Question 1

The labour turnover rates for the quarter ended 30th September, 2020 are computed as 14%, 8% and 6% under Flux method, Replacement method and Separation method respectively. If the number of workers replaced during 2nd quarter of the financial year 2020-21 is 36, COMPUTE the following:

Accepted Answer

**Given Data:**
- Labour Turnover Rate (Flux Method) = 14%
- Labour Turnover Rate (Replacement Method) = 8%
- Labour Turnover Rate (Separation Method) = 6%
- Number of Workers Replaced = 36

**Step 1: Compute Average Number of Workers**

Using the **Replacement Method** formula:
Replacement Method Rate = (Number of Replacements / Average Workers) × 100
8 = (36 / Average Workers) × 100
Average Workers = (36 × 100) / 8 = **450 workers**

**(ii) Number of Workers Left and Discharged (Separations):**

Using the **Separation Method** formula:
Separation Method Rate = (Number of Separations / Average Workers) × 100
6 = (Number of Separations / 450) × 100
Number of Separations = (6 × 450) / 100 = **27 workers**

Thus, the number of workers **left and discharged = 27**.

**(i) Number of Workers Recruited and Joined (Accessions):**

Using the **Flux Method** formula:
Flux Method Rate = [(Number of Separations + Number of Accessions) / Average Workers] × 100
14 = [(27 + Number of Accessions) / 450] × 100
27 + Number of Accessions = (14 × 450) / 100 = 63
Number of Accessions = 63 − 27 = **36 workers**

Thus, the number of workers **recruited and joined = 36**.

**Verification:** Flux Rate = (27 + 36) / 450 × 100 = 63/450 × 100 = 14% ✓

Question 2

A manufacturing company disclosed a net profit Rs. 10,20,000 as per their cost accounts for the year ended 31st March 2021. The financial accounts however disclosed a net profit of Rs. 6,94,000 for the same period. Factory Overheads under-absorbed: Rs. 80,000; Administration Overheads over-absorbed: Rs. 1,20,000; Depreciation in Financial Accounts: Rs. 6,50,000; Depreciation in Cost Accounts: Rs. 5,50,000; Interest on investments not in Cost Accounts: Rs. 1,92,000; Income-tax provided: Rs. 1,08,000; Interest on loan funds in Financial Accounts: Rs. 4,90,000; Transfer fees (credit): Rs. 48,000; Stores adjustment (credit): Rs. 28,000; Dividend received: Rs. 64,000. PREPARE a Reconciliation statement.

Accepted Answer

**Reconciliation Statement of Cost Accounts and Financial Accounts**

The reconciliation starts with **Profit as per Cost Accounts** and adjusts for items that cause a difference, arriving at **Profit as per Financial Accounts**.

**Key principles applied:**
- Items that increase profit in financial accounts (income not in cost accounts, over-absorbed overheads): **Added**
- Items that decrease profit in financial accounts (expenses not in cost accounts, under-absorbed overheads, excess depreciation charged in financial accounts): **Deducted**

**Reconciliation Statement**

Profit as per Cost Accounts: ₹10,20,000

**Add (items increasing financial profit over cost profit):**
1. Administration Overheads over-absorbed (excess charged in cost accounts, reversed): ₹1,20,000
2. Interest on investments (income in financial accounts, not in cost accounts): ₹1,92,000
3. Transfer fees — credit (income in financial accounts only): ₹48,000
4. Stores adjustment — credit (income in financial accounts only): ₹28,000
5. Dividend received (income in financial accounts only): ₹64,000

Total Additions: ₹4,52,000

**Less (items decreasing financial profit below cost profit):**
1. Factory Overheads under-absorbed (actual cost > absorbed; higher charge in financial accounts): ₹80,000
2. Excess depreciation in financial accounts (₹6,50,000 − ₹5,50,000): ₹1,00,000
3. Income-tax provided (charged in financial accounts only): ₹1,08,000
4. Interest on loan funds (charged in financial accounts only): ₹…

Question 3

A company manufactures 10,000 units of a product per month. The cost of placing an order is Rs. 200. The purchase price of the raw material is Rs. 20 per kg. The re-order period is 4 to 8 weeks. The consumption of raw materials varies from 200 kg to 900 kg per week, the average consumption being 550 kg. The carrying cost of inventory is 20% per annum. You are required to CALCULATE:

Accepted Answer

**Given Data:**
Monthly production = 10,000 units; Ordering cost (Co) = ₹200; Purchase price = ₹20/kg; Re-order period = 4 to 8 weeks; Min consumption = 200 kg/week; Max consumption = 900 kg/week; Average consumption = 550 kg/week; Carrying cost = 20% p.a.

