yes

Working Notes:

1. Input in Department A = 8,00,000 kgs

Yield = 85%
Therefore Output = 85% of 8,00,000 kgs = 6,80,000 kgs

Ratio of output for P and Q = 70 : 30

Product of P = 70% of 6,80,000 kgs = 4,76,000 kgs

Product of Q = 30% of 6,80,000 kgs = 2,04,000 kgs

2. Calculation of joint cost:

Raw materials (8,00,000 kgs × `80) = 640 lakh
Process cost of department A = 150 lakh
Joint cost = 790 lakh

3. Calculation of output and sales value of product AR:

Output = 90% of 4,76,000 kgs = 4,28,400 kgs
Sales = 4,28,400 kgs. × `115 = 492.66 Lakhs

Solution 2
I. Statement of Allocation of Joint Cost
Particulars B1 B2
Sales @ `40/`30 per unit 72,000 90,000
Less: Estimated profit @ 20%/30% 14,400 27,000
Less: Estimated selling expenses @ 15% on sales 10,800 13,500
Less: Further estimated cost (cost after separation) 35,000 24,000
Joint Cost 11,800 25,500
Total Joint Cost 2,12,400
Less: Joint cost allocable to B1 11,800
Less: Joint cost allocable to B2 25,500
Joint Cost allocable to M1 1,75,100

II. Product-wise & Overall Profitability Statement

Particulars M1 B1 B2 Total
 SOLUTION TEST 9 - JOINT PRODUCTS & BY PRODUCTS 70
Sales 4,00,000 72,000 90,000 5,62,000
Less: Selling expenses @ 20%/15%/15% 80,000 10,800 13,500 1,04,300
Less: Cost after separation Nil 35,000 24,000 59,000
Less: Joint cost 1,75,100 11,800 25,500 2,12,400
Profit 1,44,900 14,400 27,000 1,86,300

Solution 3
(a) Statement Showing Apportionment of Joint Cost
(Estimated Net Realisable Value Method)
Buttermilk Butter
Particulars
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 Realisable Value 8,40,000 75,60,000
Apportionment of Joint Cost of `51,00,000 in ratio of 1:9 5,10,000 45,90,000

Joint cost = (`100 × 50 × 1000) + `1,00,000 = ` 51,00,000

(b) Further processing of Butter into Ghee decision:

Incremental revenue = `480 × 16 × 1000 - `360 × 20 × 1000 = `4,80,000
Incremental cost = `1,20,000
Incremental benefit = `4,80,000 - `1,20,000 = `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.

Solution 4
Calculation of Net joint costs to be allocated:
Particulars Amount (`)
Joint Costs 8,40,000
Less: Net Realizable value of by-product {(4,500×50) – 1,50,000} 75,000
Net joint costs to be allocated 7,65,000

Note: Product A can be sold at the split-off point, because the question says that "Products B and C must be
processed further before they can be sold." Since product A is not included in that, we know that Product A
can be sold at the split-off point. Furthermore, the cost to process Product A after the split-off point is `150,000,
whereas the additional revenue to be earned by processing it further is only `75,000 (`50 increase in selling
price per unit multiplied by the 1,500 units produced during September). Therefore, Product A will not be
processed further, and we use the sales value at split-off for A for allocating the joint costs. The sales value at
the split-off for A is `100 × 1,500 units, or `1,50,000.

Statement Showing Total Cost of Product A

(Estimated Net Realisable Value Method)
Product A Product B
Particulars
Amount (`) Amount (`)
Sales Value of units Produced 1,50,000 5,25,000
(Product A at split off and B after further processing) (`100 × 1,500) (`175 × 3,000)
Less: Further processing cost - (1,50,000)
Net Realisable Value 1,50,000 3,75,000
Apportionment of Joint Cost of `7,65,000 in ratio of 2:5 2,18,571 5,46,429
Add: Further processing cost - 1,50,000
Total Cost of product 2,18,571 6,96,429
 SOLUTION TEST 10 - BUDGET AND BUDGETARY CONTROL 71

SOLUTION TEST 10 - BUDGET AND BUDGETARY CONTROL

Solution 1
Flexible Budget
Particulars Amount (`)
(A) Variable Cost:
Direct materials (1,40,000 × `7) 9,80,000
Direct labour (1,40,000 × 1.6 hours × `2.5) 5,60,000
Salesmen commission (1,40,000 × `1) 1,40,000
Indirect materials {(`2,64,000 ÷ 1,20,000) × 1,40,000} 3,08,000
Indirect Labour {(`1,50,000 ÷ 1,20,000) × 1,40,000} 1,75,000
Inspection {(`90,000 ÷ 1,20,000) × 1,40,000} 1,05,000
Total (A) 22,68,000
(B) Fixed Cost:
Selling and administration 85,000
Depreciation 90,000
Engineering services 94,000
Total (B) 2,69,000
(C) Semi Variable Cost:
Maintenance:
Variable (1,40,000 × `0.60) 84,000
Fixed 12,000
Supervision:
Variable (1,40,000 × `1.20) 1,68,000
Fixed 54,000
Total (C) 3,18,000
Total Cost (A + B + C) 28,55,000

Working Note:

Calculation of variable cost per unit and fixed cost portion of semi variable items:

Difference in Total Cost

Variable cost per unit =
Difference in Units

1,02,000 − 84,000
Variable Maintenance cost per unit = 1,50,000 − 1,20,000
= `0.60 per unit

2,34,000 − 1,98,000
Variable Supervision cost per unit = = `1.20 per unit
1,50,000 − 1,20,000

Fixed cost = Total cost – Variable Cost

Fixed Maintenance cost = 84,000 – 1,20,000 × 0.60 = `12,000

Fixed Maintenance cost = 1,98,000 – 1,20,000 × 1.20 = `54,000

Solution 2
(a) Production Budget of Product Minimax and Heavyhigh (in units)
April May June Total
Particulars
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 2,500 2,000 3,000 2,250 4,000 3,500 9,500 7,750
(25% of next month’s sales)
Less: Opening Stock *2,000 *1,500 2,500 2,000 3,000 2,250 7,500 5,750
Production in units 8,500 6,500 10,500 8,250 13,000 10,250 32,000 25,000
 SOLUTION TEST 10 - BUDGET AND BUDGETARY CONTROL 72
Note: Opening stock of April is the closing stock of March, which is as per company’s policy 25% of next
month’s sales.

(b) Production Cost Budget

Minimax (MM) Heavyhigh (HH)
Elements of cost
Per unit Total (`) Per unit Total (`)
No of units 1 32,000 1 25,000
Direct Material 220 70,40,000 280 70,00,000
Direct Labour 130 41,60,000 120 30,00,000
Manufacturing Overhead:
MM: `4,00,000 for 1,80,000 units 2.22 71,111 - -
HH: `5,00,000 for 1,20,000 units - - 4.167 1,04,167
Production Cost 352.22 1,12,71,111 404.167 1,01,04,167

Solution 3
(i) Material Purchase Budget
Particulars Material X Material Y
Materials consumed:
Product A @ 5 kg/4 kg per unit of 2,480 units 12,400 9,920
Product B @ 3 kg/6 kg per unit of 4,300 units 12,900 25,800
Total consumption (in kg) 25,300 35,720
Add: Closing Stock:
Materials X (25,300/20 days × 10 days) 12,650 -
Materials Y (35,720/20 days × 6 days) - 10,716
Less: Opening Stock of Raw Material (1,000) (500)
Quantity of materials to be purchased (in kg) 36,950 45,936
Rate per kg `4 `6
Material Purchase (in `) `1,47,800 `2,75,616

(ii) Wages Budget

Particulars Product A Product B
Units to be produced 2,480 4,300
Standard hours allowed per unit 3 5
Total standard hours allowed 7,440 21,500

Productive hours required for production (80% efficiency)

Product A (7,440 ÷ 80%) 9,300 -
Product A (21,500 ÷ 80%) - 26,875
Add: Non-productive down time @ 20% of productive hours 1,860 5,375
Total hours to be paid 11,160 32,250
Total hours to be paid (11,160 + 32,250) 43,410
Normal hours (4 weeks × 40 hours × 180 workers) 28,800
Overtime hours (43,410 – 28,800) 14,610

Wages to be paid:
Normal hours @ `25 per hour for 28,800 hours `7,20,000
Overtime hours @ `37.50 (25 + 50%) per hour for 14,610 hours `5,47,875
Total Wages paid (in `) `12,67,875

Working notes:

(1) Number of days in budget period = 4 weeks × 5 days = 20 days

(2) Calculation of number of units to be produced:

 SOLUTION TEST 10 - BUDGET AND BUDGETARY CONTROL 73
Particulars Product A Product B
Units to be sold 2,400 3,600
Add: Closing Stock:
Product A (2,400/20 days × 4 days) 480 -
Product B (3,600/20 days × 5 days) - 900
Less: Opening Stock (400) (200)
Units to be produced 2,480 4,300

Solution 4
1. Production Budget of ‘X’ for the Second Quarter
Particulars Bags (Nos.)
Budgeted Sales 1,50,000
Add: Desired Closing stock 33,000
Total Requirements 1,83,000
Less: Opening stock (45,000)
Required Production 1,38,000

2. Raw Materials Purchase Budget in Quantity as well as in ` for 1,38,000 Bags of ‘X’
Particulars ‘Y’ ‘Z’ Empty Bags
Production Requirements Per bag of ‘X’ 2.5 7.5 1.0
Requirement for Production 3,45,000 10,35,000 1,38,000
(1,38,000 × 2.5) (1,38,000 × 7.5) (1,38,000 × 1)
Add: Desired Closing Stock 78,000 1,41,000 84,000
Total Requirements 4,23,000 11,76,000 2,22,000
Less: Opening Stock (96,000) (1,71,000) (1,11,000)
Quantity to be Purchased 3,27,000 10,05,000 1,11,000
Cost per mtr./Bag `160 `30 `110
Cost of Purchase `5,23,20,000 `3,01,50,000 `1,22,10,000

