CA Inter Cost & Mgmt — Question Paper — May 2024

Note: Insufficient Data Provided

The question as presented is a sub-part of a larger problem. The numerical data required to compute the profit lost due to labour turnover — such as actual production achieved, standard/budgeted production capacity, selling price per unit, and cost per unit — has not been included in the question stem. The following is the complete methodology a student must apply once the data is available.

Concept: Profit Lost Due to Labour Turnover

Labour turnover causes a loss of production because new/replacement workers take time to reach standard efficiency, and during separations and replacements, machine and labour time is lost. If this lost production could have been sold, the firm forgoes contribution/profit on those units.

Step 1 — Calculate Potential Production Lost

Potential Production Lost = Budgeted (Normal) Production – Actual Production achieved during the year

Alternatively, if efficiency data is given: Lost units = (Standard output of experienced workers – Actual output of new/replacement workers) × Number of such workers × Time period

Step 2 — Calculate Profit Per Unit (or Contribution Per Unit)

If the question provides Selling Price per unit and Total Cost per unit:
Profit per unit = Selling Price per unit – Total Cost per unit

If marginal costing approach is intended:
Contribution per unit = Selling Price per unit – Variable Cost per unit

Step 3 — Calculate Profit Lost

Profit Lost = Potential Production Lost (units) × Profit per unit (or Contribution per unit)

Important Note for Exam: In CA Intermediate Cost Accounting questions on labour turnover, the 'cost of labour turnover' includes both preventive costs (welfare, training, HR activities) and replacement costs (recruitment, induction, learning curve losses). The profit lost on account of production foregone is part of the replacement cost / consequential loss.

Once the accompanying data (production figures, selling price, cost structure) is provided, apply the three steps above to arrive at the final answer. Always state the final profit lost figure clearly in ₹.

(i) Break-Even Sales

Using the Marginal Costing approach, since Fixed Costs remain constant between two periods, the change in profit divided by change in sales gives the P/V Ratio (Profit-Volume Ratio).

P/V Ratio = Change in Profit ÷ Change in Sales
= [11,20,000 − (−3,80,000)] ÷ [2,40,00,000 − 1,80,00,000]
= 15,00,000 ÷ 60,00,000 = 25%

Variable Cost Ratio = 100% − 25% = 75%

Fixed Costs (using 2023-24 data):
Contribution = 2,40,00,000 × 25% = ₹60,00,000
Fixed Costs = Contribution − Profit = 60,00,000 − 11,20,000 = ₹48,80,000

*Verification (2022-23):* Contribution = 1,80,00,000 × 25% = ₹45,00,000; Profit = 45,00,000 − 48,80,000 = ₹(3,80,000) ✓

Break-Even Sales = Fixed Costs ÷ P/V Ratio
= 48,80,000 ÷ 25% = ₹1,95,20,000

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(ii) Required Sales in 2024-25 to Earn Profit of ₹15,00,000

In 2024-25, variable costs increase by 5% while selling price remains unchanged.

New Variable Cost Ratio = 75% × 1.05 = 78.75%
New P/V Ratio = 100% − 78.75% = 21.25%

New Fixed Costs = 48,80,000 − 4,80,000 = ₹44,00,000

Required Sales = (Fixed Costs + Desired Profit) ÷ New P/V Ratio
= (44,00,000 + 15,00,000) ÷ 21.25%
= 59,00,000 ÷ 0.2125
= ₹2,77,64,706 (approx.)

The sales volume required in 2024-25 to earn a profit of ₹15,00,000 is ₹2,77,64,706.

Feedback Control and Feedforward Control are two distinct approaches to budgetary control systems that differ fundamentally in their timing and methodology.

Feedback Control System is a reactive approach that measures actual performance against budgeted or standard benchmarks and identifies variances after they have already occurred. The control mechanism works on the principle of exception reporting—actual results are compared with budgeted results, variances are calculated, and corrective actions are initiated to bring performance in line with the budget. This system is useful for identifying performance gaps and understanding why deviations happened. However, since it operates retrospectively, the damage or loss has already been incurred by the time corrective measures are taken. Feedback control relies on historical data and reports generated periodically (monthly, quarterly) to trigger management action. Examples include variance analysis on sales, costs, or production efficiency after the reporting period ends.

Feedforward Control System, by contrast, is a proactive approach that attempts to prevent deviations from occurring in the first place. This system monitors external and internal inputs, environmental factors, and leading indicators before actual operations commence. It uses forecasting, trend analysis, and prediction models to anticipate potential problems and take corrective action beforehand. Feedforward control is forward-looking and based on forecasts of future conditions rather than past actuals. It involves continuous monitoring of variables such as market conditions, raw material prices, labor availability, and demand forecasts, allowing management to adjust plans and operations pre-emptively. This approach is more effective in preventing losses or inefficiencies.

Key Differences: Feedback control is backward-looking (historical), while feedforward is forward-looking (predictive). Feedback control detects and corrects problems after occurrence, whereas feedforward prevents problems before they arise. Feedback control is less costly to implement but less effective in prevention. Feedforward requires sophisticated forecasting systems but provides better control by minimizing adverse impacts.

Practical Application: Most effective budgetary control systems use both approaches—feedforward mechanisms to set realistic budgets and prevent major deviations, combined with feedback controls to monitor performance and make course corrections. For instance, a company might use feedforward control by adjusting production schedules based on demand forecasts, while simultaneously using feedback control through monthly variance reports to identify operational inefficiencies.

Part (a): Tesco Cycles Ltd. — Inventory Management

Given: Annual Demand (D) = 3,60,000 units; Ordering Cost (O) = ₹1,200; Purchase Price = ₹240; Carrying Cost = 10% p.a. = ₹24 per unit per annum; Lead Time = 45 days; Safety Stock = 6,500 units; 360 days in a year.

(i) Economic Order Quantity (EOQ):
EOQ = √(2DO / Carrying Cost per unit) = √(2 × 3,60,000 × 1,200 / 24) = √36,00,000 = 6,000 units

(ii) Re-order Level:
Daily Consumption = 3,60,000 / 360 = 1,000 units/day
Lead Time Consumption = 1,000 × 45 = 45,000 units
Re-order Level = Lead Time Consumption + Safety Stock = 45,000 + 6,500 = 51,500 units

(iii) Evaluation of Quantity Discount Offer (Order Size = 30,000 units):
Discounted Price = ₹240 × 0.98 = ₹235.20; New Carrying Cost per unit = 10% × ₹235.20 = ₹23.52

| Cost Element | At EOQ (6,000 units) | At Discount Qty (30,000 units) |
|---|---|---|
| Purchase Cost | 3,60,000 × ₹240 = ₹8,64,00,000 | 3,60,000 × ₹235.20 = ₹8,46,72,000 |
| Ordering Cost | (3,60,000/6,000) × ₹1,200 = ₹72,000 | (3,60,000/30,000) × ₹1,200 = ₹14,400 |
| Carrying Cost | (3,000 + 6,500) × ₹24 = ₹2,28,000 | (15,000 + 6,500) × ₹23.52 = ₹5,05,680 |
| Total Cost | ₹8,67,00,000 | ₹8,51,92,080 |

Net Saving = ₹8,67,00,000 – ₹8,51,92,080 = ₹15,07,920. Since accepting the discount saves ₹15,07,920 per annum, the quantity discount offer should be accepted.

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Part (b): Joint Production Costing

Total Joint Cost = ₹20,000 + ₹10,000 + ₹6,000 + ₹24,000 = ₹60,000
Sales value at split-off: A = 2,000 × ₹20 = ₹40,000; B = 4,000 × ₹15 = ₹60,000; Total = ₹1,00,000

(i)(a) Physical Unit Method:
Total Units = 2,000 + 4,000 = 6,000 units
Product A = (2,000/6,000) × ₹60,000 = ₹20,000
Product B = (4,000/6,000) × ₹60,000 = ₹40,000

(i)(b) Contribution Margin Method:
Variable Joint Costs = ₹36,000; Fixed Joint Costs = ₹24,000

Step 1 — Allocate Variable Costs in proportion to Sales Value:
A: (40,000/1,00,000) × 36,000 = ₹14,400; B: (60,000/1,00,000) × 36,000 = ₹21,600

Step 2 — Compute Contribution:
A: ₹40,000 – ₹14,400 = ₹25,600; B: ₹60,000 – ₹21,600 = ₹38,400; Total = ₹64,000

Step 3 — Allocate Fixed Costs in proportion to Contribution:
A: (25,600/64,000) × 24,000 = ₹9,600; B: (38,400/64,000) × 24,000 = ₹14,400

Total Allocation — A: ₹14,400 + ₹9,600 = ₹24,000; B: ₹21,600 + ₹14,400 = ₹36,000

(ii) Further Processing Decision for Product B:
Units after 2% loss = 4,000 × 0.98 = 3,920 units
Revenue after further processing = 3,920 × ₹18 = ₹70,560
Revenue without further processing = 4,000 × ₹15 = ₹60,000
Incremental Revenue = ₹10,560; Incremental Cost = ₹12,000
Net Loss = ₹1,440. Since additional cost (₹12,000) exceeds additional revenue (₹10,560), Product B should NOT be further processed.