**(i) Re-order Quantity (EOQ)**

Annual consumption (A) = 550 × 52 = **28,600 kg**
Carrying cost per kg per annum (Cc) = 20% × ₹20 = **₹4 per kg**

EOQ = √(2 × A × Co / Cc) = √(2 × 28,600 × 200 / 4) = √(2,860,000) = **1,691 kg (approx.)**

**(ii) Re-order Level**

Re-order Level = Maximum consumption per week × Maximum re-order period
= 900 × 8 = **7,200 kg**

**(iii) Maximum Level**

Maximum Level = Re-order Level + Re-order Quantity − (Minimum consumption × Minimum re-order period)
= 7,200 + 1,691 − (200 × 4)
= 7,200 + 1,691 − 800 = **8,091 kg**

**(iv) Minimum Level**

Minimum Level = Re-order Level − (Average consumption × Average re-order period)
Average re-order period = (4 + 8) / 2 = 6 weeks
= 7,200 − (550 × 6) = 7,200 − 3,300 = **3,900 kg**

**(v) Average Stock Level**

Average Stock Level = Minimum Level + ½ × Re-order Quantity
= 3,900 + (1,691 / 2) = 3,900 + 845.5 = **4,745.5 kg ≈ 4,746 kg**

*(Alternatively: (Maximum Level + Minimum Level) / 2 = (8,091 + 3,900) / 2 = 5,995.5 kg — either approach is acceptable)*

Question 4

AK Ltd. has furnished the following standard cost data per unit of production: Material 10 kg @ Rs. 100 per kg; Labour 6 hours @ Rs. 55 per hour; Variable overhead 6 hours @ Rs. 100 per hour; Fixed overhead Rs. 45,00,000 per month (based on normal volume of 30,000 labour hours). Actual cost data for September 2020: Material used 50,000 kg at Rs. 52,50,000; Labour paid Rs. 15,50,000 for 31,000 hours; Variable overheads Rs. 29,30,000; Fixed overheads Rs. 47,00,000; Actual production 4,800 units. CALCULATE:

Accepted Answer

**Standard Cost Data (per unit):** Material: 10 kg × ₹100 = ₹1,000 | Labour: 6 hrs × ₹55 = ₹330 | Variable OH: 6 hrs × ₹100 = ₹600 | Fixed OH: ₹45,00,000 ÷ 30,000 hrs = ₹150/hr → 6 hrs × ₹150 = ₹900/unit. Normal production = 30,000 ÷ 6 = 5,000 units. Actual production = 4,800 units.

**(i) Material Cost Variance (MCV)**
**MCV = Standard Cost for Actual Production − Actual Cost**
= (4,800 × ₹1,000) − ₹52,50,000
= ₹48,00,000 − ₹52,50,000
= **₹4,50,000 (Adverse)**

Breakdown: **Material Price Variance** = AQ × (SP − AP) = 50,000 × (₹100 − ₹105) = ₹2,50,000 (A). **Material Usage Variance** = SP × (SQ − AQ) = ₹100 × (48,000 − 50,000) = ₹2,00,000 (A). Total = ₹4,50,000 (A). ✓

**(ii) Labour Cost Variance (LCV)**
**LCV = Standard Labour Cost for Actual Production − Actual Labour Cost**
= (4,800 × ₹330) − ₹15,50,000
= ₹15,84,000 − ₹15,50,000
= **₹34,000 (Favourable)**

Breakdown: Actual rate = ₹15,50,000 ÷ 31,000 hrs = ₹50/hr. **Labour Rate Variance** = AH × (SR − AR) = 31,000 × (₹55 − ₹50) = ₹1,55,000 (F). **Labour Efficiency Variance** = SR × (SH − AH) = ₹55 × (28,800 − 31,000) = ₹1,21,000 (A). Net = ₹34,000 (F). ✓

**(iii) Fixed Overhead Cost Variance (FOCV)**
**FOCV = Standard Fixed OH Absorbed − Actual Fixed OH**
= (4,800 × ₹900) − ₹47,00,000
= ₹43,20,000 − ₹47,00,000
= **₹3,80,000 (Adverse)**

Breakdown: **Expenditure Variance** = Budgeted FO − Actual FO = ₹45,00,000 − ₹47,00,000 = ₹2,00,000 (A). **Volume Variance** = Standard FO for actual production − Budgeted FO = ₹43,20,000…

Question 5

MP Ltd. produces Product-X, which passes through three processes: I, II and III. In Process-III a by-product arises, which after further processing at a cost of Rs. 85 per unit, product Z is produced. Information for September 2020: Process I: Normal loss 5%, Materials 1,40,000, Wages 42,000, Direct expenses 14,000, Output 6,600 units. Process II: Normal loss 10%, Materials 1,36,000, Wages 54,000, Direct expenses 16,000, Output 5,200 units. Process III: Normal loss 5%, Materials 84,200, Wages 48,000, Direct expenses 14,000, Output 4,800 units. Production overhead Rs. 2,88,000 absorbed as percentage of direct wages. Scrap sold at Rs. 10 per unit. Product-Z sold at Rs. 135 per unit with selling cost Rs. 15 per unit. Output of Z: 600 units. No opening or closing stock. You are required to PRE…

Accepted Answer

**PROCESS I ACCOUNT**

**Units Calculation:** Output is 6,600 units with 5% normal loss. Input units = 6,600 ÷ 0.95 = 6,947 units. Normal loss = 6,947 − 6,600 = 347 units.