3. Computation of Budgeted Variable Cost of Production of 1 Bag of ‘X’

Particulars Amount (`)
Raw Material:
Y 2.5 mtr @`160 400.00
Z 7.5 mtr @`30 225.00
Empty Bag 110.00
Direct Labour {(`70 ÷ 60 minutes) × 9 minutes} 10.50
Variable Manufacturing Overheads 60.00
Variable Cost of Production per bag 805.50
 SOLUTION TEST 11 - STANDARD COSTING 74

SOLUTION TEST 11 - STANDARD COSTING

Solution 1
(a) Calculation of Labour Variances:

1. Labour Cost Variance = (SH × SR) – (AH × AR)

= `3,90,000 - `4,73,500 = `83,500 A

2. Labour Rate Variance = (AH × SR) – (AH × AR)

= `4,14,000 – `4,73,500 = `59,500 A

3. Labour Efficiency Variance = (SH × SR) – (AHW × SR)

= `3,90,000 – `4,05,800 = `15,800 A

4. Labour Mix Variance = (RH × SR) – (AHW × SR)

= `4,17,300 – `4,05,800 = `11,500 F

5. Labour Yield Variance = (SH × SR) – (RH × SR)

= `3,90,000 – `4,17,300 = `27,300 A

6. Labour Idle Variance = (AHW × SR) – (AH × SR)

= `4,05,800 – `4,14,000 = `8,200 A

(b) Labour Rate Variance revised:

Labour rate Variance = (AH × SR) – (AH × AR)

Skilled = (18,000×6) – (5,000×5.5 + 13,000×7) = 10,500 A
Semi-Skilled = 33,000 × (4 – 3.5) = 16,500 F
Un-Skilled = 58,000 × (3 - 4) = 58,000 A

Total = 10,500 A + 16,500 F + 58,000 A = `52,000 A

Effect on Labour Rate Variance= Adverse effect decreased by `7,500 (`59,500A to `52,000 A)

Working notes:
1. Basic Calculation
Workers SH × SR RH × SR AHW × SR AH × SR AH × AR
Skilled 20,000 × 6 21,400 × 6 17,500 × 6 18,000 × 6 18,000 × 7
Semi-Skilled 30,000 × 4 32,100 × 4 32,300 × 4 33,000 × 4 33,000 × 3.5
Un-Skilled 50,000 × 3 53,500 × 3 57,200 × 3 58,000 × 3 58,000 × 4
Total `3,90,000 `4,17,300 `4,05,800 `4,14,000 `4,73,500

2. RH (Revised Hours):

Total Actual Hours Worked = 17,500 + 32,300 + 57,200 = 1,07,000 hours

Skilled = 1,07,000 × 2/10 = 21,400 hours

Semi-Skilled = 1,07,000 × 3/10 = 32,100 hours
Un-Skilled = 1,07,000 × 5/10 = 53,500 hours

3. SH (Standard hours) for actual output 10,000 units:

Skilled = 10,000 × 2 = 20,000 hours

Semi-Skilled = 10,000 × 3 = 30,000 hours
Un-Skilled = 10,000 × 5 = 50,000 hours
 SOLUTION TEST 11 - STANDARD COSTING 75
Solution 2
(a) Variable Overheads Variances:

Variable OH Cost variance = (SH × SR) - (AH × AR)

= (7,600 × `15) – `1,20,000 = 6,000 A
Variable OH Expenditure Variance = (AH × SR) - (AH × AR)
= (7,800 × `15) - `1,20,000 = 3,000 A

Variable OH Efficiency Variance = (SH × SR) - (AH × SR)

= (7,600 × `15) - (7,800 × `15) = 3,000 A

(b) Fixed Overhead Variances:

Fixed OH Cost Variance = (SH × SR) - (AH × AR)

= (7,600 × `50) – `3,90,000 = 10,000 A

Fixed OH Expenditure Variance = (BH × SR) - (AH × AR)

= `4,00,000 – `3,90,000 = 10,000 F

Fixed OH Volume Variance = (SH × SR) - (BH × SR)

= (7,600 × `50) – `4,00,000 = 20,000 A

Fixed OH Efficiency Variance = (SH × SR) - (AH × SR)

= (7,600 × `50) – (7,800 × `50) = 10,000 A

Fixed OH Capacity Variance = (AH × SR) - (CH × SR)

= (7,800 × `50) - (8,400 × `50) = 30,000 A

Fixed OH Calendar Variance = (CH × SR) - (BH × SR)

= (8,400 × `50) - `4,00,000 = 20,000 F

Working Notes:
(a) Standard Hours (SH) for 3,800 units = (8,000 hours ÷ 4,000 units) × 3,800 units
= 7,600 hours

(b) Standard Rate (SR) Variable OH = Budgeted Variable Overheads ÷ Budgeted Hours
= `1,20,000 ÷ 8,000 hours = `15 per hour

(c) Standard Rate (SR) Fixed OH = Budgeted Fixed Overheads ÷ Budgeted Hours
= `4,00,000 ÷ 8,000 hours = `50 per hour

(d) Calendar Hours = (8,000 hours ÷ 20 days) × 21 days

= 8,400 hours

(e) Standard Rate (SR) Fixed OH = Budgeted Fixed Overheads ÷ Budgeted Hours
= `4,00,000 ÷ 8,000 hours = `50 per hour

Solution 3
(a) Material Cost Variance = (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 ÷ 940 kg
 SOLUTION TEST 11 - STANDARD COSTING 76
Standard Price of Material A = `45

Working notes:
1. SQ of input for actual output = 1,480 kg ÷ 90% = 1,645 kgs

Materials A = 1,645 kgs × 8/14 = 940 kgs

Materials B = 1,645 kgs × 6/14 = 705 kgs

(b) 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) + (AQB × `30) = `60,000
(AQB × `30) = `60,000 - `40,500 = `19,500

Actual Quantity of Material B = `19,500 ÷ `30 = 650 kg.

(c) Actual Material Cost (A + B) = (AQ × AP) = `59,825

(AQA × APA) + (AQB × APB) = `59,825
(900 kg × APA) + (650 kg × ` 32.5) = `59,825
(900 kg × APA) + `21,125 = `59,825
(900 kg × APA) = `38,700

Actual Price of Material A = `38,700 ÷ 900 kg = `43

(d) Revised Standard Quantity (RQ) of A & B:

Materials A = (900 + 650) × 8/14 = 886 kgs

Materials B = (900 + 650) × 6/14 = 664 kgs

(e) Material Mix Variance (A + B) = (RQ × SP) – (AQ × SP)

= (886 × 45) + (664 × 30) – 60,000
= `210 A

Solution 4
1. Material Variances:

(a) Material Cost Variance = (SQ × SP) – (AQ × AP)

= (10,000 units × 0.5 meter × `60) – (5,700 × `58)
= `30,600 A

(b) Material Price Variance = (AQ × SP) – (AQ × AP)

= (5,700 × `60) – (5,700 × `58) = `11,400 F

(c) Material Usage Variance = (SQ × SP) – (AQ × SP)

= (10,000 units × 0.5 meter × `60) - (5,700 × `60)
= `42,000 A

2. Variable Overheads Variances:

Variable OH Cost variance = (SH × SR) - (AH × AR)

= (10,000 × 1 hour × `10) – `1,12,200 = `12,200 A

Variable OH Eff. Variance = (SH × SR) - (AH × SR)

`2,000 A = (10,000 × 1 hour × `10) - (AH × `10)
`2,000 A = `1,00,000 – 10 AH
 SOLUTION TEST 11 - STANDARD COSTING 77

Actual Hours = `1,02,000 ÷ `10 = 10,200 hours

Variable OH Exp. Variance = (AH × SR) - (AH × AR)
= (10,200 × `10) - `1,12,200 = 10,200 A

3. Labour Variances:

Labour Rate Variance = (AH × SR) – (AH × AR)

= (10,200 hours × `20) – `2,24,400 = `20,400 A

Labour Efficiency Variance = (SH × SR) – (AH × SR)

= (10,000 units × 1 hour × `20) – (10,200 hours × `20)
= `4,000 A

Labour Cost Variance = (SH × SR) – (AH × AR)

= (10,000 units × 1 hour × `20) – `2,24,400
= `24,400 A

Actual Labour rate = Actual Labour Cost ÷ AH

= `2,24,400 ÷ 10,200 hours = `22
 SOLUTION TEST 12 - MARGINAL COSTING 78

SOLUTION TEST – 12 MARGINAL COSTING

Solution 1
1. Statement Showing Optimum Contribution
Particulars Part A Part B
Maximum units to be manufactured and sold 6,666 8,125
Sales Price 145 115
Less: Materials 1.60 kgs. @ `12.50 per kg 20 20
Variable overheads Machine A 0.6/.25 hour @ `80 48 20
Variable overheads Machine B 0.5/.55 hour @ `100 50 55
Contribution per unit 27 20
Maximum Contribution (Contribution per unit × Max. units) 1,79,982 1,62,500

Calculation of maximum number of units that can be produced under various limiting factor:
Particulars Part A Part B
Machine A (4,000 hours) 6,666 16,000
(4,000 ÷ 0.6) (4,000 ÷ 0.25)
Machine B (4,500 hours) 9,000 8,181
(4,500 ÷ 0.5) (4,500 ÷ 0.55)
Alloy Available (13,000 kg.) 8,125 8,125
(13,000 ÷ 1.6) (13,000 ÷ 1.6)
Maximum number of part to be manufactured (least of all) 6,666 8,125

Spare Part A will optimize the contribution.

