Suggested Answer_Syl16_June2019_Paper 8

GROUP - I
(SYLLABUS 2016)!
!
SUGGESTED ANSWERS TO QUESTIONS
JUNE - 2019!
!
Paper - 8 : COST ACCOUNTING

Time Allowed : 3 Hours Full Marks : 100

The figures in the margin on the right side indicate full marks.
All Sections are compulsory. Each section contains instructions
regarding the number of questions to be answered within the section.
All working notes must form part of the answer.
Wherever necessary, candidates may make appropriate
assumptions and clearly state them.
No present value factor table or other statistical table will be
provided in addition to this question paper.

Section - A

Section A contains Question Number 1. All parts of this question are compulsory.

1. Answer the following questions:

(a) Choose the correct answer from the given alternatives (You may write only the
Roman numeral and the alphabet chosen for your answer): 1×10=10

(i) The main purpose of Cost Accounting is

(A) to maximise profit.
(B) to help in inventory valuation.
(C) to help in the fixation of selling price.
(D) to provide information to management for decision making.

(ii) Which of the following is considered to be a normal loss of material?

(A) Loss due to accident
(B) Pilferage
(C) Loss due to breaking the bulk
(D) Loss due to careless handling of material

(iii) In Reconciliation Statement expenses shown only in financial accounts are

(A) added to financial profit.
(B) added to costing profit.
(C) ignored.
(D) deducted from financial profit.

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 Suggested Answer_Syl16_June2019_Paper 8
(iv) Which of the following is a service department?
(A) Refining department
(B) Machining department
(C) Receiving department
(D) Finishing department

(v) Which of the following items is not included in preparation of cost sheet?
(A) Purchase returns
(B) Carriage inwards
(C) Sales commission
(D) Interest paid

(vi) In job costing to record the issue of direct materials to a job which of the following
document is used?
(A) Purchase order
(B) Goods receipt note
(C) Material requisition
(D) Purchase requisition

(vii) In a process 4000 units are introduced during a period. 5% of input is normal loss.
Closing work-in-progress 60% complete is 500 units. 3300 completed units are
transferred to next process. Equivalent production for the period is
(A) 3550 units
(B) 3600 units
(C) 3800 units
(D) 3950 units

(viii)Product A generates a contribution to sales ratio of 40%. Fixed cost directly

attributable to A amount Rs. 60,000. The sales revenue required to achieve a profit
of Rs.15,000 is
(A) Rs 2,00,000
(B) Rs 1,85,000
(C) Rs 1,87,500
(D) Rs 2,10,000

(ix) During a period 13600 labour hours were worked at a standard rate of Rs. 8 per
hour. The direct labour efficiency variance was Rs. 8,800 (Adv). How many
standard hours were produced?
(A) 12000 hours
(B) 12500 hours
(C) 13000 hours
(D) 13500 hours

(x) Cash Budget of ABC Ltd. forewarns of a short-term surplus. Which of the following
would be appropriate action to be taken in such a situation?
(A) Purchase new fixed assets
(B) Repay long-term loans
(C) Write off preliminary expenses

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(D) Pay creditors early to obtain a cash discount
(b) Match the statement in Column I with the most appropriate statement in Column II
(You may opt to write only the Roman numeral and the matched alphabet instead of
copying contents into the answer books): 1x5=5

Column I Column II
(i) Pharma Industry A Opportunity Cost
(ii) Management by exception B Direct Allocation
(iii) Assessment of employee with respect to a job C Joint Cost
(iv) Royalties D Batch Costing
(v) CAS-19 E Merit Rating
F Variance Analysis
G Job Evaluation
H Notional Cost

(c) State whether the following statements are 'True' or 'False': (You may write only the
Roman numeral and whether 'True' or 'False' without copying the statements into the
answer books): 1x5=5

(i) Bin card is maintained by the costing department.

(ii) CAS-8 deal with the principles and methods of determining the direct expenses.
(iii) FIFO method is followed for evaluation of equivalent production when prices are
fluctuating.
(iv) Profit Volume ratio remains constant at all levels of activity.
(v) The principal factor is the starting point for the preparation of various budgets.

(d) Fill in the blanks: (You may write only the Roman numeral and the content filling the
blanks) 1x5=5

(i) Differential cost is the change in the cost due to change in _________________ from
one level to another.
(ii) CAS _______________________ stands for cost of service cost centre.
(iii) In contract costing, the cost unit is ________________.
(iv) Marginal cost is the ___________ of sales over contribution.
(v) When actual cost is less than the standard cost, it is known as __________ variance.