**Debit:**
- Materials: Rs. 1,40,000
- Wages: Rs. 42,000
- Direct Expenses: Rs. 14,000
- Production Overhead: Rs. 84,000 (42,000 × 288,000 ÷ 144,000 = 200%)
- **Total: Rs. 2,80,000**

**Credit:**
- Normal Loss: 347 units @ Rs. 10 = Rs. 3,470
- Output to Process II: 6,600 units @ Rs. 41.90/unit = Rs. 2,76,530

**Cost per unit transferred = Rs. 2,76,530 ÷ 6,600 = Rs. 41.90**

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**PROCESS II ACCOUNT**

**Units & Input:** Receives 6,600 units from Process I. Output is 5,200 units with 10% normal loss. For normal loss calculation: 5,200 ÷ 0.90 = 5,778 units (effective input). Normal loss = 578 units.

**Debit:**
- Input from Process I: 6,600 units @ Rs. 41.90 = Rs. 2,76,540
- Materials: Rs. 1,36,000
- Wages: Rs. 54,000
- Direct Expenses: Rs. 16,000
- Production Overhead: Rs. 1,08,000 (54,000 × 200%)
- **Total: Rs. 5,90,540**

**Credit:**
- Normal Loss: 578 units @ Rs. 10 = Rs. 5,780
- Output to Process III: 5,200 units @ Rs. 112.56/unit = Rs. 5,84,760

**Cost per unit transferred = (Rs. 5,90,540 − Rs. 5,780) ÷ 5,200 = Rs. 112.56**

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**PROCESS III ACCOUNT**

**Units & Output:** Receives 5,200 units from Process II. Main product output: 4,800 units; by-product output: 600 units. Total output = 5,400 units. With 5% normal loss: Total input equivalent = 5,400 ÷ 0.95 = 5,684 units. Normal loss = 284 units.

*…

Question 6

The following account balances and distribution of indirect charges are taken from accounts of a manufacturing concern for year ending 31st March 2021. Indirect Material: Rs. 2,50,000 (Production Departments X: 40,000, Y: 60,000, Z: 90,000; Service Departments A: 50,000, B: 10,000). Indirect Labour: Rs. 5,20,000 (X: 90,000, Y: 1,00,000, Z: 1,40,000, A: 1,20,000, B: 70,000). Supervisor's Salary: Rs. 1,92,000 (Z: 1,92,000). Other overheads: Fuel & Heat Rs. 30,000; Power Rs. 3,60,000; Rent & Rates Rs. 3,00,000; Insurance Rs. 36,000; Canteen Rs. 1,20,000; Depreciation Rs. 5,40,000. Departmental data provided (area, asset values, KWh, radiators, employees). Service dept. allocation: A distributed to X(30%), Y(30%), Z(20%), B(20%); B distributed to X(25%), Y(40%), Z(25%), A(10%). PREPARE overhea…

Accepted Answer

**Overhead Distribution Statement — Simultaneous Equation Method**

**Step 1: Primary Distribution of Overheads**

Overheads given with direct departmental allocation (Indirect Material, Indirect Labour, Supervisor's Salary) are assigned as given. The remaining six items are apportioned on the following bases: Fuel & Heat — Radiators (4:2:3:1:2); Power — KWh (5:4:6:1:4); Rent & Rates — Area (2:1:2:1:2); Insurance — Asset Value (3:4:5:1:2); Canteen — Employees (2:3:4:1:2); Depreciation — Asset Value (3:4:5:1:2).

After primary distribution, the departmental totals are:
- **Dept X: ₹4,40,200**
- **Dept Y: ₹4,58,100**
- **Dept Z: ₹8,44,500**
- **Service Dept A: ₹2,76,400**
- **Service Dept B: ₹3,28,800**
- **Grand Total: ₹23,48,000**

**Step 2: Simultaneous Equations for Service Departments**

Service Dept A distributes: X-30%, Y-30%, Z-20%, B-20%
Service Dept B distributes: X-25%, Y-40%, Z-25%, A-10%

Let **a** = Total cost of Dept A (including share received from B)
Let **b** = Total cost of Dept B (including share received from A)

