Edrona Exams | Complete examination management system

Cost Management

Cost & Management accounting

 

Question 1

Distinguish between Cost control and Cost reduction

Answer

Cost Control and Cost Reduction:

Cost control is operated through setting standards or targets and comparing actual performance therewith, with a view to identify deviation from standards or norms and taking corrective action in order to ensure that future performance conforms to standards or norms.

Cost reduction is a continuous process of critical cost examination, analysis and discharge of standards. Each subject of business viz products, process, procedures, methods, origin, personnel etc is critically examined and reviewed with a view of improving the efficiency &effectiveness and reducing the costs. Even in an organization where efficient cost control is in operation, there is always room for cost reduction.

 

Question 2

Discuss the essentials of a good Cost Accounting system.

Answer

Essentials of a good Cost Accounting System: The essential features, which a good Cost Accounting System should possess, are as follows:

  1. Informative and Simple: Cost Accounting System should be tailor-made, practical,simple and capable of meeting the requirements of a business concern.

  2. Accuracy: The data to be used by the Cost Accounting System should be accurate; otherwise it may distort the output of the system.

  3. Support from Management: Necessary cooperation and participation of executives from various departments of the concern is essential for developing a good system of Cost Accounting.

  4. Cost- Benefit: The Cost of installing and operating the system should justify the results.

  5. Precise Information: The system of costing should not sacrifice the utility by introducingmeticulous and unnecessary details.

  6. Procedure: A carefully phased programme should be prepared by using network analysisfor the introduction of the system.

  7. Trust: Management should have faith in the Costing System and should also provide a helping hand for its development and success.

 

Question 3

Discuss cost classification based on variability and controllability.

Answer

Cost classification based on variability

Fixed cost – these are costs, which do not change in total despite changes of a cost driver. A fixed cost is fixed only in relation to a given relevant range of the cost driver and a given time span. Rent, insurance, depreciation of factory building and equipment are examples of fixed costs where the final product produced is the cost object.

Variable costs- these are costs which change in total in proportion to changes of cost driver.

Direct material, direct labour are examples of variable costs in cases where the final product produced is the cost object.

Semi-variable costs – These are partly fixed and partly variable in relation to output e.g. telephone and electricity bill.

Cost classification based on controllability

Controllable costs – are incurred in a particular responsibility center and relate to a defined time span. They can be influenced by the action of the executive heading the responsibility center e.g. direct costs.

Uncontrollable costs – are costs which are not influenced by the action of the responsibility manager e.g. expenditure incurred by the tool room is controllable by the foreman in charge ofthat section, but the share of tool room expenditure which is apportioned to the machine shop is not controllable by machine shop foreman.

 

Question 4

Distinguish between

  1. Profit Centres and Investment Centres.

  2. Product Cost and Period Cost.

Answer

  1. Profit Centres and investment centres

A profit centre is a centre where the manager has the responsibility of generating and maximising profits. In such centres, the manager is responsible for revenue and cost. Investment centres are those centres which are concerned with earning an adequate ROI. In such centres, the manager is responsible for investment, revenue and cost.

2. Product costs and period costs

Product costs are costs which are associated with purchase and sale of goods. These are costs are used for inventory valuation and incurred up to factory stage.

Period costs are costs, which are not assigned to the products but are charged as expenses against revenues of the period in which they are incurred e.g. Selling, General Administrative and Distribution overheads.

 

Question 5

Explain controllable and non-controllable cost with examples.

Answer

Controllable costs are those which can be influenced by the action of a specified member of an undertaking. A business organization is usually divided into a number of responsibility centres and each such centre is headed by an executive. Controllable costs incurred in a particular responsibility centre can be influenced by the action of the executive heading that responsibility centre. Direct costs comprising direct labour, direct materials, direct expenses and some of the overhead are generally controllable by the shop level management.

Non-controllable costs are those which cannot be influenced by the action of a specified member of an undertaking. For example, expenditure incurred by the tool room is controllable by the tool room manager but the share of the tool room expense which is apportioned to the machine shop cannot be controlled by the machine shop manager. It is only in relation to a particular individual that a cost may be specified as controllable or not.

Note:

1. A supervisor may be unable to control the amount of managerial remuneration allocated to his department but for the top management this would be a controllable cost.

2. Depreciation would be a non-controllable cost in the short-term but controllable in the long terms.

 

Question 6

Distinguish between cost control and cost reduction.

Answer

Difference between Cost Control and Cost Reduction

 Cost Control

 Cost Reduction

 1. Cost control aims at maintaining the costs in   accordance with the established standards.

 1. Cost reduction is concerned with reducing costs.   It challenges all standards and endeavors to better   them continuously

 2. Cost control seeks to attain lowest   possible cost under  existing conditions.

 2. Cost reduction recognises no condition as   permanent, since a change will result in lower cost.

3. In case of Cost Control, emphasis ison past   and present

3.In case of cost reduction it is on present and future.

 4.Cost Control is a preventive function

 4.Cost reduction is a corrective function. It operates   even when an efficient cost control system exists.

 5. Cost control ends when targets are achieved

 5.Cost reduction has no visible end.

 

Question-7

STATE the Cost Control and Cost Reduction objectives of Cost and Management Accounting system.

Answer:

Among other objectives of cost and management accounting system, cost control and cost reduction are principal objectives. Cost control objective ensures the compliance with the set standard of procedures, Cost Reduction objective explores the possibilities of improvements in terms of both quantitative and qualitative aspects. Both objectives are briefly explained as below:

Cost Control: Maintaining discipline in expenditure is one of the main objectives of a good cost and management accounting system. It ensures that expenditures are in consonance with predetermined set standard and any variation from these set standards is noted and reported on continuous basis. To exercise control over cost, following steps are followed:

  1. Determination of pre-determined standard or results: Standard cost or performance targets for a cost object or a cost centre is set before initiation of production or service activity. These are desired cost or result that need to be achieved.

  2. Measurement of actual performance: Actual cost or result of the cost object or cost centre is measured. Performance should be measured in the same manner in which the targets are set i.e. if the targets are set up operation-wise, and then the actual costs should also be collected and measured operation-wise to have a common basis for comparison.

  3. Comparison of actual performance with set standard or target: The actual performance so measured is compared against the set standard and desired target. Any deviation(variance) between the two is noted and reported to the appropriate person or authority.

  4. Analysis of variance and action: The variance in results so noted are further analysed to know the reasons for variance and appropriate action is taken to ensure compliance in future. If necessary, the standards are further amended to take developments into account.

 

Cost Reduction: It may be defined "as the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product."

Cost reduction is an approach of management where cost of an object is believed to be further reduced. No cost is termed as lowest and every possibility of cost reduction is explored. To do cost reduction, the following action is taken:

  1. Each activity within an entity is segmented to analyse and identify value added and non value added activities. All non-value added activities are eliminated without affecting the essential characteristics of the product or process. Value chain Analysis, a strategic tool, developed by Michael Porter, is one of the methods to do value analysis.

  2. Conducting continuous research and study to know better way to do anything.

The three-fold assumptions involved in the definition of cost reduction may be summarised asunder:

  1. There is a saving in unit cost.

  2. Such saving is of permanent nature.

  3. The utility and quality of the goods and services remain unaffected, if not improved.

 

Question-8

STATE in brief how Cost Accounting and Management Accounting is related or different from each other.

Answer:

The term Cost Accounting and Management Accounting is interchangeably by various laureates as both the disciplines are interrelated. Management accounting to enable its users to take timely and judicious decisions takes inputs from cost accounting, financial accounting, statistics and operation management tools etc. Among other sources of information Cost Accounting system provides cost related information. There are few differences between these two disciplines which are tabulated as below:

Difference between Cost Accounting and Management Accounting

 

 Basis

 Cost Accounting

 Management Accounting

 (i)

 Nature

 It records the quantitative aspect only.

 It records both qualitative and

 quantitative aspect.

 (ii)

 Objective

 It records the cost of producing a product and providing a service.

 It Provides information  to management for planning and co-ordination.

(iii)

 Area

 It only deals with cost Ascertainment.

It is wider in scope as it includes   financial accounting, budgeting, taxation, planning etc.

(iv)

Recording of data

It uses both past and present figures.

 It is focused with the projection

 of figures for future.

(v)

 Development

Its development is related to

industrial revolution.

 It develops in accordance to the

 need of modern business world.

(vi)

 Rules and   Regulation

 It follows certain principles and   procedures for recording costs of different products.

 It does not follow any specific rules   and regulations.

 

Question 9

IPL Limited uses a small casting in one of its finished products. The castings are purchased from a foundry. IPL Limited purchases 54,000 castings per year at a cost of Rs800 per casting.

The castings are used evenly throughout the year in the production process on a 360- day-per- year basis. The company estimates that it costs Rs9,000 to place a single purchase order and about Rs300 to carry one casting in inventory for a year. The high carrying costs result from the need to keep the castings in carefully controlled temperature and humidity conditions, and from the high cost ofinsurance.

Delivery from the foundry generally takes 6 days, but it can take as much as 10days. The daysofdeliverytimeandpercentageoftheiroccurrenceareshowninthefollowingtabulation:

 Delivery time (days):

 6

 7

 8

 9

 10

 Percentage of occurrence:

 75

 10

 5

 5

 5

Required:

  1. Compute the economic order quantity(EOQ).

  2. Assume the company is willing to assume a 15% risk of being out of stock. What would be the safety stock? The re-order point?

  3. Assume the company is willing to assume a 5% risk of being out of stock. What would be the safety stock? The re-order point?

  4. Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for one year?

  5. Refer to the original data. Assume that using process re-engineering the company reduce sits cost of placing a purchase order to only Rs600. In addition, company estimates that when the waste and inefficiency caused by inventories are considered, the true cost of carrying a unit in stock is Rs720 per year.

  • Compute the new EOQ.

How frequently would the company be placing an order, as compared to the old purchasing policy?

Answer

  1. Computation of economic order quantity (EOQ):

 (A)

 Annual requirement

 =

 54,000 castings

 (C)

 Cost per casting

 =

 Rs800

 (O)

 Ordering cost

 =

 Rs9,000 / order

(c  i)Carrying cost per casting p.a.                       =             Rs300

\(E O Q=\sqrt{\frac{2 A O}{C \times i}}=\sqrt{\frac{2 \times 54000 \times 9000}{300}}=1800 \text { castings }\)

 

2) Safety stock

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

Safety stock for one day = 54,000/360 days = 150 castings

Re-order point = Minimum stock level + Average lead time X Average consumption

= 150 + 6 x 150 = 1,050 castings

 

3) Safety stocks:

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

Safety stock for three days = 150 x 3 days = 450 castings

Re-order point = 450 castings + 900 castings = 1,350 castings

4) Total cost of ordering = (54,000/1,800) x Rs 9,000 = Rs 2,70,000

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

b)Total number of orders to be placed in a year are180. Each order is to be placed after 2 days (1 year = 360 days). Under old purchasing policy each order is placed after 12 days.

 

Question 10

Discuss ABC analysis as a system of Inventory control.

Answer

ABC Analysis as a system of inventory control

It exercises discriminating control over different items of stores classified on the basis of investment involved.

‘A’ category of items consists of only a small %age i.e. approximately 10% of total items handled by stores but requires heavy investment, about 70% of inventory value, because of their high prices or heavy requirement or both.

‘B’ category of items are relatively less important. They may be approximately 20% of the total items of materials handled by stores. The %age of investment required is approximately 20% of total investment in inventories.

‘C’ category of items do not require much investment. It may be about 10% of total inventory value but they are nearly 70% of the total items handled by store. EOQ, re-order level concepts are usually used in case of ‘A’ category items.

 

Question 11

SK Enterprise manufactures a special product “ZE”. The following particulars were collected for the year 2004:

Annual consumption 12,000 units (360 days) Cost per unit Rs1

Ordering cost Rs12 per order Inventory carrying cost 24% Normal lead time 15 days

Safety stock 30 days consumption

Required:

  1. Re-order quantity

  2. Re-order level

  3. What should be the inventory level (ideally) immediately before the material order is received?

Answer

(i) How much should be ordered each time i.e., Economic Order Quantity (EOQ)

 

Question 12

Discuss the treatment of spoilage and defectives in cost accounting

Answer

Normal spoilage (which is inherent in the operation) costs are included in costs either by charging the loss due to spoilage to the production order or charging it to production overhead so that it is spread over all the products. Any value realized from the sale of spoilage is credited to production order or production overhead accounts, as the case may be. The cost of abnormal spoilage is charged to Costing P/L A/C. When spoiled work is the result of rigid specification, the cost of spoiled work is absorbed by good production while the cost ofdisposal is charged to production overhead.

Defectives that are considered inherent in the process and are identified as normal can be recovered by using the following method.

  • Charged to goods products

  • Charged to general overheads

  • Charged to departmental overheads

If defectives are abnormal, they are charged to Costing Profit and Loss Account.

 

Question 13

PQR Limited produces a product which has a monthly demand of 52,000 units. The product requires a component X which is purchased at Rs15 per unit. For every finished product, 2 units of Component X are required. The Ordering cost is Rs350 per order and the Carrying cost is 12% p.a.

Required:

  1. Calculate the economic order quantity for Component X.

  2. If the minimum lot size to be supplied is 52,000 units, what is the extra cost, the company has to incur?

  3. What is the minimum carrying cost, the Company has to incur?

Answer

Demand of ‘X’ is 1,04,000 units (2 × 52,000 units) as per instruction that for every finished product , 2 units of component ‘X’ are required.

 

Question 14

PQR Ltd., manufactures a special product, which requires ‘ZED’. The following particulars were collected for the year 2005-06:

(i) Monthly demand of Zed : 7,500 units

(ii) Cost of placing an order :Rs500

(iii)Re-order period : 5 to 8 weeks

(iv) Cost per unit :Rs60

(v)Carrying cost % p.a. : 10%

(vi)Normal usage : 500 units per week

(vii) Minimum usage : 250 units per week

(viii) Maximum usage : 750 units per week

Required:

(i) Re-order quantity.

(ii) Re-order level.

(iii) Minimum stock level.

(iv) Maximum stock level.

(v) Average stock level.

Answer

(iv) Maximum stock level

= Re-order level + Re-order quantity – (Minimum usage     Minimum re-order period)

= 6,000 + 3,873 – (5×250)

= 8,623 units

(v) Average stock level

= ½ (Minimum stock level + Maximum stock level)

= ½ (2,750 + 8,623)

= 5,687 units

 

Question 15

Discuss the use of perpetual inventory records and continuous stock verification, and its advantages.

Answer

Use of perpetual inventory records and continuous stock verification: Perpetual inventory represents a system of records maintained by the stores department. These are Bin cards and Stores ledger.

Bin Card is a quantitative record of receipt, issue and closing balance of each item of stores. Separate bin cards are maintained for each item. Each card is filled up with physical movement of goods i.e. on receipt and issue.

Stores Ledger is quantitative and value record of receipt, issue and closing balance of eachitem of stores. It is filled with the help of goods received note and material issue requisitions.

A perpetual inventory is usually checked by a programme of continuous stock taking. Continuous stock taking means physical checking of those records with actual stock.

Advantages of perpetual inventory

  1. Physical stocks can be counted and book balances adjusted as and when desired without waiting for entire stock taking to be done.

  2. Quick compilation of Profit and Loss Account due to prompt availability of stock figures.

  3. Discrepancies are easily located and thus corrective action can be promptly taken.

  4. A systematic review of the perpetual inventory reveals the existence of surplus, dormant, obsolete and slow moving materials, so that remedial measures may be taken in time.

  5. Fixation of various stock levels and checking of actual balance in hand.

 

Question 16

ZED Company supplies plastic crockery to fast food restaurants in metropolitan city. One of its products is a special bowl, disposable after initial use, for serving soups to its customers. Bowls are sold in pack 10 pieces at a price of Rs50 per pack.

The demand for plastic bowl has been forecasted at a fairly steady rate of 40,000 packs every year. The company purchases the bowl direct from manufacturer at Rs40 per pack within a three days lead time. The ordering and related cost is Rs8 per order. The storage cost is 10% per cent per annum of average inventory investment.