Answer:

1. (a) (i) (D)

(ii) (B)
(iii) (A)
(iv) (C)
(v) (D)
(vi) (C)
(vii) (B)
(viii) (C)
(ix) (B)
(x) (D)

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 Suggested Answer_Syl16_June2019_Paper 8
(b)
Column I Column II
(i) Pharma Industry D Batch Costing
(ii) Management by exception F Variance Analysis
(iii) Assessment of employee with respect to a job E Merit Rating
(iv) Royalties B Direct Allocation
(v) CAS-19 C Joint Cost

(c) (i) False

(ii) False
(iii) False
(iv) True
(v) True

(d) (i) Activity

(ii) CAS - 13
(iii) Per Contract
(iv) Excess
(v) Favourable

Section - B
Answer any five questions from question numbers 2 to 8.
Each question carries 15 marks.
15 × 5 = 75

2. (a) ZINTES LTD. a manufacturing company has its factories at two locations.
Rowan plan is in use at location A and Halsey plan at location B. Standard time
and basic rate of wages are same for a job which is similar and is carried out on
similar machinery. Time allowed is 60 hours.

Job at location A is completed in 36 hours while at B, it has taken 48 hours.

Conversion costs at respective places are Rs.1224 and Rs.1500. Overheads amount
to Rs.20 per hour.

Required:
(i) Find out the normal wage rate, and
(ii) Compare conversion costs. 7

(b) ALPHA LTD. has three Production Departments and two Service Departments.
The overhead distribution sheet of the company showed the following totals:

Production Department: Amount (Rs.)

P 75,500
Q 72,000
R 96,500

Service Department:
X 46,250
Y 15,750

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 Suggested Answer_Syl16_June2019_Paper 8
Other information is as follows:
(a) Working hours of production departments are P-6226 hours, Q-4028 hours and R-
4066 hours.
(b) Services rendered by service departments are as under:
P Q R X Y
Department X 20% 30% 40% — 10%
Department Y 40% 20% 30% 10% —

Required:
(i) Calculate the total overhead of production departments distributing the cost
of service departments by Simultaneous Equation Method.
(ii) Calculate the overhead rate per hour of production departments. 8

Answer:
2(a):

Let Rs. X per hour be the normal wage rate. Wage rate at location A will

be Rs. 36x and at location B - it will be Rs. 48x, on the basis of actual time

taken, as against 60 hours permitted. For time saved, bonus will be payable

as under:
1
Location A:

!"#$ &'($)
Bonus under Rowan system = !"#$ '**+,$) ! Hrs. worked ! Rate per hour

-.
= ! Rs. 36 ! x = Rs. 14.4x
/0

Total wages =Rs. 36x + Rs.14.4x = 50.4x

Overheads @Rs. 20 per hour worked = 36 hrs. ! Rs. 20 = Rs. 720

Therefore, total conversion cost is (50.4x+ Rs. 720) = Rs. 1,224 or 50.4x =Rs. 504

Or x = Rs.504/50.4 = Rs. 10

So, Bonus = 14.4x =14.4 ! Rs. 10 = Rs. 144

Location B:

Bonus under Halsey plan = 50% of time saved ! rate per hour

= 50% of Rs. 12x = Rs.6x

Total wages = Rs. 48x + Rs. 6x = Rs. 54x

Overheads @ Rs. 20 per hour = 48 hrs. ! Rs. 20 = Rs. 960

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Total conversion cost is (54x + Rs. 960) = Rs.1,500 or 54x = Rs. 540

Hence, x= Rs. 540/54 = Rs. 10

Bonus= 6x = 6 ! Rs.10 =Rs. 60

(i) Comparative conversion cost:

Location→ A (Rowan) B (Halsey)
Amount→ Rs. Rs.
Wages @ Rs.10 per hour worked 360 480
Bonus 144 60
Overheads 720 960
Total 1,224 1,500

(b):

(i) Simultaneous Equation Method:

Let Total Cost of Service Department X be Rs. “x” and

Let Total Cost of Service Department Y be Rs “y”

X = Rs. 46,250 + 10% Y

Y = Rs. 15,750 + 10%x

By multiplying both Equations by 100, we get

100x = Rs. 46,25,000 + 10y or 100x- 10y = Rs. 46,25,000 (1)

100y = Rs. 15,75,000 + 10x or -10x +100y =Rs. 15,75,000 (2)

By Multiplying Equation (2) by 10, we get

Equation (1) 100x – 10y = Rs. 46,25,000

Equation (2) -100x +1,000y = Rs. 1,57,50,000

By adding we get 990y =Rs. 2,03,75,000 " y = Rs. 20,581

Substituting the value of “y” in Equation (1), we get

100x – (10 ! Rs. 20,581) = Rs. 46,25,000 or

100x = Rs. 46,25,000 + Rs.2,05,810 or 100x = Rs. 48,30,810

" x= Rs. 48,308

Calculation of Total Overheads of Production Departments:

Particulars P Q R X Y
Overheads (Rs.) 75,500 72,000 96,500 46,250 15,750
Costs of X (Rs. 48,308) 9,662 14,492 19,323 (48,308) 4,831
[2:3:4:1]
Costs of Y (Rs. 20,581)[4:2:3:1] 8,233 4,116 6,174 2,058 (20,581)
Total 93,395 90,608 1,21,997 - -

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(ii) Calculation of Overhead Rate per Hour:

P Q R
(aa) Total Overheads (Rs.) 93,395 90,608 1,21,997
(bb) Working Hours 6,226 4,028 4,066
(cc) Overhead Rate per Hour [(aa)/(bb)] (in 15.00 22.49 30.00
Rs.)