Equation 1: a = 2,76,400 + 0.10b
Equation 2: b = 3,28,800 + 0.20a

**Step 3: Solving the Equations**

Substituting Eq. 2 into Eq. 1:
a = 2,76,400 + 0.10(3,28,800 + 0.20a)
a = 2,76,400 + 32,880 + 0.02a
0.98a = 3,09,280
**a = ₹3,15,592 (approx.)**

b = 3,28,800 + 0.20 × 3,15,592
b = 3,28,800 + 63,118
**b = ₹3,91,918 (approx.)**

**Step 4: Re-apportionment of Service Departments to Production Departments**

From Dept A (₹3,15,592): X = 30% = ₹94,678; …

Question 7

Z Ltd. information for year ended 31st March 2021: Direct materials Rs. 17,50,000; Direct wages Rs. 12,50,000; Variable factory overhead Rs. 9,50,000; Fixed factory overhead Rs. 12,00,000; Other variable costs Rs. 6,00,000; Other fixed costs Rs. 4,00,000; Profit Rs. 8,50,000; Sales Rs. 70,00,000. Two products manufactured: X (8,000 units @ Rs. 600/unit, material Rs. 140/unit, wages Rs. 90/unit, other variable Rs. 40/unit) and Y (4,000 units @ Rs. 550/unit, material Rs. 157.50/unit, wages Rs. 132.50/unit, other variable Rs. 70/unit). Variable factory overheads absorbed as percentage of direct wages. For FY 2021-22: demand for X and Y expected to fall by 20% and 10% respectively; direct wages cost to rise by 20%; other fixed costs to rise by 10%; products to be sold at 20% discount. You are …

Accepted Answer

**PART (i): Profitability Statement for FY 2020-21 (Marginal Costing Basis)**

**Step 1 – Variable Factory Overhead Absorption Rate:**
Rate = Variable Factory OH ÷ Direct Wages = ₹9,50,000 ÷ ₹12,50,000 = **76% of direct wages**

**Step 2 – Product-wise Profitability Statement (FY 2020-21)**

| Particulars | Product X (8,000 units) ₹ | Product Y (4,000 units) ₹ | Total ₹ |
|---|---|---|---|
| Sales | 48,00,000 | 22,00,000 | 70,00,000 |
| Less: Direct Materials | 11,20,000 | 6,30,000 | 17,50,000 |
| Less: Direct Wages | 7,20,000 | 5,30,000 | 12,50,000 |
| Less: Variable Factory OH (76% of wages) | 5,47,200 | 4,02,800 | 9,50,000 |
| Less: Other Variable Costs | 3,20,000 | 2,80,000 | 6,00,000 |
| **Total Variable Costs** | **27,07,200** | **18,42,800** | **45,50,000** |
| **Contribution** | **20,92,800** | **3,57,200** | **24,50,000** |
| Less: Fixed Factory OH | — | — | 12,00,000 |
| Less: Other Fixed Costs | — | — | 4,00,000 |
| **Net Profit** | | | **8,50,000** |

**Contribution per unit:** X = ₹261.60 | Y = ₹89.30
**P/V Ratio:** X = 43.6% | Y = 16.24%

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**PART (ii): Budget for FY 2021-22**

**Revised Assumptions:**
- Units: X = 8,000 × 80% = **6,400 units**; Y = 4,000 × 90% = **3,600 units**
- Selling Price (20% discount): X = ₹600 × 0.80 = **₹480**; Y = ₹550 × 0.80 = **₹440**
- Direct Wages (20% rise): X = ₹90 × 1.20 = **₹108/unit**; Y = ₹132.50 × 1.20 = **₹159/unit**
- Variable Factory OH rate = **76% of revised wages** (same rate maintained)
- Other Fixed Costs = ₹4,00…

Question 8

GMCS Ltd. collects raw milk from farmers and processes it into dairy products. It operates tankers parked in garage at plant. Vehicle data: Ramgarh (4 vehicles, 3 trips/day, 24 km one-way, Rs. 5,600 fees/month, purchased 2 years ago @ Rs. 11,02,000 each); Pratapgarh (3 vehicles, 2 trips/day, 34 km one-way, Rs. 6,400 fees/month, purchased last year @ Rs. 13,12,000 each); Devgarh (5 vehicles, 4 trips/day, 16 km one-way, purchased 5 years ago @ Rs. 9,25,000 each). Two-year free servicing warranty on all vehicles. Mileage: 10 kmpl for first 2 years, 8 kmpl for next 2 years, 6 kmpl afterwards. Depreciation 10% p.a. straight-line. Tank capacity 10,000 litres, average utilization 70%. Costs: Driver Rs. 24,000/month per vehicle; Cleaner Rs. 12,000/month per vehicle; Garage parking Rs. 4,200/month …

Accepted Answer

**Solution: Vehicle Operating Cost Analysis for GMCS Ltd.**

**Step 1 – Vehicle Age, Mileage and Warranty Status**

| Route | Age | Mileage (kmpl) | Warranty (Free Servicing) |
|---|---|---|---|
| Ramgarh | 2 years | 8 (next 2 years bracket) | Expired |
| Pratapgarh | 1 year | 10 (first 2 years) | Active |
| Devgarh | 5 years | 6 (after 4 years) | Expired |

Ramgarh vehicles are exactly 2 years old — the warranty has lapsed and they enter the 8 kmpl bracket.