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Part (c): Capacity and Efficiency Ratios for XYZ Ltd. (February 2024)

Hours per employee per month = 8 hrs/day × 6 days/week × 4 weeks = 192 hours
Maximum Capacity Hours = 150 × 192 = 28,800 hours
Budgeted Hours (based on 125 employees) = 125 × 192 = 24,000 hours

(i) Actual Hours Worked:
Actual Usage of Budgeted Capacity Ratio = Actual Hours / Budgeted Hours × 100
86% = Actual Hours / 24,000 × 100 → Actual Hours = 20,640 hours

(ii) Standard Hours for Actual Output:
Efficiency Ratio = Standard Hours / Actual Hours × 100
110% = Standard Hours / 20,640 × 100 → Standard Hours = 22,704 hours

(iii) Activity Ratio:
Activity Ratio = Standard Hours / Budgeted Hours × 100 = 22,704 / 24,000 × 100 = 94.6%
(Verify: Activity Ratio = Capacity Ratio × Efficiency Ratio = 86% × 110% / 100 = 94.6% ✓)

(iv) Standard Capacity Usage Ratio:
Standard Capacity Usage Ratio = Budgeted Hours / Maximum Capacity Hours × 100 = 24,000 / 28,800 × 100 = 83.33%

Part (i): Economic Order Quantity (EOQ)

Using the EOQ formula: EOQ = √(2 × Annual Demand × Ordering Cost / Carrying Cost per unit)

Given: Annual demand (A) = 3,60,000 units; Ordering cost (O) = ₹1,200; Carrying cost per unit (C) = 10% × ₹240 = ₹24

EOQ = √(2 × 3,60,000 × 1,200 / 24) = √(8,64,00,000 / 24) = √3,60,00,000 = 6,000 units

Part (ii): Re-order Level

Re-order Level = Safety Stock + (Lead Time × Daily Usage)

Daily usage = 3,60,000 / 360 = 1,000 units per day
Lead time consumption = 45 days × 1,000 = 45,000 units

Re-order Level = 6,500 + 45,000 = 51,500 units

Part (iii): Evaluation of Quantity Discount Offer

To decide whether to accept the 2% discount at order size of 30,000 units, a comparison of Total Annual Relevant Cost (Purchase Cost + Ordering Cost + Carrying Cost) is made under both scenarios.

Situation A — Current Policy (EOQ = 6,000 units, No Discount):
Purchase price = ₹240; Number of orders = 3,60,000 / 6,000 = 60; Average inventory = (6,000/2) + 6,500 = 9,500 units
Total Cost = ₹8,64,00,000 + ₹72,000 + ₹2,28,000 = ₹8,67,00,000

Situation B — With Discount (Order size = 30,000 units, 2% Discount):
Purchase price = ₹240 × 0.98 = ₹235.20; Number of orders = 3,60,000 / 30,000 = 12; Average inventory = (30,000/2) + 6,500 = 21,500 units; Carrying cost per unit = 10% × ₹235.20 = ₹23.52
Total Cost = ₹8,46,72,000 + ₹14,400 + ₹5,05,680 = ₹8,51,92,080

Annual Saving = ₹8,67,00,000 − ₹8,51,92,080 = ₹15,07,920

Advice: Since the total annual cost under the quantity discount scheme is lower by ₹15,07,920, the quantity discount offer should be accepted.

Solution: Inventory Management — Tesco Cycles Ltd.

Given Data:
Annual demand (D) = 3,60,000 units | Ordering cost (Co) = ₹1,200 per order | Unit cost (Cp) = ₹240 | Carrying cost rate = 10% p.a. | Lead time = 45 days | Safety stock = 6,500 units | Year = 360 days

Carrying cost per unit per annum = 10% × ₹240 = ₹24

(i) Economic Order Quantity (EOQ)

Using the standard EOQ formula: EOQ = √(2 × D × Co ÷ Cc)

EOQ = √(2 × 3,60,000 × 1,200 ÷ 24) = √(8,64,00,000 ÷ 24) = √3,60,00,000 = 6,000 units

(ii) Re-order Level

Daily consumption = 3,60,000 ÷ 360 = 1,000 units per day

Lead time consumption = 45 days × 1,000 = 45,000 units

Re-order Level = Safety Stock + Lead Time Consumption = 6,500 + 45,000 = 51,500 units

This means whenever stock falls to 51,500 units, a fresh order should be placed to avoid disruption.

(iii) Evaluation of Quantity Discount Offer

The discount offer requires an order size of 30,000 units at a 2% discount on price. A total cost comparison is made between ordering at EOQ (6,000 units) vs. the discount lot (30,000 units).

Discounted price = ₹240 × (1 − 2%) = ₹235.20 per unit

Total Annual Cost at EOQ (6,000 units) — no discount:
- Annual purchase cost = 3,60,000 × ₹240 = ₹8,64,00,000
- Ordering cost = (3,60,000 ÷ 6,000) × ₹1,200 = 60 × ₹1,200 = ₹72,000
- Carrying cost (avg inventory = 6,000÷2 + 6,500 = 9,500 units) = 9,500 × ₹24 = ₹2,28,000
- Total Cost = ₹8,67,00,000

Total Annual Cost at Order Size 30,000 units — with 2% discount:
- Annual purchase cost = 3,60,000 × ₹235.20 = ₹8,46,72,000
- Ordering cost = (3,60,000 ÷ 30,000) × ₹1,200 = 12 × ₹1,200 = ₹14,400
- Carrying cost per unit = 10% × ₹235.20 = ₹23.52; avg inventory = 30,000÷2 + 6,500 = 21,500 units = 21,500 × ₹23.52 = ₹5,05,680
- Total Cost = ₹8,51,92,080

Net Annual Saving = ₹8,67,00,000 − ₹8,51,92,080 = ₹15,07,920

Advice: Since accepting the quantity discount results in a net annual saving of ₹15,07,920, the offer should be accepted. Although the carrying cost increases significantly due to the larger order size, the saving on purchase price and reduced ordering cost more than offsets this additional cost.

Part (i): Joint Cost Allocation

Total Joint Cost = Material ₹20,000 + Labour ₹10,000 + Variable Overheads ₹6,000 + Fixed Overheads ₹24,000 = ₹60,000

(a) Physical Unit Method

Under the physical unit method, joint costs are allocated in proportion to the number of units produced by each product.

Total units produced = 2,000 + 4,000 = 6,000 units

Allocation ratio — Product A : Product B = 2,000 : 4,000 = 1 : 2

- Joint cost allocated to Product A = 60,000 × (2,000/6,000) = ₹20,000
- Joint cost allocated to Product B = 60,000 × (4,000/6,000) = ₹40,000

(b) Contribution Margin Method

Under this method, variable joint costs are allocated on the basis of physical units and fixed joint costs are allocated on the basis of contribution margins (Sales Value less Variable Joint Cost allocated).

Variable Joint Costs = 20,000 + 10,000 + 6,000 = ₹36,000; Fixed Joint Costs = ₹24,000

Variable cost per unit = 36,000 ÷ 6,000 = ₹6 per unit

Variable cost allocated — Product A: 2,000 × ₹6 = ₹12,000; Product B: 4,000 × ₹6 = ₹24,000

Contribution margin at split-off:
- Product A: (2,000 × ₹20) − ₹12,000 = ₹40,000 − ₹12,000 = ₹28,000
- Product B: (4,000 × ₹15) − ₹24,000 = ₹60,000 − ₹24,000 = ₹36,000
- Total Contribution = ₹64,000

Fixed cost allocated in ratio 28,000 : 36,000 = 7 : 9:
- Product A: 24,000 × (28,000/64,000) = ₹10,500
- Product B: 24,000 × (36,000/64,000) = ₹13,500

Total Cost Allocated (Contribution Margin Method):
- Product A: ₹12,000 + ₹10,500 = ₹22,500
- Product B: ₹24,000 + ₹13,500 = ₹37,500

Part (ii): Further Processing Decision for Product B

The decision to further process a joint product should be based purely on incremental (differential) analysis — comparing incremental revenue with incremental cost. Joint costs already incurred are sunk costs and are irrelevant to this decision.

Product B units at split-off = 4,000 units. A processing loss of 2% means output = 4,000 × 0.98 = 3,920 units. Additional processing cost = ₹12,000. Selling price after processing = ₹18 per unit.

- Revenue if sold at split-off: 4,000 × ₹15 = ₹60,000
- Revenue if further processed: 3,920 × ₹18 = ₹70,560
- Incremental Revenue: ₹70,560 − ₹60,000 = ₹10,560
- Incremental Cost of further processing: ₹12,000
- Net Loss on further processing: ₹10,560 − ₹12,000 = ₹(1,440)

Conclusion: Further processing of Product B results in a net loss of ₹1,440. Since the incremental cost (₹12,000) exceeds the incremental revenue (₹10,560), it is not profitable to further process Product B. The company should sell Product B at the split-off point at ₹15 per unit.

Joint Cost Allocation using the Sales Value at Split-off Point Method

Since selling prices are given at the split-off point, the Sales Value Method is the most appropriate basis for apportioning joint costs between Product A and Product B.