3. (a) What is the Employee Cost as defined in CAS-7 (Limited Revision 2017)? Also discuss
the general principles of its measurement as per CAS-7. (any five only) 6

(b) The following information has been extracted from the financial books of ABC Ltd. for
the year ended 31st March, 2019:
Particulars Amount (Rs.)
Direct materials consumption 10,00,000
Direct wages 6,00,000
Factory Overhead 3,20,000
Administrative Overhead 1,40,000
Selling and Distribution Overhead 1,92,000
Bad debts 16,000
Preliminary expenses written-off 8,000
Legal expenses 2,000
Dividend received 20,000
Interest on deposits received 4,000
Sales(24000 units) 24,00,000
Closing stock of finished goods (800 units) 64,000
Closing stock of work-in-progress 48,000

The cost accounts for the same period reveal that the direct materials consumption
was Rs. 11,20,000. Factory overheads recovered at 20% of prime cost; Administration
overheads recovered @ Rs. 6 per unit of production; and selling and distribution
overheads recovered at Rs. 8 per unit sold.

Required:
(i) Find out the profit as per financial books.
(ii) Prepare the cost sheet and ascertain the profit per cost accounts.
(iii) Prepare a statement reconciling profit shown by financial and cost accounts. 9

Answer:

3. (a) Employee Cost - CAS-7 [Limited Revision 2017):

As per CAS-7 [Limited Revision 2017] Employee Cost is the benefits paid or payable in
all forms of consideration given for the service rendered by employee (including
temporary, part time and contract employee/s) of an entity.

General Principles of Measurement:

The guidelines for ascertaining the Labour Cost/Employee Cost are as follows:

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 Suggested Answer_Syl16_June2019_Paper 8
(i) Employee Cost shall be ascertained taking into account the gross pay including
all allowances payable along with the cost to the employer of all the benefits.
(ii) Bonus whether payable as a statutory minimum or on a sharing of surplus shall
be treated as part of Employee Cost. Ex-gratia payable in lieu of or in addition
to bonus shall also be treated as part of the Employee Cost.
(iii) Remuneration payable to managerial personnel including executive directors
on board and other officers of a corporate body under a statute will be
considered as part of the Employee Cost of the year under reference, whether
the whole or part of the remuneration is considered as a percentage of profits.
(iv) Separation costs related to voluntary retirement, retrenchment, termination etc.
shall be amortized over the period of benefitting from such costs.
(v) Employee Cost shall not be included any imputed costs.
(vi) Any subsidy, grant, incentive or any such amount received or receivable with
respect to any Employee Cost shall be reduced from ascertainment of cost of
the project to which such amounts are related.
(vii) Any abnormal cost where it is material and quantifiable shall not form part of
the Employee Cost.
(viii) Penalties, damages paid to statutory authorities or other third parties shall not
form part of the Employee Cost.
(ix) The cost of free housing, free conveyance and any other similar benefits
provided to an employee shall be determined at the total cost of all resources
consumed in providing such benefits.
(x) Any recovery from employees towards the facilities provided shall be reduced
from the Employee Cost.
(xi) Cost of idle time is ascertained by the idle hours multiplied by the hourly rate
applicable to idle employee or a group of employees.
(xii) Where Employee Cost is accounted at standard cost, variances due to normal
reasons related to employee cost shall be treated as part of Employee Cost.
Variances due to abnormal reasons shall be treated as part of abnormal cost.
(xiii) Any change in the cost accounting principles applied for the determination of
the Employee Cost should be made only if it is required by law or for
compliance with Cost Accounting Standard or change would result in a more
appropriate way of presentation of Cost Statement.

(b) (i)
Financial trading and Profit & Loss Account
for the Year ended 31st Mach, 2019
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Direct Materials 10,00,000 By Sales 24,00,000
To Direct Wages 6,00,000 By Dividend received 20,000
To Factory Overheads 3,20,000 By Interest received 4,000
To Administration Overheads 1,40,000 By Closing Stock:
To Selling & Distribution 1,92,000 Finished Goods 64,000
Overheads

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To Bad Debts 16,000
To Preliminary Expenses 8,000 Work-in-process 48,000
To Legal Expenses 2,000
To Net Profit 2,58,000
25,36,000 25,36,000

(ii)
Cost Sheet

Particulars Amount (Rs.)