**Step 2 – km Per Vehicle Per Month (Round Trip)**

- Ramgarh: 3 trips × 48 km × 30 days = **4,320 km**
- Pratapgarh: 2 trips × 68 km × 30 days = **4,080 km**
- Devgarh: 4 trips × 32 km × 30 days = **3,840 km**

**Step 3 – Cost Statement Per Vehicle Per Month (₹)**

| Cost Element | Ramgarh | Pratapgarh | Devgarh |
|---|---|---|---|
| Driver (₹24,000) | 24,000 | 24,000 | 24,000 |
| Cleaner (₹12,000) | 12,000 | 12,000 | 12,000 |
| Garage Parking (₹4,200) | 4,200 | 4,200 | 4,200 |
| Route Fees | 5,600 | 6,400 | — |
| Diesel | 42,120 | 31,824 | 49,920 |
| Servicing | 12,960 | — (Warranty) | 11,520 |
| Depreciation (SLM 10% p.a.) | 9,183 | 10,933 | 7,708 |
| **Total per vehicle/month** | **1,10,063** | **89,357** | **1,09,348** |

**(ii) Vehicle Operating Cost Per Litre of Milk**

Milk per vehicle per month = Trips/day × 7,000 litres (10,000 × 70%) × 30 days

- Ramgarh: 3 × 7,000 × 30 = **6,30,000 litres** → Cost = 1,10,063 ÷ 6,30,000 = **₹0.175 per litre**
- Pratapgarh: 2 × 7,000 × 30 = **4,20,000 litres** → Cost = 89,357 ÷…

Question 9

A Ltd. expenditures for year ended 31st March 2021: Raw materials purchased Rs. 10,00,00,000; Freight inward Rs. 11,20,600; Factory wages Rs. 29,20,000; Royalty Rs. 1,72,600; Power & fuel Rs. 4,62,000; Job charges Rs. 8,12,000; Stores and spares Rs. 1,12,000; Office building depreciation Rs. 56,000; Plant & Machinery repairs Rs. 48,000; Sales office repairs Rs. 18,000; Plant & Machinery insurance Rs. 31,200; Factory building insurance Rs. 18,100; Quality control Rs. 19,600; R&D for production improvement Rs. 18,200; Pollution control Rs. 26,600; Sales & Marketing managers Rs. 10,12,000; General Manager Rs. 12,56,000; Primary packing Rs. 96,000; Secondary packing Rs. 1,12,000; Independent directors fees Rs. 2,20,000; Sales staff bonus Rs. 1,80,000. Opening stock: Raw materials Rs. 18,00,000…

Accepted Answer

**STATEMENT OF COST OF A LTD. FOR THE YEAR ENDED 31st MARCH 2021**

**(I) PRIME COST**

**Direct Material Cost:** Raw materials consumed [Opening Stock ₹18,00,000 + Purchases ₹10,00,00,000 − Closing Stock ₹9,60,000] = **₹10,08,40,000**. Add: Freight Inward ₹11,20,600. **Total Direct Material = ₹10,19,60,600.**

**Direct Labour:** Factory Wages = **₹29,20,000**

**Direct Expenses:** Royalty ₹1,72,600 + Job Charges ₹8,12,000 = **₹9,84,600**

**(I) Prime Cost = ₹10,58,65,200**

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**(II) FACTORY COST**

Prime Cost ₹10,58,65,200 + **Factory Overheads** [Power & Fuel ₹4,62,000 + Stores & Spares ₹1,12,000 + Plant & Machinery Repairs ₹48,000 + P&M Insurance ₹31,200 + Factory Building Insurance ₹18,100 + Quality Control ₹19,600 + R&D for Production Improvement ₹18,200 + Pollution Control ₹26,600] = ₹7,35,700.

Gross Factory Cost = ₹10,66,00,900. Add: Opening WIP ₹9,20,000. Less: Closing WIP ₹8,70,000. Less: Scrap & Waste Realised ₹86,000.

**(II) Factory Cost = ₹10,65,64,900**

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**(III) COST OF PRODUCTION**

Factory Cost ₹10,65,64,900 + **Administration Overheads** [Office Building Depreciation ₹56,000 + General Manager Salary ₹12,56,000 + Independent Directors Fees ₹2,20,000] = ₹15,32,000. Add: **Primary Packing** ₹96,000 (part of production cost as it makes goods saleable).

**(III) Cost of Production = ₹10,81,92,900**

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**(IV) COST OF GOODS SOLD**

Opening Finished Goods ₹11,00,000 + Cost of Production ₹10,81,92,900 − Closing Finished Goods ₹18,20,000.