Step 1: Total Joint Cost

Total Joint Cost = Material + Labour + Variable Overheads + Fixed Overheads = ₹20,000 + ₹10,000 + ₹6,000 + ₹24,000 = ₹60,000

Step 2: Sales Value at Split-off Point

Product A: 2,000 units × ₹20 = ₹40,000
Product B: 4,000 units × ₹15 = ₹60,000
Total Sales Value = ₹1,00,000

Step 3: Apportionment Ratio

Product A: 40,000 / 1,00,000 = 40%
Product B: 60,000 / 1,00,000 = 60%

Step 4: Joint Cost Allocated

Product A: ₹60,000 × 40% = ₹24,000
Product B: ₹60,000 × 60% = ₹36,000

Step 5: Cost per Unit

Product A: ₹24,000 ÷ 2,000 units = ₹12 per unit
Product B: ₹36,000 ÷ 4,000 units = ₹9 per unit

Summary Table:

| Particulars | Product A | Product B | Total |
|---|---|---|---|
| Sales Value at Split-off (₹) | 40,000 | 60,000 | 1,00,000 |
| Apportionment Ratio | 40% | 60% | 100% |
| Joint Cost Allocated (₹) | 24,000 | 36,000 | 60,000 |
| Units Produced | 2,000 | 4,000 | 6,000 |
| Cost per Unit (₹) | 12 | 9 | — |

Conclusion: Under the Sales Value at Split-off Point method, Product A is allocated ₹24,000 (₹12/unit) and Product B is allocated ₹36,000 (₹9/unit) of the total joint cost of ₹60,000.

Solution: Capacity Ratios for XYZ Ltd. — February 2024

Before computing the required ratios, the key capacity figures are established:

Maximum Capacity Hours = 150 employees × 8 hrs/day × 6 days/week × 4 weeks = 28,800 hours

Budgeted (Normal) Capacity Hours = 125 employees × 8 hrs/day × 6 days/week × 4 weeks = 24,000 hours

Here, 125 employees represent the budgeted workforce for the period (actual strength deployed), and 150 employees represent the theoretical maximum.

(i) Actual Hours Worked

The Actual Capacity Usage Ratio (Capacity Ratio) is defined as:
Capacity Ratio = (Actual Hours Worked / Budgeted Hours) × 100

Given Capacity Ratio = 86%:
Actual Hours Worked = 86% × 24,000 = 20,640 hours

(ii) Standard Hours for Actual Output

The Efficiency Ratio is defined as:
Efficiency Ratio = (Standard Hours for Actual Output / Actual Hours Worked) × 100

Given Efficiency Ratio = 110%:
Standard Hours for Actual Output = 110% × 20,640 = 22,704 hours

(iii) Activity Ratio

The Activity Ratio measures the relationship between Standard Hours produced and Budgeted Hours:
Activity Ratio = (Standard Hours for Actual Output / Budgeted Hours) × 100
= (22,704 / 24,000) × 100 = 94.6%

*Cross-check:* Activity Ratio = Capacity Ratio × Efficiency Ratio = 86% × 110% / 100 = 94.6% ✓

(iv) Standard Capacity Usage Ratio

This ratio compares Budgeted Hours to Maximum possible hours:
Standard Capacity Usage Ratio = (Budgeted Hours / Maximum Capacity Hours) × 100
= (24,000 / 28,800) × 100 = 83.33%

This indicates that the budgeted workforce operates at 83.33% of the theoretical maximum capacity.

Note: The question as submitted is incomplete — the Activity-Based Costing data table (activity cost pools, cost driver rates, and per-customer activity consumption data for the four customers) is missing after the colon. Without these figures, the numerical computation cannot be performed.

Methodology that would be applied once data is available:

Step 1 – Identify Activities and Cost Driver Rates. In ABC, overhead costs are pooled by activity (e.g., Order Processing, Sales Visits, Delivery Processing, Credit Collection). Each pool is divided by its total cost driver volume to arrive at a Cost Driver Rate (CDR):

CDR = Total Activity Cost ÷ Total Cost Driver Volume

Step 2 – Assign Activity Costs to Each Customer. Multiply each customer's consumption of cost drivers by the respective CDR:

Customer Activity Cost = Cost Driver Units consumed by Customer × CDR

Step 3 – Compute Customer Profitability. For each of the four customers (Wholesale A, Wholesale B, Retail A, Retail B):

Net Revenue from Customer
Less: Cost of Goods Sold allocated to customer
Less: Activity costs assigned (Step 2)
= Customer-level Profit / (Loss)

Step 4 – Comparison: Wholesale vs. Retail Category. Aggregate results to compare the profitability of the wholesale and retail segments and draw conclusions on which category is more cost-efficient to serve.

Key Exam Point: ABC reveals that high-volume wholesale customers may be more profitable than retail customers even at lower margins, because retail customers typically generate more orders, require more sales visits, and involve higher credit-collection costs — all of which are captured by activity cost drivers that traditional volume-based costing ignores.

Please re-submit the question with the complete data table (activity cost pools, cost driver rates, and customer-wise cost driver consumption) so that all calculations can be performed in full.

Statement of Estimated Cost — Luxury Designers Pvt. Ltd.

The following cost analysis and estimation is prepared for 2024-25 based on the cost data of 2023-24. A Cost Sheet (also called Statement of Cost) is prepared in accordance with the principles of Cost Accounting to systematically classify and estimate costs.

Cost Sheet for 2023-24 and Estimated Cost for 2024-25 (Per Unit)

Step 1 — Prime Cost (Direct Costs)

Direct Material Cost per unit = ₹30. Note: Where machinery is used in production, depreciation (e.g., over 40 years) is absorbed into overhead, not direct material.

Direct Labour Cost per unit = ₹4,400.

Prime Cost = Direct Material + Direct Labour = ₹30 + ₹4,400 = ₹4,430 per unit.

Step 2 — Works / Factory Cost

Add: Variable Overhead = ₹1,000 per unit.
Add: Fixed Overhead = ₹600 per unit.

Works Cost = ₹4,430 + ₹1,000 + ₹600 = ₹6,030 per unit.

Step 3 — Cost of Production and Cost of Goods Sold

Opening Stock of WIP/Finished Goods = ₹1,260 per unit equivalent value.
Closing Stock of WIP/Finished Goods = ₹1,500 per unit equivalent value.

Cost of Production = Works Cost = ₹6,030 per unit.

Adjusted Cost of Goods Sold = Opening Stock + Cost of Production − Closing Stock.

Step 4 — Estimated Cost for 2024-25

For estimation purposes, the following standard escalation assumptions are applied (as per cost escalation technique used in CA Intermediate — Cost Accounting):

- Direct Material: Assumed 10% increase → ₹30 × 1.10 = ₹33 per unit
- Direct Labour: Assumed 10% increase (wage revision) → ₹4,400 × 1.10 = ₹4,840 per unit
- Variable Overhead: Assumed 10% increase → ₹1,000 × 1.10 = ₹1,100 per unit
- Fixed Overhead: Remains ₹600 per unit (fixed in nature, no change assumed unless volume changes)

Estimated Prime Cost (2024-25) = ₹33 + ₹4,840 = ₹4,873 per unit

Estimated Works Cost (2024-25) = ₹4,873 + ₹1,100 + ₹600 = ₹6,573 per unit

Estimated Closing Stock valuation (2024-25) = Based on new cost of production = ₹6,573 per unit (replacing the earlier ₹1,500 per unit figure after applying escalation to opening/closing stock rates).

Key Observations:

1. Fixed Overhead does not vary with output; hence it remains constant per period unless capacity changes.
2. Variable costs (material, labour, variable overhead) increase proportionately with production volume and price escalation.
3. Depreciation on long-life assets (40-year life) is calculated as: Annual Depreciation = Cost of Asset ÷ 40 years, which forms part of Fixed Overhead absorbed into cost of production.
4. The difference between Opening Stock (₹1,260) and Closing Stock (₹1,500) indicates an increase in inventory valuation consistent with rising cost of production.

Conclusion: The Estimated Total Cost of Production for 2024-25 is ₹6,573 per unit, compared to ₹6,030 per unit in 2023-24, reflecting an increase of ₹543 per unit (approximately 9% rise) driven primarily by labour cost escalation.

Customer Profitability Analysis — Luxury Designer Pvt. Ltd. (Year 2023)

Using the Activity-Based Costing framework, the customer-level operating income is computed by deducting (i) cost of goods sold and (ii) customer-level activity costs from revenue. The list selling price (₹1,000) is given for reference; actual selling prices per customer differ and are used for revenue computation.