Direct Materials 11,20,000
Direct Wages 6,00,000
Prime Cost 17,20,000
Factory Overheads (20% of Prime Cost) 3,44,000
20,64,000
Less: Closing Stock of WIP 48,000
Factory Cost 20,16,000
Administration Overheads (24,800 !Rs. 6) 1,48,800
Cost of Production 21,64,800
Less: Closing stock of Finished Goods {(21,64,800 ! 800)/24800} 69,832
Cost of Goods Sold 20,94,968
Selling & Distribution Overheads (24,000 !Rs. 8) 1,92,000
Cost of Sales (Total Cost) 22,86,968
Sales 24,00,000
Profit (Sales – Total Cost) 1,13,032

(iii)
Reconciliation Statement

Particulars Amount Amount

(Rs.) (Rs.)
Profit as per Cost Accounts 1,13,032
Add:
Over recovery of Direct Materials 1,20,000
Over recovery of Factory Overheads 24,000
Over recovery of Administration Overheads 8,800
Financial incomes not considered in Cost Accounts :
Dividend received 20,000
Interest on deposits received 4,000 24,000
2,89,832
Less:
Over valuation of Closing Stock of Finished Goods in 5,832
Cost Accounts
Pure Financial Expenses not considered in Cost
Accounts :
Bad debts 16,000
Preliminary Expenses 8,000
Legal Expenses 2,000 26,000
Profit as per Financial Accounts 2,58,000

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4. (a) VIPUL LTD. submits the following information on 31st March, 2019:
Particulars Amount (Rs.)
Sales for the year 55,00,000
Purchases of material for the year 22,00,000
Direct labour 13,00,000
Inventories at the beginning of the year—
Finished goods 1,40,000
Work-in-progress 80,000
Materials inventory—
At the beginning of the year 60,000
At the end of the year 80,000
Inventories at the end of the year—
Work-in-progress 1,20,000
Finished goods 1,60,000

Factory overheads were 60% of the direct labour cost.

Administration expenses were 5% of sales.
Selling & distribution expenses were 10% of sales.
You are required to prepare a Cost Sheet with all elements 8

(b) WEST LAND LTD. in the course of refining crude oil obtains four joint products P, Q, R
and S. The total cost till the split-off point was Rs. 9,76,640. The output and sales in the
year 2018 were as follows:
Product Output Sales Separate Costs
(Gallon) Amount (Rs.) Amount (Rs.)
P 50,000 12,50,000 2,60,000
Q 10,000 30,000 20,000
R 5,000 50,000 —
S 8,000 80,000 10,000

Required:
(i) Calculate the net income for each of the products if the joint costs are apportioned
on the basis of Net realisable values (NRV) of the different products.

(ii) Calculate the net income of each of the products if the company decides
to sell the products at the split-off point itself as – P @ Rs. 18, Q @ Rs. 1.50,
R @ Rs. 10 and S @ Rs. 7.80 per gallon. 7

Answer:

4. (a)
Cost Sheet on 31st March, 2019
Particulars Amount
(Rs.)
Materials consumed:
Opening Stock + Purchase – Closing Stock
Rs.( 60,000 + 22,00,000 – 80,000) 21,80,000
Direct Labour 13,00,000
Prime Cost 34,80,000
Factory Overheads (60% of Direct Labour Cost) 7,80,000

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42,60,000
Add: Opening Work-in-progress 80,000
Less: Closing Work-in-progress 1,20,000
Factory Cost 42,20,000
Administration Expenses (5% of Sales) 2,75,000
Cost of Production 44,95,000
Add: Opening Stock of Finished Goods 1,40,000
Less: Closing Stock of Finished Goods 1,60,000
Cost of Goods Sold 44,75,000
Selling & Distribution Expenses (10% of Sales) 5,50,000
Cost of Sales 50,25,000
Sales 55,00,000
Profit (Sales-Cost of Sales) 4,75,000

(b) (i) Statement showing Profit after Further Processing:

Amount (Rs.)
Particulars P Q R S Total
(a)Sales after further processing 12,50,000 30,000 50,000 80,000 14,10,000
(b)Separate Costs 2,60,000 20,000 --- 10,000 2,90,000
(c)Sales after split off (a-b) 9,90,000 10,000 50,000 70,000 11,20,000
(d)Joint Costs (on the basis of 8,63,280 8,720 43,600 61,040 9,76,640
NRV)
(e)Profit (c-d) 1,26,720 1,280 6,400 8,960 1,43,360

(ii) Statement showing Profit at Split off Point:

Amount (Rs.)
Particulars P Q R S Total
(a) Sales at Split off in Units 50,000 10,000 5,000 8,000
(b) Sale Price in Rs. 18 1.50 10 7.80
(c) Sales at Split off in Rs. 9,00,000 15,000 50,000 62,400 10,27,400
(d) Joint costs 8,63,280 8,720 43,600 61,040 9,76,640
(e) Profit (c - d) 36,720 6,280 6,400 1,360 50,760

5. (a) CARLHAMS LTD. runs a lodging home in a hill station. For this purpose, it has hired a
building at a rent of Rs. 1,20,000 per month along with 5% of total takings. The lodging
home has three types of suites for its customers, viz., single room, double rooms and
triple rooms.
Following information is given:
Type of Suite Number Occupancy%
Single Room 100 80%
Double Rooms 40 60%
Triple Rooms 20 50%

The rent of double rooms suite is to be fixed at 1.5 times of the single room suite and
that of triple rooms suite as twice of the double rooms suite.
The expenses for the year 2018 are as follows:

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 Suggested Answer_Syl16_June2019_Paper 8
Particulars Amount (Rs.)
Staff salaries 32,50,000
Room attendants' wages 12,00,000
Lighting, heating and power 9,75,000
Repairs & renovation 4,80,000
Laundry charges 1,65,000
Interior decoration 1,80,000
Sundry expenses 1,94,000

Provide profit @ 20% on total takings and assume 360 days in a year.
You are required to work out the room rent chargeable per day for each type of suite.
8
(b) NIRVANA LTD. undertook a contract for Rs. 50,00,000 on 1st April, 2018. On 31st March,
2019 when the accounts of the company were closed, the following details about the
contract were gathered:
Particulars Amount (Rs.)
Materials purchased 10,00,000
Wages paid 4,50,000
General expenses 1,00,000
Plant purchased 5,00,000
Materials on hand on 31.03.2019 2,50,000
Wages accrued on 31.03.2019 50,000
Work certified 20,00,000
Cash received 15,00,000
Work uncertified 1,50,000
Depreciation of plant 50,000

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

"In the event of prices of materials and rates of wages increase by more than 5%, the
contract price would be increased accordingly by 25% of the rise in the cost of
materials and wages beyond 5% in each case."

It was found that since the date of signing the agreement, the price of materials and
wage rates increased by 25%. The value of work certified does not take into account
the effect of the above clause.
Required:
Prepare Contract Account of the company as on 31st March, 2019. 7
Answer:

5.(a) Computation of Total Equivalent Single Room Suites

Nature of Occupancy Total Equivalent Single Room Suites
Suites Calculation Occupancy
Occupancy Equivalent
Rate Number
A B C B!C=D
Single Rooms 100 ! 360 ! 80% 28,800 1 28,800
Double 40 ! 360 ! 60% 8,640 1.5 12,960
Rooms
Triple Rooms 20 ! 360 ! 50% 3,600 3 10,800
Total 52,560

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Statement of Total Cost

Particulars Amount (Rs.)

Staff salaries 32,50,000
Room attendants’ wages 12,00,000
Lighting, Heating and Power 9,75,000
Repairs and Renovation 4,80,000
Laundry charges 1,65,000
Interior decoration 1,80,000
Sundry Expenses 1,94,000
Sub-total 64,44,000
Add: Building rent (1,20,000 !12 Months !5% of 14,40,000 + 5% of total takings
total takings)
Total Cost 78,84,000 + 5% of total takings

Profit is 20% of total takings.

Therefore, Total takings = Rs. 78,84,000 + 25% of Total Takings

Now, let 'x' be the rent for single room suite,

Then, 52,560x = Rs. 78,84,000 + 25% of 52,560x

52,560x = Rs. 78,84,000 + 13,140x or 39,420x = Rs. 78,84,000
" x = Rs. 78,84,000/39,420 = Rs. 200

Therefore,
Rent chargeable for Single Room Suite = Rs. 200! 1 = Rs. 200
Rent chargeable for Double Room Suite = Rs. 200 ! 1.5 = Rs. 300
Rent chargeable for Triple Room Suite = Rs. 200 ! 3 = Rs. 600

(b)
Contract Account of Nirvana Ltd
(for the Year ending on 31st March, 2019)
Dr Cr
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Materials 10,00,000 By Materials on
hand 2,50,000
To Wages paid 4,50,000 By Work-in-progress
Add: Accrued 50,000 5,00,000 Work certified 20,00,000
Work uncertified 1,50,000 21,50,000
To General expenses 1,00,000 By Contract
escalation (W. N. 1) 50,000
To Depreciation on 50,000
Plant
To Notional Profit c/d 8,00,000
24,50,000 24,50,000
To P & L A/c [W. N. 2] 1,95,122 By Notional Profit 8,00,000
b/d
To Reserve A/c 6,04,878 -
8,00,000 8,00,000

Working Notes:

(i) Calculation of Escalation Amount:

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 Suggested Answer_Syl16_June2019_Paper 8
Cost of Materials and Wages incurred = Rs. 10,00,000 + 4,50,000 + 50,000 – 2,50,000
= Rs. 12,50,000
Cost of Materials and Wages before increase in prices = (Rs. 12,50,000! 100)/125
= Rs.10,00,000
Therefore, increase in Contract Price = (25/100 )[`Rs.12,50,000 – {(10,00,000 !
105)/100}]
= Rs. 50,000

(ii) Profit to be credited to P&L A/c:

Profit = Notional Profit !{(1/3) !(cash received/work certified)}
The contract escalation is added to work certified:
Profit = Rs. 8,00,000 !{(1/3) !(15,00,000/20,50,000)} = Rs. 1,95,122

6. (a) MODERN LTD. has three departments X, Y and Z, each of which makes a different
product. The budgeted data for the coming year are as follows:

Amount (Rs.)
Particulars X Y z
Sales 22,40,000 11,20,000 16,80,000
Direct materials 2,80,000 1,40,000 2,80,000
Direct labour 1,12,000 1,40,000 4,48,000
Direct expenses 2,80,000 1,40,000 5,60,000
Fixed cost 5,60,000 2,80,000 5,60,000

The management of the company is considering to close down department 'Z'. There
is a possibility of reducing fixed cost by Rs. 1,50,000 if department 'Z' is closed down.

