t$,$

1. Basics * Com i'ffi ajlil

lllustration 1: $egrggdion of Fixd* Varhhle.Coot

in{nrmatian ic rvailahla fnr lhe irst and second of the
Production ( in units) SemFVariable Cost
Quarter
36,000 Rs.2,80,000
Quarter I
42,000 Rs.3,10,ff)0
Quarter ll
per unit, and (b) Total Fixed Cost'
EquEa: Segrr
Solution:
1. Variable Cost Per unit= Difference in Costs Rs.3,10,000 - Rs.2,80,000
= Rs.5 per unit.
(using Level of Activity Method) Difference in Prodn Quantity (42,000 - 36,000) units

units output level data)

2. Fixed Cost = Total Costs less Variable Costs (estirnated using 36,000
units level can also be taken here.]
= Rs.2,g0,000 - (36,000 unitsxRs.S) = Rs.1rooro0o [Note: 42,OOO

,lttistr.tloo 2: OH Analyo*Eand Csm n Bfp

DA I imitae{ ranarlc tha fnllawina casi slruciufe at two levels:
2,000 units (100o/o caPacit|) 1,Sfi) units
POH
Rs.3 per unit Bs.4 per unit
Production Overhead I
Rs.2 per unit Rs.2 per unit
Production Overhead ll
mtlesAiilglt its Break-Even Point?

OH At 2,000 units At 1,500 units Remarks / Infercnce

Srrrce total arnount is constant at both levels, POH I is
POH I 2,000xRs.3=Rs.6,000 1,500xRs.4=Rs.6,000 a Fixed Cost in nature.
S'ulce Total POH II varies proportionately at two levels,
POH II 2,000xRs.2=Rs.4,000 1,500xRs.2=Rs.3,000 and POH II per unit remains constant at both levels, it
is aVariable Cost in naturL
osts = Rs.8 - Rs.2 = Rs'6 Per unit'
t""
Costs - Rs.6,000
tll"1
Fixed
,
Nrv'wvv
- r1'ooo
..rnn rrnila
units'
- Contribution Per ,,
2. Break Even Quantiwr = Unit Rs.6
=
Note: Information is not sufficient for computing PVR and BES'

You are to calculate for the Year, the

4. Sales required to earn a Profit of Rs.l2,000
1. Profit Volume Ratio (PV Ratio)
2. Break Even Sales in value 5. Profit at Sales of Rs.2,00,000

3. Break Even Sales in units

Solution:
Pa*icularc Rs. per unit Total Rs.
Selling Price 20
Less: Variable Cost t2
Contribution 8
Rs.9,000x4quarters= 36,000
Fixed Costs
Contribution Per unit Rs.8
1. PV Ratio = x 100 =-Rs.20 x 100 = 4oolo.
Sales Price Per unit

11.12
 ,i'
f-a

i,l'1
+
['(
Fixed costs _ Rs.39I000 = Rs.g0,000. l!)
2. Break Even Point (in Rs.)=
PV Ratio 40o/o
I

Fixed Costs
3. Break Even Quantity =
Contribution Per Unit
=S#99 = 4,500 units.

4. Required Sales for Profit of Rs.12,000:

_
Fixed Cost +Oesired Profit Rs'36,000+Rs.12,000
==Desired Contribution - = Rs.,,2O,OOO
PV Ratio PV Ratio 40o/o

profit at Sales of Rs.2,00,000 = Contribution Less Fixed Cost = (Rs.2,O0,OO0 x 40olo) - Rs.36,000 =
Rs'44,000
5.
6. Margin of Safety: ii
V
For(4)above,MarginofSafety=Totalsales_BreakEvenSales=1,20,000-90,000=Rs.30,000.
For(5)above,MarginofSafety=Totalsales_BreakEvenSales=2,00,000_90,000=Rs.1,10,000. !

ilrlts
lffii*l lla:, a rlulll-
f;rffiHt"coJiioi,.itiyatiiii'utiuletoProductZduringtheQuarter
ffgqUCI i4
year Rs.2,g0,000. calculate tne sanJRevenue required to achieve
will be
..rrrrlrr arrlit al trc 7fl
a quarterly prolit of Rs'70'000'
Oflfl
!

ll of the financiat

Solution:
Fixed Cost +Desired Profit Rs'2,80,090-1-Rs'70,000
Requircd Sales =
Desired Contribution
p,y Ratio - 28o/o
= Rs.12,50,000 i
PV Ratio I
M00

r !!r
data is as under
a rltauvrl. -' t----- --- - - -
Rs.
Particularc
3,00,000
Sales (given)
1.20.000
l3ss:
---- varl 1,80,000
Contribution (Fixed Cost + Profit) so,000
Less: Fixed 90,ooo
Profit (sive

Total Contribution x loo = 6o0/o

1. PV Ratio =
Total Sales Value
=
H#ffi,100
2. Required Sales if Loss is Rs.30,000
Desired Contribution Fixed Cost +Desired Profit _ Rs.90,000 + Rs.(30,000)
= Rs.1,O0,0OO
PV Ratio 600/o
PV Ratio

3. when profit = Rs.90,000, Margin of safety = m = S#gq = Rs.1,50,000.

sl.r.A..r,^....".^,..^.i::^ri.oda,o,ha'.n,}ff,;
ffi;ffiffirffiilffiii.v;ilutecoJtisii.tsperunitandFixed0verheadforthe
year is Rs.6,30,000. Calculate:
I. Sales Value needed to earn a protit of I 0% on Sales'
2. Sales Price per unit to bring BEP down to 1,20,000 units'
3. Margin of Salety Sales if Prolit is Rs.60'0fl).

Siolution:
1. Let number of units sold to earn a profit of 10o/o of sales = 'Q',units.
profit = 100/oon sales= 10o/oon 20Q = 2Q'
sqi.r"rValue = Rs.20x Q = 20Q, Variablecost= Rs.15x Q = 15Q.
The equation is contribution - Fixed cost = Profit.
So, (20Q - 15Q - 6,30,000 = 2Q'
on simplification, we have 5Q - 5,30,000 = 2Q . so, 3Q = 6,30,000, or Q =
2,10,000 units'

So, Required Sales Value = 2,10,000 units x Rs'20 = RS'42'00'0OO'

11.13
 Students'Handbook on Cost Accounting and Financial Management

2. Letrequired Sale Price per unitto bring BEPto 1,20,000 units = Rs.P. So, Contribution = S-V = (P- 15).
Filtd cotts
Break Even euantity = ,
Contribution Per
, - Rs:6;0'q00
,,
Unit (P - 15)
= 1,20,000 units.

On cross multiplication and simplification, we have, (P - 15) = 1t'9':9'999 = 5.25. Hence, P = 5-25 + 15 = 20.25
Rs.1,20,000
Required Sale Price = Rs.20.25 per unit.

Pr ofit Rs.60,000
3. MOS (Quantity) =
Contribution per Unit
12,000 units,
Rs.(20 - 15)

MOS Sales Value = 12,000 units x Rs.20 per unit = Rs.2r40r000.

., ;':. : u,'
lllustration 7: C,onputing PVR, BEP, Ptoffi*, etc. ., .li.*:ffi1*#;
The Reliable Batterv Co. furnishes you the lollowing income inlormation lor a linancial year -
Particulars First Half Second Half
Sales Rs.8,10,fi)() Rs.10,26,000
Profit earned Rs. Rs. 64,800
21,600
From the above, compute the following items assuming that Fixed Cost remains the same amount in both periods - (1) PV
Ratio, (2) Fixed Cost, (3) Profit or Loss where Sales are Rs.6,48,000, (4) Sales required to earn a profit of Rs.l,08,000.

Solution: Cost Statement (filled uo after comoutino WR WN

Pafticulars First Half Second Half
Sales (Given) = Rs'8'10'000 (Given) = Rs'10'26'000
Less: Variable Costs (bal. fi9.) = (Sales - Contrib.) = Rs.6,48,000 (bal. fiq.) = (Sales - Contrib.)= Rs. 8,20,800
Contribution (at20o/o See WN 1) = Rs.1,62,000 (at2Do/o See WN 1) = Rs. 2,05,200
Less: Fixed Costs (bal. fio) = (Contrib. - Profit) = Rs.1,40,400 (bal. fiq) = (Contrib. - Profit) = Rs. 1,40,400
Profit (Given) = Rs. 21,600 (Given) = Rs. ff,800

1. - - change
PV Ratio
in Profit x 100
=
Rs.64,800 - Rs.21,600 _ Rs.43,200
= 21o/o.
Change in Sales Rs.10,26,000 - Rs.8,10,000 Rs.2,16,000

2. Fixed Costs (as computed in Marginal Cost Statement above) = Rs.1,40,400.

3. Profit / (Loss) at Sales of Rs.6,48,000 = Contribution Less Fixed Cost

= (Rs.6,48,000 x 20olo) - Rs.1,40,400 = Rs.(10,800) Loss.