2. Statement Showing Revised Contribution

Particulars Part A
Parts to be manufactured 6,666
Machine A to be used (0.6 × 6,666) 4,000
Machine B to be used (0.5 × 6,666) 3,333
Underutilized machine hours (4,500 – 3,333) 1,167
Compensation for unutilized machine hours (1,167 × `60) 70,020
Reduction in price by 10% (6,666 × 145 × 10%) 96,657
Total revised contribution (1,79,982 + 70,020 – 96,657) 1,53,345

Solution 2
(a) Fixed production costs absorbed:
Budgeted fixed production costs `1,60,000
Budgeted output (Normal level of activity 800 units)
Therefore, the absorption rate (`1,60,000 ÷ 800) `200 per unit
Fixed cost recovered (During the first quarter, 220 units × `200) `44,000

(b) Under/over-recovery of overheads during the period:

Actual fixed production overhead (¼ of `1,60,000) `40,000
Absorbed fixed production overhead `44,000
Over-recovery of overheads `4,000

(c) Profit for the Quarter (Absorption Costing)

Activity Level ` `
Sales revenue (160 units × `2,000) 3,20,000
Production costs:
Variable (220 units × `800) 1,76,000
Fixed overheads absorbed (220 units × `200) 44,000 2,20,000
 SOLUTION TEST 12 - MARGINAL COSTING 79
Cost of production 2,20,000
Add: Opening stock Nil
Less: Closing stock (`2,20,000 ÷ 220 units) × 60 units (60,000)
Cost of goods sold 1,60,000
Less: Adjustment for over recovery of fixed overheads (4,000)
Add: Selling and distribution costs:
Variable (160 units × `400) 64,000
Fixed (¼ of `2,40,000) 60,000 1,24,000
Cost of sales 2,80,000
Profit (Sales – Cost of sales) 40,000

(d) Profit for the Quarter (Marginal costing)

Activity Level ` `
Sales revenue (160 units × `2,000) 3,20,000
Production costs:
Variable (220 units × `800) 1,76,000
Cost of production 1,76,000
Add: Opening stock Nil
Less: Closing stock (`1,76,000 ÷ 220 units) × 60 units (48,000)
Cost of goods sold 1,28,000
Add: Selling and distribution costs:
Variable (160 units × `400) 64,000
Cost of sales 1,92,000
Contribution (Sales – Variable Cost of sales) 1,28,000
Less: Fixed costs:
Production 40,000
Selling & distribution 60,000 (1,00,000)
Profit 28,000

(e) Difference in profit between both techniques is due to difference in valuation of closing stock:
Profit as per Marginal costing 28,000
Add: under valuation of closing stock in marginal costing (60,000 – 48,000) 12,000
Profit as per Absorption costing 40,000

Solution 3
(1) Calculation of Fixed Cost (by using data of year 2012-13):

Fixed cost = Contribution – profit = (Sales × PV Ratio) - 10% of Sale

= (`25,00,000 × 18%) - 10% of `25,00,000 = `2,00,000

(2) Calculation of Break Even Point:

Fixed Cost 2,00,000

BEP = = = `11,11,111.11
PV Ratio 18%

(3) Calculation of Amount of profit, if Sale is `30,00,000:

Profit = Contribution - Fixed Cost

= `30,00,000 × 18% - 2,00,000 = `3,40,000

(4) Sales, when desired profit is `4,75,000:

Fixed Cost  Desired Pr ofit 2,00,000  4,75,000

Sales = =
PV Ratio 18%
 SOLUTION TEST 12 - MARGINAL COSTING 80
= `37,50,000

(5) Margin of Safety at a profit of `2,70,000:

Pr ofit 2,70,000
MOS = = = `15,00,000
PV Ratio 18%

Working Note:
Difference in Pr ofit
PV Ratio = × 100
Difference in Sales
10% of 25,00,000  8 % of 20,00,000 90,000
= × 100 = × 100
25,00,000  20,00,000 5,00,000
= 18%

Solution 4
(a) Calculation of Contribution to sales ratio at existing sales mix:
Products
Total
A B C
Selling Price (`) 300 400 200
Less: Variable Cost (`) 150 200 120
Contribution per unit (`) 150 200 80
P/V Ratio 50% 50% 40%
Sales Mix 40% 35% 25%
Contribution per rupee of sales (P/V Ratio × Sales Mix) 20% 17.5% 10% 47.5%
Present Total Contribution (`60,00,000 × 47.5%) `28,50,000
Less: Fixed Costs `18,00,000
Present Profit `10,50,000
Present Break-Even Sales (`18,00,000/0.475) `37,89,473.68

(b) Calculation of Contribution to sales ratio at proposed sales mix:

Products
Total
A B E
Selling Price (`) 300 400 300
Less: Variable Cost (`) 150 200 150
Contribution per unit (`) 150 200 80
P/V Ratio 50% 50% 50%
Sales Mix 45% 30% 25%
Contribution per rupee of sales (P/V Ratio × Sales Mix) 22.5% 15% 12.5% 50%
Present Total Contribution (`64,00,000 × 50%) `32,00,000
Less: Fixed Costs `18,00,000
Present Profit `14,00,000
Present Break-Even Sales (`18,00,000/0.5) `36,00,000

(c) The proposed sales mix increases the total contribution to sales ratio from 47.5% to 50% and the total
profit from `10,50,000 to `14,00,000. Thus, the proposed sales mix should be accepted.
 SOLUTION TEST 13 - COST ACCOUNTING SYSTEM 81

SOLUTION TEST – 13 COST ACCOUNTING SYSTEM

Solution 1
Material Control A/c
Particulars ` Particulars `
To Balance b/d 1,24,000 By Work-in-process A/c 4,77,400
To Cost ledger control A/c 4,80,100 By Production overheads A/c 41,200
(Purchases) By Administration overhead A/c 3,400
By Selling and distribution OH A/c 7,200
By Balance c/d 74,900
6,04,100 6,04,100

Wages Control A/c

Particulars ` Particulars `
To Cost ledger control A/c 2,14,300 By Work-in-process A/c 1,49,300
(`1,49,300 + `65,000) By Production overheads A/c 65,000
2,14,300 2,14,300

Production Overhead A/c

Particulars ` Particulars `
To Balance b/d 8,400 By Work-in-process A/c 3,59,100
To Cost Ledger control A/c: By Balance c/d 6,150
Transportation 8,400
Production overheads 2,42,250 2,50,650
To Wages control A/c 65,000
To Material control A/c 41,200
3,65,250 3,65,250

Work-in-Progress A/c
Particulars ` Particulars `
To Balance b/d 62,500 By Finished Goods A/c 9,58,400
To Material control A/c 4,77,400 By Balance c/d
To Wages control A/c 1,49,300 1,42,800
To Production overheads A/c 3,59,100
To Administration overheads A/c 52,900
11,01,200 11,01,200

Administration Overhead A/c

Particulars ` Particulars `
To Cost Ledger control A/c 74,000 By Balance b/d 12,000
To Material control A/c 3,400 By Work-in-process A/c 52,900
To Balance c/d 2,300 By Cost of sales A/c 14,800
79,700 79,700

Finished Goods A/c

Particulars ` Particulars `
To Balance c/d 1,24,000 By Cost of sales A/c 9,77,300
To Work-in-process A/c 9,58,400 By Balance c/d 1,05,100
10,82,400 10,82,400

Selling and Distribution Overhead A/c

Particulars ` Particulars `
To Balance b/d 6,250 By Cost of Sales A/c 82,000
To Cost Ledger control A/c 64,200
To Material control A/c 7,200
 SOLUTION TEST 13 - COST ACCOUNTING SYSTEM 82
To Balance c/d 4,350
82,000 82,000

Cost of Sales A/c

Particulars ` Particulars `
To Balance c/d 9,77,300 By Costing profit & loss A/c 10,74,100
To Administration overheads A/c 14,800
To Selling & distribution OH A/c 82,000
10,74,100 10,74,100

Costing Profit & Loss A/c

Particulars ` Particulars `
To Cost of sales A/c 10,74,100 By Cost ledger control A/c 14,43,000
To Cost ledger control A/c (b.f.) 3,68,900 (Sales)
(Profit for the period)
14,43,000 14,43,000

Cost Ledger Control A/c

Particulars ` Particulars `
To Costing profit and loss A/c 14,43,000 By Balance b/d 3,13,150
To Balance c/d 3,22,300 By Material control A/c 4,80,100
By Wages Control A/c 2,14,300
By Production overhead A/c 2,50,650
By Administration overhead A/c 74,000
By Selling & distribution OH A/c 64,200
By Costing profit and loss A/c 3,68,900
17,65,300 17,65,300

Trial Balance as at 30th September, 2017

Name of Account Dr. Cr.
Material Control A/c 74,900 -
Work-in-process A/c 1,42,800 -
Finished Goods A/c 1,05,100 -
Production Overheads A/c 6,150 -
Administration Overhead A/c - 2,300
Selling and Distribution Overhead A/c - 4,350
Cost Ledger Control A/c - 3,22,300
Total 3,28,950 3,28,950

Solution 2
Raw Material Control A/c
Particulars Amount Particulars Amount
To Bal b/d 48,836 By WIP A/c 17,000
To Cost Ledger Control A/c 22,422 By Cost Ledger Control A/c 1,000
By Cost Ledger Control A/c (Loss) 1,300
By Bal c/d 51,958
71,258 71,258

Wages Control A/c

Particulars Amount Particulars Amount
To Cost Ledger Control A/c 18,370 By WIP A/c 18,370
18,370 18,370

Factory Overheads Control A/c

Particulars Amount Particulars Amount
 SOLUTION TEST 13 - COST ACCOUNTING SYSTEM 83
To Cost Ledger Control A/c 11,786 By WIP A/c 11,786
11,786 11,786

Work-in-Process Control A/c

Particulars Amount Particulars Amount
To Bal b/d 14,745 By Finished Stock Control A/c 36,834
To Factory OH Control A/c 11,786 By Cost Ledger Control A/c
To Wages Control A/c 18,370 (Rejected) 1,800
To Raw Material Control A/c 17,000 By Bal c/d 23,267
61,901 61,901

Finished Stock Control A/c

Particulars Amount Particulars Amount
To Bal b/d 21,980 By Cost of Sales 42,000
To Work-in-Progress Control A/c 36,834 By Bal c/d 19,814
To Cost of Sales (Return) 3,000
61,814 61,814