Required:

(i) Calculate Economic Order Quantity.

(ii) Calculate number of orders needed every year.

(iii) Calculate the total cost of ordering and storage bowls for the year.

(iv) Determine when should the next order to be placed. (Assuming that the company does maintain a safety stock and that the present inventory level is 333 packs with a year of 360 working days.)

Answer

333 / 400 x 3.6 days 3 days requirement

 

(c) Time interval for placing next order

Inventory left for day’s requirement – Lead time of delivery 3 day’s requirements – 3 days lead time = 0

This means that next order for the replenishment of supplies has to be placed immediately.

 

Question 17

ABC Limited has received an offer of quantity discounts on its order of materials as under:

Price per tonnes Tonnes (Rs) Nos.

4,800 Less than 50

4,680 50 and less than 100

4,560 100 and less than 200

4,440 200 and less than 300

4,320 300 and above

 

The annual requirement for the material is 500 tonnes. The ordering cost per order is Rs6,250 and the stock holding cost is estimated at 25% of the material cost per annum.

Required :

(i) Compute the most economical purchase level

(ii) Compute E.O.Q. if there are no quantity discounts and the price per tonne is Rs5,250.

Answer

  1. Calculation of most economical purchase level:

A= Annual requirement = 500 tonnes

The total cost of purchase ordering cost and carrying cost of 500 tonnes is minimum Rs 23,32,437.50 when the order size is 300 tonnes. Hence most economical purchase level is 300 tonnes.

= 69 tonnes

A is the annual requirement for the material. O is the ordering Cost per order

Ci is the carrying Cost per unit per annum.

 

Question 19

Distinguish between bill of material and material requisition note.

Answer

 Bills of material

 Material Requisition Note

 1. It is document by the drawing office

1.It is prepared by the foreman of the

consuming department.

2. It is a complete schedule of component parts and raw materials required for a particular job or work order.

2. It is a document authorizing Store- Keeper to   issue Material to the consuming department.

3. It often serves the purpose of a Store Requisition as it shown the complete schedule of materials required for a particular job i.e. it can replace stores requisition.

3. It cannot replace a bill of material.

4. It can be used for the purpose of quotation

4. It is useful in arriving historical cost only.

5. It helps in keeping a quantitative control on               materials draw through stores Requisition.

5. It shows the material actually drawn from stores.

 

Question 20

Following details are related to a manufacturing concern:

 Re-order Level

 1,60,000 units

 Economic Order Quantity

 90,000 units

 Minimum Stock Level

 1,00,000 units

 Maximum Stock Level

 1,90,000 units

 

Average Lead Time

6 days

Difference between minimum lead time and Maximum lead time

4 days

 

Calculate:

(i) Maximum consumption per day Minimum consumption per day

Answer

Difference between Minimum lead time Maximum lead time = 4 days Max. lead time – Min. lead time = 4 days

Or, Max. lead time = Min. lead time + 4 days............................................ (i)

Average lead time is given as 6 days i.e.

Max. Lead time Min. Lead time / 2 = 6 days......................................................................................................................... (ii)

 

Putting the value of (i) in (ii),

 

Min. lead time + 4 days Min. Lead time / 2 = 6 days

 

Or, Min. lead time + 4 days + Min. lead time = 12 days Or, 2 Min. lead time = 8 days

Or, Minimum lead time = 8days / 2 = 4 days

 

Putting this Minimum lead time value in (i), we get Maximum lead time = 4 days + 4 days = 8 days

(i) Maximum consumption per day:

Re-order level = Max. Re-order period × Maximum Consumption per day 1,60,000 units = 8 days × Maximum Consumption per day

Or, Maximum Consumption per day = 1,60,000units / 8days = 20,000 units

(ii) Minimum Consumption per day:

Maximum Stock Level =

Re-order level + Re-order Quantity – (Min. lead time × Min. Consumption per day)

Or, 1,90,000 units = 1,60,000 units + 90,000 units – (4 days × Min. Consumption per day) Or, 4 days × Min. Consumption per day = 2,50,000 units – 1,90,000 units

Or, Minimum Consumption per day = 60,000 units / 4 days = 15,000 units

 

Question 21

A company manufactures 5,00,000 units of a product per month. The cost of placing an order is Rs1,000. The purchase price of the raw material is Rs50 per kg. The re-order period is 4 to 8 days. The consumption of raw materials varies from 14,000 kg to 18,000 kg per day, the average consumption being 16,000 kg. The carrying cost of inventory is 20% per annum.

You are required to CALCULATE

(i) Re-order quantity

(ii) Re-order level

(iii) Maximum level

(iv) Minimum level

(v) Average stock level

Answer:

(i)Reorder Quantity (ROQ) = 34,176 kg. (Refer to working note)

 

(ii) Reorder level (ROL) = Maximum usage × Maximum re-order period

= 18,000 kg. × 8 days = 1,44,000 kg.

(iii) Maximum level = ROL + ROQ – (Min. usage × Min. re-order period)

= 1,44,000 kg. + 34,176 kg. – (14,000 kg.× 4 days)

= 1,22,176 kg.

(iv) Minimum level = ROL – (Normal usage × Normal re-order period)

= 1,44,000 kg. – (16,000 kg. × 6 days)

= 48,000 kg.

 

Question 22

ZED Limited is working by employing 50 skilled workers. It is considered the introduction of incentive scheme-either Halsey scheme (with 50% bonus) or Rowan scheme of wage payment for increasing the labour productivity to cope up the increasing demand for the product by 40%. It is believed that proposed incentive scheme could bring about an average 20% increase over the present earnings of the workers; it could act as sufficient incentive for them to produce more.

Because of assurance, the increase in productivity has been observed as revealed by the figures for the month of April, 2004.

 

Hourly rate of wages (guaranteed)            =        Rs 30

Average time for producing one unit by one worker at the previous performance (This may be taken as time allowed) = 1.975 hours

Number of working days in the month        =        24

Number of working hours per day of each worker    =  8

Actual production during the month            =         6,120 units

Required:

(i) Calculate the effective rate of earnings under the Halsey scheme and the Rowan scheme.

(ii) Calculate the savings to the ZED Limited in terms of direct labour cost per piece.

(iii) Advise ZED Limited about the selection of the scheme to fulfill their assurance.

Answer

Working notes:

1. Computation of time saved ( in hours) per month :

= (Standard production time of 6,120 units – Actual time taken by the workers)

= (6,120 units x 1.975 hours – 24 days x 8 hrs per day x 50 skilled workers)

= (12,087 hours – 9,600 hours)

= 2,487 hours

2. Computation of bonus for time saved hours under Halsey and Rowan schemes:

Time saved hours = 2,487 hours (Refer to working note 1)

Wage rate per hour = Rs 30

Bonus under Halsey Scheme = ½ x 2,487 hours x Rs 30 (with 50% bonus) = Rs 37,305

 

(i) Computation of effective rate of earnings under the Halsey and Rowan schemes:

Total earnings (under Halsey scheme) = Time wages + Bonus (Refer to working note 2)

= 24 days x 8 hours x 50 skilled workers x Rs 30 + Rs 37,305

= Rs 2,88,000 + Rs 37,305 = Rs 3,25,305

Total earnings (under Rowan scheme) = Time wages + Bonus (Refer to working note 2)

= Rs 2,88,000 + Rs 59,258.38

= Rs 3,47,258.38

Effective rate of earnings per hour (under Halsey Plan Rs 33.89 (Rs 3,25,305 ÷ 9,600 hrs.)

Effective rate of earnings per hour (under Rowan Plan Rs 36.17 (Rs 3,47,258.38 ÷ 9,600 hrs)

 

(ii) Savings to the ZED Ltd. in terms of direct labour cost per piece:

Rs

Direct labour cost (per unit) under time wages system      = 59.25        (1.975 times per unit × Rs 30)

Direct labour cost (per unit) under Halsey Plan         =  53.15     (Rs 3,25,305 ÷ 6,120 units)

Direct labour cost (per unit) under Rowan Plan   =  56.74       (Rs 3,47,258.38 ÷ 6,120 units)

Savings of direct labour cost under:

Halsey Plan= Rs 6.10         (Rs 59.25  - 53.15)

Rowan Plan   = Rs 2.51      (Rs 59.25     56.74)

(iii) Advise to ZED Ltd : (about the selection of the scheme to fulfill assurance)

Halsey scheme brings more savings to the management of ZED Ltd, over the present earnings of Rs 2,88,000 but the other scheme viz Rowan fulfils the promise of 20% increase over the present earnings of Rs 2,88,000 by paying 20.58% in the form of bonus. Hence Rowan Plan may be adopted.

 

Question 23

Discuss the Gantt task and bonus system as a system of wage payment and incentives.

Answer

Gantt Task and Bonus System

This system is a combination of time and piecework system. According to this system a high standard or task is set and payment is made at time rate to a worker for production below the set standard.

Wages payable to workers under the plan are calculated as under:

 Output

 Payment

 (i) Output below standard

 Guaranteed time rate

 (ii) Output at standard

 Time rate plus bonus of 20% (usually) of time rate

 (iii) Output over standard

 High piece rate on worker’s output .(It is so fixed ,so

as to include a bonus of 20% of time rate)

 

Question 24

The existing Incentive system of Alpha Limited is as under:

Normal working week 5 days of 8 hours each plus 3 late shifts of 3 hours each

Rate of Payment Day work: Rs160 per hour

Late shift: Rs225 per hour

Average output per operator for 49-hours week i.e. 120 articles including 3 late shifts

In order to increase output and eliminate overtime, it was decided to switch on to a system of payment by results. The following Information is obtained:

Time-rate (as usual) :Rs160 per hour

Basic time allowed for 15 articles : 5 hours Piece-work rate : Add 20% to basic piece-rate Premium Bonus : Add 50% to time.

Required:

Prepare a Statement showing hours worked, weekly earnings, number of articles produced and labour cost per article for one operator under the following systems:

a) Existing time-rate

b)Straight piece-work

c) Rowan system

d)Halsey premium system

Assume that 135 articles are produced in a 40-hour week under straight piece work, Rowan Premium system, and Halsey premium system above and worker earns half the time saved under Halsey premium system.

Answer

Table showing Labour Cost per Article

 Method of Payment

Hours  worked

Weekly earnings

 Number articles   produced

labour cost per article

 Existing time rate

 49

 Rs 8,425.00

 120

 Rs 70.21

 Straight piece rate system

 40

 Rs 8,640.00

 135

 Rs 64.00

 Rowan Premium System

 40

 Rs 9,007.41

 135

 Rs 66.72

 Halsey Premium System

 40

 Rs 8,600.00

 135

 Rs 63.70

 

Time allowed for 135 articles = 67.5 hours

Actual time taken for 135 articles = 40 hours

 

Question 25

Discuss the treatment of Idle time and Overtime premium in Cost Accounting.

Answer

Treatment of Idle time and Overtime Premium in Cost Accounting

  • Normal idle time is treated as a part of the cost of production. Thus, in the case of direct workers, an allowance for normal idle time is built into labour cost rates. In case of indirect workers, normal idle time is spread over all the products or jobs through the process of absorption of factory overheads.

  • Abnormal idle time cost is not included as a part of production cost and is shown as a separate item in costing Profit and Loss Account.

  • Management should aim at eliminating controllable idle time and on a long-term basis reduce even the normal idle time.

  • If overtime is resorted to at the desire of the customer, then overtime premium may b charged to the job directly.

  • If overtime is required to cope with general production programme or for meeting urgent orders, the overtime premium should be treated as overhead cost of the particular department/cost centre.

 

Question 26

Enumerate the remedial steps to be taken to minimize the labour turnover.

Answer

The following steps are useful for minimizing labour turnover:

  1. Exit interview: An interview be arranged with each outgoing employee to ascertain the reasons of his leaving the organization.

  2. Job analysis and evaluation: to ascertain the requirement of each job.

  3. Organisation should make use of a scientific system of recruitment, placement and promotion for employees.

  4. Organisation should create healthy atmosphere, providing education, medical and housing facilities for workers.

  5. Committee for settling workers grievances.

 

Question 27

Distinguish between Job evaluation and Merit rating.

Answer

Job Evaluation and Merit Rating:

  • Job evaluation is the assessment of the relative worth of jobs within a company and merits rating are the assessment of the relative worth of the man behind the job.

  • Job evaluation and its accomplishment are means to set up a rational wage and salary structure where as merits rating provides a scientific basis for determining fair wages for each worker based on his ability and performance.

  • Job evaluation simplifies wage administration by bringing an uniformity in wage rates where as merits rating is used to determine fair rate of pay for different workers.

 

Question 28

Standard Time for a job is 90 hours. The hourly rate of guaranteed wages is Rs50. Because of the saving in time a worker a gets an effective hourly rate of wages of Rs60 under Rowan premium bonus system. For the same saving in time, calculate the hourly rate of wages a worker B will get under Halsey premium bonus system assuring 40% to worker.

Answer

Increase in Hourly Rate of Wages (Rowan Plan) is (Rs 60 – Rs 50) = Rs 10

This is Equal to

 

Question 29

Which is better plan out of Halsey 50 percent bonus scheme and Rowan bonus scheme for an efficient worker? In which situation the worker get same bonus in both schemes?

Answer

Rowan Bonus Scheme pays more bonus if the time saved is below the 50 per cent of time allowed and if the time saved is more than 50 percent of time allowed then Halsey bonus scheme pays more bonus. Generally, time saved by a worker is not more than 50 per cent of time allowed. So, the Rowan bonus scheme is better for an efficient worker. When the time saved is equal to 50 per cent of time allowed then both plans pays same bonus to a worker.

 

Question 30

Enumerate the causes of labour turnover.

Answer

Causes of Labour Turnover : The main causes of labour turnover in an organisation/ industry can be broadly classified under the following three heads :

a) Personal Causes;

b) Unavoidable Causes; and

c)Avoidable Causes.

Personal causes are those which induce or compel workers to leave their jobs; such causes include the following:

  1. Change of jobs for betterment.

  2. Premature retirement due to ill health or old age.

  3. Domestic problems and family responsibilities.

  4. Discontent over the jobs and working environment.

Unavoidable causes are those under which it becomes obligatory on the part of management to ask one or more of their employees to leave the organisation; such causes are summed up as listed below:

  1. Seasonal nature of the business;

  2. Shortage of raw material, power, slack market for the product etc.;

  3. Change in the plant location;

  4. Disability, making a worker unfit for work;

  5. Disciplinary measures;

  6. Marriage (generally in the case of women).

Avoidable causes are those which require the attention of management on a continuous basis so as to keep the labour turnover ratio as low as possible. The main causes under this case are indicated below:

  1. Dissatisfaction with job, remuneration, hours of work, working conditions, etc.,

  2. Strained relationship with management, supervisors or fellow workers;

  3. Lack of training facilities and promotional avenues;

  4. Lack of recreational and medical facilities;

  5. Low wages and allowances.

 

Question 31

A skilled worker is paid a guaranteed wage rate of Rs120 per hour. The standard time allowed for a job is 6 hour. He took 5 hours to complete the job. He is paid wages under Rowan Incentive Plan.

(i) Calculate his effective hourly rate of earnings under Rowan Incentive Plan.

(ii) If the worker is placed under Halsey Incentive Scheme (50%) and he wants to maintain the same effective hourly rate of earnings, calculate the time in which he should complete the job.

Answer

(i) Effective hourly rate of earnings under Rowan Incentive Plan Earnings under Rowan Incentive plan =

Question 32

The following particulars have been extracted from the records of MJ Ltd.

 

 Workers

 A

 B

 C

 Actual hours worked in a month

 152

 160

 136

 Hourly rate of wages

 Rs50

 Rs55

 Rs48

 Production in units

 

 

 

 Product- P

 84

 -

 240

 Product- Q

 144

 -

 540

 Product -R

 184

 100

-

Standard time allowed per unit of each product is:

                          P                             Q                             R

Minutes             12                           18                          30

 

For the purpose of piece rate,each minute is valued at Rs1/-

You are required to CALCULATE the wages of each worker under:

(i) Guaranteed hourly rate  basis

(ii) Piece work earnings basis, but guaranteed at 75% of basic pay (guaranteed hourly rate)if the earnings are less than 50% of basic pay.