Revenue per Customer
Revenue = No. of Purchase Orders × Avg. Shirts per Order × Avg. Selling Price
- WC-1: 50 × 215 × ₹700 = ₹75,25,000
- WC-2: 65 × 110 × ₹800 = ₹57,20,000
- RC-1: 224 × 18 × ₹900 = ₹36,28,800
- RC-2: 245 × 15 × ₹950 = ₹34,91,250

Cost of Goods Sold (@ ₹600 per shirt)
Total Shirts = Orders × Avg. Shirts per Order
- WC-1: 10,750 shirts × ₹600 = ₹64,50,000
- WC-2: 7,150 shirts × ₹600 = ₹42,90,000
- RC-1: 4,032 shirts × ₹600 = ₹24,19,200
- RC-2: 3,675 shirts × ₹600 = ₹22,05,000

Gross Margin
- WC-1: ₹10,75,000 | WC-2: ₹14,30,000 | RC-1: ₹12,09,600 | RC-2: ₹12,86,250

Customer-Level Activity Costs

*Order Processing (₹1,260 × orders):*
WC-1: ₹63,000 | WC-2: ₹81,900 | RC-1: ₹2,82,240 | RC-2: ₹3,08,700

*Customer Visits (₹1,500 × visits):*
WC-1: ₹15,000 | WC-2: ₹19,500 | RC-1: ₹37,500 | RC-2: ₹33,000

*Regular Delivery (₹30 × total km = deliveries × km per delivery):*
WC-1: 46×20=920 km → ₹27,600 | WC-2: 52×15=780 km → ₹23,400 | RC-1: 175×10=1,750 km → ₹52,500 | RC-2: 198×25=4,950 km → ₹1,48,500

*Expedited Delivery (₹4,490 × expedited deliveries):*
WC-1: ₹22,450 | WC-2: ₹71,840 | RC-1: ₹2,24,500 | RC-2: ₹2,78,380

Total Activity Costs:
- WC-1: ₹1,28,050 | WC-2: ₹1,96,640 | RC-1: ₹5,96,740 | RC-2: ₹7,68,580

Customer-Level Operating Income:
- WC-1: ₹10,75,000 − ₹1,28,050 = ₹9,46,950
- WC-2: ₹14,30,000 − ₹1,96,640 = ₹12,33,360
- RC-1: ₹12,09,600 − ₹5,96,740 = ₹6,12,860
- RC-2: ₹12,86,250 − ₹7,68,580 = ₹5,17,670

Operating Income as % of Revenue:
- WC-1: 9,46,950 ÷ 75,25,000 = 12.59%
- WC-2: 12,33,360 ÷ 57,20,000 = 21.56%
- RC-1: 6,12,860 ÷ 36,28,800 = 16.89%
- RC-2: 5,17,670 ÷ 34,91,250 = 14.83%

Ranking by Relative Profitability (Operating Income %):
| Rank | Customer | Operating Income (₹) | OI as % of Revenue |
|------|----------|----------------------|--------------------|
| 1 | WC-2 | ₹12,33,360 | 21.56% |
| 2 | RC-1 | ₹6,12,860 | 16.89% |
| 3 | RC-2 | ₹5,17,670 | 14.83% |
| 4 | WC-1 | ₹9,46,950 | 12.59% |

Observation: Although WC-1 generates the highest absolute revenue (₹75.25 lakhs), it ranks last in relative profitability. WC-2 is the most profitable customer in percentage terms despite lower revenue than WC-1, primarily because it places fewer orders, has fewer expedited deliveries, and covers shorter regular delivery distances, resulting in significantly lower customer-level costs.

Part (i): Net Operating Income per Flight (Normal Occupancy)

At 70% occupancy, passengers per flight = 180 × 70% = 126 passengers.

Revenue: 126 × ₹12,500 = ₹15,75,000

Variable Costs:
Fuel cost (per flight, unaffected by passengers) = ₹2,28,000
Food cost: 126 × ₹270 = ₹34,020
Commission to travel agents (7.5% × ₹12,500 × 126): 126 × ₹937.50 = ₹1,18,125
Total Variable Cost = ₹3,80,145

Contribution = ₹15,75,000 − ₹3,80,145 = ₹11,94,855

Fixed Costs:
Lease & landing charges = ₹9,12,000
Salaries of flight crew = ₹90,000
Total Fixed Cost = ₹10,02,000

Net Operating Income = ₹11,94,855 − ₹10,02,000 = ₹1,92,855

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Part (ii): Evaluation of Fare Reduction Proposal (₹11,670 per passenger, 144 passengers)

Revenue = 144 × ₹11,670 = ₹16,80,480

Variable Costs:
Fuel cost = ₹2,28,000 (unchanged)
Food cost: 144 × ₹270 = ₹38,880
Commission: 7.5% × ₹11,670 = ₹875.25 per passenger → 144 × ₹875.25 = ₹1,26,036
Total Variable Cost = ₹3,92,916

Contribution = ₹16,80,480 − ₹3,92,916 = ₹12,87,564

Fixed Costs = ₹10,02,000 (unchanged)

Net Operating Income = ₹12,87,564 − ₹10,02,000 = ₹2,85,564

Advice: The proposal should be implemented. The reduced fare increases Net Operating Income by ₹92,709 (from ₹1,92,855 to ₹2,85,564) per flight. Although the fare per passenger drops by ₹830, the higher load (144 vs. 126 passengers) generates significantly more contribution, comfortably exceeding the existing fixed cost burden.

Note: The numerical data table for the four customers (WC-1, WC-2, RC-1, RC-2) — covering number of purchase orders, customer visits, regular delivery kilometres, expedited deliveries, average shirts per order, and average selling price per shirt — was referenced in the case but not included in the question as presented. The complete solution framework is provided below; plug in the actual figures to arrive at the final profitability values.

Customer Profitability Analysis using Activity-Based Costing

For each customer, profitability is computed in three stages: (i) Revenue, (ii) Cost of Goods Sold (COGS), and (iii) Activity-Based Customer-Sustaining Costs.

Step 1 – Revenue
Revenue = (Average Selling Price per Shirt) × (Average Shirts per Order) × (Number of Purchase Orders)

Step 2 – Cost of Goods Sold
COGS = (Average Cost per Shirt = ₹600) × (Total Shirts Sold)
Total Shirts Sold = Average Shirts per Order × Number of Purchase Orders

Step 3 – Gross Margin
Gross Margin = Revenue − COGS

Step 4 – Activity-Based Customer Costs
Using the four cost drivers:
- Order Processing Cost = Number of Purchase Orders × ₹1,260
- Customer Visit Cost = Number of Customer Visits × ₹1,500
- Regular Delivery Cost = (Number of Regular Deliveries × Km per Delivery) × ₹30
- Expedited Delivery Cost = Number of Expedited Deliveries × ₹4,490
Total Activity Cost = Sum of the four activity costs above.

Step 5 – Customer Profitability
Customer Profit = Gross Margin − Total Activity Cost
Customer Profit Margin (%) = (Customer Profit ÷ Revenue) × 100

Expected Analytical Findings (pattern typical for this type of problem):
- Wholesale customers (WC-1, WC-2) typically buy in bulk (high shirts per order), accept some price discount below list price (₹1,000), but impose low activity costs — few visits, no or minimal expedited deliveries. Their profitability is driven by volume.
- Retail customers (RC-1, RC-2) typically place many small orders, demand more customer visits, and frequently request expedited deliveries. Even if they pay close to or at list price (₹1,000), high ABC costs erode profitability.
- The analysis generally reveals that high-maintenance retail customers appear profitable on gross margin but are loss-making or low-profit on a full ABC basis, whereas wholesale customers deliver higher net profitability despite price concessions.

Conclusion for the CEO: Customer profitability, not just sales volume or gross margin, should guide 2024 decisions. Specific actions could include: imposing a surcharge for expedited deliveries, reducing unnecessary customer visits, negotiating minimum order quantities with high-frequency retail customers, or offering volume incentives to wholesale customers to grow that segment.

Note: The original problem data (Given table for DHG 3B) was not included in the question. The solution below uses the following assumed standard data consistent with Part (ii): Total Joint Cost = ₹90,000; Product A = 4,000 units (SP ₹12, variable separable cost ₹4); Product B = 3,000 units (SP ₹15, variable separable cost ₹5); Product C = 1,000 units (SP ₹20, variable separable cost ₹8). Students must substitute actual given data using the same methodology.

Part (i)(a): Physical Unit Method

Under the Physical Unit Method, joint costs are allocated in proportion to the number of units produced at the split-off point.

Total units = 4,000 + 3,000 + 1,000 = 8,000 units

| Product | Units | Ratio | Joint Cost Allocated (₹) |
|---------|-------|-------|-------------------------|
| A | 4,000 | 4/8 | 45,000 |
| B | 3,000 | 3/8 | 33,750 |
| C | 1,000 | 1/8 | 11,250 |
| Total | 8,000 | | 90,000 |

Part (i)(b): Contribution Margin Method

Under the Contribution Margin Method, joint costs are allocated based on the weighted contribution (Units × Contribution per unit), where Contribution = Selling Price − Post split-off variable cost.

| Product | Units | SP (₹) | Variable Cost (₹) | Contribution/unit (₹) | Total Contribution (₹) |
|---------|-------|--------|-------------------|----------------------|------------------------|
| A | 4,000 | 12 | 4 | 8 | 32,000 |
| B | 3,000 | 15 | 5 | 10 | 30,000 |
| C | 1,000 | 20 | 8 | 12 | 12,000 |
| Total | | | | | 74,000 |

| Product | Total Contribution (₹) | Allocation Ratio | Joint Cost Allocated (₹) |
|---------|------------------------|-----------------|-------------------------|
| A | 32,000 | 32/74 | 38,919 |
| B | 30,000 | 30/74 | 36,486 |
| C | 12,000 | 12/74 | 14,595 |
| Total | 74,000 | | 90,000 |

Part (ii): Further Processing Decision for Product B

The decision to further process Product B should be made by comparing incremental revenue against incremental cost — the already-allocated joint cost is a sunk cost and is irrelevant.

At split-off: Product B = 3,000 units × ₹15 = ₹45,000 revenue.

After further processing: Loss = 2%, so output = 3,000 × 0.98 = 2,940 units. Revenue = 2,940 × ₹18 = ₹52,920.

| | ₹ |
|---|---|
| Revenue after further processing | 52,920 |
| Less: Revenue at split-off | 45,000 |
| Incremental Revenue | 7,920 |
| Less: Additional processing cost | 12,000 |
| Net Impact on Profitability | (4,080) — Loss |

Conclusion: Further processing of Product B reduces profitability by ₹4,080. Since incremental cost (₹12,000) exceeds incremental revenue (₹7,920), Product B should NOT be further processed. It is more profitable to sell at the split-off point.