Cost of Sales A/c

Particulars Amount Particulars Amount
To Finished Goods Control A/c 42,000 By Finished Goods Control A/c 3,000
By Bal c/d 39,000
42,000 42,000

Cost Ledger Control A/c

Particulars Amount Particulars Amount
To Raw Material Control A/c 1,000 By Bal b/d 85,561
(Returns) By Raw Material Control A/c 22,422
To Raw Materials Control A/c (Loss) 1,300 By Wages Control A/c 18,370
To WIP Control A/c (Rejected) 1,800 By Factory OH Control A/c 11,786
To Bal c/d 1,34,039
1,38,139 1,38,139

Solution 3
Stores Ledger Control Account
Particulars Amount Particulars Amount
To Balance b/d 32,000 By WIP Ledger Control A/c 1,60,000
To Cost Ledger Control A/c 1,58,000 By Work Overhead Control A/c 20,000
To Work in progress Control A/c 80,000 By Costing P/L A/c 6,000
(assumed abnormal)
By Balance c/d 84,000
2,70,000 2,70,000

Work in Progress Ledger Control Account

Particulars Amount Particulars Amount
To Balance b/d 60,000 By Stores Control A/c 80,000
To Stores Ledger Control A/c 1,60,000 By Costing Profit and Loss A/c 4,00,000
To Direct Wages Control A/c 65,000 (i.e., cost of sales)
To Works Overhead Control A/c 2,40,000 By Balance c/d 45,000
5,25,000 5,25,000

Works Overhead Control Account

Particulars Amount Particulars Amount
To Cost Ledger Control A/c 2,50,000 By WIP Ledger Control A/c 2,40,000
To Store Ledger Control A/c 20,000 By Costing Profit & Loss A/c 35,000
 SOLUTION TEST 13 - COST ACCOUNTING SYSTEM 84
To Wages Control A/c 5,000 (under recovery)
2,75,000 2,75,000

Costing Profit & Loss Account

Particulars Amount Particulars Amount
To WIP Control A/c 4,00,000 By Cost Ledger Control A/c 4,40,000
To Works Overhead Control A/c 35,000 (4,00,000 + 10%)
To Stores Ledger Control A/c 6,000 By Loss 1,000
4,41,000 4,41,000

Recording of transaction in financial books:

Profit & Loss Account
Particulars Amount Particulars Amount
To Opening stock: By Sales 4,40,000
Stores 32,000 By Closing stock:
WIP 60,000 92,000 Stores 84,000
To Purchases 1,58,000 WIP 45,000 1,29,000
To Wages incurred 70,000 By Income from investment 10,000
To Overheads incurred 2,50,000 By Loss 11,000
To Loss on sale of capital asset 20,000
5,90,000 5,90,000

Reconciliation statement
Particulars `
Loss as per Cost Accounts (1,000)
Add: Income from investment recorded in financial accounts 10,000
Less: Loss on sale of capital assets only (20,000)

Loss as per Financial Accounts (11,000)

Solution 4
Creditors A/c
Particulars ` Particulars `
To Cash or Bank A/c 5,80,000 By Balance b/d 25,000
To Balance c/d 40,000 By Stores Ledger Control A/c 5,95,000
(Balancing figure)
6,20,000 6,20,000

Stores Ledger Control A/c

Particulars ` Particulars `
To Balance b/d 40,000 By Work-in-progress Control A/c 5,70,000
To Creditors A/c 5,95,000 (Balancing figure)
(Purchase: figure from creditor A/c) By Balance b/d 65,000
6,35,000 6,35,000

Work-in-progress Ledger Control A/c

Particulars ` Particulars `
To Balance b/d 50,000 By Finished Goods Control A/c (b.f.) 10,05,000
To Stores Ledger Control A/c 5,70,000 By Balance c/d:
To Wages Control A/c 3,20,000 Material `35,000
To Factory Overhead Control A/c 1,28,000 Labour (400 hrs × `50) `20,000
Overheads (400 hrs × `20) `8,000 63,000
10,68,000 10,68,000

Wages Control A/c

 SOLUTION TEST 13 - COST ACCOUNTING SYSTEM 85
Particulars ` Particulars `
To Bank A/c 4,00,000 By WIP Ledger Control A/c 3,20,000
(8,000 hours × 80% × 50)
By Factory Overhead Control A/c 80,000
(8,000 hours × 20% × 50)
4,00,000 4,00,000

Factory Overhead Control A/c

Particulars ` Particulars `
To Bank A/c 60,000 By WIP Ledger Control A/c 1,28,000
To Wages Control A/c 80,000 (6,400 hrs × `20)
By Costing P/L A/c 12,000
(Under-absorbed Overheads)
1,40,000 1,40,000

Working notes:

1. Direct Labour Hour Rate = Labour Cost ÷ Labour Hour

= `4,00,000 ÷ 8,000 hours = `50 per hour

2. Factory Overhead Rate = Budgeted Factory Overheads ÷ Budgeted Labour Hours

= `20,80,000 ÷ 1,04,000 = `20 per hour
 SOLUTION TEST 14 - RECONCILIATION STATEMENT 86

SOLUTION TEST – 14 RECONCILIATION STATEMENT

Solution 1
(1) Cost Sheet
Particulars Amount (`)
Direct materials @ `13 for 10,000 units 1,30,000
Direct wages @ `7.50 for 10,000 units 75,000
Prime Cost 2,05,000
Factory overheads at 60% of wages 45,000
Factory Cost 2,50,000
Administrative overheads at 20% of factory cost 50,000
Cost of Production 3,00,000
Add: Opening stock of finished goods (500 units × `22.50) 11,250
Less: Closing stock of finished goods (7,500)
Cost of Goods Sold 3,03,750
Selling expenses at `3 per unit of 10,250 units 30,750
Cost of sales 3,34,500
Profit (balancing figure) 24,250
Sales 3,58,750

(2) Reconciliation Statement

Particulars Amount Amount
Profit as per Cost Accounts 24,250

Add: Selling expenses over recovered (30,750 – 27,500) 3,250

Opening stock over valued (11,250 – 8,750) 2,500
Interest received 125
Dividend received 5,000 10,875

Less: Factory overheads under recovered (47,375 – 45,000) 2,375

Administration overheads under recovered (53,000 – 50,000) 3,000
Closing stock over valued (7,500 – 6,250) 1,250
Bad debts 2,000
Preliminary expenses 2,500 (11,125)

Profit as per Financial Accounts 24,000

Working note:
(1) Calculation of units produced = Units sold + Closing finished units – Opening finished units
= 10,250 + 250 – 500 = 10,000 units

Cost of Production
(2) Value of closing finished goods = Units Produced
× Closing finished goods units
3,00,000
= 10,000
× 250 = `7,500

Solution 2
Memorandum Reconciliation Account
Particulars Amount Particulars Amount
To Net Loss as per Cost books 3,47,000 By Admin. OH over recovered 60,000
To Factory OH under absorbed 40,000 By Interest on investment 96,000
To Depreciation under charged 50,000 By Transfer fees 24,000
To Income Tax 54,000 By Stores adjustment 14,000
To Interest on loan 2,45,000 By Dividend received 32,000
By Net loss as per Financial books 5,10,000
7,36,000 7,36,000
 SOLUTION TEST 14 - RECONCILIATION STATEMENT 87
Solution 3
Reconciliation Statement
Particulars ` `
Loss as per Cost Records (35,400)

Add: Factory overhead over recovered 1,35,000

Dividend received 20,000
Bank interest credited in financial A/c 13,600
Opening stock overvalued in cost A/c (1,65,000 – 1,45,500) 19,500
Closing stock undervalued in cost A/c (1,32,000 – 1,25,000) 7,000
Notional rent charged in cost A/c 60,000 2,55,100

Less: Administrative overheads under recovered 25,500

Depreciation under charged in cost A/c 26,000
Loss due to obsolescence in Financial A/c 16,800
Income Tax provided 43,600
Goodwill w/o in financial A/c 25,000
Provisions for doubtful debt in financial A/c 15,000 (1,51,900)

Profit as per Financial Books 67,800

 SOLUTION TEST 15 - ACTIVITY BASED COSTING 88

SOLUTION TEST – 15 ACTIVITY BASED COSTING

Solution 1
Statement Showing Production Cost Using ABC Method
Particulars A (`) B (`) C (`)
Number of units 10,000 20,000 30,000
Direct Material @ `50/40/40 per unit 5,00,000 8,00,000 12,00,000
Direct Labour @ `30/40/50 per unit 3,00,000 8,00,000 15,00,000

Production Overhead:
Stores receiving @ `236.8 per requisition 71,040 1,06,560 1,18,400
(236.8 × 300) (236.8 × 450) (236.8 × 500)
Inspection @ `298 per production run 2,23,500 3,12,900 3,57,600
(298 × 750) (298 × 1,050) (298 × 1,200)
Dispatch @ `280 per order 50,400 75,600 84,000
(280 × 180) (280 × 270) (280 × 300)
Machine setup @ `100 per setup 3,60,000 3,90,000 4,50,000
(100 × 360) (100 × 390) (100 × 450)
Total Production Cost 15,04,940 24,85,060 37,10,000
Production Cost Per Unit 150.49 124.25 123.67

Calculation of Activity rate:

Activity Cost Pool Amount Cost Driver Volume Cost Driver Rate
Stores Receiving `2,96,000 Purchase requisitions 1,250 `236.80 per requisition
Inspection `8,94,000 Number of production runs 3,000 `298 per production run
Dispatch `2,10,000 Orders executed 750 `280 per order
Machine Setup `12,00,000 Number of setups 1,200 `100 per setup

Solution 2
1. Statement of Operating income and Operating income as a % 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 Drinks Fresh Packaged Total
(`) Produce (`) Foods (`) (`)
Revenues 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost of Goods sold (COGS) 30,00,000 75,00,000 45,00,000 1,50,00,000
Support cost (30% of COGS) 9,00,000 22,50,000 13,50,000 45,00,000
Total cost 39,00,000 97,50,000 58,50,000 1,95,00,000
Operating income (Sales – Total cost) 67,500 7,53,000 1,99,500 10,20,000
% of Operating income to Sales 1.70% 7.17% 3.30% 4.97%