4. Sales required to earn a profit of Rs.1,08,000 =

Desired Contribution _ Fixed Cost +Desired Profit Rs.1,40,409.1 Rs.1,08,000
= Rs.12,42r0OO
PV Ratio PV Ratio 20o/o

ln 20X1, the turnover of Ganapati Co. which operated at a Margin ol Salety ol 25o/o amounted to Rs.9,00,000 and the PV
Ratio was 33 1t3yo. During 20X2, the Company estimated that although the same volume of Sales as in 20Xl would be
maintained, the Sales ValIe would go down due to decrease in Selling Price. There will be no change in Variable Costs.
The Company proposes to reduce its Fixed Costs through an intensive cost reduction programnne. These changes will
alter the PV ratio and Margin of Safety to 307o and 407o respectively in 20X2. Even if the Company closed down its
operations in 20X2, it would incur a minimum Fixed Cost ol Rs.50,000.

1. Present a comparative statement indicating the Sales, Variable Costs, Fixed Costs and Prolits for 20X1 and 20X2.
2. At what minimum sales will the Company be better otf by locking up the business in 20X2?
\
J

11.14
 MarginalCosting

Solution: 1. cost statement

Particularc Year 20X1 Year 2OX2
Rs.6r99,ooo
Sales (Given) = Rs'9'00'000 = Rs.g,57,143
70o/o

Less: Variable Cosb (bal. fiq.) = (Sales - Contrib.) = Rs.6,00,000 (no chanoe in volume) = Rs.6.00,000
Contribution (at 33.33olo of Sales) = Rs'3,00,000 (Sales less Variable Cost; = Ps.2,57,t43
Less: Fixed Costs (bal. fio) = (Contrib. - Profit) = Rs.2,25,000 (bal. fio) = (Contrib. - Profit) = Rs.1,54,286
Profit (see Comoutation below) = Rs. 75,OOO (see Computation below) = Rs.1,02,857
Maroin of SafeW (Given) 25o/ox Rs.9,00,000 = Rs.2,25,000 (Given) 40o/ox Rs.8,57,143 = Rs.3,42,857
PV Ratio (Given) 33.33olo (Given) = 30o/o
Profit=MOSxPVR Rs.2,25,000 x 33.33% = Rs.75,000 Rs.3,42,857 x 30o/o = Rs.1,02,857
Note: Since there is no change in volume, Total Variable Cost will rcmain the same for both years. Since PV Ratio
for 20X2 is 30o/o, Variable Cost = 100o/o - 30o/o = 70olo. Hence Sales figure is derived therefrom.
Avoidab.le Fjxed Costs _ R9.1,54,2q6__ Rs.50,000
2. Shut Down point _ = Rs.3r4Z62O.
PV Ratio 30o/o

A Company sells its product at Rs.l5 per unit. In a period, if it produces and sells 8,000 uniB, it incurs a loss of Rs.S per unit. lf
the volume is raised to 20,0fi) units, it earns a profit of Rs.4 per unit.
1. Compute the Contribution per unit.
2. Calculate the Break-Even Point both in terms ol rupees as well as in units.
3. Find out the Margin of Safety and Profit if the volume is 27,500 units.
4. lf minimum Fixed Costs are Rs.75,000!Itrgpgg!!ygg!lhq-!e!,-el,q!-pQ$ctbn, find out the Shut Down Point.
1. Cost Statement after PVR as per Note
Particularc Situation I (8.000 units) Situation II (20,000 units)
p.u. Rs. D.U. Rs.
Sales 15 1,20,000 15 3,00,000
Less: Variable Cost (bal. fis.) (Sales - Contrib.) 5 /t(},OOO 5 1,00,000
Contribution at66.670/o (see Note below) 10 80,000 10 2,00,000
Less: Fixed Cost (bal. fio.) (Contrib.- Profit) 1,20,OOO 1.20.000
ProfiV (Loss) 8,000xRs.S=(40,000) 20.000xRs.4=80.000
Note: pvRatio=change
in profitx100= Rs.90,000-Rs.(-40,000) R..1,?9,999
Change in Sales
=
Rs.3,00,000 - Rs.1,20,000 Rs.1,80,000
=66.670/o.

t'::9 *t;!'=o=:o,oo
2. (a) point (in
Break Even Rs.;=
PV
s",:o
Ratio =
Rs.1,8O,OOO.
66.670/o
=

(b) BreakEveneuantity= ,Fil"9,.co:! ,,

,. -Rs'-1'20'-000 = 12,000units.
=
Contribution per Unit Rs.10

3. Margin of Safety and Profit if Sales Volume is 27,500 units:

-
Margin of Safety (units; = Total Sales - Break Even Sales = 27 ,500 12,000 = 15,500 units.
Margin of Safety (in Rs.) = 15,500 units x Rs.15 per unit = Rs.2,32,500.
Profit = Contribution earned out of MOS Sales = (Rs.2,32,500 x 66.670/o) = Rs.l,SSrOOO.
Avoidable Fixed Costs _ Rs.1,20,000-Rs.75,000
4. (a) Shut Down Point (Rs.) =
PV Ratio 66.670/o
= Rs.67r5O0

(b) Shut Down Point (Quantity) =

Avoidable Fixed Costs Rs.1,20,000 - Rs.75,000
= dSOO units.
Contribution per Unit Rs.10

"illustmtionl0:CqrffiiwdffidffiMC@tm&SdoPri@8 "...::;.' . .:".",SiiE

A Factory engaged in manufacturing plastic buckets is working to 40% capaci$ and produces 10,0fl) buckets p.a. The present
cost break-up for one bucket is - Materials Rs.10, Labour Rs.3, and OH Rs.S (of which 60% is Fixed).

11.15
The Setling Price is Rs.20 per bucket.

ll it is decided to work the Factory at 50% capacity, the Selling Price falls by 3%. At 90o/o capacitt, the Selling Price falls by 5%,
accompanied by a similar fall in the price of material.

Calculate the Profit at 50% and 90% capacities, and also the BEP at those capacity productions.

Cnhrtiant of Profits and BEP

50o/o 90o/o
Capacity Levels
1o'ooo 10'ooo
Production (Units) x 5oo/o=12.500 units x 9oo/o=22,500 units
40o/o 4oo/o

p.u. Total p.u. Tota!

Rs.20-3olo = 19.40 2,42,500 Rs.20-5o/o=19'00 4,27,540
Sales
Less: Variable C,osb
Materials 10.00 1,25,000 Rs.10-5o/o= 9.50 2,13,750
3.00 37,500 3.00 57,500
Wages
2.00 2s_000 2.00 45,000
Variable OH (4oo/o of Rs.5)
Contribution 4.40 55,000 4.50 L,OL,25O
Less: Fixed OH (600/o x Rs.5 x 10,000) 30.000 30,000
Profit 25,000 7t,25O
*:''9'990 Rs'3o,ooo
BEQ= = 6,818 unlts = 6,6G7 units
Rs.4.40 Rs.4.50

BES = BEO "#ffi#Fr"

x Sellinq Price per unit 5,818 uts x 19.40 = Rs.1,32,270 5.557 uts x 19.00= Rs.1,26,673

liltil:.tti.',..**,:-,.,]..'..'-..:...i....l..:#i.f;u..i.i".;.li;ji,##8
'[ 6estadiish ;'Subiiatary company in lndia to produce Product K. Based on the estimated
Jipanese coniiini ti"iffiflU
annual sales of 40.dD units of th; Product, cost studies produled the following estl
Particulars Total Annual Costs Percent of Total Annual Cost which is variable
llaterial Rs.2,10,000 1fi)o/o

Labour Rs.1,50,0$ 8070

Factory Overheads Rs. 92,000 60o/o

Administration Exoenses Rs. t10,fi)0 35%

whowillreceiveacommissionof8o/ooftheSa|ePrice.
No portion of the Japanese Ofice Expenses is to be allocated to the lndian Subsidiary.

l. Gompute the Sale prlce per unit, to enable the Management to realize an estimated 10o/o Profit on sale
proceeds in lndia.
Sale Price is
2, Calculate the BEp in Rupee Sales and in number of units lor the lndian Subsidiary on the assumption that the
Rs.l4 per unit.
Galrrlianr 1- of Sale Price
(a) Commission is 8olo of Sales Revenue and Profit is 10o/o of Sales Revenue.
(b) So. Cost of Sales, i.e. Cost excluding Commission = 100o/o LBo/o - = 82o/o of Sales Revenue
(c) Total Costs excluding Commission = Rs.2,10,000 + ns.1,SO,OOO + ns.g = Rs.4,92,000

(d) Hence, Desired Totalsales Revenue = tr*#q = Rs.5r00,000

(e) Therefore, Sale Price per unit = = Rs.15 per unit

#*q9#L
2. of into Fixed and Variable
Item Total Costs p.a, Variable Costs o.a. Variable Costs p.u. Fixed Costs p.a.
Rs.2,10,000 100o/o = Rs.2,10,000 Rs.5.25 Nil
Material
Labour Rs.1.50,000 80o/o = Rs.1,20,000 Rs.3.00 Rs.30,000
Factol OH Rs. 92,000 600/o = Rs.55,200 Rs.1.38 Rs.36,800
Admin. OH Rs. 40.000 35o/o = Rs.14.000 Re.0.35 Rs.25.000
Rs.14x8o/o=Re.1.12 Nil
Commission
Total Rs.11.10 Rs.g2,8OO

11.16
 3. Computation of BEP (if SP = Rs'14 p'u')
per unit = Rs.14 - Rs'11'10 = Rs'2'90 per unit'
(a) Contribution per unit = Sale price per unit less Variable Cgst
= 32'000 units'
(b) Break Even Quantitv =
a;l##H *n =
H#fiq
(c)BreakEvenPoint(inRs')=BEQxSalePriceperunit=32,000unitsxRs.14=Rs.4,4&ooo.