(iii) Premium bonus basis where the worker receives bonus based on Rowan scheme.

Answer:

  1. Computation of wages of each worker under guaranteed hourly rate basis

 Workers

 Actual hours worked in a week

Hourly rate of wages (Rs)

Wages (Rs)

(a)

(b)

(c)

(d) = (b) × (c)

A

 

B

152

 

160

50

 

55

7,600

 

8,800

C

136

48

6528

 

 

  1. Computation of wages of each worker under piece work earnings basis

 

Worker A

Worker B

Worker C

Product

Rate per

unit

Units

Wages (Rs)

Units

Wages (Rs)

Units

Wages (Rs)

(a)

(b)

(c)

(d= b*c)

(e)

(f = b*e)

(g)

(h=b*g)

P

 

Q

 

R

12

 

18

 

30

84

 

144

 

184

1,008

 

2,592

 

5,520

-

 

-

 

100

-

 

-

 

3,000

240

 

540

 

-

2,880

 

9,720

 

-

 

9,120

 

3,000

 

12,600

Since each worker has been guaranteed at 75% of basic pay, if their earnings are less than 50% of basic pay (guaranteed hourly rate), earning of the workers will be as follows: Workers A and C will be paid the wages as computed viz., Rs9,120 and Rs12,600 respectively. The computed earnings under piece rate basis for worker B is Rs3,000 which is less than 50% of basic pay i.e., Rs 4,400 (Rs8,800 × 50%) therefore B would be paid Rs6,600 i.e. 75% × Rs8,800 .

Working Notes:

(i) Piece rate / perunit

Product

Standard time per unit in minutes

Piece rate  each minute (Rs)

 Piece rate per unit

(Rs)

(a)

(b)

(c)

(d) = (b) × (c)

P

 

Q

 

R

12

 

18

 

30

1.00

 

1.00

 

1.00

12.00

 

18.00

 

30.00

 

(ii) Time allowed to each worker

Worker A = (84 units × 12 minutes) + (144 units × 18 minutes) + (184 units × 30 minutes)

= 9,120 minutes or 152 hours

Worker B = 100 units × 30 minutes

= 3,000 minutes or 50 hours

Worker C = (240 units × 12 minutes) + (540 units × 18 minutes)

= 12,600 minutes or 210 hours

 

Question 33

The existing incentive system of Alpha Limited is as under:

Normal working week 5 days of 8 hours each plus 3 late shifts of 3 hours each

Rate of Payment:

Day work: Rs160 per hour

Late shift: Rs225 per hour

Average output per operator for 49-hours 240 articles week i.e. including 3 late shifts

In order to increase output and eliminate overtime, it is decided to switch on to a system of payment by results. The following information is obtained:

Time-rate (as usual) :Rs160 per hour

Basic time allowed for 15 : 2.5 hours articles

Piece-work rate : Add 20% to basic piece rate

Premium Bonus : Add 50% to time.

If during the last week 270 articles are produced in a 40-hour week.

Required:

(i) CALCULATE weekly earnings, number of articles produced and labour cost per article for one operator under the following systems:

(a) Existing time-rate

b)Straight piece-work

c) Rowan system

d) Halsey premium system

(ii) PREPARE a Statement showing hours worked, weekly earnings, number of articles produced and labour cost per article for one operator under the above systems.

Answer:

(i) (a) Existing time rate

 

 

Question 34

Discuss the treatment of under-absorbed and over-absorbed factory overheads in cost accounting.

Answer

Treatment of under absorbed and over absorbed factory overheads in cost accounting: Factory overheads are usually applied to production on the basis of pre-determined rate

= Estimated normal overheads for the period / Budgeted No. of units during the period

The possible options for treating under / over absorbed overheads are

  • Use supplementary rate in the case of substantial amount of under / over absorption

  • Write it off to the costing profit & loss account in the event of insignificant amount / or abnormal reasons.

  • Carry forward to next accounting period if operating cycle exceeds one year.

 

Question 35

Discuss the step method and reciprocal service method of secondary distribution of overheads.

Answer

Step method and Reciprocal Service method of secondary distribution of overheads

Step method: This method gives cognisance to the service rendered by service department to another service dep’t, thus sequence of apportionments has to be selected. The sequence here begins with the dep’t that renders service to the max number of other service dep’t. After this, the cost of service dep’t serving the next largest number of dep’t is apportioned.

Reciprocal service method : This method recognises the fact that where there are two or more service dep’t, they may render service to each other and, therefore, these inter dep’t services are to be given due weight while re-distributing the expense of service dep’t. The methods available for dealing with reciprocal servicing are:

  • Simultaneous equation method

  • Repeated distribution method

  • Trial and error method.

 

Question 36

Explain: Single and multiple overhead rate.

Answer

Single and multiple overhead rate: A single overhead rate, when computed for the entire factory is known as the blanket rate.

Blanket rate = Overhead cost of entire factory / total quantum of the base selected

The blanket rates can be utilised in the following cases;

i) Where only one major product is being produced.

ii)Where several products are produced but: (a) all products pass through all departments and (b) all products require the same length of time in each department.

When the above conditions are not applicable, separate departmental rates should be used. Multiple rates involve computation of separate rates for each production department, service department, cost-centre, each product or line and each production factor.

 

Question 37

Discuss the treatment of research and development expenditures in cost accounting.

Answer

If research is conducted in the methods of production, the expenses should be charged to production overhead. If the research relates to administration, the expenses are charged to administration overheads. If it is related to market research, the expenses are charged to S&D overheads. Development costs incurred in connection with a particular product should be charged directly to that product. Such expenses are usually treated as deferred revenue expenditure and recovered as cost per unit of the product when production is fully established. Routine nature research expenses are charged to general overheads.

 

Question 38

A manufacturing unit has purchased and installed a new machine of Rs12,70,000to its fleet of 7 existing machines. The new machine has an estimated life of 12 years and is expected to realise Rs70,000 as scarp at the end of its working life. Other relevant data are as follows:

  1. Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This includes 300hoursforplantmaintenanceand92hoursforsettingupofplant.

  2. Estimated cost of maintenance of the machine is Rs25,000(p.a.).

  3. Rs The machine requires a special chemical solution, which is replaced at the end of each week (6 days in a week) at a cost of Rs400 each time.

  4. Four operators control operation of 8 machines and the average wages per person amounts to Rs420 per week plus 15% fringe benefits.

  5. Electricity used by the machine during the production is 16 units per hour at a cost of Rs3 per unit. No current is taken during maintenance and setting up.

  6. Departmental and general works overhead allocated to the operation during last   year   was Rs50,000. During the current year it is estimated to increase 10% of this amount.

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

Answer

Computation of Machine hour Rate

 

Per year

   Per hour

 (unproductive)

  Per hour

 (productive)

 Standing charges

 

 

 

Operators wages

 

 

 

4  × 420  ×  54

90,720

 

 

Add: Fringe Benefits 15%

13,608

 

 

 

1,04,328

 

 

 Departmental and general overhead

 

 

 

(50,000 + 5,000)

 55,000

 

 

 Total Std. Charging for 8 machines

 1,59,328

 

 

 Cost per Machine 1,59,328/8

 19,916

 

 

 Cost per Machine hour 19,916/2,200

 

 9.05

 

 19,916/2,292

 

 

8.69

 

Machine hours:

 

 

 

Setting time unproductive (2,592-300-92)= 2200

 

 

 

Setting time productive (2,592-300) = 2,292

 

 

 

Machine expenses

 

 

 

Depreciation (12,70,000 -70,000)/(12 × 2,200)

 

45.45

 

(12,70,000-70,000)/(12 × 2,292)

 

 

43.63

Electricity (16 × 3)

 

48.00

 

(16 × 3 × 2,200)/2,292)

 

 

46.07

Special chemical solution (400 × 54)/2,200/ 2,292

 

9.82

9.42

Maintenance (25,000/2,200)

 

11.36

 

(25,000/2,292)

 

 

10.91

Machine Hour Rate

 

123.68

118.72

 

Question 39

From the details furnished below you are required to compute a comprehensive machine-hour rate:

Original purchase price of the machine (subject to depreciation at 10% per annum on original cost)

 

 Rs3,24,000

Normal working hours for the month

 

 200 hours

(The machine works to only 75% of capacity)

 

 

Wages of Machine man

 Rs125 per day (of 8 hours)

 

Wages for Helper (machine attendant)

Rs75 per day (of 8 hours)

 

 Power cost for the month for the time worked

 

 Rs 15,000

Supervision charges apportioned for the machine

 centre for the month

 

 Rs 3,000

 Electricity & Lighting for the month

 

 Rs 7,500

 Repairs & maintenance (machine)   including Consumable stores per month

 

 

 Consumable stores per month

 

 Rs 17,500

 Insurance of Plant & Building (apportioned) for the year

 

 Rs 16,250

 Other general expense per annum

 

 Rs 27,500

The workers are paid a fixed Dearness allowance of Rs1,575 per month. Production bonus payable to workers in terms of an award is equal to 33.33% of basic wages and dearness allowance. Add 10% of the basic wage and dearness allowance against leave wages and holidays with pay to arrive at a comprehensive labour-wage for debit to production.

Answer

Computation of Comprehensive Machine Hour Rate

 

 Per month(Rs)

 Per hour(Rs)

 Fixed cost

 

 

Supervision charges

3,000

Electricity and lighting

7,500

Insurance of Plant and building

1,354.17

(16,250×1/12)

 

 Other General Expenses (27,500×1/12)

 2,291.67

 Depreciation (32,400×1/12)

 2,700

 

 16,845.84

 112.31

 Variable Cost

 

 

 Repairs and maintenance

 17,500

 116.67

 Power

 15,000

 100.00

 Wages of machine man

 

 44.91

 Wages of Helper

 

 32.97

 Machine Hour rate (Comprehensive)

 

 Rs 406.86

Effective machine working hour’s p.m.

200 hrs. × 75% = 150 hrs.

Wages per machine hour

 

 Machine man

 Helper

 Wages for 200 hours

 

 

 (Rs 125× 25)

 Rs 3,125

 

 (Rs 75× 25)

 

 Rs 1,875

 D.A.

 Rs 1,575

 Rs 1,575

 

 Rs 4,700

 Rs 3,450

 Production bonus (1/3 of above)

 1,567

 1,150

 

 6,267

 4,600

 Leave wages (10%)

 470

 345

 

 6,737

 4,945

 Effective wage rate per machine hour (150 hrs in all)

 Rs44.91

 Rs32.97

 

Question 40

Discuss the accounting of Selling and Distribution overheads.

Answer

Accounting of Selling and Distribution Overheads

It is difficult to determine an entirely satisfactory basis for computing the overhead rate for absorbing selling and distribution overheads. The basis usually adopted is:

  • Sales value of goods

  • Cost of goods sold

  • Gross profit on sales

  • Number of orders or units sold

 

Expenses

Basis for allocation

Salaries in Sales Department

Advertisements 

Show room expenses

Rent of finished goods, go downs and expenses on own delivery vans.

Estimated time devoted to the sale of various products.

Actual amount incurred for each product

Average space occupied by each product

Average quantities delivered during a period

 

Question 41

RST Ltd. has two production departments: Machining and Finishing. There are three service departments: Human Resource (HR), Maintenance and Design. The budgeted costs in these service departments are as follows:

 

  HR

  Rs

  Maintenance

   Rs

 Design

   Rs

 Variable

 1,00,000

 1,60,000

 1,00,000

 Fixed

 4,00,000

 3,00,000

 6,00,000

 

 5,00,000

 4,60,000

 7,00,000

The usage of these Service Departments’ output during the year just completed is as follows: Provision of Service Output (in hours of service)

 

Users of Service

                     Providers of Service

HR

Maintenance

Design

 HR

 Maintenance

 500

 Design

 500

 500

 Machining

 4,000

 3,500

 4,500

Finishing

5,000

4,000

1,500

Total

10,000

8,000

6,000

Required:

(i) Use the direct method to re-apportion RST Ltd.’s service department cost to its production departments.

(ii) Determine the proper sequence to use in re-apportioning the firm’s service department cost by step-down method.

(iii) Use the step-down method to reapportion the firm’s service department cost.

Answer

(i)  Apportionment of Service Department Overheads amongst production departments using Direct Method:

 

Production Deptts.

Service Deptts.

Machining

Rs

Finishing

Rs

HR

Rs

Maintenance

Rs

Design

Rs

Overhead as per primary

distribution

 

 

5,00,000

4,60,000

7,00,000

 Apportionment design

 5,25,000

 1,75,000

 

 

 

 4,500 : 1,500

 

 

 

 

 

 Maintenance

 2,14,667

 2,45,333

 

 

 

3,500 : 4,000

 

 

 

 

 

HR 4,000 : 5,000

2,22,222

2,77,778

 

 

 

 

9,61,889

6,98,111

 

 

 

 

(ii) The proper sequence for apportionment of service department overheads is

First               HR

Second        Maintenance

Third          Design

The sequence has been laid down based on service provided.

(iii) Apportionment of Service Department overheads amongst production departments using step-down method.

 

 Production Department

 Service Department

Machining

Rs

Finishing

Rs

HR

Rs

Maintenance

Rs

Design

Rs

Overhead as per

 

 

5,00,000

4,60,000

7,00,000

primary

 

 

( )5,00,000

25,000

 

distribution

2,00,000

2,50,000

 

( )4,85,000

25,000

Apportionment HRD 4

 

 

 

 

 

: 5 :     : 0.5 : 0.5

2,12,188

2,42,500

 

 

30,312

Maintenance 7 : 8:   : 1

5,66,484

1,88,828

 

 

( )7,55,312

Design 3 : 1

9,78,672

6,81,328

 

 

 

 

Question 42

Explain briefly the conditions when supplementary rates are used.

Answer

When the amount of under absorbed and over absorbed overhead is significant or large, because of differences due to wrong estimation, then the cost of product needs to be adjusted by using supplementary rates (under and over absorption/actual overhead) to avoid misleading impression.

 

Question 43

Distinguish between Fixed overheads and Variable overheads.

Answer

Fixed overheads v/s Variable Overheads

Fixed overheads are not affected by any variation in the volume of activity, e.g., managerial remuneration, rent etc. These remain the same from one period to another except when they are deliberately changed.Fixed overheads are generally variable per unit of output or activity.

On other hand the variable overheads that change in proportion to the change in the volume of activity or output, e.g., power consumed, consumable stores etc. The variable overheads are generally constant per unit of output or activity

 

Question 44

What are the methods of re-apportionment of service department expenses over the production departments? Discuss.

Answer

Methods of re-apportionment of service department expenses over the production departments

  1. Direct re-distribution method.

  2. Step method or non-reciprocal method.

  3. Reciprocal Service method

Direct re-distribution Method: Service department costs under this method are apportioned over the production departments only, ignoring services rendered by one service department to another.The basis of apportionment could be no. of workers .H.P of machines.

Step Method or Non-Reciprocal Method:

This method gives cognizance to the service rendered by service department to another service department. Therefore, as compared to previous method, this method is more complicated because a sequence of apportionments has to be selected here. The sequence here begins with the department that renders service to the maximum number of other service departments.

 

Production Department

Service Department

P1

 

 

 

 

 

 

 

 

 

P

 

 

 

 

 

 

 

 

 

P3

 

 

 

 

 

 

 

 

 

S1

 

 

 

 

 

 

 

 

 

S2

 

 

 

 

 

 

 

 

 

 

S3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reciprocal Service Method:

This method recognizes the fact that where there are two or more service departments they may render service to each other and, there these inter-departmental services are to be given due weight while re-distributing the expenses of service department.

The methods available for dealing with reciprocal services are:

  • Simultaneous equation method

  • Repeated distribution method

  • Trial &Error method.