Working notes:
(a) Calculation of Cost Driver Rate
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

(b) Total support cost = 60,000 + 7,80,000 + 12,60,000 + 8,64,000 + 15,36,000

= 45,00,000
(c) Percentage of support cost to COGS = (45,00,000 ÷ 1,50,00,000) × 100 = 30%
 SOLUTION TEST 15 - ACTIVITY BASED COSTING 89
2. Statement of Operating income and Operating income as a % of revenues for each product line
(When support costs are allocated to product lines using an activity based costing system)
Soft Drinks Fresh Packaged Total
(`) Produce (`) Foods (`) (`)
Revenues 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost of Goods sold (COGS) 30,00,000 75,00,000 45,00,000 1,50,00,000
Bottle return costs 60,000 - - 60,000
Ordering cost (360 : 840 : 360) 1,80,000 4,20,000 1,80,000 7,80,000
Delivery cost (300 : 2190 : 660) 1,20,000 8,76,000 2,64,000 12,60,000
Shelf stocking cost (540 : 5400 : 2700) 54,000 5,40,000 2,70,000 8,64,000
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 35,54,000 1,04,40,000 55,20,000 1,95,00,000
Operating income (Sales – Total cost) 4,27,500 63,000 5,29,500 10,20,000
% of Operating income to Sales 10.78% 0.60% 8.75% 4.97%

Solution 3
1. Statement Showing “Unit Cost and Total Cost as per Absorption Costing”
BABYSOFT- BABYSOFT- BABYSOFT-
Particulars
Gold Pearl Diamond
Number of units 4,000 3,000 2,000
Direct Materials 167.50 215.50 248.50
Direct Labour [(30, 40, 60 minutes) @ `10 per hour 5.00 6.67 10.00
Production OH [(30, 40, 60 minutes) @ `33 per hour 16.50 22.00 33.00
Cost per unit 189.00 244.17 291.50
Total cost (Cost per unit × number of units) 7,56,000 7,32,510 5,83,000

Working notes:

(a) Total Direct labour hours = 4,000 units × 30/60 + 3,000 × 40/60 + 2,000 × 1 hour
= 2,000 hours + 2,000 hours + 2,000 hours
= 6,000 hours

(b) Overhead rate = Budgeted overheads ÷ Budgeted labour hours

= `1,98,000 ÷ 6,000 hours = `33/direct labour hour

(c) Calculation of Direct material cost

BABYSOFT- Gold (`) BABYSOFT- Pearl (`) BABYSOFT- Diamond (`)
120.00 165.00 195.00
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)
4.50 4.50 4.50
Filtered water
(30 × 15/100) (30 × 15/100) (30 × 15/100)
3.00 6.00 9.00
Chemicals
(30 × 10/100) (50 × 12/100) (60 × 15/100)
Total cost 167.50 215.50 248.50

2. Statement Showing “Unit Cost and Total Cost as per ABC Costing”
BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT-
Particulars
Diamond
Number of units 4,000 3,000 2,000
Direct Materials 167.50 215.50 248.50
 SOLUTION TEST 15 - ACTIVITY BASED COSTING 90
Direct Labour 5.00 6.67 10.00
Production OH:
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)
Cost per unit 192.48 243.70 285.72
Total cost 7,69,920 7,31,100 5,71,440

Working notes:

(a) Forklifting rate = `58,000 ÷ 9,84,000 grams = `0.06 per gram

(b) Supervising rate = `60,000 ÷ 6,000 hours labour hour = `10 labour hour

(c) Utilities rate = `80,000 ÷ 47,000 machine operations = `1.70 per machine operations

(d) Calculation of Total Weight and Total Operations:

BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Diamond Total
Quantity (units) 4,000 3,000 2,000 -
Weight per unit (grams) 108 106 117 -
{(60×0.8)+20+30+10} {(55×0.8)+20+30+12} {(65×0.8)+20+30+15}
Total weight (grams) 4,32,000 3,18,000 2,34,000 9,84,000
(4,000 × 108) (3,000 × 106) (2,000 × 117)
Total operations 20,000 15,000 12,000 47,000
(4,000 × 5) (3,000 × 5) (2,000 × 6)

3. 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 accurate.
 SOLUTION SAMPLE PAPER 1 91

SOLUTION SAMPLE PAPER 1

Solution 1 (a)
(i) Calculation of Fixed Cost (by using data of year 2012-13):
Fixed cost = Contribution – profit
= (Sales × PV Ratio) - 10% of Sale
= (`25,00,000 × 18%) - 10% of `25,00,000 = `2,00,000

(ii) Calculation of Break Even Point:

Fixed Cost 2,00,000
BEP = = = `11,11,111.11
PV Ratio 18%

(iii) Calculation of Amount of profit, if Sale is `30,00,000:

Profit = Contribution - Fixed Cost
= `30,00,000 × 18% - 2,00,000 = `3,40,000

(iv) Sales, when desired profit is `4,75,000:

Fixed Cost  Desired Pr ofit
Sales =
PV Ratio
2,00,000  4,75,000
= = `37,50,000
18%

(v) Margin of Safety at a profit of `2,70,000:

Pr ofit 2,70,000
MOS = = = `15,00,000
PV Ratio 18%

Working Note:
(i) Calculation of PV Ratio:
Difference in Pr ofit 10% of 25,00,000  8 % of 20,00,000
PV Ratio = × 100 = × 100
Difference in Sales 25,00,000  20,00,000
90,000
= × 100 = 18%
5,00,000

Solution 1 (b)
(i) Statement Showing Most Economical Purchase Level
Cost of Purchase Ordering Cost Carrying Cost
Order No. of Orders
(500 × Price per (No. of Orders (½ × ROQ × Price Total Cost
Size (A/ROQ)
Tonne) × `12,500) × 25%)
40 12.5 48,00,000 1,56,250 48,000 50,04,250
50 10 46.80,000 1,25,000 58,500 48,63,500
100 5 45,60,000 62,500 1,14,000 47.36,500
200 2.5 44,40,000 31,250 2,22,000 46,93,250
300 1.67 43,20,000 20,875 3,24,000 46,64,875

Most economical purchase level is 300 units having lower total cost.

2AO 2  500  12,500

(ii) EOQ = = = 69 tonnes
C 10,500  25%

Solution 1 (c)
 SOLUTION SAMPLE PAPER 1 92

(i) Production Budget (Quarterly)

Particular IQ II Q III Q IV Q
70% of current quarter 12,600 15,400 17,500 18,900
30% of following quarter 6,600 7,500 8,100 7,400 (b.f.)
Production (in units) 19,200 22,900 25,600 *26,300

*Production in Quarter IV = Total production – Production upto III quarter

= 94,000 – 67,700 = 26,300 units

Total production = Units to be sold + Closing inventory – Opening inventory

= (18,000 + 22,000 + 25,000 + 27,000) + 8,000 – 6,000
= 94,000 units

Production upto Quarter III = 19,200 + 22,900 + 25,600 = 67,700 units

Fixed cost 2,20,000

(ii) B.E.P. (in units) = =
Conttribution P.U. 5.50
= 40,000 units

Calculation of fixed cost = 1,10,000 labour hours × `2 per hour = 2,20,000

Contribution per unit = Sale price per unit – Variable cost per unit
= 40 – 34.50 = `5.50 p.u.

In second quarter company is expected to achieve break - even point i.e. 40,000 units (18,000 + 22,000).

Solution 1 (d)
Memorandum Reconciliation Account
Particulars ` Particulars `
To Net loss as per Costing Books 48,700 By Admin OH over absorbed 65,000
To Factory OH under absorbed 30,500 By Depreciation over charged 45,000
To Income tax provision 52,400 (2,70,000 - 2,25,000)
To Obsolescence loss 20,700 By Transfer fee 10,200
To Closing stock over valued 9,500 By Notional rent 54,000
To Net profit as per Financial Books 35,400 By Opening stock over valued 23,000
1,97,200 1,97,200

Solution 2 (a)
(1) Statement Showing Overhead Cost per unit “Traditional Method”
Particulars Gel Pen Ball Pen
Overheads @ `20 per machine hour `4,80,000 `10,80,000
(24,000 × 20) (54,000 × 20)
Number of units 5,500 24,000
Overheads Cost Per Unit `87.27 `45.00

Overheads Recovery Rate = Annual Overheads ÷ Annual Machine Hours

= (4,75,020 + 5,79,988 + 5,04,992) ÷ (24,000 + 54,000)
= `15,60,000 ÷ 78,000 = `20 per machine hour

(2) Statement Showing Overhead Cost per unit “Activity Based Costing”
Activity Cost Pool Cost Driver Ratio Amount Gel Pen Ball Pen
Volume related activity Machine Hours 24 : 54 4,75,020 1,46,160 3,28,860
costs
Set up related cost No. of Setups 30 : 56 5,79,988 2,02,321 3,77,667
Purchase related cost No. of Purchase 240 : 448 5,04,992 1,76,160 3,28,832
 SOLUTION SAMPLE PAPER 1 93

Orders
Total Cost 5,24,641 10,35,359
÷ Total Units 5,500 24,000
Overheads Cost Per Unit `95.39 `43.14

Note: Machine hours is used as Cost driver of volume related activity cost (as per ICAI suggested answer).