Let Overall BEQ of three products X, Y and Z together be'Q'

units' At BEP Level, the ratio of quantity is
Solution:
-^,{ Eno/^ fnr Y Y and 7 The is ascertained as under -
x Y z
Products
Variable Cost p'u' 100-50=Rs.50 160-80=Rs.80 75-30=Rs.45
@ Contribution p.u. = Sale Price p.u. less 0.20 Q 0.30 Q 0.50 Q
(b) Break Even Quantity
10Q 24Q 22.5Q
(c)
IL,, Contribution
LUl lll luullvl r at
sL BEP
eLr Level (a x b)
(d)AtBEP,totatcont,io,80,o00.So,56.5Q=Rs.14,80,000.
Rs'11'-89'000
Therefore, Q - = 20195 units'
55.5
Product wise break-up of Overall Break - Even Quantity:
e Product X : 26,195 units x 0'20= 5,239 units
o Product Y : 26,195 units x 0'30= 7,858 units
o Product 7 : 26,195 units x 0.50= 13,098 units

,.-.,.,,-,,,,, :1" :, .. ,:.,1 ,r,:)i::..i: ' ,r,ii:,ftftif f"i,,ffi,, ., .- :,f i:ll:;$tf

--..
satgs_rr-rix is 4 units ol J and 3 units of K. The contribution
ilargin per unit are
ffiy sels trvo products, J .rii i.'ine
are.Rs.6,16,000 per month. Compute the Break-Even Point'
ibr,l anO Rs.20 for K. fixeO Costs

Pafticularc
1. Sales Mix Ratio
2. Contribution Per unit
3. Ratio of (lx 2
4Jo€chiere BEP, Required Contribution = Fixed Cost, Rs'6,16,000'

5. Break Even units per month) = (4 + Z

@00= l9r6ogunits.
i::11rjllq

fr:al;Uil;:;il';;;;;;iriics ot idarih ilultioroducts Ltd for a vear is as follgrvq -

Product A Product B Product C
Product
2.00,000 5,00,000 3,00,00q
Galaa

Variable ExPenses: 1,35,000

1,10,0m 2,80,000
Cost of Goods Sold
20.000 90,000 45,000
Sellino Exoenses
Fixed Erpenses: 45,000
30,000 75,000
Overheads
12,000 30.000 18.000

Tax
lncome Before . 28,000 25,000 57,000

Less: lncomeTax al4Wh- 11.200 10.000 22.800

16,800 15,000 34,200
Net lncome
ed ExPenses are allocated
among the products in proportion to their Budgeted Sales Value'

Lt.t7
Students'Handbook on Cost Accounting and Financial Management

Required:
1. Compute the Budgeted BEP of the Company as a whole from the data provided.
2. Draft an lncome Statement product-wise to ascertain the etlect on Budgeted lncome i@t of the Budgeted Sales Value
of Product B were shitted to Product A and C in equil'rupee amounts, so that the-total Budgeted Sales in rupees
-'
remain the same. a,t

3. Show the etfect of the shift suggested in (2) above on the Budgeted Break-Even Point of the whole Company.

1. of Overall PVR and BES

Product A B c Total
olo Rs. o/o Rs. olo Rs. Rs.
Sales 100o/o 2,00,000 1000/o 5,00,000 1000/o 3,00,000 10,00,000
Less: Variable Costs: COGS 5SP/o 1,10,000 560/o 2,80,000 45o/o 1,35,000 5,25,000
SOH l0o/o 20.000 L8o/o 90,000 L5o/o 45,000 1.55.000
Contribution 35o/o 70,000 25o/o 1,30,000 40o/o 1,20,000 3,20,000
Less: Fixed Costs: OH 30,000 75,000 45,000 1,50,000
Administration OH 12,000 30,000 18.000 60,000
Profit 28,000 25,000 57.000 1,10,000
Total Contribution Rs'3,20,000
OverallPVR
Total Sales
x 100 =
Value Rs.10,00,000
- 32o/o

Overall BES
Total Fixed Costs _ Rs.2,10,000 _
6,56,25O
Overall PV Ratio 32o/o

Note: (a) Variable Costs percentages are calculated, based on the amounts given in the question.
(b) Technically, Fixed Cosb are not product-related, and should not be apportioned to products. However, for
calculating product-wise profits, Fixed Costs are apportioned as per Companyt policy.

2. Revised Income Statement

half of the Budqeted Sales Value of Product B were shifted to Producb A and C in
Product A B c Total
(2,00,000 +1,25,000) (5,00,000 - 50o/o) = (3,00,000 +1,25,000)
(a) Revised Budgeted Sales
= 3,25,000 2,50,000 = 4,25,000 10,00,000
(b) Variable Costs as o/o of Sales
COGS at 55o/o,560/o and 45o/o 1,78,750 1,40,000 L,9t,250 5,10,000
SOH at 10o/o, 18o/o and 150/o 32,500 45.000 63,750 t.4t,250
(c) Contribution (a - b) t,t3,750 65,000 1,70,000 3,48,750
(d) Fixed Costs: OH (see Note) 48,750 37,500 63,750 1,50,000
Admin OH 19,500 15.000 25,500 60,000
(e) Profit before Tax (c - d) 45,500 12,500 80,750 1,38,750
(fl Tax at 40olo on (e) 18,200 5.000 32,300 55.500
(q) Profit after Tax (e - fl 27.300 7.500 48,450 83.2s0
Total Contribution Rs'3,48,750
OverallPVR
Total Sales Value
x 100 = Rs.10,00,000 - 34.875o/o

Overall BES
Total Fixed Costs _ Rs.2,10,000 _ 6,02,15O
Overall PV Ratio 34.8750/o
Note: Fixed OH and Administration Expenses Rs.1,50,000 and Rs.60,000 respectively are r*apportioned based on the
revised Budgeted Sales Value (as per Companyt Policy) i.e. 325 :250 : 425.

3. Effect of Sales Mix Change:

o Due to change in Sales Mix from least PV Ratio Product B (260/o), to higher PV Ratio Products A and C (35o/o and 40olo),
OverallPVR has increased from32o/oto34.875o/o. OverallBEP is reduced from Rs.6,56,250 to Rs.6,02,150.
. Also, the Net Income (i.e. PAT) will increase by Rs.17,250 (Rs,83,250 - Rs.66,000) over the Budgeted Income as a
result of the proposed change in product mix.

ffiffiion 15: @e kP!,n enl BEP drr b"hdd HBx Cfimgo ll81
Joy Ltd operating at 807o level of activity furnishes the following information for last year -
11.18
 Products A B c
Selling Price per unit Rs.10 Rs.l2 Rs.20
Profit as percentage on Selling Price 25Yo 33.33o/o 200h
Units produced and sold 10.0fi) units t5,{X}0 units 5,$0 units
Fixed Costs Rs.40,fi)O Hs"45,000 Rs.25,000

Prllng the next year, the Valqlle Costs are expected to increase by 107o. There will, however, be no change in Fixed Costs,
Selling Prices and the units tobe produced and sold. The sales potential for each of the products ls unlimited.

1. Prepare a statement showing PVR, BEP & MOS for last year and next year for the Company as a whole.
2. The Company intends to increase the production of only one of the 3 products to reach the full capacity levet, by
utilizing the spare capacity available. Assuming that all the three products take the same machine time, aivise with
reasons, as to which of the three products should be produced so that lhe overall profitability is the maximum.