**(IV) Cost of Go…

Question 10

ABY Ltd. manufactures four products A, B, C, D using same plant. December 2020 production: Product A (1,440 units, Rs. 84 material/unit, Rs. 20 labour/unit, 4 machine hours/unit); Product B (1,200 units, Rs. 90 material/unit, Rs. 18 labour/unit, 3 machine hours/unit); Product C (960 units, Rs. 80 material/unit, Rs. 14 labour/unit, 2 machine hours/unit); Product D (1,008 units, Rs. 96 material/unit, Rs. 16 labour/unit, 1 machine hour/unit). Production runs of 48 units per batch, sales batches of 24 units. Overheads: Machine dept Rs. 2,52,000; Set-up costs Rs. 80,000; Store receiving Rs. 60,000; Inspection Rs. 40,000; Material handling Rs. 10,368. Machine dept apportioned to set-up, receiving, inspection as 4:3:2. Set-up costs per production run (batch); Store receiving per requisition (50 p…

Accepted Answer

**ABY Ltd. — Overhead Absorption: Machine-Hour Rate vs. Activity-Based Costing (December 2020)**

**Part (i): Total Cost using Machine-Hour Rate (MHR) Basis**

First, total machine hours are computed: A = 1,440 × 4 = 5,760 hrs; B = 1,200 × 3 = 3,600 hrs; C = 960 × 2 = 1,920 hrs; D = 1,008 × 1 = 1,008 hrs. **Total machine hours = 12,288 hrs.**

Total overheads = ₹2,52,000 + ₹80,000 + ₹60,000 + ₹40,000 + ₹10,368 = **₹4,42,368**

**Machine Hour Rate = ₹4,42,368 ÷ 12,288 = ₹36 per machine hour**

| Product | Material (₹) | Labour (₹) | OH @ ₹36/hr (₹) | Cost/unit (₹) | Units | **Total Cost (₹)** |
|---------|-------------|-----------|----------------|--------------|-------|-------------------|
| A | 84 | 20 | 4 × 36 = 144 | 248 | 1,440 | **3,57,120** |
| B | 90 | 18 | 3 × 36 = 108 | 216 | 1,200 | **2,59,200** |
| C | 80 | 14 | 2 × 36 = 72 | 166 | 960 | **1,59,360** |
| D | 96 | 16 | 1 × 36 = 36 | 148 | 1,008 | **1,49,184** |
| **Total** | | | | | | **₹9,24,864** |

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**Part (ii): Total Cost using Activity-Based Costing (ABC)**

**Step 1 — Reapportion Machine Dept. cost (₹2,52,000) in ratio 4:3:2 to Set-up, Store Receiving, Inspection:**
- Set-up: 2,52,000 × 4/9 = ₹1,12,000 → Revised pool = 80,000 + 1,12,000 = **₹1,92,000**
- Store Receiving: 2,52,000 × 3/9 = ₹84,000 → Revised pool = 60,000 + 84,000 = **₹1,44,000**
- Inspection: 2,52,000 × 2/9 = ₹56,000 → Revised pool = 40,000 + 56,000 = **₹96,000**
- Material Handling remains = **₹10,368**

**Step 2 — Identify Cost Drivers:**
…

Question 11

Manufacturing unit information: Sales 80,000 units @ Rs. 50 = Rs. 40,00,000; Material consumed Rs. 16,00,000; Variable Overheads Rs. 4,00,000; Labour Charges Rs. 8,00,000; Fixed Overheads Rs. 7,20,000; Total costs Rs. 35,20,000; Net Profit Rs. 4,80,000. CALCULATE:

Accepted Answer

**Given Data (Per Unit & Total):**

Selling Price per unit = Rs. 50; Units sold = 80,000; Total Sales = Rs. 40,00,000.

Variable Costs: Material Rs. 16,00,000 + Labour Rs. 8,00,000 + Variable Overheads Rs. 4,00,000 = **Total Variable Cost Rs. 28,00,000**.

Variable Cost per unit = 28,00,000 ÷ 80,000 = **Rs. 35**.

Fixed Overheads = **Rs. 7,20,000**.

**Contribution per unit** = SP – VC = 50 – 35 = **Rs. 15**.

**P/V Ratio** = 15 ÷ 50 × 100 = **30%**.

Total Contribution = 80,000 × 15 = Rs. 12,00,000. Profit = 12,00,000 – 7,20,000 = **Rs. 4,80,000** (confirmed).

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**(i) Break-Even Point (BEP):**

BEP (units) = Fixed Costs ÷ Contribution per unit = 7,20,000 ÷ 15 = **48,000 units**.

BEP (value) = 48,000 × 50 = **Rs. 24,00,000** (or Fixed Cost ÷ P/V Ratio = 7,20,000 ÷ 0.30 = Rs. 24,00,000).

At 48,000 units, the company neither earns profit nor incurs loss.

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**(ii) Sales required to earn profit of 20% on sales:**

Let required Sales = S.
Contribution – Fixed Costs = Profit → P/V Ratio × S – Fixed Costs = 0.20 × S.
0.30S – 7,20,000 = 0.20S → 0.10S = 7,20,000 → **S = Rs. 72,00,000**.

Units to be sold = 72,00,000 ÷ 50 = **1,44,000 units**.

---

**(iii) Extra units required to maintain present profit when SP is reduced:**

Present Profit = Rs. 4,80,000. Required Contribution = Fixed Cost + Profit = 7,20,000 + 4,80,000 = Rs. 12,00,000.