Advise the management whether or not department 'Z' should be closed down. 8

(b) SRIJAN LTD. had incurred fixed expenses of Rs. 9,00,000 with sales of Rs. 20,00,000 and
earned a profit of Rs. 3,00,000 during the first half-year. In the second-half, it suffered
a loss of Rs. 1,50,000.

Required:
Calculate the following:
(i) The P/V Ratio, Break Even Point and Margin of Safety for the first half-year.
(ii) The expected sales amount for the second half-year assuming that the selling
price and fixed expenses remained unchanged during the second half-year.
(iii) The Break Even point and Margin of Safety for the whole year. 7

Answer:

6. (a)
Statement of Profit before closing Department ‘Z’
Amount (Rs.)
Particulars X Y Z Total
(i) Sales 22,40,000 11,20,000 16,80,000 50,40,000

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(ii) Variable Cost:
Direct Materials 2,80,000 1,40,000 2,80,000 7,00,000
Direct Labour 1,12,000 1,40,000 4,48,000 7,00,000
Direct Expenses 2,80,000 1,40,000 5,60,000 9,80,000
(iii) Total Variable Cost 6,72,000 4,20,000 12,88,000 23,80,000
(iv) Contribution (i-iii) 15,68,000 7,00,000 3,92,000 26,60,000
(v) Fixed Cost (As given in Question) 5,60,000 2,80,000 5,60,000 14,00,000
(vi) Profit (iv-v) 10,08,000 4,20,000 (1,68,000) 12,60,000

Statement of profit after closing Department 'Z’

Amount (Rs.)
Particulars X Y Total
(i) Sales 22,40,000 11,20,000 33,60,000
(ii)Variable cost:
Direct Materials 2,80,000 1,40,000 4,20,000
Direct Labour 1,12,000 1,40,000 2,52,000
Direct Expenses 2,80,000 1,40,000 4,20,000
(iii) Total Variable Cost 6,72,000 4,20,000 10,92,000
(iv) Contribution (i-iii) 15,68,000 7,00,000 22,68,000
(v) Fixed cost 12,50,000
(vi) Profit (iv-v) 10,18,000

Advice: From the comparative profitability statements stated supra, it is clear that
profit is decreased by Rs. 2,42,000 that is (Rs. 12,60,000 –Rs.10,18,000) by closing
down Department 'Z'. Therefore, it should not be closed down.

(i) (b) P/V Ratio = (Contribution/ Sales) ! 100

Where, Contribution = Fixed Cost + Profit = Rs. 9,00,000 + Rs. 3,00,000 = Rs.
12,00,000
P/V Ratio = (Rs. 12,00,000 / 20,00,000) ! 100 = 60%
Break Even Point = (Fixed Cost)/ (P/V Rtio)
= Rs. 9,00,000/ 60% = Rs. 15,00,000
Margin of Safety = Sales- Break Even Point
= Rs. 20,00,000 – Rs. 15,00,000 = Rs.5,00,000
Or Margin of Safety = (Profit)/ (P/V Ratio) = Rs. 3,00,000/60% = Rs.5,00,000

(ii) Contribution during the second half-year = Fixed Cost + Profit

= Rs. 9,00,000 + (- Rs. 1,50,000) = Rs. 7,50,000
Expected Sales = (Contribution) / (P/V Ratio)
= Rs. 7,50,000/60% = Rs.12,50,000

(iii) Break Even Point for the whole year = Fixed Cost for the whole year/(P/V Ratio)
= Rs. 18,00,000/60% = Rs. 30,00,000
Margin of Safety = Sales- Break Even Point
= Rs. 32,50,000 – Rs. 30,00,000 = Rs.2,50,000
Or Margin of Safety = (Profit)/ (P/V Ratio) = Rs. 1,50,000/60% = Rs.2,50,000

7. (a) BENCO LTD. a manufacturing concern which has adopted standard costing furnishes
the following information for the month ending March 31, 2019:

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The standard mix to produce one unit of product Z is as under—

Material A 30kg @ Rs. 30 per kg
Material B 40kg @ Rs. 50 per kg
Material C 50kg @ Rs. 40 per kg

During the month of December 2018, 10 units of product Z were actually produced
and consumption was as under—
Material A 320kg @ Rs. 35 per kg
Material B 475kg @ Rs. 55 per kg
Material C 435kg @ Rs. 36 per kg

Required:
Calculate the following Material Variances:
(i) Material Cost Variance
(ii) Material Price Variance
(iii) Material Usage Variance
(iv) Material Mix Variance
(v) Material Yield Variance 8

(b) ANKRITI LTD. manufactures product X and product Y during the year ending on 31st
March, 2019. It is expected to sell 7500 kg of product X and 37500 kg of product Y @
Rs. 60 and Rs. 32 per kg respectively.