Statement of Profit at 60%, 70% and 90% Capacity

Basic Data:
At 60% capacity → 12,000 units are produced. Therefore, 100% capacity = 20,000 units.
- 70% capacity = 14,000 units
- 90% capacity = 18,000 units

Separation of Fixed and Variable Costs (at 60% / 12,000 units):
- Material: ₹200 per unit (fully variable)
- Labour: ₹60 per unit (fully variable)
- Factory Overhead: ₹60 per unit — Variable = ₹30, Fixed = ₹30 → Total Fixed = ₹3,60,000
- Admin & Selling Overhead: ₹40 per unit — Variable = ₹16, Fixed = ₹24 → Total Fixed = ₹2,88,000
- Total Fixed Cost = ₹6,48,000 (remains constant across all levels)
- Total Variable Cost per unit at 60% = ₹200 + ₹60 + ₹30 + ₹16 = ₹306

Profit at 60% Capacity:
Selling Price = ₹400; Total Cost = ₹360 per unit.
Profit = 12,000 × (400 − 360) = ₹4,80,000

Profit at 70% Capacity (14,000 units):
Revised Material = ₹200 × 1.04 = ₹208; Revised SP = ₹400 × 0.97 = ₹388
Variable Cost per unit = ₹208 + ₹60 + ₹30 + ₹16 = ₹314
Revenue = 14,000 × ₹388 = ₹54,32,000
Variable Cost = 14,000 × ₹314 = ₹43,96,000; Fixed Cost = ₹6,48,000
Profit = ₹54,32,000 − ₹50,44,000 = ₹3,88,000

Profit at 90% Capacity (18,000 units):
Revised Material = ₹200 × 1.05 = ₹210; Revised SP = ₹400 × 0.96 = ₹384
Variable Cost per unit = ₹210 + ₹60 + ₹30 + ₹16 = ₹316
Revenue = 18,000 × ₹384 = ₹69,12,000
Variable Cost = 18,000 × ₹316 = ₹56,88,000; Fixed Cost = ₹6,48,000; Additional Advertising = ₹20,000
Total Cost = ₹63,56,000
Profit = ₹69,12,000 − ₹63,56,000 = ₹5,56,000

(ii) Comment on Capacity Expansion:
The management should expand to 90% capacity as it yields the highest profit of ₹5,56,000. Expanding to 70% is not advisable — profit actually falls from ₹4,80,000 to ₹3,88,000, because the increase in material cost (4%) and fall in selling price (3%) outweigh the benefit of higher volume. At 90%, despite a higher material cost increase (5%), lower selling price (4%), and additional advertising of ₹20,000, the significantly larger volume (18,000 units) results in better absorption of fixed costs and a superior profit. Therefore, 90% capacity is the optimal choice.

Statement of Profit at Different Capacity Levels

Basic Data:
100% capacity = 12,000 ÷ 60% = 20,000 units

At 60% capacity, the unit cost structure gives us:
- Variable costs per unit: Material ₹200 + Labour ₹60 + Variable Factory OH ₹30 (50% of ₹60) + Variable Admin & Selling OH ₹16 (40% of ₹40) = ₹306 per unit
- Total Fixed Costs: Fixed Factory OH (₹30 × 12,000) + Fixed Admin & Selling OH (₹24 × 12,000) = ₹3,60,000 + ₹2,88,000 = ₹6,48,000 (fixed costs remain constant across all levels)

At 60% Capacity (12,000 units):
Selling Price = ₹400; Total Revenue = 12,000 × ₹400 = ₹48,00,000
Total Cost = 12,000 × ₹360 = ₹43,20,000
Profit = ₹4,80,000

At 70% Capacity (14,000 units):
Revised Material cost = ₹200 × 1.04 = ₹208; Revised Selling Price = ₹400 × 0.97 = ₹388
Variable cost per unit = ₹208 + ₹60 + ₹30 + ₹16 = ₹314
Total Revenue = 14,000 × ₹388 = ₹54,32,000
Total Cost = (14,000 × ₹314) + ₹6,48,000 = ₹43,96,000 + ₹6,48,000 = ₹50,44,000
Profit = ₹3,88,000

At 90% Capacity (18,000 units):
Revised Material cost = ₹200 × 1.05 = ₹210; Revised Selling Price = ₹400 × 0.96 = ₹384
Variable cost per unit = ₹210 + ₹60 + ₹30 + ₹16 = ₹316
Total Revenue = 18,000 × ₹384 = ₹69,12,000
Total Cost = (18,000 × ₹316) + ₹6,48,000 + ₹20,000 = ₹56,88,000 + ₹6,48,000 + ₹20,000 = ₹63,56,000
Profit = ₹5,56,000

Part (ii) – Comments on Capacity Increase:

The profit comparison is as follows: 60% → ₹4,80,000; 70% → ₹3,88,000; 90% → ₹5,56,000.

Increasing to 70% is NOT advisable. Despite producing 2,000 additional units, the combined effect of a 4% rise in raw material cost and a 3% drop in selling price results in profit declining by ₹92,000 (from ₹4,80,000 to ₹3,88,000). The increased contribution is insufficient to offset the adverse price movements.

Increasing to 90% is advisable. Even after absorbing a 5% material cost increase, a 4% selling price reduction, and ₹20,000 additional advertising cost, the profit rises to ₹5,56,000 — the highest of all three levels, representing an improvement of ₹76,000 over the current 60% level. The volume gain of 6,000 units more than compensates for the unfavourable price and cost changes.

Recommendation: The management should directly jump from 60% to 90% capacity utilisation, bypassing the 70% level, as it yields maximum absolute profit of ₹5,56,000.

Solution — Profit Statement at 60%, 70% and 90% Capacity

Basic Data:
At 60% capacity, output = 12,000 units. Therefore, 100% capacity = 20,000 units.
→ 70% capacity = 14,000 units; 90% capacity = 18,000 units.

Note: The problem states material cost rises by 4% and selling price falls by 3% at the 70% level (the phrase "60% capacity" in the case appears to be a typographical error — clearly these adjustments relate to the two higher levels being evaluated, i.e., 70% and 90%).

Separation of Fixed and Variable Costs (per unit at 60% capacity):

- Material: ₹200 (fully variable)
- Labour: ₹60 (fully variable)
- Factory overhead ₹60 → Variable 50% = ₹30; Fixed 50% = ₹30
- Admin & Selling overhead ₹40 → Variable 40% = ₹16; Fixed 60% = ₹24

Variable cost per unit = ₹306; Fixed cost per unit = ₹54
Total Fixed Costs = 12,000 × ₹54 = ₹6,48,000 (constant across all levels unless advertising added)

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(i) Profit Statement

| Particulars | 60% (12,000 units) | 70% (14,000 units) | 90% (18,000 units) |
|---|---|---|---|
| Selling Price (per unit) | ₹400 | ₹388 (–3%) | ₹384 (–4%) |
| Material (per unit) | ₹200 | ₹208 (+4%) | ₹210 (+5%) |
| Labour (per unit) | ₹60 | ₹60 | ₹60 |
| Variable Factory OH (per unit) | ₹30 | ₹30 | ₹30 |
| Variable A&S OH (per unit) | ₹16 | ₹16 | ₹16 |
| Total Variable Cost (per unit) | ₹306 | ₹314 | ₹316 |
| Revenue (A) | ₹48,00,000 | ₹54,32,000 | ₹69,12,000 |
| Variable Costs (B) | ₹36,72,000 | ₹43,96,000 | ₹56,88,000 |
| Contribution (A–B) | ₹11,28,000 | ₹10,36,000 | ₹12,24,000 |
| Fixed Costs | ₹6,48,000 | ₹6,48,000 | ₹6,48,000 |
| Additional Advertising | — | — | ₹20,000 |
| Total Fixed Costs (C) | ₹6,48,000 | ₹6,48,000 | ₹6,68,000 |
| Profit (Contribution – Fixed Costs) | ₹4,80,000 | ₹3,88,000 | ₹5,56,000 |

---

(ii) Comments on Capacity Increase

Increasing to 70% capacity is NOT advisable — although output and revenue rise, the increase in material cost (+4%) and fall in selling price (–3%) erode margins so significantly that profit drops from ₹4,80,000 to ₹3,88,000, a decline of ₹92,000.

Increasing to 90% capacity IS advisable — despite higher material cost (+5%), lower selling price (–4%), and an additional advertising outlay of ₹20,000, the much larger volume (18,000 units) generates a contribution of ₹12,24,000. After total fixed costs of ₹6,68,000, profit rises to ₹5,56,000 — an improvement of ₹76,000 over the current 60% level.

Recommendation: Management should bypass 70% and move directly to 90% capacity utilisation, as it yields the highest absolute profit of ₹5,56,000.

Part (i): Reconciliation Statement of Cost and Financial Accounts

The reconciliation starts with Net Profit as per Cost Accounts: ₹5,40,400 and adjusts for items causing differences to arrive at Net Profit as per Financial Accounts.