Solution: 1, Ma Cost Statement (f at 80o/o

Pafticulars A B c Total
- Sales Ouantitv 10,000 units 15,000 units 5,000 units
Selling Price p.u. Rs.10 Rs.12 Rs.20
Sales Value 1,00,000 1,90,000 1,00,000 3,80,000
Less: Variable Costs (balancinq fiqure) 3s.ooo 7s,000 55.OOO 1,65,000
Contribution (Fixed Cost + Profit) 55,000 1,05,000 45,000 2,15,000
Less: Fixed Costs (given) 40.000 45,000 25,000 1,10,000
Profit (as o/o of Sale Price, qiven) 25,000 60,000 20,000 1,05,000
Individual PV Ratio | 6so/o I 5s.33o;T asolo
Total Contribution Rs'2,15,000
Overall PV Ratio =
Total Sales Value
x 100 = Rs.3,80,000 - 56.58o/o

Total Fixed Costs _ Rs.1,10,000 _

Overall BEP == 1,94,4L5
Overall PV Ratio 56.58o/o
Overall MOS = Total Sales - Overall BES = Rs.3,80,000 - Rs.1,94,415 1,85,595
Note:ProfitandFixedCosEarewrittenfirstinthisstatement.Contributioniswoffi
2. Evaluation of next
Pafticularc A B c
(a) Sellinq Price p.u. (as oer last vear) Rs.10.00 Rs.12.00 Rs.20.00
(b) Variable Costs p.u. (as per last year) (Total VC + Ouantity) Rs.3.50 Rs.5.00 Rs.11.00
(c) Variable Costs p.u. for next year (b + 10olo) Rs.3.85 Rs.5.50 Rs.12.10
(d) Revised Contribution p.u. for next vear (a - c) Rs.5.15 Rs.6.50 Rs.7.90

Since machine time for the 3 products are the same, the prody.c!yf,e|dilg the. h1gh99t contribution per unit should bq
preferred. Hence, Product C should be produced additionally next year, srias to r6acd full capdtiiy.

Present Total Output = 10,000 + 15,000 + 5,000 = 30,000 units at 80o/o capacit!. Hence, Total Capacity = 39=Oj'
80o/o
=
37,500 units. Hence, additional 7,500 unib of Product c will be produced next year.
\
Cost Statement at full
Particularc A B c Total
Sales Quantity 10,000 units 15.000 units 12,500 units
Contribution p.u. for next vear (as oer WN 2) Rs.6.15 Rs.6.50 Rs.7.90
Contribution 61,500 97,500 98,750 2,57,750
Less: Fixed Costs (qiven) 40.000 45.000 25,000 1.10.000
Profit 21.500 52,500 73,750 1,47,750

11.19
 has Ie a
15"000 Sales Value Rs.l.50,000
Sales Units
Rs.34,0fi1 Variable Costs Rs.6 oer unit
Fixed Expenses
d pVR, BEP and MoS, in each of the following cases -
(a) Decrease of 100/o in Selling Price.
(b) lncrease ol1ff/o Variable Costs.
(c) lncrease of Sales Volume by 2,000 units.
(d) lncrease ol Rs.6,0fi) in Fixed Costs.

Solution: Note: 1. Present Selling Price p.u. ,Y:!lo'ool

= 15,000 units
= Rs.lo p'u.
Variable Costs p.u. = Rs.10 - Rs'6 = Rs'4 p'u'
2. Present Contribution P.u. = Selling Price p.u. -
Contribution per unit Fixed Cosb
3. In the following calculations, PVR = x 100, BEQ =
Sales Pr ice per unit Contribution Per Unit

of BEP and MOS

BES = MOS (QttY) = MOS (Rs.) =
Particularc PVR = See Note BEQ = See Note x SP p.u.
BEO x SP p.u. Total Sales - BEQ MOS
6,500 x10 =
Data given
10 -6 = 4oo/o E#rq = 8,500 units
8,500 x10 =
Rs,85,000
15,000 - 8,500 =
6,500 units Rs.65,000
10
o_6 Rs'34,ooo 11,333 x9 = 15,000 - 11,333 = 3,667 x9 =
10o/o Decrease in 7--J = 33.33o/o =11.333 units Rs.1,01,997 3,567 units Rs.33,003
Selling Price 9 Rs.3

6.60 _34olo Rs.34,000 10,000 x10 = 15,000 - 10,000 = 5,000 x10 =

l0o/o Increase in 10 - =10.000 units Rs.50,000
10 Rs.3.40 Rs.1,00,000 5,000 units
Variable Costs
10-6 Rs.34,ooo 8,500 x10 = 17,000 - 8,500 = 8,500 x10 =
Sales Increase by
=4oo/o = g.5oo units Rs.85,000 8,500 units Rs.85,000
2000 units 10 Rs.4
10-6 Rs.4o,ooo 10,000 x10 = 15,000 - 10,000 = 5,000 x10 =
Rs.6,000 Increase =1o.ooo units
=4610/o Rs.1,00,000 5,000 units Rs.50,000
in Fixed Costs 10 Rs.4

Tffi+Iiiififfi
ffi ffi 'ffi;iffiil"i;;ffi iii4d;ffi :1i:'i0;.+d;f;*:lggf
Selling price is Rs.90 pei unit. Sales for the current year is expected to be 15,000
units and
PS^"]l'*"'n'
Fixed Overheads are Rs.1,40,000'

under a wage agreement, an increase of 1olo is q ?l ffire difl workers lrom the beginning rolncenlu-v+ar,rrhile
9!tf
and Fixed oH by From the abovC, you are required to
Material Cost is expected to lncrcase by 7.s%,variable oH by 5olo 3olo-

calculate the lollowing -

1. Present PV Ratio, BEP, MOS and Profits.
2, Sales required to earn a prolit of Rs.7,50,000, if the current cost and
price structure continues.
g. Revised pV Ratio and profits ol lorthcoming year il the current sales quantity and price were maintained.

l. New Selling price if the Current PV Ratio is to be maintained in the forthcoming

year'
Rs.90'
S. Sales euantity in the forthcoming year, to yield the same as present profits, il the Sale Price remains

Garrrlian. I Cnmnarison of orcsent and cost

Pafticularc Cunent Year Change Foflficoming Year
Rs.40 + 7.5o/o Rs.43.00
Materials
labour Rs.10 + 10o/o Rs.11.00
Rs. 4 + 5o/o Rs. 4.20
Variable OH
Rs.54 Rs.58.20
Total Variable Costs P.u
Rs.1,40,000 + 3o/o Rs.1,44,200
Total Fixed Costs

11.20
 MarginalCosting

1. Contribution per unit = Selling Price - Variable Costs = Rs.90 - Rs.54 = Rs.36.00 per unit.

Present PV Ratio
Contribution per
- x 100 =
unit
Rs'36
xloo=4oolo.
Sales Pr ice per unit Rs.90

Present BEP (in Rs.) _ Fixed Costs _ Rs.1,40,000 _ Rs.315OrOOO.

PV Ratio 40o/o
Fixed Costs Rs'1,4o,ooo
Present BEQ =
Contribution per Unit Rs.36
= 3,gg9 units.

Present MOS (in Rs.) = Total Sales - BES = (15,000 units x Rs.90) - Rs.3,50,000 = Rs.[0,OOOQO.
Present MOS (Qtty) = Total Sales Quantity - BEQ = 15,000 units - 3,889 units = 11,111 units.
Present Profits = Total Contribution - Fixed Costs = (15,000 units x Rs.36) - Rs.1,40,000 = Rs.4rOOrOOO.

2. Sales required to earn a profit of Rs.7,50,000 with the current cost and price structure:
Desired Contribution Fixed cost +Desired Profit Rs.1,40,000+Rs.7,50'000
ReqdSalesValue=
PV Ratio - PV Ratio - 4oo/o
= Rs.22r25r0oo

B*i#q = 24122 uniu,.

Required sares Quantity =
ffiffffi =

3. Revised Contribution of forthcoming year = Selling Price - Variable Costs = Rs.90 - Rs.58.20 = Rs.31.80 per uniL
cgntribution per unit
Revised pV Ratio - Sales Price per
x 100
unit = 5.11.99
Rs.90.00
x 100 = 35.33olo.
Revised Profits = Total Contribution - Fixed Costs = (15,000 units x Rs.31.80) - Rs.1,44,200 = Rs.3r32r800.

4. New Selling Price if the Current PV Ratio is to be maintained:'

Since Current PV Ratio is 40o/o, Variable Cost Ratio = 100% - 40o/o = 6o0/o.

Therefore, the Variable Costs of the forthcoming year constitute 600/o of the Selling Price.