The direct materials A, B and C are mixed in the proportion of 4:4:2 in the manufacture
of Product X and in the proportion of 3:5:2 in the manufacture of product Y. The actual
and budget inventories for the year are as follows:
Particulars Opening Stock (kg) Expected Closing Stock Anticipated Cost per
(kg) kg (Rs.)
Material A 3000 2400 10
Material B 2500 5800 8
Material C 16000 17300 6
Product X 1500 2000 —
Product Y 3000 3500 —

Required:
Prepare the Production Budget and Materials Budget showing the purchase cost
of materials for the year ending 31st March, 2019. 7

Answer:
7. (a) Statement showing Standard and Actual Material Cost
Standard for 10 Units Actual for 10 Units
Material Quantity Rate Amount Quantity Rate Amount
(Units) (Rs.) (Rs.) (Units) (Rs.) (Rs.)
A 300 30 9,000 320 35 11,200
B 400 50 20,000 475 55 26,125
C 500 40 20,000 435 36 15,660
Total 1,200 49,000 1,230 52,985

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(i) Material Cost Variance = Standard Cost – Actual Cost

= Rs.49,000 – Rs.52,985 = Rs.3,985 (A)

(ii) Material Price Variance = Actual Quantity (Standard Price – Actual Price)
Material A = 320 (Rs. 30 – 35) = Rs. 1,600 (A)
Material B = 475 (Rs. 50 – 55)=Rs. 2,375 (A)
Material C= 435 (Rs. 40 – 36) = Rs. 1,740 (F)
= Rs.2,235 (A)

(iii) Material Usage Variance = Standard Price ( Standard Quantity – Actual Quantity)
Material A = 30 (Rs. 300 – 320) = Rs. 600 (A)
Material B = 50 (Rs. 400 – 475)=Rs. 3,750 (A)
Material C= 40 (Rs. 500 – 435) = Rs. 2,600 (F)
= Rs.1,750 (A)

(iv) Material Mix Variance = Standard Price (Revised Std. Quantity – Actual Quantity)
Material A = 30 (Rs. 307.50 – 320) = Rs. 375 (A)
Material B = 50 (Rs. 410 – 475) = Rs. 3,250 (A)
Material C= 40 (Rs. 512.50 – 435) = Rs. 3,100 (F)
= Rs.525 (A)

Note: Revised Standard Quantity (RSQ) is calculated as under:

!!"#$
Material A =!!"$$ ! (300) = 307.50kg
!!"#$
Material B =!!"$$ ! (400) = 410 kg
!!"#$
Material C =!!"$$ ! (500) = 512.50kg
(v) Material Yield Variance = Standard Cost per Unit ( Actual Yield – Standard Yield)
Rs. 4,900 (10 – 10.25) = Rs. 1,225 (A)
Note:
(a) Standard Material Cost per Unit of output = Rs. 49,000/10 = Rs. 4,900
(b) Standard Yield = Actual usage of material/ Standard usage per Unit of output
= 1,230/120 = 10.25 Units

(b)
Production Budget for the Year ending 31st March 2019
Particulars Product – X ((kgs.) Product – Y
(kgs.)
Sales 7,500 37,500
Add: Closing Stock 2,000 3,500
Sub-total 9,500 41,000
Less: Opening tock 1,500 3,000
Production 8,000 38,000

(c)
Materials Purchase Budget
(for the year ending 31st March 2019)

Particulars A B C Total
Materials required for product-X in the ratio 3,200 3,200 1,600 8,000
of 4:4:2
Materials required for product-Y in the ratio 11,400 19,000 7,600 38,000
of 3:5:2

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Total requirement 14,600 22,200 9,200
Add: Closing Stock 2,400 5,800 17,300
17,000 28,000 26,500
Less: Opening Stock 3,000 2,500 16,000
Purchases (Kgs) 14,000 25,500 10,500
Cost per Kg (Rs.) 10 8 6
Total Purchase Cost (Rs.) 1,40,000 2,04,000 63,000 Rs. 4,07,000

8. Answer any three out of the following four questions: 5×3=15

(a) Distinguish between Cost Allocation and Cost Apportionment.

(b) State the main objectives of Cost Accounting,
(c) List out the various measures to reduce the Labour Turnover (any five).
(d) Write a brief note on Master Budget.

Answer:

8. (a) Difference between Cost Allocation and Cost Apportionment:

Cost Allocation: When items of cost are identifiable directly with some products or
departments such costs are charged to such cost centres. This process is known as
cost allocation. Wages paid to workers of service department can be allocated to
the particular department. Indirect materials used by a particular department can
also be allocated to that department. Cost allocation calls for two basic factors - (i)
Concerned department/product should have caused the cost to be incurred, and
(ii) exact amount of cost should be computable.