 

Question 45

You are given the following information of the three machines of a manufacturing department of X Ltd.:

 

 Preliminary estimates of expenses (per annum)

Total

(Rs)

Machines

A

(Rs)

B

(Rs)

C

(Rs)

 Depreciation

 20,000

 7,500

 7,500

 5,000

 Spare parts

 10,000

 4,000

 4,000

 2,000

 Power

 40,000

 

 

 

 Consumable stores

 8,000

 3,000

 2,500

 2,500

 Insurance of machinery

 8,000

 

 

 

 Indirect labour

 20,000

 

 

 

 Building maintenance expenses

 20,000

 

 

 

 Annual interest on capital outlay

 50,000

 20,000

 20,000

 10,000

 Monthly charge for rent and rates

 10,000

 

 

 

 Salary of foreman (per month)

 20,000

 

 

 

 Salary of Attendant (per month)

 5,000

 

 

 

 

(The foreman and the attendant control all the three machines and spend equal time on them) The following additional information is also available:

 

 Machines

 A

 B

 C

 Estimated Direct Labour Hours

 1,00,000

 1,50,000

 1,50,000

 Ratio of K.W. Rating

 3

 2

 3

 Floor space (sq. ft.)

 40,000

 40,000

 20,000

There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The manufacturing department works 8 hours in a day but Saturdays are half days. All machines work at 90% capacity throughout the year and 2% is reasonable for breakdown.

You are required to :

Calculate predetermined machine hour rates for the above machines after taking into consideration the following factors:

  • An increase of 15% in the price of spare parts.

  • Anincreaseof25%intheconsumptionofsparepartsformachine‘B’&‘C’only. 20% general increase in wages rates.

 

Answer

Computation of Machine Hour Rate

 

 

Basis   of

apportionment

 

Total

      Machines

 A

 B

 C

Rs

 Rs

 Rs

 Rs

(A)     Standing

Charges

 

 

 

 

 

Insurance

Depreciation Basis

8,000

3,000

3,000

2,000

Indirect Labour

Direct Labour

24,000

6,000

9,000

9,000

Building

Maintenance expenses

Floor Space

20,000

8,000

8,000

4,000

 Rent and Rates

 Floor Space

 1,20,000

 48,000

 48,000

 24,000

 Salary of foreman

 Equal

  2,40,000

  80,000

 80,000

 80,000

 Salary of attendant  

 Equal

 60,000

  20,000

  20,000

  20,000

 Total standing charges

 

 4,72,000

 1,65,000

 1,68,000

 1,39,000

 Hourly rate for standing   charges

 

 

   84.75

   86.29

  71.40

(B)  Machine  Expenses:

 

 

 

 

 

 Depreciation

 Direct

 20,000

 7,500

 7,500

 5,000

Spare parts

Final estimates

13,225

4,600

5,750

2,875

 Power

 K.W. rating

 40,000

 15,000

 10,000

 15,000

 Consumable Stores

 Direct

  8,000

  3,000

  2,500

  2,500

 Total Machine expenses

 

 81,225

 30,100

 25,750

 25,375

Hourly Rate for Machine expenses

 

 

15.46

  13.23

  13.03

 Total (A + B)

 

 553,225

 1,95,100

 1,93,750

 1,64,375

Machine Hour rate

 

 

   100.21

     99.52

    84.43

Working Notes:

(i)  Calculation of effective working hours:

No. of holidays 52 (Sundays) + 12 (other holidays) = 64 Saturday (52 – 2) = 50

No. of days (Work full time) = 365 – 64 – 50 = 251

 

(iii) Amount of Indirect Labour is calculated as under:

 

 Rs

 Preliminary estimates

 20,000

Add: Increase in wages @ 20%

 4,000

 

24,000

  • Interest on capital outlay is a financial matter and, therefore it has been excluded from the cost accounts.

 

Question 46

How do you deal with the following in cost account?

  1. Packing Expenses

  2. Fringe benefits Answer

Packing expenses: Cost of primary packing necessary for protecting the product or for convenient handling, should become a part of the prime cost. The cost of packing to facilitate the transportation of the product from the factory to the customer should become a part of the distribution cost. If the cost of special packing is at the request of the customer, the same should be charged to the specific work order or the job. The cost of fancy packing necessary to attract customers is an advertising expenditure. Hence, it is to be treated as a selling overhead.

Fringe benefits: These are the additional payments or facilities provided to the workers apart from their salary and direct cost-allowances like house rent and city compensatory   allowances. If the amount of fringe benefit is considerably large, it may be recovered as direct charge by means of a supplementary wage or labour rate; otherwise these may be collected as part of production overheads.

 

Question 47

The following account balances and distribution of indirect charges are taken from the accounts of a manufacturing concern for the .year ending on 31st March,2012:

 Item

Total Amount

 Production Departments

Service

Departments

(Rs)

X (Rs)

Y (Rs)

Z (Rs)

A (Rs)

B (Rs)

 Indirect Material

 1,25,000

 20,000

 30,000

 45,000

 25,000

 5,000

 Indirect Labour 

 2,60,000

 45,000

 50,000

 70,000

 60,000

 35,000

 Superintendent's Salary

 96,000

-

-

96,000

-

-

 Fuel & Heat

15,000

 

 

 

 

 

 Power

1,80,000

 

 

 

 

 

 Rent & Rates

 1,50,000

 

 

 

 

 

 Insurance

 18,000

 

 

 

 

 

 Meal Charges

 60,000

 

 

 

 

 

 Depreciation

 2,70,000

 

 

 

 

 

 

The following departmental data are also available:

 

Production Departments

Service Departments

X

Y

Z

A

B

 Area (Sq. ft.)

 4,400

 4,000

 3,000

 2,400

 1,200

 Capital Value of Assets (Rs)

 4,00,000

 6,00,000

 5,00,000

 1,00,000

 2,00,000

 Kilowatt Hours

 3,500

 4,000

 3,000

 1,500

-

 Radiator Sections

 20

 40

 60

 50

 30

 No. of Employees

 60

 70

 120

 30

 20

 

Expenses charged to the service departments are to be distributed to other departments by the following percentages:

 

 X 

 Y

 Z

 A

 B

 Department A

 Department B

 30

 25

 30

 40

 20

 25

 -

 10

 20

 -

Prepare an overhead distribution statement to show the total overheads of production departments after re-apportioning service departments' overhead by using simultaneous equation method.' Show all the calculations to the nearestrupee.

Answer

Primary Distribution of Overheads

 Item

 Basis

 Total   Amount (Rs)

 Production Departments

 Service

Departments

X (Rs)

Y (Rs)

Z (Rs)

A (Rs)

B (Rs)

 Indirect Material

 Actual

 1,25,000

 20,000

 30,000

 45,000

 25,000

 5,000

 Indirect Labour

 Actual

 2,60,000

 45,000

 50,000

 70,000

 60,000

 35,000

Superintendent’s

Salary

 Actual

 96,000

 -

 -

 96,000

-

-

Fuel & Heat

Radiator Sections

{2:4:6:5:3}

 15,000

 1,500

 3,000

 4,500

 3,750

 2,250

Power

Kilowatt Hours

{7:8:6:3:0}

 1,80,000

 52,500

 60,000

 45,000

 22,500

-

Rent & Rates

Area (Sq. ft.)

{22:20:15:12:6}

 1,50,000

 44,000

 40,000

 30,000

 24,000

 12,000

Insurance

Capital Value of Assets {4:6:5:1:2}

 18,000

 4,000

 6,000

 5,000

 1,000

 2,000

Meal Charges

 No.of Employees

{6:7:12:3:2}

 60,000

 12,000

 14,000

 24,000

 6,000

 4,000

Depreciation

Capital Value of Assets {4:6:5:1:2}

 2,70,000

 60,000

 90,000

 75,000

 15,000

 30,000

Total overheads

 

 11,74,000

 2,39,000

 2,93,000

 3,94,500

 1,57,250

 90,250

Secondary Distribution of Overheads

 

Production Departments

X (Rs)

Y (Rs)

Z (Rs)

 Total overhead as per primary distribution

 2,39,000

 2,93,000

 3,94,500

 Service Department A (80% of 1,69,668)

 50,900

 50,900

 33,934

 Service Department B (90% of 1,24,184)

 31,046

 49,674

 31,046

 Total

 3,20,946

 3,93,574

 4,59,480

 

Question 48

Distinguish between cost allocation and cost absorption.

Answer

Distinguish between Cost allocation and Cost absorption:

Cost allocation is the allotment of whole item of cost to a cost centre or a cost unit. In other words, it is the process of identifying, assigning or allowing cost to a cost centre or a cost unit.

Cost absorption is the process of absorbing all indirect costs or overhead costs allocated or apportioned over particular cost center or production department by the units produced.

 

Question 49

Explain the treatment of over and under absorption of overheads in cost accounts.

Answer

Treatment of over and under absorption of overheads are:-

  1. Writing off to costing P&L A/c:– Small difference between the actual and absorbed amount should simply be transferred to costing P&L A/c, if difference is large then investigate the causes and after that abnormal loss/ gain shall be transferred to costing P&LA/c.

  2. Use of supplementary Rate: Under this method the balance of under and over absorbed overheads may be charged to cost of W.I.P., finished stock and cost of sales proportionately with the help of supplementary rate ofoverhead.

  3. Carry Forward to Subsequent Year: Difference should be carried forward in the expectation that next year the position will be automatically corrected.

 

Question 50

(Re-apportionment of overheads using Trial and Error Method):

SA Ltd. has three production (M1, M2 and A1) and three service departments (Stores, Engineering services and General service). Engineering department serves the M1 and M2 only.

The relevant information related with Product X and Y are as follows:

(Rs)

  • Depreciation on Machinery 7,92,000

 

  • Insurance of Machinery 1,44,000

  • Insurance of Building 64,800 (Total building insurance cost for M1 is one third of annual premium)

  • Power 1,29,600

  • Light 1,08,000

  • Rent 2,53,500 (The general service deptt. is located in a building owned by the company. It is valued at Rs1,20,000 and is charged into cost at notional value of 8% per annum. This cost is additional to the rent shown above)

The value of issues of materials to the production departments are in the same proportion as shown above for the Consumable supplies.

The following data are also available:

 

Required:

(i) PREPARE an overhead analysis sheet, showing the bases of apportionment of overhead to departments.

(ii)PREPARE a statement allocating service department overheads to production department ignoring the apportionment of service department costs among service departments.

(iii) CALCULATE suitable overhead absorption rate for the production departments.

(iv) CALCULATE the overheads to be absorbed by two products, X and Y.

Answer:

(i) Summary of Apportionment of Overheads

(Rs)

*Rent to be apportioned among the departments which actually use the rented building. The notional rent is imputed cost and is not included in the calculation.

ii) Allocation of service departments overheads

 

Answer:

(i) Overhead Distribution Summary

 

Question 51

Why is it necessary to reconcile the Profits between the Cost Accounts and Financial Accounts?

Answer

When the cost and financial accounts are kept separately, it is imperative that these should be reconciled, otherwise the cost accounts would not be reliable. The reconciliation of two set of accounts can be made, if both the sets contain sufficient detail as would enable the causes of differences to be located. It is, therefore, important that in the financial accounts, the expenses should be analysed in the same way as in cost accounts. It is important to know the causes which generally give rise to differences in the costs & financial accounts. These are:

(i) Items included in financial accounts but not in cost accounts Appropriation of

  • profits Income-tax

  • Transfer to reserve

  • Dividends paid

  • Goodwill / preliminary expenses written off

  • Pure financial items

  • Interest, dividends

  • Losses on sale of investments

  • Expenses of Co’s share transfer office Damages & penalties

(ii) Items included in cost accounts, but not in financial accounts

  • Opportunity cost of capital

  • Notional rent

(iii)Under / Over absorption of expenses in cost accounts

(iv) Different bases of inventory valuation Motivation for reconciliation are:

  • To ensure reliability of cost data

  • To ensure ascertainment of correct product cost

  • To ensure correct decision making by the management based on cost & financial data

  • To report fruitful financial / cost data

 

Question 53

The following figures have been extracted from the cost records of a manufacturing unit:

 

Rs

 Stores: Opening balance

 32,000

 Purchases of material

 1,58,000

 Transfer from work-in-progress

 80,000

 Issues to work-in-progress

 1,60,000

 Issues to repair and maintenance

 20,000

 Deficiencies found in stock taking

 6,000

 Work-in-progress: Opening balance

 60,000

 Direct wages applied

 65,000

 Overheads applied

 2,40,000

 Closing balance of W.I.P.

 45,000

 

Finish products: Entire output is sold at a profit of 10% on actual cost from work-in- progress. Wages incurred Rs70,000, overhead incurred Rs2,50,000.

Items not included in cost records: Income from investment Rs10,000, Loss on sale of capital assets Rs20,000.

Draw up Store Control account, Work-in-progress Control account, Costing Profit and Loss account, Profit and Loss account and Reconciliation statement.

Answer

  1. Costing books

Stores Control Account

 Particulars

 Rs

 Particulars

 Rs

 To Balance b/d

 32,000

 By W.I.P. Control A/c

 1,60,000

 To General ledger adjustment A/c

 1,58,000

 "Work overhead control A/c

 20,000

 To Work in progress   control A/c

 80,000

 "Costing Profit and Loss A/c

 6,000

 

 

 "Balance c/d

 84,000

 

 2,70,000

 

 2,70,000

 

W.I.P. Control Account

 Particulars

 Rs

 Particulars

 Rs

 To Balance b/d

 60,000

 By Stores control A/c

 80,000

 To Stores control A/c

 1,60,000

 By Costing profit and loss A/c

 

 To Direct wages control A/c

 65,000

 (Cost of sales)

 4,00,000

 To Works overhead control A/c

 2,40,000

 By Balance c/d

 45,000

 

 5,25,000

 

 5,25,000

 

Works overhead control account

Particulars

Rs

Particulars

Rs

 To General ledger adjustment A/c

 2,50,000

 By W.I.P. Control A/c

By Costing profit  &loss   A/c (under recovery)

 

 2,40,000

 To Store ledger control A/c

 20,000

 30,000

 

 2,70,000

 2,70,000

 

Costing Profit & Loss Account

 Particulars

 Rs

 Particulars

 Rs

 Rs

To W.I.P. control A/c (Cost

of sales)

 4,00,000

 By General ledger adjustment   A/c

 

 

 

 

 Cost of sales

 4,00,000

 

 

 

 10% profit

 40,000

 4,40,000

 To Works overhead control A/c

 30,000

 

 

 

 To Stores control A/c (shortage)

 6,000

 

 

 

 To Profit

 4,000

 

 

 

 

 4,40,000

 

 

 4,40,000

 

2. Financial Books

Profit & Loss Account

 Particulars

 Rs

 Rs

  Particulars

 Rs

 Rs

To Opening stock

 

 

By Sales

 

4,40,000

 Stores

 32,000

 

 By Closing stock:

 

 

 To W.I.P.

 60,000

 92,000

 By Stores

 84,000

 

 

 

 

 By W.I.P.

 45,000

 1,29,000

 To Purchases

 

 1,58,000

 By Income from investment

 

 10,000

 To Wages incurred

 

 70,000

 By Loss

 

 11,000

 To Overheads incurred

 

 2,50,000

 

 

 

 To Loss on sale of capital assets

 

 20,000

 

 

 

 

 

 5,90,000

 

 

 5,90,000

 

Reconciliation statement

Profit as per cost accounts

Add: Income from investment recorded in financial accounts

 

 

 

 

5,000

4,000

10,000

 

 

14,000

 

Less: Under absorption of wages in cost accounts

 

Loss on sales of capital asset only included in financial accounts Loss as per financial accounts

 

25,000

 

20,000

 

11,000

 

 

Question 54

What are the essential pre-requisites of integrated accounting system? Discuss.

Answer

Estimated Pre-requisites for integrated accounts:

  1. Themanagement’sdecisionabouttheextentofintegrationofthetwosetsofbooks.

  2. A suitable coding system must be made available so as to serve the accounting purposes of financial and cost accounts.

  3. An agreed routine, with regard to the treatment of provision for accruals, pre- paid expenses, other adjustments necessary for preparation of interim accounts.

  4. Perfect coordination should exist between the staff responsible for the financial and cost aspects of the accounts and an efficient processing of accounting documents should be ensured.