Hence Revised Sellinq Price

' = T.!9,20
600/o
= Rs.97.00,

5. Sales Quantity to earn the same profit of current year if SP = Rs.90

ncq0
Desired Contribution Fixed Cost +Desired Profit Rs.1,44,200j 1s,4,00,000
= 17,113 uniB.
>Er€S
' = :--:--
V-uy
Contribution per unit
=
Contribution per unit Rs.31.80

ffii ttrgomp;ffiffid, , $ fflirii;tr:iiii;':i;:l;::iriiiiJi:': tr'*tiiiiii;:TftH,.riEi!# ffiflti*i,tif,iiliffi#ei:

A single product Company sells its products at Rs.60 per unit. Last year, the Company operated at a Margin of Salety of 40%.
The Fixed Costs amounted to Rs.3,60,fl)0 and the Variable Cost ratio to Sales was 80o/o.
ln the next year, it is estimated that Variable Gost will go up by 10o/o and the Fixed Costs will increase by 5olo.
1. Find the Setling Price required to be lixed in the next year to earn the same PVR as in last year.
2. Assuming the same Selling Price of Rs.60 per unit in the next year also,lind the number ol units required to be produced
and sold to earn the same profit as in last year.

Solution: 1. of SP to earn the same PVR

(a) PVR of last vear = 100o/o - Variable Cost Ratio =100o/o - 80o/o = 20o/o

(b) Variable Cost per unit (for last year) = Rs.60 x 80o/o = Rs.48 oer unit
(c) Variable Cost per unit (for next year) = Rs.48 + 10o/o = Rs.52.80 per unit
(d) Since PVR should be the same as last vear, Variable Costs should be = 80o/o of New Sale Price
*#;80
(e) Hence, New Sale Price for next year ' = 80o/o
= Rs.66 per unit

2. of Sale in last

(a) BES or last year =

ffi# = S-l4P = Rs.18,00,(X)0

(b) Since MOS = 40olo, BES = 600/o of Total Sales

LL.2L
Students'Handbook on Cost Accountinq and Financial Management

Rs'19r0-9'000
(c) Hence, MoS of last year
' - 600/o
x 40o/o = Rs.12,OQO0O
(d) Profit for last year = MOS x PVR = Rs.12,00,000 x 2oo/o = Rs.2,40,000
(e) So, Desired Contribution for next year = Next Year Fixed Cost + Profit
= (Rs.3.50.000 + 5olo) + Rs.2.40.000 = Rs.5,18,000
Desired Contribution Rs.6,18,000
(0 Required Sale Quantity =
Contribution per Unit = 851833 units
Rs.60.00 - Rs.52.80

: ",,4,:.:t *.ffi.i
Ftrm is
ol a Firm
The comDarative orolit statement ol two ouaners of ls as under
Particulars Quarter I Quarter ll
Units sold 2,500 3,750
Direct Materials_ Rs.87,500 ?
Direct Wages Rs.62,500 ?
Fixed and Variable Factory Overheads Rs.75,000 Rs.95,000
Sales Rs.2,75,fiXl ?
Profit Rs.50.fi10 Rs.66,250
ln the second quarter, the Direct MatgryqlPr!_cq haq tnsreasedby 2I)%. There was a saving of Rs.5,000 in Fixed Overheads in the
sscond quarter. The other costs and selling price rcmained the same. Determine the quantity that should have been sold in the
second quarter to maintain the same amount of profit per unit as in the first quarter.
1. Comoutation of Profit and VOH Der unat
(a) Direct Material
_ Rs.87,500
= Rs.35 per unit
2,500 units

(b) Direct Wages _ Rs.62,500

= Rs.25 per unit
2,500 units

(c) Selling Price

_ Rs.2,75,000
= Rs.110 per unit
2,500 units
Rs.50,000
(d) Profit = 2,500 units
= Rs.20 per unit

6s= _ (Rs.1,00,000 - Rs.75,000)

(e) variabre Factory
=39!99{' ?I,-(see Note)
Change in Quantity ' (3,750 - 2,500) units = Rs.20 per unit

I[ote: Tofal OH for 2no Ouarter Rs.1,00,000, (before considering reduction in Fixed OH Rs.5 ,000)
Quarter is Rs,
for znd ts as uncler
Particularc Rs.
Total Factory Overheads of 2no Quafter (before considering saving) 1,00,000
Less: Variable Factorv Overheads (3,750 units x Rs.20 calculated above) 75.000
Total Fixed Factory Overheads for 2n0 Quafter 25,000
Less: Savinq of Fixed Factorv Overheads 5.000
Net Factory Overheads for 2no quarter 20,000

2nt unit as in
Pafticularc Rs. Rs.
Selling Price per unit (WN 1c) 110
Less: Variable Costs per unit . Direct Materials (Rs.35 x L20o/o, i.e. 20o/o Pricn Increase) 42
Direct Wages (WN 1b) 25
Overheads
Variable Factory (WN 1e) 20 87
Contribution per unit 23
Less: Profit oer unit (WN ld) 20
Balance for Fixed Cost per unit 3
Total Fixed Cost Rs.20.000
Rs.20,000
Hence, Quantity required to be sold = 61667 units
Rs.3

Lt.22
 5.'Ifl*ifiEerence P'oint
ii

IltuSpfid2ft Frtemnilatiqr of BEp & lnditrerence point

Dlff Ventbres Co has decided to introduce a new product. The new product can be manufactured by either Capital lntensive
method or Labour lntensfue method. The manufacturing method will not atfect the quality of the- product. ihe estimated
costs by the two methods are -
Particulars Capital lntensive Labour lntensive
Raw Materials per unit
Direct Labour per unit
Rs.5.00 " Rs.5.60
0.5 DLH at Rs.12 = Rs.6.00 0.8 DLH at Rs.9 = Rs.7.20
Variable Overhead per unit 0,5 DLH at Rs.6 = Rs.3.00 0.8 DLH at Rs.6 = Rs.4.80
Additional Annual Fixed Manulacturinq Costs Rs.24.40.000 Rs.13,20,000
The Company's Market Research department has reco
selling expenses are estimated to be Rs.5,00,000 plus Rs.2 for each unit sold regardless of the manufacturing method.
1. Compute the estimated BEP in annual unit sales of the new product under the alternative manufacturing methods.
2. Compute the annual unit sales volume at which the Company would be indifferent between the two manufacturing methods.
3. Suggest which production method should be adopted.
Solution:
Pafticularc Capital fntensive Labour Intensive
Selling Price per unit Rs.30.00 Rs.30.00
Less: Variable Cost per unit
Direct Materials Rs. 5.00 Rs. 5.60
Direct Labour Rs. 6.00 Rs. 7.20
Variable Overhead Rs. 3.00 Rs. 4.80
Selling Expenses Rs. 2.00 Rs. 2.00
Contribution per unit Rs.14.00 Rs.10.40
Total Fixed Costs:
Manufacturing Costs Rs.24,40,000 Rs.13,20,000
Sellinq Costs Rs. 5,00,000 Rs. 5,00,000
Total Fixed Costs Rs.29,40,000 Rs.18,20,000
Fixed Costs
Brcak Even Point =
Contribution per Unit = 2,101000 units = 1,751000 units
Indifference Point (Qtty) = Difference in Fixed Costs Rs.29,40,000 - Rs. 18,20,000
Difference in Contribution per Unit = 3,11,111 units
Rs.14.00 - Rs.10.40
Decision on on the level of sales demand. as under -
Level of Sales Choice Reason
Upto1,75,000 units Neither Method Loss under'both the methods
Between 1,75,000 & 3,11,111 units Labour Intensive Method Lower Fixed Cost (bebw Indifference point)
Equal to 3,11,111 units Either of the Methods Indifference Point (Eoual Profits)
Above 3,11,111 units Capital Intensive Method Higher PVR (above IMifference Point) (High pVR
is indicated by hiqher Contribution per unit.)

$r!{ona: hffirence Poimwfth muHide options

The following are the cost data for three alternative ways of processing the clerical work for cases brought before the LC
Court
Particulars A B c
Nature Manual Semi-automatic Fully-automatic
Monthly Fixed Costs: Occupancy Rs.15,000 Rs.15,000 Rs.15,000
Maintenance Contract Nit Rs.5,000 Rs.10,000
Equipment Lease Nir Rs.25,000 Rs.1,00,000
Unit Variable Costs per report Supplies Rs.40 Rs.80 Rs.20
Labour 5 hours x Rs.40 t hour x Rs.60 0.25 hour x Rs.80
Calculate the Cost Indifference pointC. Interpret your results

tl.23
35
Students'Handbook on Cost Accounting and Financial

lf the present case load is 600 cases, and it is expected to go rp to 850 cases in near future, which method is the most
appropriate on cost considerations?