Cost Apportionment: When items of cost cannot directly be charged to or be

accurately identifiable with any cost centres, they are prorated or distributed
amongst the cost centres on some pre-determined basis. This method is known as
cost apportionment. Thus, items of indirect costs residual to the process of cost
allocation are covered by cost apportionment. The pre-determination of suitable
basis of apportionment is very important and usually following principles are adopted
- (i) Service or use, (ii) Survey method, or (iii) Ability to bear. The basis ultimately
adopted should ensure an equitable share of common expenses for the cost centres
and the basis once adopted should be reviewed at periodic intervals to improve
upon the accuracy of apportionment.

OR ( Alternative)

Cost Allocation: CIMA defines Cost Allocation as, “ the charging of discrete, identifiable
items of cost to cost centres or cost units.” In simple words complete distribution of an item of
overhead to the departments or products on logical or equitable basis is called allocation.
Where a cost can clearly be identified with a Cost Centre or Cost unit, then it can be
allocated to that particular Cost Centre or

Cost Unit. In other words, allocation is the process by which cost items are charged directly

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to a Cost Unit or Cost Centre. For example, electricity charges can be allocated to various
departments if separate meters are installed, depreciation of machinery can be allocated
to various departments as the machines can be identified, salary of stores clerk can be
allocated to stores department, cost of coal used in boiler can directly be allocated to boiler
house division. Thus allocation is a direct process of identifying overheads to cost units or cost
centres. So the term allocation means allotment of whole item of cost to a particular cost
centre or cost object without any division.

Cost Apportionment:

Cost Apportionment is the allotment of proportions of items to Cost Centres. Wherever

possible, the overheads are to be allocated. However, if it is not possible to charge the
overheads to a particular Cost Centre or Cost Unit, they are to be apportioned to various
departments on some suitable basis.

This process is called “Apportionment” of overheads. The basis for apportionment is normally
predetermined and is decided after a careful study of relationship between the base and
the other variables within the organisation. The Cost Accountant must ensure that the
selected basis is the most logical. A lot of quantitative information has to be collected and
constantly updated for the purpose of apportionment. The basis selected should be applied
consistently to avoid vitiation.

However, there should be a periodical review of the same to revise the basis if needed.In
simple words, distribution of various items of overheads in portions to the departments or
products on logical or equitable basis is called apportionment.A general example of various
bases that may be used for the purpose of apportionment is shown below:

Overhead item Basis

Rent and Building Floor space occupied by each department
General Lighting No. of light points in each department
Telephones No. of extensions in a department
Depreciation of factory building Floor space
Material handling No. of material requisitions or Value of material
used

The above list is not exhaustive and depending upon peculiarities of the organisation, it
could be extended. This allocation and/or apportionment is called primary distribution of
overheads.

OR (Alternative)

Note: The question asks: Distinguish between Cost Allocation and Cost Apportionment.

Distinction between Cost Allocation and Cost Apportionment:

Although the purpose of both allocation and apportionment is identical, that is to identify or
allot the costs to the Cost Centres or Cost Units, both are not the same.

Allocation deals with the whole items of cost and apportionment deals with proportion of
items of cost.

Allocation is direct process of departmentalisation of overheads, whereas apportionment

needs a suitable basis for sub-division of the cost.

Whether a particular item of expense can be allocated or apportioned does not depend on

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the nature of expense, but depends on the relation with the Cost Centre or Cost Unit to
which it is to be charged.

(b) Main Objectives of Cost Accounting:

The main objectives of cost accounting are as under:

(i) To ascertain the costs under different situations using different techniques and
systems of costing.
(ii) To determine the selling prices under different circumstances.
(iii) To determine and control efficiency by setting standards for Materials, Labour and
Overheads.
(iv) To determine the value of closing inventory for preparing financial statements of
the concern.
(v) To provide a basis for operating policies of the concern

(c) Measures to Reduce Labour Turnover:

Labour Turnover may be reduced by removing its avoidable causes and taking
preventive remedial measures.

The various measures may be as under:

(i) Efficient, sympathetic and impartial personnel administration.
(ii) Effective communication system to keep the workers informed on matters that
affect them.
(iii) Improving working conditions and placing the right man on the right job.
(iv) Job enrichment to reduce boredom and monotony and to provide job
satisfaction.
(v) Introducing fair rates of pay and allowance/s and incentives, pension, gratuity
etc.
(vi) Strengthening welfare measures.
(vii) Augmenting recreational activities and schemes.

(d) Master Budget:

Master Budget is the budget prepared to cover all the functions of the business organization.
It can be taken as the integrated budget of business concern, that means, it shows the profit
or loss and financial position of the business concern such as Budgeted Profit and Loss
Account, Budgeted Balance Sheet etc. Master budget, also known as summary budget or
finalized profit plan, combines all the budgets for a period into one harmonious unit and thus,
it shows the overall budget plan.

The master budget incorporates all the subsidiary functional budgets and the Budgeted
Profit and Loss Account and Budgeted Balance Sheet. Before the budget plan is put
into operation, the master budget is considered by the management and revised if the
position of profit disclosed therein is not found to be satisfactory. After suitable revision made,
the Master Budget is finally approved and put into action.

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