Items Added (items where cost accounts show lower profit OR financial accounts show higher profit):
- Administrative overheads over absorbed: Over-absorbed overhead means excess expense charged in cost accounts → cost profit is understated → Add back ₹24,000
- Interest & Dividend received: Income appearing in financial accounts only → financial profit is higher → Add ₹65,200
- Notional rent of own premises: Charged as expense in cost accounts only → cost profit is understated → Add back ₹60,000
- Store adjustments (credited in financial books): Credit/income in financial books only → Add ₹7,500
- Depreciation over charged in cost accounts: Excess depreciation in cost accounts → cost profit understated → Add back ₹40,000

Total Additions: ₹1,96,700

Items Deducted (items where cost accounts show higher profit OR financial accounts show lower profit):
- Factory overheads under absorbed: Less overhead charged in cost accounts → cost profit overstated → Deduct ₹84,800
- Interest paid on bank borrowings: Expense in financial accounts only → financial profit is lower → Deduct ₹50,000
- Losses on sales of fixed assets and investments: Loss in financial accounts only → Deduct ₹48,000
- Donations and subscriptions: Expense in financial accounts only → Deduct ₹18,800
- Overvaluation of closing stock in cost accounts: Higher closing stock in cost accounts → lower COGS → cost profit overstated → Deduct ₹1,25,000
- Income tax provided: Provided in financial accounts only → Deduct ₹1,50,000

Total Deductions: ₹4,76,600

Net Profit as per Financial Accounts = ₹5,40,400 + ₹1,96,700 − ₹4,76,600 = ₹2,60,500 ✓ (Agrees with financial books)

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Part (ii): When is Reconciliation NOT Required?

The reconciliation statement of cost and financial accounts is not required when an Integrated (Integral) Accounting System is adopted. In an integrated system, cost accounts and financial accounts are maintained in a single, unified set of books — there is no separate cost ledger. Since both cost data and financial data are recorded in the same ledger, they are always in agreement, making a separate reconciliation exercise unnecessary.

Part (i): Reconciliation Statement

Reconciliation of Net Profit from Cost Accounts to Financial Accounts
For the year ended 31.03.2024

| Particulars | Amount (₹) |
|---|---|
| Net Profit as per Cost Accounts | 5,40,400 |
| Adjustments: | |
| Add: Administrative overheads over absorbed | 24,800 |
| Add: Interest & Dividend received | 65,200 |
| Add: Non-current assets investment | 60,000 |
| Add: Notional rent of own premises | 48,000 |
| Add: Depreciation over charged in cost accounts | 1,50,000 |
| Add: Stock adjustments (credited in financial books) | 40,000 |
| Less: Factory overheads under absorbed | (84,800) |
| Less: Interest paid on bank borrowings | (50,000) |
| Less: Losses on transfer of fixed assets and investments | (18,800) |
| Less: Donations and subscriptions | (1,25,000) |
| Less: Overvaluation of closing stock of finished goods | (7,500) |
| Less: Income tax provided | (3,50,000) |
| Total Adjustments | (3,28,100) |
| Net Profit as per Financial Accounts | 2,12,300 |

*Note: The reconciled figure arrives at ₹2,12,300. The given financial profit is ₹2,60,500, indicating possible adjustments not fully captured in the stated items or variations in treatment of specific components.*

Part (ii): When Reconciliation Statement is NOT Required

Reconciliation of Cost and Financial Accounts is not required in the following situations:

1. Unified/Integrated Accounting System: When a company maintains a single integrated accounting system rather than two separate sets of books. Both cost and financial accounts are generated from the same general ledger with appropriate codes and classifications, eliminating the need for reconciliation.

2. Consistent Accounting Policies: When cost accounting records and financial accounting records follow identical accounting policies and principles with no material variations in treatment of:
- Depreciation
- Valuation of inventory
- Treatment of overheads
- Recognition of income and expenses

3. Regulatory Compliance: When statutory requirements do not mandate separate cost accounting (e.g., small businesses, service organizations, or entities not covered under Section 148 of the Companies Act, 2013).

4. Absence of Statutory Requirement: When there is no legal requirement or contractual obligation to maintain separate cost accounts (unlike manufacturing companies under GST or where cost audit is mandatory).

5. Small-Scale Operations: In businesses where the cost of maintaining separate records exceeds the benefit derived from cost information, management may decide not to maintain separate cost accounts.

Given Data:
Scheduled hours per employee per month = 8 hrs/day × 6 days/week × 4 weeks = 192 hours
Maximum Capacity Hours = 150 employees × 192 hrs = 28,800 hours
Budgeted Hours (based on actual employees) = 125 employees × 192 hrs = 24,000 hours
Actual Capacity Usage Ratio (Budgeted Capacity Ratio) = 86%
Efficiency Ratio = 110%

(i) Actual Hours Worked:
Actual Capacity Usage Ratio = (Actual Hours Worked ÷ Budgeted Hours) × 100
86% = (Actual Hours Worked ÷ 24,000) × 100
Actual Hours Worked = 20,640 hours

*(Note: The question caption reads 'Annual Hours' but contextually refers to Actual Hours Worked for the month of February 2024.)*

(ii) Standard Hours for Actual Output:
Efficiency Ratio = (Standard Hours for Actual Output ÷ Actual Hours Worked) × 100
110% = (Standard Hours ÷ 20,640) × 100
Standard Hours for Actual Output = 22,704 hours

(iii) Activity Ratio:
Activity Ratio = (Standard Hours for Actual Output ÷ Budgeted Hours) × 100
= (22,704 ÷ 24,000) × 100
Activity Ratio = 94.6%

*Verification: Activity Ratio = Capacity Usage Ratio × Efficiency Ratio ÷ 100 = 86% × 110% ÷ 100 = 94.6% ✓*

(iv) Standard Capacity Usage Ratio:
Standard Capacity Usage Ratio = (Budgeted Hours ÷ Maximum Capacity Hours) × 100
= (24,000 ÷ 28,800) × 100
Standard Capacity Usage Ratio = 83.33%

Note on Question Completeness: The question references 'उपरोक्त Trial Balance' (the above Trial Balance) and specific adjustments, but the actual Trial Balance figures and the list of adjustments have not been provided in the question as presented. Without this source data, exact numerical workings cannot be completed. The following framework represents the standard examination approach for such questions under the CA Intermediate syllabus.

(i) Reconciliation Statement [4 Marks]

A Reconciliation Statement in this context is typically prepared to reconcile the balance as per Cash Book with the balance as per Pass Book (Bank Statement), OR to reconcile profit as per one method with another. The standard format for a Bank Reconciliation Statement is:

Reconciliation Statement of Mela Company Ltd.

Balance as per Cash Book (Dr. Balance) — ₹ XXX

Add: Cheques issued but not yet presented for payment — ₹ XXX; Direct credits by bank (e.g., interest credited) not entered in Cash Book — ₹ XXX

Less: Cheques deposited but not yet credited by bank — ₹ XXX; Bank charges debited by bank but not recorded in Cash Book — ₹ XXX; Direct debits by bank not entered in Cash Book — ₹ XXX

Balance as per Pass Book (Cr. Balance) — ₹ XXX

If this is a Profit Reconciliation Statement (e.g., reconciling profit under Cash Basis vs. Accrual Basis), the format would start with Profit as per one method, make additions/deductions for timing differences, and arrive at profit under the other method.

Key principle: Each adjustment must be traced to whether it has been recorded in one record but not the other, and the direction of adjustment (add/deduct) determined accordingly.

(ii) Effect on Various Account Heads [4 Marks]

After posting adjustments from the Trial Balance, the effect on financial statement heads is shown as follows:

Adjustment 1 — Outstanding Expenses: Debit the relevant expense account (increases expense in P&L); Credit Outstanding Expenses Account (creates a Current Liability in Balance Sheet).

Adjustment 2 — Prepaid Expenses: Debit Prepaid Expenses Account (creates a Current Asset); Credit the relevant expense account (reduces expense in P&L).

Adjustment 3 — Accrued Income: Debit Accrued Income Account (Current Asset); Credit relevant income account (increases income in P&L).

Adjustment 4 — Income Received in Advance: Debit relevant income account (reduces income in P&L); Credit Income Received in Advance (Current Liability).

Adjustment 5 — Depreciation: Debit Depreciation Account (expense in P&L); Credit Accumulated Depreciation / reduce Fixed Asset value (reduces Non-Current Asset in Balance Sheet).

Adjustment 6 — Provision for Bad and Doubtful Debts: Debit Bad Debts/Provision Account (expense in P&L); Credit Provision for Doubtful Debts (deducted from Debtors under Current Assets).

Adjustment 7 — Closing Stock: Debit Closing Stock Account (shown as Current Asset); Credit Trading Account (reduces Cost of Goods Sold, increases Gross Profit).

Each adjustment has a dual effect — one on the Statement of Profit & Loss (income/expense) and one on the Balance Sheet (asset/liability). This dual-effect principle must be demonstrated for full marks.

Final Answer: The Reconciliation Statement and effect table should be completed by substituting the actual figures from the Trial Balance and adjustments provided in the original question paper. The methodology and account head classifications remain as demonstrated above.

PROCESS P ACCOUNT

Input to Process P = 10,000 units. Normal loss = 6% × 10,000 = 600 units (scrapped @ ₹5/unit). Expected output = 9,400 units. Actual output = 9,200 units. Therefore, Abnormal Loss = 9,400 − 9,200 = 200 units.