1. rhe Cost Indifference Points are as under

Pafticulars A B c
Manual Semi-automatic Fully-automatic
Nature
Rs.15,000 Rs.45.000 Rs.1,25,000
Fixed Costs
Rs.240 Rs.140 Rs.40
Variable Costs Der report

IndifferencePoint=,mffi,computedforeachsetofoptions,asunder_

Between A i,nd B = !g#f:Fff## = 300 reports.

c - Rs'1'-25'099 -Bs'1!'000 = 800 reports'

Between B and
Rs.140 - Rs.40
Rs'1?5'999 -Es'1!'000 550 reports
Between C and A - =
Rs.240 - Rs.40
point, the option with the. lower
Indifference point represents the situation when cost of two options are equal. Below this
ino ueyonA this point, the option with the lower variable cost per unit (or higher PV ratio) will
flxed cost ls more
".onorni.it lndifference point and the decisions are as under: (the numbers
be cheaper. In the above case, the interpretation of the
indicate the number of repofts / cases handled)

Choice AorB
2. Decision / Interpretation: Reason
Numher of Cases / reoolts Choice of method
A (Manual) Due to Lower Fixed Cost'
Less than 300 cases
Exactly 300 cases Either A or B Indifference Point (between A and B).
Above 300 but less than 800 cases B (Semi-automatic) Next Range of Lower Fixed Costs.
Exactly 800 cases Either B or C Indifference Point (between B and C).
Above 800 cases C (Fully automatic) Lower Variable Costs per repoft / case.

@600cases.'Thisisintherange300to800.HenceMethodB(semi-automatic)canbeused.
o should opt for Method C
When the Case Load is expected to go up to 850 cases in the near future, the Court
(fully automatic),
B is profitable in the range
Note: Indifference point between A and c (550 cases) is not relevant-for decision.making since
A and C'
300 to g00 cases. This indifference point will be relevant only if the choice lies between
of at 550
A B c
Pafticulars
Rs.15,000 Rs.45,000 Rs.1,25,000
Fixed Costs
Rs.240 x 550 = Rs.1,32,000 Rs.140x550=Rs.77,000 Rs.40x550=Rs.22,000
Variable Costs
Rs.1r47rOO0 Rs.1122rO00 Rs.1r47rO0O
Total Costs
es irrelevant in the overall analysis
among A, B and C.

6. Frofits under & Absorption Costin

lllustration 2*: Marginal ()osting vs Absorption Costing - Profit Statements ..N
{18

Production costs are Hs.40 per unit and

ABC Ltd can preduce 4,00,000-units of a product p.a.-at 100% capaclty, The variable
were Rs.24,00,000 p.a. and the
the Variabte $eqing rxpenses are Rs.12 per sold unit. The budgeted Fiied Production Expenses
year enied 31.t March,.the Company worked at 80% ol its capacity. The
Fixed Selling Expenses were Rs.l6,00,0ti0. During the
operating data for the year are as follows

tl.24
 Production 3,20,000 units
Sales at Rs.80 per unit 3,10,000 units
Stock of Finished Goods 40,000 units

Fixed Production Expenses are absorbed on the basis of capacity, and Fixed Selling Expenses are recovered on the
basis of period.

Prepare Statements of Cost and Profit lor the year ending 31,t March- (a) on the basis of Marginal Costing, and (b) on the basis
of Absorption Costing.

Solution: 1. Profit Statement under

Particulars Computation Rs.
Sales Value 3,10,000 units at Rs,80 per unit 2,48,00,000
Less: Variable Costs
Production Costs at Rs.40 Per unit 3,10,000 units at Rs.40 per unit t,24,00,000
Sellinq Costs at Rs.12 Per unit 3,10,000 units at Rs,12 per unit 37,20,000
g5,g0rooo
Contribution
Less: Fixed Costs Production 24,00,000 + Selling 16,00,000 40,00,000
Profit 46,801000

2. Profit Statement under

Pafticulars lomoutation Rs.
Sales Value 3,10,000 units at Rs.80 Per unit 2,48,00,000
Less: Cost of Goods Sold (as computed below)
Cost of Production Variable 3,20,000 units x Rs.40 pu = 1,28,00,000
Fixed (Note 1) 3,20,000 units x Rs.6 Pu = 19.20,000
Total Cost of Production Total (3,20,000 units x Rs.46 PU) = L,47,20,000
Add: Opening Stock of FG (Note 2) 40,000 units x Rs.46 Pu = 18.40,000
Cost of Goods available for Sale 1,65,60,000
Less: Closinq Stock of FG (Note 3) 50,000 units x Rs.46 pu = 23.00.000 1,40,20,000
Gross Profit 1105r40r000
Less: SOH Variable 3,10,000 units x Rs.12 per unit 37,20,000
. Fixed Given 16,00,000
Profit (before absorption adjustments) 52120r000
Less: Underabsorption of Fixed OH Incurred Rs.24,00,000 - Absorbed 19,20,000 4.80.000
Profi t (after absorption adiustments) 47,40,OOO
Note:
1. Absorbed Fixed Costs per unit (based on full capacity 4,00,000 units) ' = 4,00,000
-tfllo=op0-o
units
= Rs'6 per unit.

2. In the absence of specific cost of Opening Stock, it is taken at the same cost as current production, i.e. Rs.46 p'u.
3. Closing StockQuantity = Opening Stock+ Production-SaleQtty = 40,000 + 3,20,000-3,10,000 = 50rOOOunits.
This is valued at Current Cost (based on FIFO / WAC Methocl).

Reconci liation of Profi ts

Profits under Marginal Costing

Fixed Mfq Costs included in ,000 units x Rs.6 pu) =

Less: Fixed Mfs Costs included in 40,000 units x Rs.6 pu) = 2,40,000

Note: If F'txed Manufacturing Costs are included in Closing Inventory Valuation, to that extent, Closing Inventory Value
and hence Profits will be higher r,rnder Absorption Costing. Hence, this amount is added to the Profits under
Marginal Costing. The reverse will be the case in case of Opening Inventory Valuation.

Mega Company has just completed its first year of operations. The unit costs on a normal costing basis are as under -

11.25
Students'Handbook on Cost Accounting and Financial Management

Direct Material 4 kg at Rs.4 Rs. 16.00

Direct Labour 3 hrs at Rs.18 Rs. 54.00
Variable Overhead 3 hrs at Rs.4 Rs. 12.00
Fixed Overhead 3 hrs at Rs.6 Hs. 18.00
Total Rs.100.00
Selling and Administrative Costs are - (a) Variable Rs.20 per unit, (b) Fixed Rs.7,60,000.

Units produce6 = 24,000 Price

Units Selling = Rs.168
Units Sold =
worked
Direct Labour Hours = 72,000
Actual Fixed Overhead was Rs.48,000 less than the Budgeted Fixed Overhead. Budgeted Variable Overhead was Rs.20,000 less
than the Actual Varidble 0verhead. The Company used an expected actual activity level of 72,000 Direct Labour Hours to
compute the pre{etermined overhead rates.

Required:
1. Compute the Unit Cost and Total lncome under - (a) Absorption Costing, and (b) Marginal Costing.
2. Compute the Under or Over-absorption of Overhead,
3. Reconcile the difierence between the Total lncome under Absorption and Marginal Costing.

Solution: Note:
1. Budgeted Production = 72,000 hours = 3 hours per unit = 24,000 units. This is also equal to Actual Production.
2. It is assumed that Budgeted and Actual Selling and Administrative OH are the same.

1. of Actual and Fixed POH

Pafticulars Budoeted Production OH ActualProduction OH
Variable 72,000 hours x Rs.4 ph = Rs.2,88,000 2.88.000 + 20.000 (oiven) = Rs.3.08,000
Fixed 72.000 hours x Rs.6 oh = Rs.4.32,000 4,32,000 - 48,000 (qiven) = Rs.3,84,000

2. Profit Statement under

Pafticulars Tota! Rs. Rs. p.u.
(a) Sales (21.500 units x Rs.168 o.u) 36,12,000 168.00
(b) Variable Cost Direct Materials (24,000 units x Rs.16 P.u) 3,84,000 16.00
Direct Labour (24,000 units x Rs.54 p.u) 12,96,000 54.00
Variable POH (Actuals as per WN 1 above) (Rs.3,08,000 + 24,000 uts) 3.08.000 12.83
Variable Production Cost 19,99,000 82.83
Less: Closing Stock (2,500 units valued at Rs.82.83 Variable Cost) 2.07.083 82.83
Variable Cost of Goods Sold 17,80,9t7 82.83
Variable SOH & AOH (21,500 units x Rs.20 p,u) 4,30,000 20.00
Sub-Total Variable Cost 22,10,9L7 102.83
(c) Contribution (a - b) 14,01,083 65.t7
Id) Fixed Costs (POH Rs.3.84.000 + SOH & AOH Rs.7,60,000) (WN 1) LL,44,000 53.21
(e) Profit (c - d) 2,57,O83 11.96
(0 Total Costs per unit (b + d) or (a - e) 156.04

3. Profit Statement under

Pafticularc Total Rs. Rs. p.u.
(a) Sales (21.500 units x Rs.168 o.u) 36,12,000 168.00
(b) Variable Cost Direct Materials (24,000 units x Rs.16 p.u) 3,84,000 16.00
Direct Labour (24,000 units x Rs.54 p.u) 12,96,000 54.00
Variable POH (Absorbed 72,000 hoursx Rs.4 ph) 2,88,000 12.00
' Fixed POH (Absorbed 72,000 hoursx Rs.6 ph) 4,32,000 18.00
Production Cost of 24,000 units 24,00,000 100.00
Less: Closinq Stock (2,500 units valued at Rs.100.00 pu) 2,50,000 100.00
Production Cost of Goods Sold 21r5Or00O 100.00
Gross Profit (a - b 14.62,000 68.00

L7"26
 MarginalCosting

Pafticularc Total Rs. Rs. o.u.