(3) Difference in overheads cost per unit under both methods

Particulars Gel Pen Ball Pen
Overheads cost per unit (Traditional method) `87.27 `45.00
Overheads cost per unit (Activity based cost) `95.39 `43.14
Difference in overheads cost per unit - `8.12 + `1.86

Solution 2 (b)
(i) Contract A/c
For the period 01.04.09 to 31.03.10
Particulars Amount Particulars Amount
To Materials issued 4,56,000 By Work in progress:
To Labour: Work certified 12,75,000
Paid 3,05,000 Work uncertified 40,000
Add: O/s 24,000 3,29,000 By Material at site 30,000
To Depreciation of plant 45,000
(2,25,000 × 20%)
To Expenses:
Paid 1,00,000
Less: Prepaid (22,500) 77,500
To Notional profit 4,37,500
13,45,000 13,45,000

(ii) Calculation of Estimated Profit:

Particulars Cost to date Further estimated cost
Materials 4,26,000 7,69,000
(4,56,000 – 30,000) (30,000 + 8,14,000 – 75,000)
Labour 3,29,000 3,93,500
(3,05,000 + 24,000) (3,80,000 – 24,000 + 37,500)
Depreciation 45,000 18,000
(2,25,000 × 20%) (1,50,000 – 20%) × 20% × 9/12)
Expenses 77,500 2,22,500
(1,00,000 – 22,500) (1,75,000 + 22,500 + 25,000)
Total 8,77,500 14,03,000

Estimated Profit = Contract price – Total cost

= 27,12,500 – (8,77,500 + 14,03,000) = 4,32,000

Solution 3 (a)
(a) Labour Cost Variance = (SH × SR) – (AH × AR)
= `3,24,800 - `3,99,360 = `74,560 A

(b) Labour Rate Variance = (AH × SR) – (AH × AR)

= `3,46,112 – `3,99,360 = `53,248 A

(c) Labour Efficiency Variance = (SH × SR) – (AHW × SR)

= `3,24,800 – `3,39,456 = `14,656 A

(d) Labour Mix Variance = (RH × SR) – (AHW × SR)

= `3,31,296 – `3,39,456 = `8,160 A
 SOLUTION SAMPLE PAPER 1 94

(e) Labour Yield Variance = (SH × SR) – (RH × SR)

= `3,24,800 – `3,31,296 = `6,496 A

(f) Labour Idle Variance = (AHW × SR) – (AH × SR)

= `3,39,456 – `3,46,112 = `6,656 A

Working notes:
Basic Calculation
Workers SH × SR RH × SR AHW × SR AH × SR AH × AR
A 100 × 8 × 6 × 25 102 × 8 × 6 × 25 102 × 8 × 8 × 25 104 × 8 × 8 × 25 104 × 8 × 8 × 30
B 100 × 8 × 8 × 20 102 × 8 × 8 × 20 102 × 8 × 6 × 20 104 × 8 × 6 × 20 104 × 8 × 6 × 24
C 100 × 8 × 6 × 16 102 × 8 × 6 × 16 102 × 8 × 6 × 16 104 × 8 × 6 × 16 104 × 8 × 6 × 16
Total `3,24,800 `3,31,296 `3,39,456 `3,46,112 `3,99,360

Solution 3 (b)
Statement Showing Overhead Rate per Labour Hour
Basis of Production Departments Service Departments
Items
Charge A B C D E
Direct materials Allocation - - - 6,000 5,000
Direct wages Allocation - - - 2,000 4,000
Indirect materials Materials 5,000 2,500 4,750 1,500 1,250
Indirect wages Wages 3,750 3,750 1,000 500 1,000
Depreciation:
Machinery Value 6,000 10,000 4,000 2,500 2,500
Building Area 1,500 1,000 1,000 500 1,000
Rent, rates, taxes Area 3,000 2,000 2,000 1,000 2,000
Power for machine H.P. 5,000 6,000 3,000 500 500
Power for lighting Light points 150 100 100 50 100
General expenses Labour hours 5,000 5,000 2,000 1,000 2,000
Total Overheads Prim. Dist. 29,400 30,350 17,850 15,550 19,350
Department D [Link] 6,220 3,110 4,665 (15,550) 1,555
Department E [Link] 6,272 6,271 8,362 - (20,905)
Total OH Secon. Dist. 41,892 39,731 30,877 - -
÷ Labour hours - 5,000 5,000 2,000 - -
OH rate per labour hour `8.3784 `7.9462 `15.4385 - -

Solution 4 (a)
Process A A/c
Particulars Total Cost Profit Particulars Total Cost Profit
To Balance b/d 5,000 5,000 - By Process B 28,800 21,600 7,200
To Materials 9,000 9,000 - A/c
To Wages 5,000 5,000 -
Prime Cost 19,000 19,000 -
- Closing Stock (2,000) (2,000) -
Prime Cost 17,000 17,000 -
To Factory OH 4,600 4,600 -
Process Cost 21,600 21,600 -
To Profit @ 25% 7,200 - 7,200
on transfer price
28,800 21,600 7,200 28,800 21,600 7,200

Process B A/c
Particulars Total Cost Profit Particulars Total Cost Profit
To Balance b/d 5,500 4,500 1,000 By Finished 61,675 41,550 20,125
To Process A A/c 28,800 21,600 7,200 Stock A/c
 SOLUTION SAMPLE PAPER 1 95

To Materials 9,500 9,500 -

To Wages 6,000 6,000 -
49,800 41,600 8,200
- Closing Stock (2,490) (2,080) *(410)
Prime Cost 47,310 39,520 7,790
To Factory OH 2,030 2,030 -
Process Cost 49,340 41,550 7,790
To Profit @ 20% 12,335 - 12,335
on transfer price
61,675 41,550 20,125 61,675 41,550 20,125

* Stock reserve in closing stock of Process B = 8,200/

49,800 × 2,490 = 410
* Stock reserve in closing stock of FG = 20,125/61,675 × 5,000 = 1,639

Finished Stock A/c

Particulars Total Cost Profit Particulars Total Cost Profit
To Balance b/d 10,000 6,000 4,000 By Costing P 75,000 44,189 30,811
To Process B A/c 61,675 41,550 20,125 & L A/c
- Closing Stock (5,000) (3,361) *(1,639)
COGS 66,675 44,189 22,486
To Profit (b.f.) 8,325 - 8,325
75,000 44,189 30,811 75,000 44,189 30,811

Solution 4 (b)
Statement Showing Earning of Worker A and B
Particulars A B
Basic Wages 10,000 16,000
Dearness Allowance (50% of Basic) 5,000 8,000
Overtime Wages (W.N.) 1,500 -
Gross Wages Earned 16,500 24,000
Less: Employee’s Contribution to Provident Fund (8% of basic) (800) (1,280)
Less: Employee’s Contribution ESI (2% of basic) (200) (320)
Net Wages Earned 15,500 22,400

Statement Showing Labour Cost Chargeable to Jobs

Particulars Job X Job Y Job Z
Worker A:
Ordinary Wages 16,000 in 4 : 3 : 3 6,400 4,800 4,800
Overtime 1,500 for Job Y - 1,500 -
Worker B:
Ordinary Wages 25,600 in 5 : 2 : 3 12,800 5,120 7,680
Labour Cost chargeable 19,200 11,420 12,480

Working Note:
1. Statement Showing Labour Cost Excluding Overtime
Particulars A B
Basic Wages 10,000 16,000
Dearness Allowance (50% of Basic) 5,000 8,000
Add: Employer’s Contribution to Provident Fund (8% of basic) 800 1,280
Add: Employer’s Contribution ESI (2% of basic) 200 320
Net Wages Earned 16,000 25,600

2. Overtime wages of worker A = (15,000 ÷ 200 hours) × 10 hours × 2 = 1,500

Solution 5 (a)
 SOLUTION SAMPLE PAPER 1 96

Stores Ledger Control A/c

Particulars Amount Particulars Amount
To Balance b/d 54,000 By WIP Ledger Control A/c 2,88,000
To Cost Ledger Control A/c 2,88,000 By Overhead Control A/c 36,000
To WIP Ledger Control A/c 1,44,000 By Overhead Control A/c 10,800
(Deficiency assumed normal)
By Balance c/d 1,51,200
4,86,000 4,86,000

WIP Ledger Control A/c

Particulars Amount Particulars Amount
To Opening balance 1,08,000 By Stores Ledger Control A/c 1,44,000
To Stores Ledger Control A/c 2,88,000 By Costing Profit & Loss A/c 7,20,000
To Wages Control A/c 1,08,000 By Balance c/d 72,000
To Overhead Control A/c 4,32,000
9,36,000 9,36,000

Overhead Control A/c

Particulars Amount Particulars Amount
To Cost Ledger Control A/c 4,50,000 By WIP Ledger Control A/c 4,32,000
To Stores Ledger Control A/c 36,000 By Costing P & L A/c 82,800
To Stores Ledger Control A/c 10,800
To Wages Control A/c 18,000
5,14,800 5,14,800

Costing P/L A/c

Particulars Amount Particulars Amount
To WIP Ledger Control A/c 7,20,000 By Cost Ledger Control A/c 8,28,000
To Overhead Control A/c 82,800 (Sales: 7,20,000 + 15%)
To Cost Ledger Control A/c 25,200
(Profit)
8,28,000 8,28,000

Wages Control A/c

Particulars Amount Particulars Amount
To Cost Ledger Control A/c 1,26,000 By WIP Ledger Control A/c 1,08,000
By Overhead Control A/c 18,000
1,26,000 1,26,000

Solution 5 (b)
(1) Cost Sheet
Particulars First 3 Months Next 9 Months Total
Number of Units (W.N. 1) 4,500 21,600 26,100
Raw Materials @ `40 per unit 1,80,000 8,64,000 10,44,000
Less: Sale of Scrap of Material @ `5 per unit (22,500) (1,08,000) (1,30,500)
Raw Materials Consumed 1,57,500 7,56,000 9,13,500
Direct Labour (W.N. 2) 1,44,000 6,48,000 7,92,000
Prime Cost 3,01,500 14,04,000 17,05,500
Factory Overheads:
Fixed 90,000 2,70,000 3,60,000
Variable @ `10 per unit 45,000 2,16,000 2,61,000
Semi Variable (W.N. 3) 27,000 1,51,200 1,78,200
Works Cost 4,63,500 20,41,200 25,04,700
Administrative Overheads 1,29,600 3,88,800 5,18,400
 SOLUTION SAMPLE PAPER 1 97