 

Question 55

Enumerate the factors which cause difference in profits as shown in Financial Accounts and Cost Accounts.

Answer

Causes of difference:

  • Items included in financial accounts but not in cost accounts such as:

Interest received on bank deposits, loss/profit on sale of fixed assets and investments, dividend, rent received.

  • Items included in cost accounts on notional basis such as rent of owned building, interest on own capital etc.

  • Items whose treatment is different in the two sets of accounts such as inventory valuation.

 

Question 56

A manufacturing company has disclosed a net loss of Rs2,13,000 as per their cost accounting records for the year ended March 31, 2009. However, their financial accounting records disclosed a net loss of Rs2,58,000 for the same period. A scrutiny of data of both the sets of books of accounts revealed the following information:

 

 

Rs

 (i)

 Factory overheads under-absorbed

 5,000

 (ii)

 Administration overheads over-absorbed

 3,000

 (iii)

 Depreciation charged in financial accounts

 70,000

 (iv)

 Depreciation charged in cost accounts

 80,000

 (v)

 Interest on investments not included in cost accounts

 20,000

 (vi)

 Income-tax provided in financial accounts

 65,000

 (vii)

 Transfer fees (credit in financial accounts)

2,000

 (viii)

 Preliminary expenses written off

 3,000

 (ix)

 Over-valuation of closing stock of finished goods in cost Accounts

 7,000

Prepare a Memorandum Reconciliation Account.

Answer

Memorandum Reconciliation Account

Particulars

Rs

Particulars

Rs

To Net loss as per costing books

2,13,000

By    Administrative overhead

over absorbed in costs

3,000

 To  Factory overheads under   absorbed

 5,000

 By Depreciation over charged in cost books (80,000 – 70,000)

 10,000

To Income tax not provided

in cost books

65,000

 By Interest on investments not included in cost books

 20,000

To Preliminary expenses written    off in financial books

3,000

 By Transfer fees not considered in cost books

 2,000

To Over-valuation of Closing

Stock of finished goods in cost books

 7,000

 By Net loss as per financial books

 2,58,000

 

 2,93,000

 

 2,93,000

 

 

Question 57

What are the main advantages of Integrated accounts?

Answer

Integrated Accounts is the name given to a system of accounting, whereby cost and financial accounts are kept in the same set of books. There will be no separate sets of books for Costing and Financial records. Integrated accounts provide or meet out fully the information requirement for Costing as well as for Financial Accounts.

Advantages: The main advantages of Integrated Accounts are as follows:

  1. No need for Reconciliation- The question of reconciling costing profit and financial profit does not arise, as there is one figure of profit only.

  2. Less efforts- Due to use of one set of books, there is a significant extent of saving in efforts made.

  3. Less Time consuming- No delay is caused in obtaining information as it is provided from books of original entry.

  4. Economical process- It is economical also as it is based on the concept of “Centralisation of Accounting function”.

 

Question 58

R Limited showed a net loss of Rs35,400 as per their cost accounts for the year ended 31st March, 2012. However, the financial accounts disclosed a net profit of Rs67,800 for the same period. The following information were revealed as a result of scrutiny of the figures of cost accounts and financial accounts:

 (i)Administrative overhead under recovered

 25,500

 (ii) Factory overhead over recovered

 1,35,000

 (iii) Depreciation under charged in Cost Accounts

 26,000

 (iv) Dividend received

 20,000

 (v) Loss due to obsolescence charged in Financial Accounts

 16,800

 (vi) Income tax provided

 43,600

 (vii) Bank interest credited in Financial Accounts

 13,600

(viii) Value of opening stock:

 

 In Cost Accounts

 1,65,000

 In Financial Accounts

 1,45,000

 (ix) Value of closing stock:

 

 In Cost Accounts

 1,25,500

 In Financial Accounts

 1,32,000

 (x) Goodwill written-off in Financial Accounts

 25,000

 (xi) Notional rent of own premises charged in Cost Accounts

 60,000

 (xii) Provision for doubtful debts in Financial Accounts

 15,000

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

Answer

Statement of Reconciliation

Sl.

No.

Particulars

Amount (Rs)

Amount

(Rs)

 1.

Net loss as per Cost Accounts Additions

Factory O/H over recovered

1,35,000

(35,400)

 2.

 Factory O/H over recovered

20,000

 

 3.

 Dividend Received Bank Interest received

13,600

 

 4.

 Difference     in    Value    of                 Opening       Stock (1,65,000 –1,45,000)

20,000

 

 5.

 Difference in Value of Closing Stock (1,32,000 –1,25,500)

 6,500

 

 

 Notional Rent of own Premises Deductions

 60,000

 2,55,100

 

 

 1.

  Administration  O/H   under recovered

 

25,500

 

 2.

 Depreciation undercharged

26,000

 

 3.

 Loss due to obsolescence

16,800

 

 4.

  Income tax

 43,600

 

 5.

 Provided Goodwill written-off

25,000

 

 6.

 Provision for doubtful debts

15,000

(1,51,900)

 

 Net Profit as per Financial A/cs

 

67,800

 

Question 59

Following information have been extracted from the cost records of XYZ Pvt. Ltd:

 

Rs

 Stores:

 

 Opening balance

 54,000

 Purchases

 2,88,000

 Transfer from WIP

 1,44,000

 Issue to WIP

 2,88,000

 Issue for repairs

 36,000

 Deficiency found in stock

 10,800

Work-in-progress:

Rs

Opening balance

1,08,000

Direct wages applied

1,08,000

Overheads charged

4,32,000

Closing balance

72,000

 

Finished Production:

Rs

Entire production is sold at a profit of 15% on cost at WIP

 

Wages paid

1,26,000

Overheads incurred

4,50,000

Draw the Stores Ledger Control Account, Work-in-Progress Control Account, Overheads Control Account and Costing Profit and Loss Account.

Answer

Particulars

(Rs)

Particulars

(Rs)

To

Balance b/d

54,000

By

Work in Process A/c

2,88,000

To

General Ledger

2,88,000

By

Overhead Control A/c

36,000

Adjustment A/c

 

To Work in Process A/c

1,44,000

By Overhead Control A/c (Deficiency)

 

 By   Balance c/d

 10,800*

 

 1,51,200

 

 4,86,000

 

 4,86,000

 

Stores Ledger Control A/c

 

*Deficiency assumed as normal (alternatively can be treated as abnormal loss)

Work in Progress Control A/c

 Particulars

 (Rs)

 Particulars

(Rs)

 To Balance b/d

1,08,000

By Stores Ledger Control a/c

1,44,000

To Stores Ledger Control A/c

2,88,000

By Costing P/L A/c

7,20,000

To Wages Control A/c

 

To Overheads Control a/c

1,08,000

 

4,32,000

(Balancing    figures                         being Cost of finished goods)

 

By     Balance c/d

 

 

 

72,000

 

9,36,000

 

9,36,000

 

Overheads Control A/c

 Particulars

 (Rs)

 Particulars

 (Rs)

 To Stores Ledger Control A/c

 36,000

ByWork    in   Process  A/c Balance c/d

(Under absorption)

 4,32,000

 ToStores Ledger Control A/c

 10,800

 82,800

To Wages Control A/c (Rs1,26,000- Rs1,08,000)

18,000

 

To Gen. Ledger Adjust. A/c

 4,50,000

 

 

 5,14,800

 

 5,14,800

 

Costing Profit & Loss A/c

 Particulars

 (Rs)

 Particulars

 (Rs)

 To Work in progress

 7,20,000

 By Gen. Ledger Adjust A/c

 8,28,000

 To Gen.   Ledger   Adjust.   A/c

 1,08,000

 (Sales) (Rs 7,20,000 × 115%)

 

 (Profit)

 

 

 

 

 8,28,000

 

 8,28,000

 

Question-60

MST Limited has collected the following data for its two activities. It calculates activity cost rates based on cost driver capacity.

Required:

  1. PREPARE a statement showing cost allocation to each product from each activity.

  2. CALCULATE the cost of unused capacity for each activity.

  3. STATE the factors the management considers in choosing a capacity level to compute the budgeted fixed overhead cost rate.

Answer:

  1. Statement of cost allocation to each product from each activity

 

  Product

 M (Rs)

 S (Rs)

 T (Rs)

 Total (Rs)

 Power (Refer to   working note)

 8,00,000

 (10,000 kWh×Rs80)

 16,00,000

 (20,000 kWh×Rs80)

 12,00,000

 (15,000 kWh×Rs80)

 36,00,000

 Quality

 21,00,000

 15,00,000

 18,00,000

54,00,000

 Inspections

 (3,500 inspections

 (2,500 inspections

 (3,000 inspections

 (Refer to working note)

 ×Rs600)

 ×Rs600)

 ×Rs600)

Working Note:

Rate per unit of cost driver:

Power         :(Rs40,00,000 ÷ 50,000 kWh) = Rs80/kWh

Quality Inspection      :(Rs60,00,000 ÷ 10,000 inspections) = Rs600 per inspection

 

2. Calculation of cost of unused capacity for each activity:

 

 (Rs)

 Power (Rs40,00,000 – Rs36,00,000)

 4,00,000

 Quality Inspections (Rs60,00,000 – Rs54,00,000)

 6,00,000

  Total cost of unused capacity

 10,00,000

3. Factorsmanagementconsiderinchoosingacapacityleveltocomputethebudgete dfixed overhead cost rate:

  • Effect on product costing & capacity management

  • Effect on pricing decisions.

  • Effect on performance evaluation

  • Effect on financial statements

  • Regulatory requirements.

  • Difficulties in forecasting for any capacity level.

 

Question 61

Distinguish between Job costing and batch costing

Answer

Job costing and Batch costing

According to Job costing, costs are collected and accumulated according to jobs. Each job or unit of production is treated as a separate entity for the purpose of costing. Job costing may be employed when jobs are executed for different customers according to their specifications.

Batch costing is a form of job costing, a lot of similar units which comprises the batch may be used as a cost unit for ascertaining cost. Such a method of costing is used in case of pharmaceutical industry, readymade garments, industries manufacturing parts of TV, radio sets etc.

 

Question 62

In order to develop tourism, ABCL airline has been given permit to operate three flights in a week between X and Y cities (both side). The airline operates a single aircraft of 160 seats capacity. The normal occupancy is estimated at 60% throughout the year of 52 weeks. The one-way fare is Rs7,200. The costs of operation of flights are:

Fuel cost(variable)   :  Rs96,000 per flight

Food serve don board on non-chargeable basis   :   Rs125 per passenger

Commission  :  5% of fare applicable for all booking

Fixed cost:

Aircraft lease   :    Rs3,50,000per flight

Landing Charges     : Rs72,000 per flight

Required:

(i) Calculate the net operating income per flight.

(ii) The airline expects that its occupancy will increase to 108 passengers per flight if   the   fare is reduced to Rs6,720. Advise whether this proposal should be implemented or not

Answer

  No. of passengers 160 - 60/100 = 96

Rs

Rs

 (i) Fare collection 96 × 7,200 Variable costs:

 

 6,91,200

 Fuel

 

 96,000

 Food 96 × 125

 

 12,000

 Commission 5%

 

 34,560

 Total variable Costs

 

 1,42,560

 Contribution per flight

 

 5,48,640

 Fixed costs: Lease

 3,50,000

 

 Crew

 72,000

 4,22,000

 Net income per flight

 

 1,26,640

(ii) Fare collection 108  × 6,720

 

7,25,760

 Variable costs:

 

 

 Fuel

 

 96,000

 Food 108  × 125

 

 13,500

 Commission @ 5%

 

 36,288

 Contribution

 

 5,79,972

There is an increase in contribution by Rs31,332. Hence the proposal is acceptable

 

Question 63

Calculate total passenger kilometres from the following information:

Number of buses 6, number of days operating in a month 25, trips made by each bus per day 8, distance covered 20 kilometres (one side), capacity of bus 40 passengers, normally 80% of capacity utilization.

Answer

Calculation of passenger kilometers:

6 × 25 × 8 × 2 ×  20 ×  40 × 80% = 15,36,000 passenger kms.

 

Question 64

What are the main advantages of cost plus contract?

Answer

Costs plus contracts have the following advantages:

  1. The contractor is assured of a fixed percentage of profit. There is no risk of incurring any loss on the contract.

  2. It is useful especially when the work to be done is not definitely fixed at the time of making the estimate.

  3. Contractee can ensure himself about “the cost of the contract”, as he is empowered to examine the books and document of the contractor to ascertain the veracity of the cost of the contract.

 

Question 65

A contract expected to be completed in year 4, exhibits the following information:

End of Year

Value of work

Certified

Cost of work to Date

 Cost of work not yet certified

Cash received

 

 (Rs)

 (Rs)

 (Rs)

 (Rs)

 1.

 0

 50,000

 50,000

 0

 2.

 3,00,000

 2,30,000

 10,000

 2,75,000

 3.

 8,00,000

 6,60,000

 20,000

 7,50,000

The contract price is Rs10,00,000 and the estimated profit is 20%.

You are required to calculate, how much profit should have been credited to the Profit and Loss A/c by the end of years 1,2and3.

Answer

* Cost of work certified = Cost of work to date – Cost of work not yet certified

** Notional profit = Value of work certified – (Cost of work to date – Cost of work 9not yet certified)

 

Question 67

A lorry starts with a load of 24 tonnes of goods from station A. It unloads 10 tonnes at station B and rest of goods at station C. It reaches back directly to station A after getting reloaded with 18 tonnes of goods at station C. The distance between A to B, B to C and then from C to

A are 270 kms, 150 kms and 325 kms respectively. Compute ‘Absolute tonnes kms’ and ‘Commercial tones-kms’.

Answer

Absolute tonnes kms

= Tonnes (unit of weight) × Km (Unit of distance)

= 24 tonnes × 270 kms

+ 14 tonnes × 150 kms

+ 18 tonnes × 325 kms

= 6480 + 2100 + 5850

= 14430 tonnes kms Commercial Tonnes kms

= Average load × total kms travelled

= (24+14+18 / 3) tonnes × 745 kms

= 13906.67 Tonnes km

 

Question 68

Explain briefly, what do you understand by Operating Costing. How are composite units computed?

Answer

Operating Costing: It is method of ascertaining costs of providing or operating a service. This method of costing is applied by those undertakings which provide services rather than production of commodities. This method of costing is used by transport companies, gas and water works departments, electricity supply companies, canteens, hospitals, theatres, schools etc.

Composite units may be computed in two ways:

  1. Absolute (weighted average) tones kms, quintal kms etc.

  2. Commercial (simple average) tonnes kms, quintal kms etc.

Absolute tonnes-kms are the sum total of tonnes kms arrived at by multiplying various distances by respective load quantities carried.

Commercial tonnes-kms, are arrived at by multiplying total distance kms, by average load quantity.

 

Question 69

A transport company has been given a 40 kilometre long route to run 5 buses. The cost of each bus is Rs6,50,000. The buses will make 3 round trips per day carrying on an average 80 percent passengers of their seating capacity. The seating capacity of each but is 40 passengers. The buses will run on an average 25 days in a month. The other information for the year 2010-11 are given below:

Garage rent     :     Rs4,000 per month

Annual repairs and maintenance   :  Rs22,500 each bus

Salaries of 5 drivers    :   Rs3,000 each per month

Wages of 5 conductors     :     Rs1,200 each per month

Manager’s salary      :    Rs7,500 per month

Road tax, permit fee, etc.      :  Rs5,000 for a quarter

Office expenses        :  Rs2,000 per month

Cost of diesel per litre    :   Rs33

Kilometre run per litre for each but    :  6 kilometres

Annual depreciation    :  15% of cost

Annual Insurance  : 3% of cost

You are required to calculate the bus fare to be charged from each passenger per kilometre, if the company wants to earn a profit of 33 (1/3) percent on taking (total receipts from passengers).

Answer

Operating Cost Sheet for the year 2010- 11 (Total Passenger Km = 115,20,000)

 

Question 70

Discuss the process of estimating profit/loss on incomplete contracts.

Answer

Process of Estimating Profit/Loss on Incomplete Contracts: To determine the profit to be taken to Profit and Loss Account, in the case of incomplete contracts, the following process is followed:

(i) Completion of contract is less than 25 per cent: In this case no profit should be taken to profit and loss account.