(d) SOH & AOH (Fixed Rs.7,60,000 + Variable 21,500 unitsx Rs.20 p.u) 11.90.000 55.35
(e) Profit before Absorotion Adiustments (c - d) 2,72,OOO 12.65
(f) Absorption Adjustments: Absorbed OH Actual OH Difference
Var.POH underabsorbed 72,000 hrsx 4 ph = Rs.2,88,000 Rs.3,08,000 Rs.20,000 (20,000)
Fixed POH overabsorbed 72,000 hrsx 6 ph = Rs.4,32,000 Rs.3,84,000 Rs.48,000 48,000
(g) Net Profit after absorption adjustments (e + 0 3,00,000
(i) Total Costs per unit (b + d) or (a - e) 155.35
Note: Over and Under-absorbed Overheads are already indicated in statement. Hence, they
separately computed.

4. Profit Reconcaliation Statement between and

Pafticularc Rs.
Profit as per Marginal Costing System 2,57,083
Add: Fixed POH included in Closinq FG Valuation [(100.00 - 82.83) x 2,500 unitsl (approx) 42,9L7
Profit as per Absorption Costinq System (after Absorption Adiustments) 3,00,000

or
Pafticularc Rs.
Profit as per Marginal Costing System 2,57,083
Add: Variable POH overcharged in Marginal Costing [(12.83 12.00) x 21,500 units]
- (approx) L7,9t7
Less: Fixed POH overcharqed in Absorption Costing [(21,500 units x Rs.18 pu) - Rs.3,84,000] (3.000)
Profit as oer Absorotion Costinq System (before Absorption Adiustments) 2,72,OOO

irii,r,,',Tr fitrelu*tlon,,o'f'Pr eql ,* "Deciaio g Basics

lllustration 24: Evaluation of Prcpale
Tre Flnancial Controller of Kapila Ltd has prepared the following estimates of working results for the last year
Direct Material Rs. per unit 16.00
Direct Wages Rs. per unit 40.00
Variable Overhead Rs. per unit 12.00
Selling Price Rs. per unit 125.00
Fixed Expenses Rs.6,75,000 per annum.
Sales Rs.25,00,000 per annum.

During this year, it is expected that the Material Prices and Variable Overheads will go up by 10% and 5% respectively. As a
result of re+ngineering of business processes, the overall Direct Labour Etliciency will increase by 12o/o, but the Wage Rate
will go up by 57o. The Fixed Overheads are also expected to increase by Rs.1,25,000.

The Vice-President Manufacturing states that the same level of output as obtained in last year should be maintained this year also
and efforts should be made to maintain the same level of profit by suitably increasing the Selling Price.

The Vid+Presklent Marketing states that the market will not absorb any increase in the selling price. On the other hand, he
proposes that publicity involving advertisement expenses as given below will increase the quantity of sales as under -
AdvertisementExpenses(Rs.) 80,000 1,94,000 3,20,000 4,60,000
Additional units ol Sales 2,000 4,000 6,000 9,000

Required:
1. Present an lncome Statement for last year and this year.
2. Find the revised price and the petcentage of increase in the price for this year if the views of the Vice President
Manufacturing were accepted.
3. Evaluate the four alternative proposals by the Vice President Marketing. Determine the best output level to be budgeted
and prepare an Overall lncome Statement for this year at that level of output.

tL.27
 1. Profit Statement last and this
last Year This Year
Pafticulars
Rs.125.00 Rs.125.00
Sellinq Price p.u
Less: Variable Costs P.u
Rs.16+ l0o/o= Rs.17.60
Direct Material Rs.16.00
Rs.40.00 (See Note) = Rs.37.50
Direct Labour
Rs.12.00 Rs.12.00 + 5o/o = Rs.12.60
Variable OH
Rs.68.00 Rs.67.70
Total Variable Costs P.u
Rs.57.00 Rs.57.30
Contribution Per unit
(as per last Year) 20,000 units
Sales OuantiW Rs.25,00,000 + Rs.125 = 20,000 units
Rs.11,40,000 KS.I I,'TO,UUU
Total Contribution
Rs. 6,75,000 6,75,000 + 1,25,000 = Rs. 8,QQ,09[
!-ess: Fixed CosE
Rs.3,46rOOO
Profit Rs.4r55r0O0
Note:
o the iob, but will be paid 5olo lTlor€
since Labour Efficienry increases by l2o/o, rheworkers will take less time to complete
by way of Wage Rate increase. Hence, Revised Labour Cost
per unit will 5s B{q
x 105o/o= Rs.37'50 per unit'
ll2o/o

Alternatively, Revised Labour cost per unit can also be taken as I(RS.4O * 5olo rate
o increase) less 120lo savings due to
higher efficienry and lower time takenl = Rs'42 less 12olo thereon = Rs'36'96
per unit'
o It is presumed that the Labour Efficiency does not affect Variable Overheads'
last
n*i,^.t Drnfir + Fiyad costs = Rs-4.65.000 + Rs.8.00.000 = Rs.12,65,000
Rs.12.65.000
Desired Contribution per unlt = 20pOO;its = Rs.63.25 per unit

Add: Variable Costs per unit for this year = Rs.67.70 Per unit
ffe.nce. Oesired Sellinq price to maintain the same profit = Rs.130.95 per unit
3. of
Ootion 1 Option 2 Option 3 Ootion 4
Pafticulars
2,000 4,000 6,ooo 8,000
(a) Additional Sales QuantitY
Rs.1,14,600 FLs,2,29,200 Rs.3,43,800 Rs,4,58,400
(b) Additional Contribution at Rs.57.30 p.u
/a\ Arllilinnrl Arlvorticcment FYnenses Rs. 80.000 Rs.1,94,000 Rs.3.20.000 Rs.4.60.000
Rs. 34.600 Rs. 35,200 Rs. 23.800 (Rs. 1.600)
(d) Additional Net Benefit
Decision:ttrecompanisementexpensesofRs.1,94,000toincrease
Rs.3,46,000 + Rs.35,200 Rs.3r81,200'
year
rui"iOy 4,000 units. ThL revised profit foi this will be =

Special0rder il 99
lllustration 25: Aeeptance ol to
pOR Ltd manufactures medals for winners of athletic eventa and other contests. lts manufacturing Plant has the capacity
and sales level of 7,500 medals per month' The
produce 10,000 medats per month, The Company hry c.ulent-produc'tion
^..rr^-r I^*aafir *.,1,.r nriaa at
.r^*aarir marlual al tha
rha madal ic Pc 150- Cost data tor
fof OctObef is aS Undgf -
iS as

VartaUte Costs (that vary wlth units produced)

Rs.2,62,500
. Direct Materials
Rs.3,00,000
Direct Manulacturing Labour
Varhblc Costs (that vary with the number ol batches)
Rs. 75,000
set up, Matedals Handling, ouality control 150 batches x Rs.500 per batch
Rs.2,75,000
Fixed Manulacturing Costs
Rs.l,75,000
Fixad Markeiino Cosis
Total Rs.10,87,500
dals Per batch = 7'500 medals)'

peR Ltd has received a special one-timmnly order for 2,500 medals at Rs.100 per medal. The Special Order for 2,500 medals
requiros. PQR Ltd to manufacture the medals in 25 batches of 100 each.