Cost of Production 5,93,100 24,30,000 30,23,100

Selling and Distribution OH @ `8 per unit 36,000 1,72,800 2,08,800
Cost of Sales 6,29,100 26,02,800 32,31,900

(2) Statement Showing Selling Price Per Unit

Particulars Amount
Sales Value for First Three Months (4,500 × 145) 6,52,500
Less: Cost of Sales for First Three Months (6,29,100)
Profit for First Three Months 23,400

Required Profit from Next Nine Months (8,76,600 – 23,400) 8,53,200

Cost of Sales for Next Nine Months 26,02,800
Sales Value for Next Nine months 34,56,000
÷ Number of Units for Next Nine Months ÷ 21,600
Selling Price Per Unit for Next Nine Months `160.00

Working Notes:

1. Calculation of production per annum:

50% for 3 months (36,000 units × 50% × 3/12) = 4,500 units
80% for 9 months (36,000 units × 80% × 9/12) = 21,600 units
Total production for the year = 26,100 units

2. Calculation of Labour cost:

First Three Months (4,500 × 30 or 48,000 × 3) whichever is higher = 1,44,000
Next Nine Months (21,600 × 30 or 48,000 × 9) whichever is higher = 6,48,000

3. Calculation of Semi-variable cost:

First Three Months (1,08,000 × 3/12) = 27,000
Next Nine Months [(1,08,000 + 46,800 + 46,800) × 9/12] = 1,51,200

Note:
1. Administrative overheads is assumed to be related to production, student may treat it as not related to
production.

Solution 6 (a)
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:

Productio Material Order

n starts Requirem for raw
Supplier
Demand to ent is sent materia
sent the
for final process to ls sent
material
product the Purchase to
demand departme supplie for
for producti
nt r
product on
 SOLUTION SAMPLE PAPER 1 98

Solution 6 (b)
Zero Base Budgeting (ZBB): 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 synchronisation
with organisational objectives, availability of funds, regulatory requirement etc.

Stages in Zero-based budgeting:

(1) Identification and description of Decision packages
(2) Evaluation of Decision packages
(3) Ranking (Prioritisation) of the Decision packages
(4) Allocation of resources

Solution 6 (c)
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.

Solution 6 (d)
Treatment of by-product cost in Cost Accounting: By-product cost can be dealt in cost accounting in the
following ways:
(a) 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.
(b) 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.
 SOLUTION SAMPLE PAPER 1 99

(c) 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.

Solution 6 (e)
(i) 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.

(ii) 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 material 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, 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.
 SOLUTION SAMPLE PAPER 2 100

SOLUTION SAMPLE PAPER 2

Solution 1 (a)
(a) Contract Account (Showing Work Cost)
For the period 01.07.17 to 31.03.18
Particulars ` Particulars `
To Materials issued 9,48,000 By Work Cost 23,57,200
To Direct wages 4,57,200
Less: Prepaid wages (1,08,000) 3,49,200
To Supervisor’s salary
(50,000 × 9 month × 2/3) 3,00,000
To Administration charges 7,20,000
To Depreciation (WN. 2) 40,000
23,57,200 23,57,200

(b) Notional Profit = Value of Work Certified + Cost of Work Uncertified – Work Cost
= 50% of 42,00,000 + 5,89,300 – 23,57,200 = 3,32,100
Working Notes:
(1) Calculation of cost of work uncertified:
Contract Completed = ⅔
Cost of ⅔ contract = 23,57,200
∴ Cost of work uncertified = 23,57,200 × 3 × 16-⅔% = 5,89,300
2

(2) Depreciation = (7,85,270 – 75,000) ÷ 9 Years × 185 = 40,000

365

Solution 1 (b)
The following equation can be made:
Effective Earnings per hour = [(AH × R) + AH/SH (SH - AH) × R] ÷ AH
37.50 = [30 AH + AH/4 (4 - AH) × 30] ÷ AH
37.50 AH = 30 AH + AH/4 (4 - AH) × 30
7.50 AH = AH/4 (4 - AH) × 30
7.50 AH = AH (4 - AH) × 7.50
1 = 4 - AH
AH = 3 hours

Total earnings and effective hourly rate of skilled worker under Halsey Incentive Scheme:

Total earnings = (AH × R) + 50% (SH – AH) × R

= (3 × 30) + 50% (4 – 3) × 30 = `105

Effective hourly rate = Total earning ÷ hours worked

= `105 ÷ 3 hours = `35

Solution 1 (c)
Journal Entries
S. No. Entries Dr. Cr.
(i) Work-in-progress Ledger Control A/c Dr. 3,25,000 -
Factory Overhead Control A/c Dr. 1,15,000 -
To Stores Ledger Control A/c - 4,40,000
(Being issue of direct and indirect materials)
(ii) Work-in-progress Ledger Control A/c Dr. 4,87,500 -
Factory Overhead Control A/c Dr. 1,62,500 -
 SOLUTION SAMPLE PAPER 2 101
To Wages Control A/c - 6,50,000
(Being allocation of direct and indirect wages)
(iii) Factory Overhead Control A/c Dr. 2,50,000 -
To Costing P/L A/c - 2,50,000
(Being factory overhead over absorbed)
Costing P/L A/c Dr. 1,75,000 -
To Administration Overhead Control A/c - 1,75,000
(Being administration overhead under absorbed)
(iv) Sundry Creditors Dr. 1,50,000 -
To Cash A/c - 1,50,000
( Being payments made to sundry creditors)
(v) Cash A/c Dr. 2,00,000 -
To Sundry Debtors - 2,00,000
( Being collection received from sundry debtors)

Solution 1 (d)
(1) Statement Showing Material Purchased
Particulars Amount
Cost Of Goods Sold excluding Administrative Expenses 56,000
Add: Closing Finished Goods 19,000
Less: Opening Finished Goods (17,600)
Factory Cost 57,400
Add: Closing WIP 14,500
Less: Opening WIP (10,500)
Gross Factory Cost 61,400
Less: Factory Overheads (10,000)
Prime Cost 51,400
Less Direct Wages (17,500)
Raw Material Consumed 33,900
Add: Closing Raw Materials 10,600
Less Opening Raw Materials (8,000)
Raw Materials Purchased 36,500

(2) Cost Sheet

Particulars Amount
Raw Materials Purchased (W.N.) 36,500
Add: Opening stock of Raw Materials 8,000
Less: Closing stock of Raw Materials (10,600)
Materials Consumed 33,900
Direct Wages 17,500
Prime Cost 51,400
Factory Overheads (17,500 ÷ 175%) 10,000
Add: Opening WIP 10,500
Less: Closing WIP (14,500)
Factory Cost 57,400
Add: Opening Finished Goods 17,600
Less: Closing Finished Goods (19,000)
Cost of Goods Sold 56,000
General Administrative Expenses 2,500
Selling and Distribution Overheads 3,500
Cost of Sales 62,000
Profit (b.f.) 13,000
Sales 75,000

Solution 2 (a)
 SOLUTION SAMPLE PAPER 2 102
2 DS 2  24,000  324
(i) Optimum Run size = = = 3,600 bearings
C 1.2

D = Bearing to be manufactured/supplied p.a. = 24,000 bearings

S = Set-up cost per run of bearing manufacture = `324.
C = Carrying cost per bearing p.a. = `0.10 × 12 months
= `1.2 per bearing p.a.

(ii) Calculation of Extra Cost at Run Size 6,000 bearings:

Particulars At RBQ 6,000 At EBQ 3,600
Set up Cost ( /RBQ × S)
D 1,296 2,160
Carrying cost (RBQ × ½ × C) 3,600 2,160
Total Cost 4,896 4,320
Extra Cost - 576

(iii) Minimum inventory holding cost is `2,160

Solution 2 (b)
Process A Account
Particulars Units ` Particulars Units `
To Units Introduced 10,000 10,000 By Normal Loss A/c 300 75
To Sundry Materials 1,000 (3% @ `0.25/unit)
To Labour 5,000 By Process B A/c 9,500 16,625
To Direct expenses 1,050 @ `1.75 per unit
By Abnormal Loss A/c @ 200 350
`1.75 per unit

10,000 17,050 10,000 17,050

Total Cost − Sale value of Normal Loss Units 17,050 − 75

NCPU = = = `1.75 per unit
Total Units−Normal Loss Units 10,000 − 300

Process B Account
Particulars Units ` Particulars Units `
To Process A A/c 9,500 16,625 By Normal Loss A/c 475 238
To Sundry Materials 1,500 (5% @ `0.50/unit)
To Labour 8,000 By Process C A/c 9,100 27,300
To Direct expenses 1,188 @ `3 per unit
To Abnormal Gain A/c 75 225
@ `3 per unit
9,575 27,538 9,575 27,538

Total Cost − Sale value of Normal Loss Units 27,313 − 238

NCPU = Total Units−Normal Loss Units
= 9,500 − 475
= `3 per unit

Process C Account
Particulars Units ` Particulars Units `
To Process B A/c 9,100 27,300 By Normal Loss A/c 728 728
To Sundry Materials 500 (8% @ `1.00/unit)
To Labour 6,500 By Profit & Loss A/c 8,100 34,425
To Direct expenses 2,009 @ `4.25 per unit
By Abnormal Loss A/c @ 272 1,156
`4.25 per unit
9,100 36,309 9,100 36,309

Total Cost − Sale value of Normal Loss Units 36,309 − 728

NCPU = Total Units−Normal Loss Units
= 9,100 − 728
= `4.25 per unit
 SOLUTION SAMPLE PAPER 2 103
Normal Loss Account
Particulars Units ` Particulars Units `
To Process A A/c 300 75 By Cash A/c:
To Process B A/c 475 238 Process A 300 75
To Process C A/c 728 728 Process B 400 200
Process C 728 728
By Abnormal Gain A/c 75 38
1,503 1,041 1,503 1,041