(ii) Completion of contract is upto 25 per cent or more than 25 per cent but less than 50 percent: In this case one-third of the notional profit, reduced in the ratio of cash received to work certified, should be transferred to the Profit and Loss Account. Mathematically:

 

Question 71

Explain the terms notional profit and retention money in contract costing.

Answer

Notional Profit in contract costing ;

It represents the difference between the value of work certified and cost of work certified.

Notional Profit = Value of work Certified Less Cost of work Certified

Retention money in contract Costing:

A contractor does not receive the full payment of work certified by the surveyor of work certified by the surveyor. Contractee retains some amount to be paid after some time, when it is ensured that there is no default in the work done by the contractor. If any deficiency or defect is noticed it is to be rectified by the contractor before the release of the retention money. Thus retention money provides a safe guard against the default risk in contract

 

Question 72

From the following particulars compute a conservative estimate of profit by 4 methods on a contract which has 80 percent complete:

 

Rs

 Total expenditure to date

 8,50,000

Estimate further expenditure to complete the contract

 1,70,000

 Contract Price

 15,30,000

 Work Certified

 10,00,000

 Work not certified

 85,000

 Cash received

 8,16,000

Answer

Working Notes:

(i) Calculation of Notional Profit=

(Work certified + work not certified) – Total expenditure to date

= Rs(10,00,000+85,000) – Rs8,50,000 = Rs2,35,000

(ii) Calculation of Estimated Profit

Contract Price – (Expenditure to date + Further expenditure to be incurred)

= Rs15,30,000 – Rs(8,50,000 + 1,70,000) = Rs5,10,000

Computation of Conservative Estimate of Profit by following methods:

= Rs 2,35,000 x 10,00,000 / 15,30,000 = Rs 1,53,595

Most conservative Profit is Rs 1,25,333, therefore profit to be transferred to Profit and Loss a/c is Rs 1,25,333.

 

Question 73

What do you understand by operating costing? How are composite units computed?

Answer

Meaning of Operating Costing:

Operating Costing is a method of ascertaining costs of providing or operating a service. This method of costing is applied by those undertakings which provide services rather than production of commodities. This costing method is usually made use of by transport companies, gas and water works departments, electricity supply companies, canteens, hospitals, theatres, schools etc.

Computation of composite units:

When two units are merged into one it is called Composite units. It is explained with example as follows.

Composite units i.e. tonnes kms., quintal kms. etc. may be computed in two ways.

  • Absolute (weighted average) tonnes-kms.

Absolute tonnes-kms., are the sum total of tonnes-kms., arrived at by multiplying various distances by respective load quantities carried.

  • Commercial (simple average) tonnes-kms.

Commercial tonnes-kms., are arrived at by multiplying total distance kms., by average load quantity.

 

Question 75

Pokemon Chocolates manufactures and distributes chocolate products. It purchases Cocoa beans and processes them into two intermediate products:

  • Chocolate powder liquor base

  • Milk-chocolate liquor base.

These two intermediate products become separately identifiable at a single split off point. Every 500 pounds of cocoa beans yields 20 gallons of chocolate - powder liquor base and 30 gallons of milk-chocolate liquor base.

The chocolate powder liquor base is further processed into chocolate powder. Every 20gallons of chocolate-powder liquor base yields 200 pounds of chocolate powder. The milk- chocolate liquor base is further processed into milk-chocolate. Every 30 gallons of milk- chocolate liquor base yields 340 pounds of milk chocolate.

Production and sales data for October, 2004 are:

  • Cocoa beans processed             =    7,500pounds

  • Costs of processing Cocoa beans to split off point (including purchase of beans)    = Rs7,12,500

 

 

 Production

 Sales

 Selling price

 Chocolate powder

 3,000pounds

 3,000pounds

 Rs190  per pound

Milk chocolate

pound

5,100

5,100

Rs237.50 per pound

The October, 2004 separable costs of processing chocolate-powder liquor into chocolate

powder are Rs3,02,812.50. The October 2004 separable costs of processing milk-chocolate liquor base into milk-chocolate are Rs6,23,437.50.

Pokemon fully processes both of its intermediate products into chocolate powder or milk- chocolate. There is an active market for these intermediate products. In October, 2004, Pokemon could have sold the chocolate powder liquor base for Rs997.50 a gallon and the milk-chocolate liquor base for Rs1,235 a gallon.

Required:

(i) Calculate how the joint cost of Rs7,12,500 would be allocated between the chocolate powder and milk-chocolate liquor bases under the following methods:

  1. Sales value at split off point

  2. Physical measure(gallons)

  3. Estimated net realisable value, (NRV)and

  4. Constant gross-margin percentage NRV.

(ii) What is the gross-margin percentage of the chocolate powder and milk- chocolate liquor bases under each of the methods in requirements (i)?

(iii) Could Pokemon have increased its operating income by a change in its decision to fully process both of its intermediate products ?Show your computations.

Answer

(i)     Comparison of alternative joint-cost allocation methods Sales value at split-off point method

 

Chocolate

powder liquor Base

Milk  chocolate liquor base

Total

*Sales value of products at split off

 Rs 2,99,250

 Rs 5,55,750

 Rs 8,55,000

 Weights

 0.35

 0.65

 1.00

 Joint cost allocated

 Rs7,12,500 0.35

 =Rs2,49,375

 Rs7,12,500 0.65

 =Rs4,63,125

 

* 300 × 997.50 = Rs2,99,250;

450 × 1,235  = Rs5,55,750

Physical measure method

 

 Chocolate powder

Liquor base

 Milk chocolate liquor Base

 Total

Output

 300 gallons

 450 gallons

 750 gallons

Weight

300÷750= 0.40

450÷750 = 0.60

1.00

 Joint cost allocated

 Rs7,12,500  ×  0.40

 Rs7,12,500  ×  0.60

 Rs 7,12,500

 

 =Rs 2,85,000

 = Rs4,27,500

 

 

Net realisable value method

 

Chocolate powder

Liquor base

 Milk chocolate liquor Base

 Total

Final sales value of

production

 3,000 lbs  ×  Rs190

 5,100 lbs  ×  Rs237.50

 Rs 17,81,250

 = Rs5,70,000

 = Rs12,11,250

 

 Less separable costs

 Rs 3,02,812.50

 Rs 6,23,437.50

 Rs 9,26,250

 Net realisable value at split off point

 Rs 2,67,187.50

 Rs 5,87,812.50

 Rs 8,55,000

Weight

 

 2,67,187.50/8,55,000

 5,87,812.5/8,55,000

 

= 0.3125

= 0.6875

 

 Joint cost allocated

  Rs 7,12,500  ×  0.3125

 Rs 7,12,500  ×  0.6875

 

 

= Rs 2,22,656.25

= Rs 4,89,843.75

Rs 7,12,500

Constant × gross margin % NRV method

 

Chocolate powder

Liquor base

 Milk chocolate

 liquor base

 Total

Final sales value of production

 Rs 5,70,000

 Rs 12,11,250

 Rs 17,81,250

 

 (Chocolate Powder)

 (Milk Chocolate)

 

*Less Gross Margin 8%

Rs 45,600

Rs 96,900

Rs 1,42,500

 Cost of goods available for sale

 Rs 5,24,400

 Rs 11,14,350

 Rs 16,38,750

 Less Separable costs

 Rs 3,02,812.50

 Rs 6,23,437.50

 Rs 9,26,250

 Joint cost allocated

 Rs 2,21,587.50

 Rs 4,90,912.50

Rs 7,12,500

*Final sales value of total production  = Rs17,81,250

Deduct joint and separable cost = Rs7,12,500+ Rs9,26,250

= Rs16,38,750

Gross Margin    = Rs1,42,500

Gross margin% =Rs1,42,500 / Rs17,81,250 = 8%

 

(i)  Chocolate powder liquor base (calculations inRs)

 

Sales value at Split off

 Physical Measure

 Estimated                          net realisable value

Constant gross                      –margin NRV

Final sale value of

Chocolate powder.

 5,70,000

 5,70,000

 5,70,000

 5,70,000

 Less: separable costs

 3,02,812.50

 3,02,812.50

 3,02,812.50

 3,02,812.50

 Less: Joint costs

 2,49,375

 2,85,000

 2,22,656.25

 2,21,587.50

 Gross Margin

 17,812.50

 ( 17,812.50)

 44,531.25

 45,600

 Gross Margin %

 3.125%

 (3.125%)

 7.8125%

 8%

 

Milk chocolate liquor base( calculations in Rs)

 

Sales value at Split off

Physical Measure

Estimated net realisable value

Constant gross   -margin NRV

Final sale value of milk chocolate.

12,11,250

12,11,250

12,11,250

12,11,250

 Less: separable costs

 6,23,437.50

 6,23,437.50

 6,23,437.50

 6,23,437.50

 Less: Joint costs

 4,63,125

 4,27,500

 4,89,843.75

 4,90,912

 Gross Margin

 1,24,687.50

 1,60,312.50

 97,968.75

 96,900.50

 Gross Margin %

 10.29%

 13.23%

 8.08%

 8%

 

(i)     Further processing of Chocolate powder liquor base into Chocolate powder (calculations in Rs)

 Incremental revenue ( 5,70,000-(997.5 × 300))

 2,70,750

 Incremental costs

 3,02,812.50

 Incremental operating income

 (32,062.50)

 Further processing of Milk chocolate liquor base into milk chocolate (calculations in Rs)

 Incremental revenue(12,11,250 – 5,55,750)

 6,55,500

 Incremental cost

 6,23,437.50

 Incremental operating income

 32,062.50

 The above computations show that Pokemon

 Chocolates could increase operating

income by Rs32,062.50 if chocolate liquor base is sold at split off point and milk chocolate liquor base is processed further.

 

Question 76

A Company produces a component, which passes through two processes.During the month of April, 2006, materials for 40,000 components were put into Process I of which 30,000 were completed and transferred to Process II. Those not transferred to Process II were 100% complete as to materials cost and 50% complete as to labour and overheads cost. The Process I costs incurred were as follows:

Direct Materials    :   Rs15,000

Direct Wages :    Rs18,000

Factory Overheads  :  Rs12,000

Of those transferred to Process II, 28,000 units were completed and transferred to finished goods stores. There was a normal loss with no salvage value of 200 units in Process II. There were 1,800 units, remained unfinished in the process with 100% complete as to materials and 25% complete as regard to wages and overheads.

No further process material costs occur after introduction at the first process until the end of the second process, when protective packing is applied to the completed components. The process and packing costs incurred at the end of the Process II were:

Packing Materials  :   Rs4,000

Direct Wages :   Rs3,500

Factory Overheads  :  Rs4,500

Required:

  1. Prepare Statement of Equivalent Production, Cost per unit and Process I A/c.

  2. Prepare statement of Equivalent Production, Cost per unit and Process II A/c.

Answer

Process I

            Statement of Equivalent Production and Cost

 

Material

Labour and Overheads

Total

Units completed

30,000

30,000

 

Closing Inventory

10,000

5,000

Equivalent Production

40,000

35,000

 

 

  Rs

 Rs

 Rs

 Current  Process    cost

 15,000

 30,000

 45,000

 Cost/unit

 0.375

 0.8571

 

Closing inventory cost

 3,750

 4,286

 8,036

 Material transferred to Process II

 

 

 36,964

 

Process I Account

 

Units

Rs

 

Units

Rs

To Direct material

40,000

15,000

By Process II A/c

30,000

36,964

To Direct wages

 

18,000

By Work-in-progress

10,000

8,036

 

 

 

inventory

 

 

To Factory overheads

 

12,000

 

 

 

 

40,000

45,000

 

40,000

45,000

 

Process II

    Statement of Equivalent Production and Cost

 

 Materia

 Labour and Overheads

 Total

 Units completed

 28,000

 28,000

 

 Closing Inventory

 1,800

 450

 

 Equivalent Production

 29,800

 28,450

 

 Process cost

 36,964

 8,000

 44,964

 Cost/unit

 1.24

 0.2812

 

 Closing inventory

 2,232

 127

 2,359

 

 

 

 42,605

 Packing material cost

 

 

   4,000

 

 

 

 Rs 46,605

 

Process II Account

 

 Units

 Rs

 

 Units

 Rs

 To Material transferred from Process I

 30,000

 36,964

 By Finished                     goods stores A/c

 

 By  WIP stock By Normal loss

 

 

 

 

 

 28,000

 46,605

 To Packing Material

 

 4,000

 1,800

 2,359

 To Direct wages

 

 3,500

 200

 To Factory overheads

 

 4,500

 

 

 

 30,000

 48,964

 30,000

 48,964

 

Question 78

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

The selling prices per kg. are as under:

Product P : Rs85

Product Q : Rs290

Product AR : Rs115

The production will be taken up in the next month. Raw materials 8,00,000Kgs.

Purchase price Rs80 per Kg.

 

Deptt. A

RsLacs

Deptt. B

RsLacs

 Direct materials

 35.00

 5.00

 Direct labour

 30.00

 9.00

 Variable overheads

 45.00

 18.00

 Fixed overheads

 40.00

 32.00

 Total

 150.00

 64.00

 

 Rs in Lacs

 

Selling Expenses:

 

 

 Product P

 24.60

 

 Product Q

 21.60

 

 Product AR

 16.80

 

Required:

(i)    Prepare a statement showing the apportionment of jointcosts.

 

State whether it is advisable to produce product AR or not.

Answer

Input in Deptt. ‘A’ 80,000 kgs.

Yield 85%

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

Ratio of output for P and Q = 70 : 30.

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

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

 

Statement showing apportionment of joint cost

 

 P

 Q

 Total

 Product kgs.

 4,76,000

 2,04,000

 

 Selling price per kg.

 Rs 85.00

 290.00

 

 

 Rs lakhs

 Rs lakhs

 Rs lakhs

 Sales

  404.60

 591.60

 996.20

 Less: Selling expenses 

 24.60

 21.60

 46.20

 Net sales

   380

    570

   950

 Ratio

   40%

   60%

100%

 

 

 

Rs lakhs

 Raw materials (8,00,000kgs. × Rs80)

 

 

  640

 Process cost of department ‘A’

   150

 

   790

 

Apportionment of Joint Cost

(In the ratio of Net Sales i.e. P : Q., 40% : 60%.

Joint Cost of ‘P’ = Rs316lakhs

Joint Cost of ‘Q’ = Rs474 lakhs

Statement showing the profitability of further processing of product ‘P’ and converted into product ‘AR’

Product ‘AR”

Output = 90% of 4,76,000kgs. = 4,28,400kgs.

Joint costs                  316.00 RS lakhs

 

Cost of Department B

64.00

Selling expenses

16.80

396.80

 

Sales value (Rs 115 4,28,400)

492.66

Profit (492.66–396.80)

95.86

If ‘P’ is not processed profitability is as under.

 

 Rslakhs

 Sales

 380.00

 Less: Joint expense

316.00

Profit

64.00

Further processing of product ‘P’ and converting into product ‘AR’ is beneficial to the company because the profit increases by Rs31.86 lakhs (95.86 – 64.00).

 

Question 79

“Operation costing is defined as refinement of Process costing.” Explain it.

Answer

Operation costing is concerned with the determination of the cost of  each operation rather than the process:

  • In the industries where process consists of distinct operations, the operation costing method is applied.

It offers better control and facilitates the computation of unit operation cost at the end of each operation.

 

Question 80

Describe briefly, how joint costs upto the point of separation may be apportioned amongst the joint products under the following methods:

  1. Average unit cost method

  2. Contribution margin method

  3. Market value at the point of separation

  4. Market value after further processing

  5. Net realizable value method.

Answer

Methods of apportioning joint cost among the joint products:

  1. Average Unit Cost Method: under this method, total process cost (upto the point of separation) is divided by total units of joint products produced. On division average cost per unit of production is obtained. The effect of application of this method is that all joint products will have uniform cost per unit.