**When SP reduced by 20%:** New SP = 50 × 0.80 = Rs. 40. New Contribution/unit = 40 – 35 = Rs. 5.
Units needed = 12,00,000 ÷ 5 = **2,40,00…

Question 12

A Ltd. is an engineering manufacturing company producing job orders on customer specifications. During last month completed three jobs A, B, C. Additional expenditures incurred (beyond direct materials and labour): Office and administration Rs. 6,00,000; Product blueprint cost for job A Rs. 2,80,000; Machinery hire for job B Rs. 80,000; Office attendants salary Rs. 1,00,000; Software license for job C graphics Rs. 1,00,000; Marketing manager salary Rs. 2,40,000. Required: CALCULATE direct expenses attributable to each job.

Accepted Answer

**Direct Expenses** are costs other than direct materials and direct labour that can be **specifically and exclusively identified** with a particular job. They form part of Prime Cost.

From the given list, the following are classified as **Direct Expenses** because they are incurred exclusively for a specific job:

- **Job A — Product blueprint cost: ₹2,80,000** — Blueprint is prepared specifically for Job A's design requirement; entirely traceable to Job A.
- **Job B — Machinery hire charges: ₹80,000** — Machinery was hired exclusively for Job B; directly attributable.
- **Job C — Software license for graphics: ₹1,00,000** — License procured exclusively for Job C's graphical work; directly attributable.

The remaining items are **Indirect Expenses (Overheads)** and are NOT direct expenses:

- Office and administration expenses ₹6,00,000 — General overhead; not traceable to any single job.
- Office attendants salary ₹1,00,000 — General establishment cost; indirect.
- Marketing manager salary ₹2,40,000 — Selling and distribution overhead; not related to production jobs.

**Summary of Direct Expenses attributable to each job:**

Job A = ₹2,80,000 | Job B = ₹80,000 | Job C = ₹1,00,000

**Total Direct Expenses = ₹4,60,000**

Question 13

A jobbing factory has undertaken to supply 200 pieces per month for 6 months. Batch order opened each month with materials and labour at actual. Overheads levied per labour hour. Contracted selling price Rs. 80/piece. Monthly data January-June: Output (pieces), Material cost (Rs.), Direct wages (Rs.), Direct labour hours. January: 210, 6,500, 1,200, 240. February: 200, 6,400, 1,400, 280. March: 220, 6,800, 1,500, 280. April: 180, 6,300, 1,400, 270. May: 200, 7,000, 1,500, 300. June: 220, 7,200, 1,600, 320. Chargeable expenses and direct labour hours by month provided separately. Required: COMPUTE cost and profit per piece of each batch order and overall position for 1,200 pieces.

Accepted Answer

**Assumption:** The question states chargeable expenses are provided separately; using the standard ICAI version where the overhead absorption rate is **Rs. 5 per direct labour hour** (a pre-determined rate derived from factory overhead budget ÷ budgeted DLH).

**Batch Cost Statement — January to June**

| Month | Output (pcs) | Material (₹) | Direct Wages (₹) | OH @ ₹5/DLH (₹) | Total Cost (₹) | Cost/Piece (₹) | SP/Piece (₹) | Profit/Piece (₹) |
|-------|-------------|--------------|-----------------|-----------------|---------------|---------------|--------------|------------------|
| Jan | 210 | 6,500 | 1,200 | 1,200 | 8,900 | 42.38 | 80 | 37.62 |
| Feb | 200 | 6,400 | 1,400 | 1,400 | 9,200 | 46.00 | 80 | 34.00 |
| Mar | 220 | 6,800 | 1,500 | 1,400 | 9,700 | 44.09 | 80 | 35.91 |
| Apr | 180 | 6,300 | 1,400 | 1,350 | 9,050 | 50.28 | 80 | 29.72 |
| May | 200 | 7,000 | 1,500 | 1,500 | 10,000 | 50.00 | 80 | 30.00 |
| Jun | 220 | 7,200 | 1,600 | 1,600 | 10,400 | 47.27 | 80 | 32.73 |
| **Total** | **1,230** | **40,200** | **8,600** | **8,450** | **57,250** | **46.54 avg** | | |

**Overall Position for 1,200 Pieces Contracted**

Total pieces produced over 6 months = 1,230; contracted delivery = 1,200; **closing stock = 30 pieces**.

Average cost per piece = ₹57,250 ÷ 1,230 = **₹46.54**
Value of closing stock (30 pcs) = 30 × ₹46.54 = **₹1,396**
Cost of 1,200 pieces delivered = ₹57,250 − ₹1,396 = **₹55,854**
Sales revenue = 1,200 × ₹80 = **₹96,000**
**Total profit on the contract =…

Question 14

DISCUSS the Net Realisable Value (NRV) method of apportioning joint costs to by-products.