Abnormal Loss Account

Particulars Units ` Particulars Units `
To Process A A/c 200 350 By Cash A/c:
To Process C A/c 272 1,156 Process A 200 50
Process C 272 272
By Costing P/L A/c 1,184

472 1,506 472 1,506

Abnormal Gain Account

Particulars Units ` Particulars Units `
To Normal Loss A/c 75 38 By Process B A/c 75 225
To Costing P/L A/c 187
75 225 75 225

Costing Profit and Loss Account

Particulars Units ` Particulars Units `
To Process C A/c 8,100 34,425 By Sales A/c 8,100 48,600
To Selling Expenses 850 (8,100 × 6.00)
To Ab. Loss A/c 1,184 By Abnormal Gain A/c 187
To Profit (b.f.) 12,328
8,100 48,787 8,100 48,787

Solution 3 (a)
(i) Minimum stock of A = ROL – (Average usage × Average lead time)
= 8,000 kg – [(200 units × 10 kg) × 2 weeks] = 4,000 kg

(ii) Maximum stock of B = ROL – (Minimum usage × Minimum lead time) + ROQ
= 4,750 – [(175 units × 4 kg) × 3 weeks] + 5,000
= 9,750 – 2,100 = 7,650 kg

(iii) Re-order Level of C = Minimum stock of C + (Average usage × Average lead time)
= 2,000 + [(200 units × 6kg) × 3 weeks] = 5,600 kg

(iv) Average level of A = Minimum stock level + ½ ROQ

= 4,000 + ½ × 10,000
= 4,000 + 5,000 = 9,000 kg
Or
Minimum stock  Maximum stock
=
2
4,000  16,250
= = 10,125 kg
2
Working Notes:

Max. Stock of A = ROL (Minimum usage × Minimum re-order period) + ROQ

= 8,000 kg – [(175 units × 10 kg) × 1 week] + 10,000 = 16,250 kg
 SOLUTION SAMPLE PAPER 2 104
Solution 3 (b)
Calculation of Relative Costs of Three Proposals and their Ranking
Particulars Own Car Reimburse Hire
(A) Standing Charges:
Insurance 1,200 1,200 -
Taxes 800 - 800
Depreciation (6,00,000 – 80,000) × 1/5 1,04,000 - -
Hire Charges - - 1,80,000
Total (A) 1,06,000 1,200 1,80,800
(B) Running Charges:
Petrol (20,000 × 6) 1,20,000 - 1,20,000
Reimbursement (20,000 × 10) - 2,00,000 -

Total (B) 1,20,000 2,00,000 1,20,000

(C) Maintenance Charges:
Repairs and maintenance (20,000 × 0.20) 4,000 - -
Tyres (20,000 × .12) 2,400 - 2,400
Total (C) 6,400 - 2,400
Total Cost (A + B + C) 2,32,400 2,01,200 3,03,200
Rank II I III

Analysis: 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.

Solution 4 (a)
Expenses Budget of RST Ltd
Particulars Per Unit (`) 30,000 units (`) 36,000 units (`)
(A) Sales 200.00 60,00,000 72,00,000
(B) Variable Cost:
Direct Material (`75 + 10%) 82.50 24,75,000 29,70,000
Direct Wages (`25 + 10%) 27.50 8,25,000 9,90,000
Variable Overhead (`25 + 10%) 27.50 8,25,000 9,90,000
Direct Expenses (`15 + 10%) 16.50 4,95,000 5,94,000
Variable Factory Expenses (`20 × 75% + 10%) 16.50 4,95,000 5,94,000
Variable Selling and Distribution Expenses 8.80 2,64,000 3,16,800
(`10 × 80% + 10%)
Total (B) 179.30 53,79,000 64,54,800
(C) Contribution (A - B) 20.70 6,21,000 7,45,200
(D) Fixed Cost:
Office and Administration Expenses - 1,72,500 1,72,500
(`5 × 100% × 30,000 units + 15%)
Factory Expenses - 1,72,500 1,72,500
(`20 × 25% × 30,000 units + 15%)
Selling and Distribution Expenses - 69,000 69,000
(`10 × 20% × 30,000 units + 15%)
Total (D) - 4,14,000 4,14,000
Net Profit (C - D) - 2,07,000 3,31,200

Solution 4 (b)
(i) Statement of Allocation of Joint Cost
Particulars P Q
Sales @ `80/`50 per unit 2,00,000 75,000
Less: Estimated profit @ 30%/25% 60,000 18,750
Less: Estimated selling 85,000 in (4,500 : 2,500 : 1,500) 25,000 15,000
Less: Further estimated cost (cost after separation) 60,000 30,000
Joint Cost 55,000 11,250
 SOLUTION SAMPLE PAPER 2 105
Total Joint Cost 2,50,000
Less: Joint cost allocable to P 55,000
Less: Joint cost allocable to Q 11,250
Joint Cost allocable to M 1,83,750

(ii) Product-wise & Overall Profitability Statement

Particulars M P Q Total
Sales 7,65,000 2,00,000 75,000 10,40,000
Less: Selling expenses 45,000 25,000 15,000 85,000
Less: Cost after separation Nil 60,000 30,000 90,000
Less: Joint cost 1,83,750 55,000 11,250 2,50,000
Profit 5,36,250 60,000 18,750 6,15,000

(iii) Further processing decision in respect of by product ‘P’:

Reduction in revenue = 2,500 units (`80 - `60) = `50,000

Reduction in cost = Further processing cost + Selling expenses
= 60,000 + 25,000 = `85,000

Decision: Since, reduction in cost is higher than reduction in revenue therefore, By product ‘P’ should be sold
at split of stage (by following such decision company can increase its income by `35,000).

Solution 5 (a)
(i) Actual labour rate per hour:
Labour rate variance = (AH × SR) - (AH × AR) = 68,376 A
= (17,094 × 8) – (17,094 × AR) = 68,376 A
17,094 AH = 1,36,752 + 68,376
AH = 2,05,128 ÷ 17,094 = `12 per hour

(ii) Standard hours required for 6,000 units

Labour efficiency ratio = SH ÷ AH
105.3% = SH ÷ 17,094
SH = 17,094 × 105.3% = 18,000 hours

(iii) Labour efficiency variance = (SH × SR) - (AH × SH)

= (18,000 × 8) – (17,094 × 8) = 7,248 F

(iv) Standard labour cost per unit = (SH × SR) ÷ No of units

= (18,000 × 8) ÷ 6,000 units = `24 per unit

(v) Standard labour cost per unit:

Actual labour cost per unit = (AH × AR) ÷ No of units
= (17,094 × 12) ÷ 6,000 units = `34.188/unit

Solution 5 (b)
(i) Computation of under absorption of Production Overheads:
Particulars Amount
Total production overheads actually incurred during the year 1998-99 6,00,000
Less: Written off obsolete stores (45,000)
Less: Wages paid for strike period (30,000)
Net production overheads actually incurred 5,25,000
Production overheads absorbed (48,000 hours × `10) 4,80,000
Under Recovery of production overheads 45,000
 SOLUTION SAMPLE PAPER 2 106
(ii) Accounting treatment of under-absorption of production overheads:
1. `15,000 (i.e., 45,000 × ⅓) of under absorbed overheads were due to lack of production planning. This
being abnormal should be debited to Costing Profit and Loss Account.

2. The balance of `30,000 (i.e., 45,000 × ⅔) of under absorbed overheads should be distributed over
work in progress, finished goods and cost of sales by using supplementary rate.

Supplementary OH Rate = Under Absorbed Overhead = 30,000 = `1.25 pu

Equivalent Units 4,000 + 2,000 + 18,000

Distribution of unabsorbed overheads of `30,000 over work-in-progress, finished goods and cost of sales:
Work-in-Progress (4,000 units × `1.25) 5,000
Finished goods (2,000 units × `1.25) 2,500
Cost of sales (18,000 units × `1.25) 22,500

Journal Entries
Entries Dr. Cr.
Cost of Sales A/c Dr. 22,500 -
Finished Goods Control A/c Dr. 2,500 -
Work in Progress Control A/c Dr. 5,000 -
Costing Profit & Loss A/c Dr. 15,000 -
To Overhead Control A/c - 45,000
(Being under recovery of under absorbed oh recovered/charged)

Solution 6 (a)
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.

Solution 6 (b)
The operational level staffs like supervisors, foreman, and team leaders are requiring information:
(1) to know the objectives and performance goals for them
(2) to know product and service specifications like volume, quality and process etc.
(3) to know the performance parameters against which their performance is measured and evaluated.
(4) to know divisional (responsibility centre) profitability etc.

Solution 6 (c)
M arg in of safety in rupees 3,75,000
(i) Selling price per unit = = = `25
M arg in of safety in units 15,000

(ii) Profit = Total sales – Total cost

= [(15,000 + 5,000) × 25] – 3,87,500 = `1,12,500

Pr ofit 1,12,500
(iii) Profit/Volume ratio = × 100 = × 100
M arg in of safety in rupees 3,75,000
= 30%

(iv) Break even sales = Break even point in units × sale price per unit
 SOLUTION SAMPLE PAPER 2 107
= 5,000 units × 25 = `1,25,000

(v) Fixed cost = Break even point in rupees × PV ratio

= 1,25,000 × 30% = `37,500

Solution 6 (d)
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:

(1) No need for Reconciliation - The question of reconciling costing profit and financial profit does not arise,
as there is only one figure of profit.
(2) Less efforts - Due to use of one set of books, there is a significant saving in efforts made.
(3) Less time consuming - No delay is caused in obtaining information as it is provided from books of original
entry.
(4) Economical process - It is economical also as it is based on the concept of “Centralisation of Accounting
function”.

Solution 6 (e)
Limitations of Marginal Costing:
(1) 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.
(2) Dependence on key factors: Contribution of a product itself is not a guide for optimum profitability
unless it is linked with the key factor.
(3) 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.
(4) 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.
(5) 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
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.
(6) 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.
(7) Understating of W-I-P: Under marginal costing stocks and work in progress are understated.