  2. Contribution Margin Method: under this method joint costs are segregated into two parts– variable and fixed. The variable costs are apportioned over the joint products on the basis of units produced (average method) or physical quantities. If the products are further processed, then all variable cost incurred be added to the variable cost determined earlier. Then contribution is calculated by deducting variable cost from their respective sales values. The fixed costs are then apportioned over the joint products on the basis of contribution ratios.

  3. Market Value at the Time of Separation: This method is used for apportioning joint costs to joint products upto the split off point. It is difficult to apply if the market value of the products at the point of separation are not available. The joint cost may be apportioned in the ratio of sales values of different joint products.

  4. Market Value after further Processing: Here the basis of apportionment of joint costs is the total sales value of finished products at the further processing. The use of this method is unfair where further processing costs after the point of separation are disproportion ate or when all the joint products are not subjected to further processing.

  5. Net Realisable Value Method: Here joint costs is apportioned on the basis of net realisable value of the joint products,

Net Realisable Value = Sale value of joint products (at finished stage)

(-) estimated profit margin

(-) selling &distribution expenses, if any () post split off cost

 

Question 81

How apportionment of joint costs upto the point of separation amongst the joint products using market value at the point of separation and net realizable value method is done? Discuss

Answer

Apportionment of Joint Cost amongst Joint Products using:

Market value at the point of separation

This method is used for apportionment of joint costs to joint products upto the split off point. It is difficult to apply if the market value of the product at the point of separation is not available. It is useful method where further processing costs are incurred disproportionately.

Net realizable value Method

From the sales value of joint products (at finished stage) are deducted:

  • Estimated profit margins

  • Selling distribution expenses, if any

  • Post split off costs.

The resultant figure so obtained is known as net realizable value of joint products. Joint costs are apportioned in the ratio of net realizable value.

 

Question 82

What is inter-process profit? State its advantages and disadvantages.

Answer

Definition of Inter-Process Profit and Its advantages and disadvantages In some process industries the output of one process is transferred to the next process not at cost but at market value or cost plus a percentage of profit. The difference between cost and the transfer price is known as inter-process profits.

The advantages and disadvantages of using inter-process profit, in the case of process type industries are as follows:

Advantages:

  1. Comparison between the cost of output and its market price at the stage of completion is facilitated.

  2. Each process is made to stand by itself as to the profitability.

Disadvantages:

  1. The use of inter-process profits involves complication.

  2. The system shows profits which are not realized because of stock not sold out

 

Question 83

Explain the following terms in relation to process costing:

(i)    Equivalent Production

(ii)Inter-process profit

Answer

(i) Equivalent Production: When opening and closing stocks of work-in-process exist, unit costs cannot be computed by simply dividing the total cost by total number of units still in process. We can convert the work-in-process units into finished units called equivalent production units so that the unit cost of these uncompleted (W-I-P) units can be obtained. Equivalent Production units = Actual number of units in production × Percentage of work completed. It consists of balance of work done on opening work-in-process, current production done fully and part of work done on closing WIP with regard to different elements of costs viz., material, labour and overhead.

(ii) Inter-Process Profit: In some process industries the output of one process is transferred to the next process not at cost but at market value or cost plus a percentage of profit. The difference between cost and the transfer price is known as inter-process profits.

 

Question 84

KPR Limited operates a system of standard costing in respect of one of its products which is manufactured within a single cost centre. The Standard Cost Card of a product is as under: Standard Unit cost (Rs)

 Direct material

 5 kgs @ Rs4.20

 21.00

 Direct labour

 3 hours @ Rs3.00

 9.00

 Factory overhead

 Rs1.20 per labour hour

 3.60

 

 Total manufacturing cost

 33.60

The production schedule for the month of June, 2007 required completion of 40,000 units. However, 40,960 units were completed during the month without opening and closing work-in process inventories.

Purchases during the month of June, 2007, 2,25,000 kgs of material at the rate of Rs4.50 per kg. Production and Sales records for the month showed the following actual results.

Material used                                                                       2,05,600 kgs.

Direct labour                                                                        1,21,200 hours;

cost incurred                                                                        Rs3,87,840

Total factory overhead cost incurred                                    Rs1,00,000

Sales                                                                                   40,000 units

Selling price to be so fixed as to allow a mark-up of 20 per cent on selling price.

Required:

(i) Calculate material variances based on consumption of material.

(ii) Calculate labour variances and the total variance for factory overhead.

(iii) Prepare Income statement for June, 2007 showing actual gross margin.

(iv) An incentive scheme is in operation in the company whereby employees are paid a bonus of 50% of direct labour hour saved at standard direct labour hour rate. Calculate the Bonus amount.

Answer

(i) Material variances:

(a) Direct material cost variance = Standard cost – Actual cost

= 40,960 × 21 – 2,05,600 × 4.50

= 8,60,160 – 9,25,200 = 65,040 (A)

(b) Material price variance = AQ (SP – AP)

= 2,05,600 (4.20 – 4.50) = 61,680 (A)

(c) Material usages variance = SP (SQ – AQ)

= 4.20 (40,960 × 5 – 2,05,600) = 3,360 (A)

(ii)Labour variances and overhead variances:

(a) Labour cost variance = Standard cost – Actual cost

= 40,960 × 9 – 3,87,840 = 19,200 (A)

(b) Labour rate variance = AH (SR – AR)

1,21,200 (3 – 3.20) = 24,240 (A)

(c) Labour efficiency variance = SR (SH – AH)

= 3 (40,960 × 3 – 1,21,200)

= 5,040 (F)

(d) Total factory overhead variance = Factory overhead absorbed – factory overhead incurred

= 40,960 × 3 × 1.20 – 1,00,000 = 47,456 (F)

(iii) Preparation of income statement

 Calculation of unit selling price

 Rs

 Direct material

 21

 Direct labour

 9

 Factory overhead

   3.60

 Factory cost

 33.60

 Margin 25% on factory cost

   8.40

 Selling price

 42.00

 

Income statement

 

 

Rs

Sales 40,000 units  × 42

 

16,80,000

Less: Standard cost of goods sold 40,000 × 33.60

 

13,44,000

 

 

3,36,000

Less: Variances adverse

 

 

Material price variance

61,680

 

Material quantity variance

3,360

 

Labour rate variance

24,240

    89,280

 

 

2,46,720

Add: Favourable variance

 

 

Labour efficiency variance

5,040

 

Factory overhead

47,456

   52,496

Actual gross margin

 

2,99,216

 

(iv)

 Labour hour saved

 Rs

 Standard labour hours 40,960 × 3

1,22,880

 Actual labour hour worked

 1,21,200

Labour hour saved

     1,680

Bonus for saved labour = 0.50 (1,680 × 3) = 2,520.

 

Question 85

UV Ltd. presents the following information for November, 2008:

Budgeted production of product P = 200 units.

Standard consumption of Raw materials = 2 kg. per unit of P.

Standard price of material A = Rs6 per kg.

Actually, 250 units of P were produced and material A was purchased at Rs8 per kg and consumed at 1.8 kg per unit of P. Calculate the material cost variances.

Answer

 Actual production of P

 

 250 units

 

 Standard quantity of A for actual production = 2 × 250

 =

 500kg.

 (SQ)

 Actual quantity of A for actual production = 1.8 × 250

 =

 450kg.

 (AQ)

 Standard price / kg. of A

 =

 Rs 6

(SP)

 Actual price / kg. of A

 =

 Rs 8

(AP)

(1) Total Material Cost Variance  = (Standard Price × Standard Quantity) – (Actual Price  × Actual Quantity)

= (6 × 500) – (8 × 450)

= 3,000 – 3,600 = 600 (A)

(2) Material Price Variance  = (Standard price – Actual price) × Actual quantity

= (6 – 8) × 450 = 900 (A)

(3) Material Usage Variance   = (Standard quantity – Actual quantity) × Standard price

= (500 – 450) × 6 = 300 (F)

 

Question 86

SB Constructions Limited has entered into a big contract at an agreed price of Rs1,50,00,000 subject to an escalation clause for material and labour as spent out on the contract and corresponding actuals are as follows:

 

Standard

Actual

 Quantity (Tonnes)

 Rate per Tonne

 (Rs)

 Quantity (Tonnes)

 Rate per Tonne

 (Rs)

 Material:

 

 

 

 

 A

 3,000

 1,000

 3,400

 1,100

 B

 2,400

 800

 2,300

 700

 C

 500

 4,000

 600

 3,900

 D

 100

 30,000

 90

 31,500

 

 Hours

 HourlyRate (Rs)

 Hours

 HourlyRate (Rs)

Labour:

 

 

 

 

 L1

 60,000

 15

 56,000

 18

 L2

 40,000

 30

 38,000

 35

You are required to:

(i) Give your analysis of admissible escalation claim and determine the final contract price payable.

(ii) Prepare the contract account, if the all expenses other than material and labour relatedto the contract are Rs13,45,000.

(iii) Calculate the following variances and verify them:

(a) Material cost variance

(b) Material price variance

(c) Material usage variance

(d) Labour cost variance

(e) Labour rate variance

Labour efficiency variance.

Answer

(i)    Statement showing additional claim due to escalation clause.

 

 Material

 Std.

 Qty/Hours

 Std. Rate

 Actual Rate

 Variation in

 Rate (Rs)

 Escalation

 claim (Rs)

 (a)

 (b)

 (c)

 (d)= (c-b)

 (e)= (a×d)

 A

 3000

 1000

 1100

 +100

 +3,00,000

 B

 2400

 800

 700

 -100

 -2,40,000

 C

 500

 4000

 3900

 -100

 -50000

 D

 100

 30000

 31500

 +1500

 +1,50,000

 

 

 Material escalation claim

 1,60,000

Labour:

 

 

 

 

 

 L1

 60,000

 15

 18

 +3

 +1,80,000

 L2

 40,000

 30

 35

 +5

 +2,00,000

 

 

 Labour escalation claim

 3,80,000

 

Statement showing Final Contract Price

 

Rs

Rs

 Agreed contract price

 

 1,50,00,000

 Add: Agreed escalation claim: Material Cost

 1,60,000

 

 Labour Cost

 3,80,000

 5,40,000

 Final Contract Price

 

 1,55,40,000

 

(ii) Contract Account

 

 Rs

 

 Rs

To

 Material:

 

 By Contractee’sA/c

 1,55,40,000

 

 A – 3,400 × Rs1,100

 

 

 

 

 B – 2,300 × Rs700

 

 

 

 

 C – 600 × Rs3,900

 

 

 

 

 D- 90 ×   Rs31,500

 1,05,25,000

 

 

To

 Labour:

 

 

 

 

 L1 – 56,000 × Rs18

 

 

 

 

 L2 – 38,000 × Rs35

 23,38,000

 

 

To

 Other expenses

 13,45,000

 

 

To

 Profit and Loss A/c

 13,32,000

 

 

 

 

 1,55,40,000

 

 1,55,40,000

 

(iii) Material Variances

 SQ × SP

 Rs

 AQ × AP

 Rs

 AQ × SP

 Rs

 A-3000×1000

 =

 3,00,000

 3,400×100

 =

 37,40,000

 3400×1000

=

 34,00,000

 B-- 2400×800

=

 19,20,000

 2,300×700

 =

 16,10,000

 2,300×800 

=

 18,40,000

 C- 500 ×4000

 =

 20,00,000

 600×3,900

 =

 23,40,000

 600×4,000

 =

 24,00,000

D-100×30000 =

 30,00,000

 90×31,500 =

 28,35,000

 90×30,000        =

 27,00,000

 Total

 99,20,000

 

 1,05,25,000

 

 1,03,40,000

 

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

=Rs99, 20,000 – Rs1, 05, 25,000 = Rs6, 05,000(A)

Material Price Variance (MPV) = AQ (SP – AP) or (AQ × SP) – (AQ × AP)

=Rs1, 03, 40,000 – Rs1, 05, 25,000 = Rs1, 85,000 (A)

 

Material usage variance (MUV) = (SQ × SP) – (AQ × SP)

=Rs99, 20,000 – Rs1, 03, 40,000 = Rs4, 20,000(A)

 

Verification = MCV = MPV + MUV

Or Rs6, 05,000(A) = Rs1, 85,000(A) + Rs4,

20,000(A) OrRs6, 05,000(A) = Rs6, 05,000(A)

 

Labour Variances:

 SH × SR

 Rs

  AH× AR

 Rs

 AH× SR

 Rs

L160,000×15           =

 

L240,000×30        =

9,00,000

 

12,00,000

56,000×18 =

 

38,000×35 =

10,08,000

 

13,30,000

56,000×15 =

 

38,000×30 =

8,40,000

 

11,40,000

Total

21,00,000

 

23,38,000

 

19,80,000

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

= Rs21,00,000 – Rs23,38,000 = Rs2,38,000 (A)

 

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

=Rs19,80,000 – Rs23,38,000 = Rs3,58,000(A)

 

Labour Efficiency Variance (LEV) = (SH × SP) – (AH × SP)

=Rs21,00,000 – Rs19,80,000 = Rs1,20,000(F)

 

Verification – LCV = LRV + LEV

Rs2,38,000(A) = Rs3,58,000(A) + Rs1,20,000(F) Or Rs2,38,000(A) = Rs2,38,000(A)

 

Question 87

SJ Ltd. has furnished the following information:

Standard overhead absorption rate per unit       :      Rs20

Standard rate per hour          ;      Rs4

Budgeted production        : 15,000units

Actual production       :  15,560units

Actual overheads were Rs2,95,000

Out of which Rs62,500 fixed .

Actual hours    :     74,000

Overheads are based on the following flexible budget

 Production(units)

 8,000

 10,000

 14,000

 Total Overheads(Rs)

 1,80,000

 2,10,000

 2,70,000

You are required to calculate the following overhead variances (on hour’s basis) with appropriate workings:

  1. Variable overhead efficiency and expenditure variance Fixed overhead efficiency and capacity variance.

Answer

Workings:

(a) Variable overhead rate perunit

= Difference in total overheads at two levels/ Difference in out- put at two level

= (2,70,000 - 2,10,000) /(14,000 -10,000)

= 60,000/ 4,000 = Rs15 per unit

(b)   Fixed overhead = 2,70,000 - (14000 ×15) = Rs60,000

(c) Standard Fixed Overhead Rate per Hour=4-3=1

(d) Standard Hour Per Unit = Standard hours rate per unit/standard overhead rate per hour

       = 20 ÷ 4 = 5 hours

(e) Actual Variable Overhead = 2,95,000 – 62,500 = 2,32,000

(f) Actual Variable Overhead per Hour = 2,32,500 / 74,000 = 3.1419

(g) Budgeted hours = 15,000 × 5 = 75,000hours

(h)Standard variable overhead rate per hour

= Variable overheads/budgeted hours =15,000 ×15 / 75,000 = Rs3.00 per hour

(i) Standard Hours for Actual Production= 15,560 × 5 = 77,800hours

 

1) variable Overhead efficiency and expenditure Variance:

Variable overhead efficiency variance      = Standard Rate per Hour (Std. Hours – Actual Hours)

= 3 (77,800 - 74,000) = 11,400 (F)

Variable overhead expenditure variance = Actual Hours (Std. Rate per Hour- Actual Rate per Hour)

= 74,000 (3 - 3.1419) = 10,500 (A)

 

2)  Fixed overhead efficiency and expenditure variance:

Fixed overhead efficiency variance = Std. Rate per Hour (Std. Hours - Actual Hours)

= 1(77,800-74,000) = 3,800(F)

Fixed overheads Capacity variance= Std. Rate per Hour (Actual Hours - Budgeted Hours)

= 1(74,000 – 75,000 )

= 74,000 - 75,000 = 1,000 (A)

Standard Fixed overhead rate per hour is calculated with the help of budgeted hours and the Fixed overhead efficiency and expenditure variance is calculated as follows:

Standard fixed overhead rate per hour

= Fixed overheads/budgeted hours= 60,000 ÷ 75,000 = Rs0.80 per hour

 

(ii) Fixed overhead efficiency and capacity variance

Fixed overhead efficiency Variance*    = Std. Rate per hour (Std. hours – Actual hours)

=Rs0.80(15,560×5-74,000)

=Rs3,040(F)

Fixed overhead capacity variance*   = Std. Rate per hour (Actual hours- Budgeted hours)

= Rs0.80 (74,000 – 15,000 x 5)

= Rs800 (A)

 

Question 88

Answer the following:

Following are the details of the product Phomex for the month of April 2013:

Standard quantity of material required per unit      :  5 kg     

Actual output             :  1000units

Actual cost of materials used     :      Rs7,14,000

Material price variance               :      Rs51,000(Fav)

Actual price per kg of material is found to be less than standard price per kg of material by Rs 10.