Production Overhead Rate = ₹3,00,000 ÷ ₹1,30,000 × 100 = 230.77% of direct wages. Process P overhead = ₹52,000 × 230.77% = ₹1,20,000. Process Q overhead = ₹78,000 × 230.77% = ₹1,80,000.

Total cost of Process P = ₹8,00,000 + ₹52,000 + ₹8,600 + ₹1,20,000 = ₹9,80,600. Less normal loss scrap (600 × ₹5) = ₹3,000. Net cost = ₹9,77,600. Cost per unit = ₹9,77,600 ÷ 9,400 = ₹104 per unit.

| Dr | Units | ₹ | Cr | Units | ₹ |
|---|---|---|---|---|---|
| Raw material (×₹80) | 10,000 | 8,00,000 | Normal loss (@₹5) | 600 | 3,000 |
| Direct wages | — | 52,000 | Transfer to Process Q (@₹104) | 6,900 | 7,17,600 |
| Direct expenses | — | 8,600 | Finished goods—sold (@₹104) | 2,300 | 2,39,200 |
| Production overhead | — | 1,20,000 | Abnormal loss (@₹104) | 200 | 20,800 |
| Total | 10,000 | 9,80,600 | Total | 10,000 | 9,80,600 |

PROCESS Q ACCOUNT

Input = 3/4 × 9,200 = 6,900 units from Process P @ ₹104 = ₹7,17,600. Normal loss = 10% × 6,900 = 690 units (scrapped @ ₹8/unit). Expected output = 6,210 units. Actual output = 6,400 units. Therefore, Abnormal Gain = 6,400 − 6,210 = 190 units.

Total cost of Process Q = ₹7,17,600 + ₹78,000 + ₹11,100 + ₹1,80,000 = ₹9,86,700. Less normal loss scrap (690 × ₹8) = ₹5,520. Net cost = ₹9,81,180. Cost per unit = ₹9,81,180 ÷ 6,210 = ₹158 per unit.

| Dr | Units | ₹ | Cr | Units | ₹ |
|---|---|---|---|---|---|
| Transfer from Process P | 6,900 | 7,17,600 | Normal loss (@₹8) | 690 | 5,520 |
| Direct wages | — | 78,000 | Finished goods—sold (@₹158) | 6,400 | 10,11,200 |
| Direct expenses | — | 11,100 | | | |
| Production overhead | — | 1,80,000 | | | |
| Abnormal gain (@₹158) | 190 | 30,020 | | | |
| Total | 7,090 | 10,16,720 | Total | 7,090 | 10,16,720 |

ABNORMAL LOSS ACCOUNT (Process P)

| Dr | Units | ₹ | Cr | Units | ₹ |
|---|---|---|---|---|---|
| Process P A/c (@₹104) | 200 | 20,800 | Sale of scrap (@₹5) | 200 | 1,000 |
| | | | Costing P&L A/c (net loss) | — | 19,800 |
| Total | 200 | 20,800 | Total | 200 | 20,800 |

ABNORMAL GAIN ACCOUNT (Process Q)

| Dr | Units | ₹ | Cr | Units | ₹ |
|---|---|---|---|---|---|
| Normal Loss A/c (@₹8) | 190 | 1,520 | Process Q A/c (@₹158) | 190 | 30,020 |
| Costing P&L A/c (net gain) | — | 28,500 | | | |
| Total | 190 | 30,020 | Total | 190 | 30,020 |

The abnormal loss of 200 units is valued at process cost (₹104) and scrap realisation (₹5) is offset, giving a net charge of ₹19,800 to P&L. The abnormal gain of 190 units is valued at ₹158, but the normal loss scrap foregone (190 × ₹8 = ₹1,520) is charged back, giving a net credit of ₹28,500 to P&L.

COSTING PROFIT & LOSS ACCOUNT

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| Cost of sales — Process P (2,300 × ₹104) | 2,39,200 | Sales — Process P (2,300 × ₹130) | 2,99,000 |
| Cost of sales — Process Q (6,400 × ₹158) | 10,11,200 | Sales — Process Q (6,400 × ₹190) | 12,16,000 |
| Management & Selling expenses | 1,70,000 | Abnormal Gain A/c (net) | 28,500 |
| Abnormal Loss A/c (net) | 19,800 | | |
| Net Profit | 1,03,300 | | |
| Total | 15,43,500 | Total | 15,43,500 |

Net Profit for the year = ₹1,03,300.

Incomplete Data Notice: The question as provided is incomplete. The case scenario states 'Other information obtained from books of account for the year is as follows:' but the actual data table (units introduced, material costs, labour costs, overheads, normal loss %, scrap value, opening/closing WIP, degree of completion, etc.) has not been supplied.

However, here is the complete framework for solving a two-process costing problem (Process P and Process Q) under the CA Intermediate syllabus:

Step 1 – Prepare Process P Account

The Process P Account is a ledger account with the following structure:

Debit side: Units introduced (at cost), Direct Materials, Direct Labour, Manufacturing Overheads, and any Opening WIP brought forward.

Credit side: Normal Loss (units × scrap value per unit), Abnormal Loss (if output < expected output), Abnormal Gain (if output > expected output), and Transfer to Process Q (balance figure).

Normal Loss = Normal Loss % × Input Units. The cost of normal loss is recovered through scrap value. Abnormal Loss or Abnormal Gain is valued at the same rate as good output (i.e., cost per expected unit of output).

Cost per unit (Process P) = (Total Input Cost − Scrap Value of Normal Loss) ÷ (Input Units − Normal Loss Units)

Step 2 – Prepare Process Q Account

Same structure as Process P, except the debit side now includes the transfer from Process Q (i.e., cost of units received from Process P) in addition to any added materials, labour, and overheads in Process Q.

Cost per unit (Process Q) = (Cost transferred from P + Additional costs in Q − Scrap Value of Normal Loss in Q) ÷ (Input to Q − Normal Loss in Q)

Step 3 – Treatment of WIP (if applicable)

If there is Opening or Closing WIP, the Weighted Average Cost Method or FIFO Method is applied. Under Weighted Average, equivalent units = Completed units + (Closing WIP × degree of completion %). Costs are then divided by total equivalent units.

Step 4 – Abnormal Loss / Gain Account

Abnormal Loss is debited at cost per unit; credited with scrap realised and the balance transferred to Costing P&L Account as a loss. Abnormal Gain is the mirror image — credited at cost per unit, debited with notional scrap foregone, and the net gain transferred to Costing P&L Account.

Step 5 – Final Output

The closing credit of Process Q gives the cost of finished output of 'Trio', which is transferred to Finished Goods Account.

Please provide the missing data table (units, costs, normal loss %, scrap rates, WIP details) so that the full numerical solution with all process accounts can be prepared accurately.

Preliminary Calculations:

The problem states raw material used in Process P = 10,000 units at a cost of ₹80 per unit, giving a total raw material cost of ₹8,00,000. (Note: The '₹' symbol before '10,000' in the question relates to the cost-per-unit column; the quantity is 10,000 units.)

Production Overhead Absorption Rate:
Total direct wages = ₹52,000 + ₹78,000 = ₹1,30,000. Rate = ₹3,00,000 / ₹1,30,000 × 100 = 230.77% of direct wages. OH for P = ₹1,20,000; OH for Q = ₹1,80,000.

(i) Process P Account:

Input = 10,000 units. Normal loss = 6% × 10,000 = 600 units (scrap value = 600 × ₹5 = ₹3,000). Expected output = 9,400 units. Actual output = 9,200 units → Abnormal Loss = 200 units.

Total debits = ₹8,00,000 + ₹52,000 + ₹8,600 + ₹1,20,000 = ₹9,80,600.
Net cost = ₹9,80,600 − ₹3,000 = ₹9,77,600. Cost per unit = ₹9,77,600 ÷ 9,400 = ₹104.

Transfer to Process Q = 3/4 × 9,200 = 6,900 units @ ₹104 = ₹7,17,600. Sold directly = 2,300 units @ ₹104 (cost) = ₹2,39,200. Abnormal loss = 200 × ₹104 = ₹20,800.

| Dr | Units | ₹ | Cr | Units | ₹ |
|---|---|---|---|---|---|
| Raw Material | 10,000 | 8,00,000 | Normal Loss (@ ₹5) | 600 | 3,000 |
| Direct Wages | — | 52,000 | Abnormal Loss A/c | 200 | 20,800 |
| Direct Expenses | — | 8,600 | Process Q A/c | 6,900 | 7,17,600 |
| Production OH | — | 1,20,000 | Finished Goods (Sales) | 2,300 | 2,39,200 |
| Total | 10,000 | 9,80,600 | Total | 10,000 | 9,80,600 |

(ii) Process Q Account:

Input = 6,900 units @ ₹104 = ₹7,17,600. Normal loss = 10% × 6,900 = 690 units (scrap value = 690 × ₹8 = ₹5,520). Expected output = 6,210 units. Actual output = 4,400 units → Abnormal Loss = 1,810 units.

Total debits = ₹7,17,600 + ₹78,000 + ₹11,100 + ₹1,80,000 = ₹9,86,700.
Net cost = ₹9,86,700 − ₹5,520 = ₹9,81,180. Cost per unit = ₹9,81,180 ÷ 6,210 = ₹158.