Accepted Answer

**Net Realisable Value (NRV) Method of Apportioning Joint Costs to By-Products**

In joint product costing, a **by-product** is a product of minor economic value that emerges incidentally during the manufacture of the main product(s). The **Net Realisable Value (NRV) method** (also known as the *reversal cost method* or *opportunity cost method*) is one of the recognised approaches to account for by-products by crediting their value against the joint cost of production.

**Concept and Rationale**

Under this method, the NRV of the by-product is computed first and then **deducted from the total joint costs** before those costs are allocated to the main products. The underlying rationale is that since the by-product is produced alongside the main product, its realisable value represents a cost saving (or cost recovery) to the main production process. Accordingly, the net joint cost burden on main products is reduced.

**Computation of NRV of By-Product**

The NRV of a by-product is calculated as follows:

**NRV = Selling Price of By-Product − Further Processing Costs (if any) − Selling & Distribution Expenses attributable to By-Product**

If the by-product requires no further processing and has no additional selling costs, the NRV equals its sale price at the point of separation.

**Treatment in Cost Accounts**

Once the NRV is determined, the accounting treatment is:

1. **Total Joint Cost** is ascertained up to the point of separation (split-off point).
2. **NRV of by-product…

Question 15

DIFFERENTIATE between Service costing and Product costing.

Accepted Answer

**Service Costing vs. Product Costing**

**Service Costing** (also called Operating Costing) is a method of cost ascertainment used by organisations that provide services rather than produce tangible goods. It is applied in industries such as transport, hospitals, hotels, electricity supply, and educational institutions. The cost unit in service costing is a composite unit, for example — passenger-kilometre, bed-day, kilowatt-hour, or student-hour.

**Product Costing** is a method used by manufacturing organisations to ascertain the cost of producing a tangible, physical product. It encompasses Job Costing, Batch Costing, Process Costing, etc., depending on the nature of production. The cost unit is a single product, batch, or job.

The key points of difference are as follows:

**1. Nature of Output:** In service costing, the output is intangible and cannot be stored (e.g., a transport journey, a hospital stay). In product costing, the output is a tangible physical good that can be stored and inventoried.

**2. Cost Unit:** Service costing uses composite or dual cost units (e.g., tonne-kilometre, passenger-kilometre). Product costing uses a simple cost unit such as per unit, per kg, or per batch.

**3. Storability / Inventory:** Services cannot be stored; production and consumption occur simultaneously. Products can be stored as inventory (raw material, WIP, finished goods) and valued using AS 2 (Valuation of Inventories).

**4. Homogeneity of Cost:** In service costing, cost…

Question 16

DISCUSS the Controllable and un-controllable variances.

Accepted Answer

**Variance Analysis: Controllable and Uncontrollable Variances**

In standard costing, variances are classified not only by type (material, labour, overhead) but also by the **degree of control** that management can exercise over them. This classification is essential for **performance evaluation** and the application of the **management by exception** principle.

**Controllable Variances**

A variance is said to be **controllable** when it arises due to factors that are within the authority and responsibility of a specific manager or department head. These variances can be directly influenced by managerial action, decision-making, or corrective steps taken at the operational level.

Examples of controllable variances include:
- **Material usage variance** caused by excessive wastage, pilferage, or poor handling — controllable by the production manager.
- **Labour efficiency variance** arising from worker idle time or poor supervision — controllable by the foreman or production supervisor.
- **Fixed overhead efficiency variance** — controllable by the production department through efficient utilisation of capacity.
- **Selling overhead variance** due to excessive expenditure on advertising beyond the budget — controllable by the sales manager.

The key characteristic is that the responsible person has the **authority to act** and the **ability to influence** the outcome. Controllable variances are therefore used for **performance appraisal** and for holding managers accountab…

Question 17

DISCUSS the Standard and Discretionary Cost Centres.

Accepted Answer

**Cost Centre** is a location, person, or item of equipment (or a group of these) for which costs may be ascertained and used for the purpose of cost control. Cost centres are broadly classified based on the nature of costs incurred and the degree of control exercisable over them.

**Standard Cost Centre**

A Standard Cost Centre is one where the nature of work is repetitive and the relationship between inputs and outputs can be clearly established. In such centres, it is possible to set standard costs per unit of output and compare actual costs against these predetermined standards. Efficiency and performance measurement are straightforward because the input-output relationship is measurable and predictable.

*Characteristics of Standard Cost Centres:*
- Work performed is uniform and repetitive in nature.
- A clear and measurable relationship exists between inputs consumed and outputs produced.
- Standard costs (material, labour, overhead) can be set per unit of output with reasonable accuracy.
- Performance is evaluated through **variance analysis** — price variances, efficiency variances, usage variances, etc.
- The objective is **cost efficiency**: producing the budgeted output at or below standard cost.

*Examples:* Manufacturing departments in a factory (e.g., machining department, assembly department), where each unit of product requires a defined quantity of labour hours and material.

**Discretionary Cost Centre**

A Discretionary Cost Centre (also called a **Managed…

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