You are required to calculate:

  1. Actual quantity and Actual price of materials used.

  2. Material Usage Variance

  3. Material Cost Variance

Answer

1. Actual Quantity and Actual Price of material used

Material Price Variance = Actual Quantity (Std. Price–Actual Price)

=Rs51,000 Or, AQ (SP–AP) =       Rs51,000

Or, 10 AQ           =      Rs51,000

Or,AQ        =      5,100kgs

Actual cost of material used  is given i.e. AQxAP      = Rs7,14,000

or, 5,100AP

AP

=

=

Rs7,14,000

Rs140

Actual price is less by Rs10

So, Standard Price

=

Rs140 + Rs10 = Rs150 per

kg Actual Quantity

=

5,100kgs

Actual Price

=

Rs140/kg

 

2. Material Usage Variance

Std. Price  (Std. Quantity  –  Actual Quantity) Or, SP (SQ – AQ)

= Rs150 (1,000 units x 5 kg – 5,100 kg)

= Rs15,000 (A)

 

3. Material Cost Variance  = Std. Cost – Actual Cost

= (SP x SQ) – (AP x AQ)

= Rs150 x 5,000 – Rs140 x 5,100

= Rs7,50,000 – Rs7,14,000

= Rs36,000 (F)

OR

Material Price Variance + Material Usage Variance Rs51,000 (F) + Rs15,000 (A)

= Rs36,000 (F)

 

Question-89

A factory can produce 1,80,000 units per annum at its 60% capacity. The estimated costs of production are as under:

Direct material Rs300 per unit Direct employee cost Rs160 per unit Indirect expenses:

  • Fixed Rs32,50,000 per annum

  • Variable Rs50 per unit

  • Semi-variable Rs80,000 per annum up to 50% capacity and Rs15,000 for every 20% increase in the capacity or part thereof.

If production program of the factory is as indicated below and the management desires to ensure a profit of Rs10,00,000 for the year, DETERMINE the average selling price at which each unit should be quoted:

First three months of the year- 50% of capacity; Remaining nine months of the year- 75% of capacity.

Answer:

Statement of Cost

 

Question-89

Star study centre provides coaching classes to school students. The study centre has taken an auditorium of 250 seat capacity on rent of Rs3,75,000 per month. It has also hired some renowned teachers for taking classes. A teacher takes Rs3,000 per hour. The study centre has decided to conduct a batch of 2-hour per day for 3 days a week for 4 months.

(i) CALCULATE the total cost per batch.

(ii) COMPUTE the minimum fee to be charged per student in a batch, if the centre operates at 60% capacity.

(iii) DETERMINE the fee per student if the study centre desires to earn a profit of 50% and study centre operates at 50% capacity.

Answer:

(i) Calculation of total cost per batch:

 

Question 90

A company produces single product which sells for Rs20 per unit. Variable cost is Rs15 per unit and Fixed overhead for the year is Rs6,30,000.

Required:

  1. Calculate sales value needed to earn a profit of 10% on sales.

  2. Calculate sales price per unit to bring BEP down to 1,20,000 units.

  3. Calculate margin of safety sales if profit is Rs60,000.

Answer

  1. Suppose sales units are x then S = V + F + P

S = Sales

V = Variable Cost F = Fixed Cost

P = Profit

20x = 15x + 6,30,000 + 2x

20x – 17x = 6,30,000

 

Question 91

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

 Direct material 4 kg @ Rs4

 =

 16.00

 Direct labour 3 hrs @ Rs18

 =

 54.00

 Variable overhead 3 hrs @ Rs4

 =

 12.00

 Fixed overhead 3 hrs @ Rs6

 =

 18.00

 

 

100.00

 Selling and administrative costs:

 

 

 Variable

 

 Rs20 per unit

 Fixed

 

 Rs 7,60,000

 During the year the company has the following activity:

 

 

 Units produced

 =

 24,000

 Units sold

 =

 21,500

 Unit selling price

 =

 Rs 168

 Direct labour hours worked

 =

 72,000

Actual fixed overhead was Rs48,000 less than the budgeted fixed overhead. Budgeted variable overhead was Rs20,000 less than the actual variable overhead. The company used an expected actual activity level of 72,000 direct labour hours to compute the predetermined overhead rates.

Required :

(i) Compute the unit cost and total income under:

  1. Absorption costing

  2. Marginal costing

(ii)Under or over absorption of overhead.

Reconcile the difference between the total income under absorption and marginal costing.

Answer

(i)  Computation of Unit Cost &Total Income

 Unit Cost

 Absorption Costing (Rs)

 Marginal  Costing (Rs )

 Direct Material

 16.00

 16.00

 Direct Labour

 54.00

 54.00

 Variable Overhead

 12.00

 12.00

 Fixed Overhead

 18.00

-

 Unit Cost

 100.00

 82.00

 

Income Statements

  Absorption Costing

Sales

 

36,12,000

(21500 × Rs168)

 

 

 Less: Cost of goods sold (21500 × 100)

 21,50,000

 

 Less: Over Absorption

    28,000

21,22,000

 

 

 14,90,000

Less: Selling & Distribution Expenses

 

 11,90,000

Profit

 

  3,00,000

 

Marginal Costing

 Sales

 

 36,12,000

 Less: Cost of goods sold (21500×82)

17,63,000

 

Add: Under Absorption

     20,000

17,83,000

 

 

18,29,000

 Less: Selling & Distribution Expenses

 

  4,30,000

 Contribution

 

13,99,000

 Less: Fixed Factory and Selling & Distribution

 

 

 Overhead (38,400 + 7,60,000)

 

11,44,000

 Profit

 

  2,55,000

 

 

(ii) Under or over absorption of overhead: Budgeted Fixed Overhead

 

Rs

 72,000 Hrs. × Rs6 4,32,000

 

 Less: Actual Overhead was less than Budgeted Fixed Overhead

   48,000

 Actual Fixed Overhead

 3,84,000

Budgeted Variable Overhead

 

72,000 Hrs. × Rs4 2,88,000

 

Add: Actual Overhead was higher than Budgeted

   20,000

Budgeted

3,08,000

Both Fixed & Variable Overhead applied

 

72,000 Hrs × Rs10

7,20,000

Actual Overhead (3,84,000 + 3,08,000)

6,92,000

Over Absorption

   28,000

(iii) Reconciliation of Profit

Difference in Profit: Rs3,00,000– 2,55,000 = Rs45,000

Due to Fixed Factory Overhead being  included in Closing Stock in Absorption Costing not in MarginalCosting.

Therefore,

Difference in Profit = Fixed Overhead Rate (Production – Sale) 18 (24,000 – 21,500) = Rs45,000

 

Question 92

What do you understand by Key factor? Give two examples of it.

Answer

Key factor is a factor which at a particular time or over a period limits the activities of an undertaking. It may be the level of demand for the products or service or it may be the shortage of one or more of the productive resources.

Examples of key factors are:

  1. Shortage of raw material.

  2. Shortage of Labour.

  3. Plant capacity available.

  4. Sales capacity available.

  5. Cash availability.

 

Question 93

MNP Ltd sold Rs2,75,000 units of its product atRs37.50 per unit. Variable costs are Rs17.50 per unit (manufacturing costs of Rs14 and selling cost Rs3.50 per unit). Fixed costs are incurred uniformly throughout the year and amount to Rs35,00,000 (including depreciation of Rs15,00,000). There is no beginning or ending inventories.

Required:

  1. Estimate breakeven sales level quantity and cash breakeven sales level quantity.

  2. Estimate the P/V ratio.

  3. Estimate the number of units that must be sold to earn an income (EBIT) of Rs2,50,000.

  4. Estimate the sales level achieve an after-tax income (PAT) of Rs2,50,000. Assume 40% corporate Income Tax rate.

Answer

 

Question 94

The following figures are related to LM Limited for the year ending 31st March, 2012 : Sales - 24,000 units @ Rs200 per unit;

P/V Ratio 25% and Break-even Point 50% of sales. You are required to calculate:

i)Fixed cost for the year

ii) Profit earned for the year

iii) Units to be sold to earn a target net profit of Rs11,00,000 for a year.

iv) Number of units to be sold to earn a net income of 25% on cost.

iv) Selling price per unit if Break-even Point is to be brought down by 4,000 units.

Answer

Break- even point (in units) is 50% of sales i.e. 12,000 units.

Hence, Break- even point (in sales value) is 12,000 units × Rs200 = Rs24,00,000

(iv) Net desired total Sales (Number of unit x Selling price) be X, then desired profit is 25% on Cost or 20% on Sales i.e. 0.2 X

 

Question 95

Elaborate the practical application of Marginal Costing.

Answer

Practical applications of Marginal costing:

  1. Pricing Policy: Since marginal cost per unit is constant from period to period, firm decisions on pricing policy can be taken particularly in short term.

  2. Decision Making: Marginal costing helps the management in taking a number of business decisions like make or buy, discontinuance of a particular product, replacement of machines, etc

  3. Ascertaining Realistic Profit: Under the marginal costing technique, the stock of finished goods and work-in-progress are carried on marginal cost basis and the fixed expenses are written off to profit and loss account as period cost. This shows the true profit of the period.

  4. Determination of production level: Marginal costing helps in the preparation of break even analysis which shows the effect of increasing or decreasing production activity on the profitability of the company.

 

Question 96

What is the meaning of Margin of Safety (MOS)? State the relationship between Operating Leverage and Margin of Safety Ratio.

Answer

Margin of Safety (MoS) is the excess of total sales over the Break even sales. MoS defines the amount upto which level sales can decline before occurring loss. Therefore MoS = Total

Sales – Break even sales and MoS ratio = Sales - Break even sales / Sales

Break even sales (BE sales) will depend on contribution margin (BE sales = Fixed Cost ÷ Contribution margin). Contribution margin is related to operating leverage also. Operating leverage is calculated as Contribution ÷ Operating profit and contribution margin plays an important role in it. If sales are expected to increase, higher operating leverage will result in higher profit. When sales are expected to decrease, lower operating leverage will result in higher profit. Higher variable cost and lower fixed cost will result into higher MoS and risk will be lower and vice versa.

So like Operating leverage, MoS is a measure of risk as to what extent an organisation is exposed to change in sales volume.

 

Question 97

Explain briefly the concept of ‘flexible budget’.

Answer

Flexible Budget: A flexible budget is defined as “a budget which, by recognizing the difference between fixed, semi-variable and variable cost is designed to change in relation to the level of activity attained”. A fixed budget, on the other hand is a budget which is designed to remain unchanged irrespective of the level of activity actually attained. In a fixed budgetary control, budgets are prepared for one level of activity whereas in a flexibility budgetary control system, a series of budgets are prepared one for the each of a number of alternative production levels or volumes. Flexible budgets represent the amount of expense that is reasonably necessary to achieve each level of output specified. In other words, the allowances given under flexibility budgetary control system serve as standards of what costs should be at each level of output.

 

Question 98

Discuss the components of budgetary control system.

Answer

Components of budgetary control system

The policy of a business for a defined period is represented by the master budget the details of which are given in a number of individual budgets called functional budgets. The functional budgets are broadly grouped under the following heads:

  1. Physical Budgets – Sales Qty, Product Qty., Inventory, Manpower budget.

  2. Cost Budgets – Manufacturing Cost, Administration Cost, sales & distribution cost, R & D Cost.

  3. Profit Budget

 

Question 99

List the eight functional budgets prepared by a business.

Answer

The various commonly used Functional budgets are:

Sales Budget

Production Budget

Plant Utilisation Budget

Direct Material Usage Budget

Direct Material Purchase Budget

Direct Labour (Personnel) Budget

Factory Overhead Budget

Production Cost Budget

 

Question 100

Answer the following:

AK Limited produces and sells a single product. Sales budget for calendar year 2012 by a quarters is as under:

 Quarters

 I

 II

 III

 IV

 No. of units to be sold

 18,000

 22,000

 25,000

 27,000

The year is expected to open with an inventory of 6,000 units of finished products and close with inventory of 8,000 units. Production is customarily scheduled to provide for 70% of the current quarter’s sales demand plus 30% of the following quarter demand. The budgeted selling price per unit is Rs40. The standard cost details for one unit of the product are as follows:

Variable Cost Rs34.50 per unit

Fixed Overheads Rs2 hours 30 minutes @Rs2 per hour based on a budgeted production volume of 1,10,000 direct labour hours for the year. Fixed overheads are evenly distributed through-out the year.

You are required to:

i) Prepare Quarterly Production Budget for the year.

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

Answer

(i) Production Budget for the year 2012 by Quarters

 

 I

 II

 III

 IV

 Total

 

 Sales demand(Unit)

 18,000

 22,000

 25,000

 27,000

 92,000

 I

 Opening Stock

 6,000

 7,200

 8,100

 8,700

 30,000

 II

 70% of Current Quarter‘s Demand

 12,600

 15,400

 17,500

 18,900

 64,400

 III

 30% of Following Quarter’s Demand

 6,600

 7,500

 8,100

 7,400*

 29,600

 IV

 Total Production(II &III)

 19,200

 22,900

 25,600

 26,300

 94,000

 V

 Closing Stock (I+IV-Sales)

 7,200

 8,100

 8,700

 8,000

 32,000

*Balancing Figure

(ii) Break Even Point = Fixed Cost/ PV Ratio

= 2,20,000 ÷ 13.75% = 16,00,000 or 40,000 units.

P/V Ratio  = (40 - 34.50 = 5.50) ÷ 40 ×100 =13.75%

(Or, Break Even Point= Fixed Cost/ Contribution = 2,20,000 ÷ 5.50 = 40,000 Units) Total sales in the quarter II is 40,000 equal to BEP means BEP achieved in II quarter.

 

Question 101

Describe the steps involved in the budgetary control technique.

Answer

There are certain steps involved in the budgetary control technique. They are as follows:

  1. Definition of objectives: A budget being a plan for the achievement of certain operational objectives, it is desirable that the same are defined precisely. The objectives should be written out; the areas of control demarcated; and items of revenue and expenditure to be covered by the budget stated.

  2. Location of the key (or budget) factor: There is usually one factor (sometimes there may be more than one) which sets a limit to the total activity. Such a factor is known as key factor. For proper budgeting, it must be located and estimated properly.

  3. Appointment of controller: Formulation of a budget usually required whole time services of a senior executive known as budget controller; he must be assisted in this work by a Budget Committee, consisting of all the heads of department along with the Managing Director as the Chairman.

  4. Budget Manual: Effective budgetary planning relies on the provision of adequate information which are contained in the budget manual. A budget manual is a collection of documents that contains key information for those involved in the planning process.

  5. Budget period: The period covered by a budget is known as budget period. The Budget Committee determines the length of the budget period suitable for the business. It may be months or quarters or such periods as coincide with period of trading activity.

  6. Standard of activity or output: For preparing budgets for the future, past statistics cannot be completely relied upon, for the past usually represents a combination of good and bad factors. Therefore, though results of the past should be studied but these should only be applied when there is a likelihood of similar conditions repeating in the future.

 

Question 102

Describe the salient features of budget manual.

Answer

Salient features of Budget Manual

  • Budget manual contains many information which are required for effective budgetary planning.

  • A budget manual is a collection of documents that contains key information for those involved in the planning process.

  • An introductory explanation of the budgetary planning and control process, including a statement of the budgetary objective and desired results is included in Budget Manual

  • Budget Manual contains a form of organization chart to show who is responsible for the preparation of each functional budget and the way in which the budgets are interrelated.

  • In contains a timetable for the preparation of each budget.

  • Copies of all forms to be completed by those responsible for preparing budgets, with explanations concerning their completion is included in Budget Manual.