Required:
1. Should POR Ltd accept the special order? Why? Explaln briefly'

11.28
2, Suppose the plant capacity was 9,000 medals instead of 10,000 medals each month. The Special Order
must be taken
eithir in lutl oi rejected totally. Should PQR Ltd accept the special order? Why? Explain briefly.

of medal(for customers
Rs.2,62,500
(a) Direct Material Cost per medal = = Rs.35 per medal
7,500 medals
Rs'3'00'000
(b) Direct Manufacturing Labour Cost per medal = 2,500 medals = Rs.40 per medal

(c) Average Set Up, etc. Costs per medal (for existing customers) = ,ffiO = Rs.10 per medal

(il contnbut'on per unit for existing customers = sP - vc = 150 - 35 - 40 - 10 = Rs.65 per medal
2. Evaluation of Speci, Order for medals
Particulars Rs.
2,50,000
Sales Revenue (2,500 medals x Rs'100 per medal)
Variable Costs Direct Material (2,500 medals x Rs'35 per medal)
87,500
Less:
Direct Manufacturing Labour (2,500 medals x Rs'40 per medal) 1,00,000
set-uDs. Materials Handlinq, Quality Control (25 batches x Rs'500 per batch) 12.s00

Contribution from SPecial Order 50.000

,sincethereissufficientsparecapacity(10,000_7,500 2,500
medals), and there will be an increase the operating profit by Rs'50,000'
3, Effect of reduced capacity (i.e. 9,000 medals)
Since the Special Order is indivisible, i.e. to be accepted or rejected totally, acceptance of Special order would reduce the
crlac leyel of 7.500 to (9.000 - 2,500) = 6,500 units.
Particulars Rs.
50,000
Additional Contribution due to Special Order (WN 2)
(6s,000)
Less: Loss of Contribution from existing customers (1,000 medals at Rs'65 per medal)
(15,000)
Net Loss of Contribution
Rs'15,000,theSpecialorderisnotacceptableinthiscase'

A manufacturer of a certain proauct has been seiling exclusively in the lndian Market upto now. The Company has iust
The latest lndian Cost
received its first export enquiry and wants to quote aJ competitively as the circumstances will allow.

34
Raw Materials
13
Direct Labour
6
Services
7
Works Overhead
2
Otfice Overhead
62
Total Costs
6
Add: Profit earned in lndia
68
lndian Selllnq Price
quoting Price somewhere DeMeen
between Hs.oz
Rs.62 ano
and Hs.ou
Hs.68 per unll
tnlt l0r
Tor Inls
rnrs expon
exPort oruel' une
oroer.
ihe Management is thlnking ol selling
a SellinE
q-uotin'g an iven lowdr prlce based on the principles of Marginal Costing. As the Firm'sAccountant'
of the Dlre=ctors suggests
you may
you are required tjltre louiest th-e management could quote on these principles, State clearly any assumptions that
inake on the above facts, and also on any other costs or facts.
for the asu
Pafticulars Rs. oer unit
RawMaterials (Variable) 34
Direct Labour (Variable) 13

Services (Assumed as Variable) 6

Maroinal Cost (see Notes / Assumptions below) 53

Notes / Assumptions:
1. It is assumed that sufficient production capacity exists so as to meet the Export Order, without affecting the supplies
now being made to the Indian Market. If any such disruption takes place, the negative costs of this disruption will be
included as direct or Oppoftunity Cost of fulfilling this expoft order'

tL.29
2. It is assumed that Work OH and Office OH are entirely fixed and should, therefore, be excluded in Marginal Costing'
3. Direct Costs of export order like Insurance, Special Packing, Import Duties in the foreign country, Special Commissions,
etc. would have to be separately calculated and added on to the above Marginal Cost of Rs.53 before the Selling Price is
finally determined / agreed.
4. The Firm should also determine whether the quoted price should be on FOB or CIF basis. Also, the benefits available
from exports, such as cash subsidy that may be available, should be considered.

lllusiration 27: Evaluation ol Special Order H 0f

A Company operates at 50o/o of capacity utilization. At this level ol operation, the sales Yalue is Rs.9,fi),000. At 100% capacity
utilization, the following costs and relationships will apply -
. Factory Overheads Rs.1,80,000(50% Variable)
o Factory Cost 60% of Sales.
r Selling Costs (75olo Variable) is 20olo of Sales.

The Company anticipates that its sales will increase up to 75% of capacity utilization. The Company also leceiveas a special
order from a Government Department. This order will occupy 15% of capacity utilization ol the plant. The Prime Cost of this
order is Rs.1,35,000 and the Variable Selling Cost will only be 2olo of the Sales Value otfered. Besides, the cost ol processing
the order is Rs.8,000. The Sales Price otfered is Rs.1,45,000'

Required:
1. Present a statement ol prolitability at 507o and7io/o levels of activity.
2. Evaluate the Government Order and state whethet it is acceptable or not.

cnlrrtianr 1- Prime Cost at l00o/o caoaciW utilization (Let Prime Cost

Prime Cost + Factorv Overhead = Factory Cost
X + IRs.90.000 Nariable) + 90,000 (Fixed)l = 60o/ox Rs.18,00,000
x + Rs.1,80,000 = Rs,101801000
x = Rs.9,00,000
So, Prime Cost is 500/o of Sales.
2. Fixed and Variable at l00o/o utilization
Sellino Cost = 2Oo/o of Sales Value = = 20o/o xRs.18,00,000 = Rs.3,60,000
Variable Sellinq Cost = 75o/o x Rs.3,60,000 = Rs.2,70,000
Fixed Sellinq Cost = 25o/o x Rs.3,60,000 = Rs.90,000

3. of 5oo/o and 75olo levels of

Levels of activiW 5Oo/o 75o/o
(a) Sales Value 9,00,000 13,50,000
Prime Cost at 500/o of Sales (WN 1) 4,50,000 6,75,000
Add: Variable Factory Overheads (WN 1) 45,000 67,500
Add: Fixed Factory Overheads (WN 1) 90.000 90.000
Factory Cost 5,85,000 8,32,500
Add: Variable Selling Cost (wN 2) 1,35,000 2,02,500
Fixed Sellinq Cost (wN 2) 90,000 90.000
(b) Total Cost of Sales 8,10.000 11.25.000
(c) Profit (a - b) 90,000 2,25,OOO

4. Evaluation of Government Order (15% of of

Particularc Rs.
(a) Sales Price offered 1.45.000
Prime Cost (given) 1,35,000
Variable Factory Overhead (WN 1) 13,500
Variable Selling Cost (20lo x Rs.1,45,000) 2,900
Processinq Cost (Given) 8.000
(b) Total Cost of Sales 1,59.400
(c) Profit /(Loss) (a - b) (14,400)
Oecision; fne Government order results in a loss of Rs.14,400 and is hence not acceptable.

11.30
l ,!*, #. :
A Comparry, which manufactures and sells three products.lurnishes the details for a month -
Products A B c
Number of units budgeted 1,00,000 units 38,000 units tl6,0fil units
Selling Price per unit Rs.50 Rs.80 Rs.60
Variable Costs per unit Rs.34 Rs.52 Rs.24
It has been proposed that an intensive advertisement campaign involving an expenditure of Rs.1,20,fi)0 per month and
reduction of Selling Prices wi!! increase the Sales of product C as under -
o ll Selling Price is reduced to Rs.55 per unit, the sales will increase to 59,0fi) units per month.
o lf Selling Price is reduced to Rs.51 per unit, the sales will increase to 65,000 units per month.

The Fixed Costs of the Company amount to Rs.34,20,000 per month.

1. Calculate the current monthly Break-Even Sales Value ol the Company.

2. Evaluate the two proposals and advise which of the proposals should be implemented.
3. Calculate the sales units required per month of Product C to justify the expenditure on advertisement in respect ol your
decision in (2) above.

Solution: 1. of PVR and BES

Products A B c Total
(a) Sale Ouantitv unib 1,00,000 38,000 u+6,000
(b) Sellinq Price oer unit Rs.50 Rs.80 Rs.60
(c) Variable Costs per unit Rs.34 Rs.52 Rs.24
(d) Contribution Der unit (b - c) Rs.16 Rs.28 Rs.36
(e) TotalContribution (d x a) Rs.16.00.000 Rs.10,64,000 Rs.16.56.000 Rs.43.20.000
(0 Sales Revenue (b x a) Rs.50.00.000 Rs.30.40.000 Rs.27.50.000 Rs.1,08.00.000
Total Contribution Rs.43,20,000
(g) Overall PVR x100 = 40olo
Total Sales Value Rs.1,08,00,000
Total Fixed Costs _ Rs.34,20,000 _
(h) Overall Monthly BES Rs.85r5Or000
Overall PV Ratio 40o/o

2. Evaluation of for c
Pafticularc Proposall Proposal II
(a) Contribution per unit 55-24 = Rs.31 5L-24 = Rs.27
(b) Total Contribution for 59,000 and 65.000 units 18,29,000 17.55.000
(c) Contribution from Products A and B (WN 1) 26,64,000 26,64,000
(d) Total Contribution (b + c) 44,93,000 4,19.000
(e) Additional Adveftisement Costs per month (qiven) 1,20,000 1,20,000
(0 Net Contribution (d - e) 43,73,000 42,99,000
Conclusion: Hence, Proposal I is more beneficial.

3. Computation of Sales Units required to as Der PrcDosal I

Particularc
Present Contribution of Product C (WN 1) Rs.16,56,000
Add: Adveftisement Cost Rs. 1,20,000
Total Desired Contribution Rs.17.76.000
-
Contribution per unit Rs.31
Rs'Y'16r000
No. of sales units required - Rs.31 57,291units

11.31