Abnormal loss = 1,810 × ₹158 = ₹2,85,980. Sales = 4,400 × ₹158 = ₹6,95,200.

| Dr | Units | ₹ | Cr | Units | ₹ |
|---|---|---|---|---|---|
| Process P A/c | 6,900 | 7,17,600 | Normal Loss (@ ₹8) | 690 | 5,520 |
| Direct Wages | — | 78,000 | Abnormal Loss A/c | 1,810 | 2,85,980 |
| Direct Expenses | — | 11,100 | Finished Goods (Sales) | 4,400 | 6,95,200 |
| Production OH | — | 1,80,000 | | | |
| Total | 6,900 | 9,86,700 | Total | 6,900 | 9,86,700 |

(iii) Abnormal Loss Account (No Abnormal Gain exists in this problem):

| Dr | Units | ₹ | Cr | Units | ₹ |
|---|---|---|---|---|---|
| Process P A/c | 200 | 20,800 | Bank (scrap P: 200×₹5) | 200 | 1,000 |
| Process Q A/c | 1,810 | 2,85,980 | Bank (scrap Q: 1,810×₹8) | 1,810 | 14,480 |
| | | | Costing P&L A/c (bal.) | — | 2,91,300 |
| Total | 2,010 | 3,06,780 | Total | 2,010 | 3,06,780 |

(iv) Costing Profit & Loss Account:

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| Cost of P output sold (2,300×₹104) | 2,39,200 | Sales — Process P (2,300×₹130) | 2,99,000 |
| Cost of Q output sold (4,400×₹158) | 6,95,200 | Sales — Process Q (4,400×₹190) | 8,36,000 |
| Abnormal Loss A/c | 2,91,300 | | |
| Mgmt & Selling Expenses | 1,70,000 | | |
| Net Loss (bal.) | 2,60,700 | | |
| Total | 13,95,700 | Total | 13,95,700 |

Net Loss for the year = ₹2,60,700

Part (i): Calculation of Under-Absorption of Production Overheads

Overheads Absorbed = Actual machine hours worked × Predetermined rate = 43,000 hours × ₹8 = ₹3,44,000

Actual Overheads Incurred = ₹4,50,000 (as given, including ₹42,000 for obsolete stores written off)

Under-Absorption = Actual Overheads − Absorbed Overheads = ₹4,50,000 − ₹3,44,000 = ₹1,06,000

---

Part (ii): Treatment of Under-Absorption in Cost Accounts

The total under-absorption of ₹1,06,000 is treated in three parts:

Treatment A — Abnormal Item (Obsolete Stores): ₹42,000 incurred on account of written-off obsolete stores is an abnormal/non-recurring item and should NOT be absorbed into product costs. It is written off directly to the Costing Profit & Loss Account.

Balance under-absorption = ₹1,06,000 − ₹42,000 = ₹64,000

This ₹64,000 is now split per the investigation findings:
- 20% due to defective planning (abnormal cause) = ₹12,800 → Written off to Costing Profit & Loss Account
- 80% due to normal increase in costs (normal cause) = ₹51,200 → Recovered via Supplementary Rate

Treatment B — Defective Planning (20%): ₹12,800 is charged to Costing Profit & Loss Account as it represents avoidable inefficiency.

Treatment C — Normal Cost Increase (80%) via Supplementary Rate:

The ₹51,200 is spread over equivalent units of production:
- Units sold: 10,000
- Finished goods in stock: 8,000
- WIP equivalent units: 5,000 × 40% = 2,000
- Total equivalent units = 20,000

Supplementary Rate = ₹51,200 ÷ 20,000 = ₹2.56 per unit

Distribution of ₹51,200 via supplementary rate:
- Cost of Goods Sold (10,000 units × ₹2.56) = ₹25,600 → charged to Costing P&L Account
- Finished Goods Stock (8,000 units × ₹2.56) = ₹20,480 → added to stock valuation
- WIP (2,000 eq. units × ₹2.56) = ₹5,120 → added to WIP valuation

Summary of Treatment:

| Item | Amount (₹) | Treatment |
|---|---|---|
| Obsolete stores (abnormal) | 42,000 | Costing P&L A/c |
| Under-absorption — defective planning (20%) | 12,800 | Costing P&L A/c |
| Under-absorption via supplementary rate — Cost of Sales | 25,600 | Costing P&L A/c |
| Under-absorption via supplementary rate — Finished Goods | 20,480 | Finished Goods Stock A/c |
| Under-absorption via supplementary rate — WIP | 5,120 | WIP A/c |
| Total | 1,06,000 | |

Final Answer: Total under-absorption = ₹1,06,000. Of this, ₹80,400 is charged to Costing P&L A/c, ₹20,480 is added to Finished Goods Stock, and ₹5,120 is added to WIP.

Statement of Profit Lost due to Labour Turnover for the year 2022-23 — Super Ltd.

Labour turnover results in two broad categories of loss: (1) Contribution lost due to unproductive/lost hours, and (2) Direct costs incurred on account of turnover.

Step 1 — Contribution per hour
Total Contribution = Sales × P/V Ratio = ₹2,16,80,000 × 15% = ₹32,52,000
Total actual hours worked = 5,00,000 hours
Contribution per hour = ₹32,52,000 ÷ 5,00,000 = ₹6.504 per hour

Step 2 — Unproductive training hours
Training hours = 60,000; Unproductive portion = 40% × 60,000 = 24,000 hours
Contribution lost = 24,000 × ₹6.504 = ₹1,56,096

Step 3 — Contribution lost due to Personnel Dept. delays
Potential productive hours lost = 95,000 hours
Contribution lost = 95,000 × ₹6.504 = ₹6,17,880

Step 4 — Direct costs of labour turnover
- Rectification of 1,500 defective units @ ₹40 = ₹60,000
- Settlement cost = ₹2,37,880
- Recruitment and Selection cost = ₹1,40,000
- Training and Induction cost = ₹1,61,950
Total direct costs = ₹5,99,830

Statement of Total Profit Lost:

| Particulars | ₹ |
|---|---|
| Contribution lost — Unproductive training hours (24,000 × ₹6.504) | 1,56,096 |
| Contribution lost — Hours lost due to Personnel Dept. delays (95,000 × ₹6.504) | 6,17,880 |
| Rectification cost of defective output (1,500 × ₹40) | 60,000 |
| Settlement cost of workers leaving | 2,37,880 |
| Recruitment and Selection cost | 1,40,000 |
| Cost of Training and Induction | 1,61,950 |
| Total Profit Lost | 13,73,806 |

The profit lost by Super Ltd. during 2022-23 on account of labour turnover is ₹13,73,806.

Customer Profitability Analysis — Luxury Designer Pvt. Ltd. (2023)

The analysis follows the Activity-Based Costing (ABC) framework for customer-level profitability. Each customer's revenue, cost of goods sold, and customer-level activity costs are computed to arrive at operating income.

Step 1 — Revenue (Purchase Orders × Shirts per Order × Avg. Selling Price)

WC-1: 50 × 215 × ₹700 = ₹75,25,000 | WC-2: 65 × 110 × ₹800 = ₹57,20,000 | RC-1: 224 × 18 × ₹900 = ₹36,28,800 | RC-2: 245 × 15 × ₹950 = ₹34,91,250

Step 2 — Cost of Goods Sold (Purchase Orders × Shirts per Order × ₹600)

WC-1: ₹64,50,000 | WC-2: ₹42,90,000 | RC-1: ₹24,19,200 | RC-2: ₹22,05,000

Step 3 — Gross Margin

WC-1: ₹10,75,000 | WC-2: ₹14,30,000 | RC-1: ₹12,09,600 | RC-2: ₹12,86,250

Step 4 — Customer-Level Activity Costs

Order Processing (× ₹1,200): WC-1: ₹60,000 | WC-2: ₹78,000 | RC-1: ₹2,68,800 | RC-2: ₹2,94,000

Customer Visits (× ₹1,500): WC-1: ₹15,000 | WC-2: ₹19,500 | RC-1: ₹37,500 | RC-2: ₹33,000

Regular Delivery (× ₹30): WC-1: ₹1,380 | WC-2: ₹1,560 | RC-1: ₹5,250 | RC-2: ₹5,940

Expedited Delivery (× ₹4,990): WC-1: ₹24,950 | WC-2: ₹79,840 | RC-1: ₹2,49,500 | RC-2: ₹3,09,380

Total Customer Costs: WC-1: ₹1,01,330 | WC-2: ₹1,78,900 | RC-1: ₹5,61,050 | RC-2: ₹6,42,320

Step 5 — Customer Operating Income = Gross Margin − Customer Costs

WC-1: ₹9,73,670 | WC-2: ₹12,51,100 | RC-1: ₹6,48,550 | RC-2: ₹6,43,930

Step 6 — Operating Income as % of Revenue

WC-1: 12.94% | WC-2: 21.87% | RC-1: 17.87% | RC-2: 18.44%

Ranking by Relative Profitability (Operating Income %):

Rank 1 — WC-2: 21.87% | Rank 2 — RC-2: 18.44% | Rank 3 — RC-1: 17.87% | Rank 4 — WC-1: 12.94%

Key Insight: Although WC-1 generates the highest absolute revenue (₹75.25 lakhs), it ranks last in relative profitability (12.94%) due to its low selling price per shirt (₹700) and expedited delivery costs. WC-2 is the most profitable customer on a relative basis despite moderate revenue, owing to a better selling price (₹800) and fewer expedited deliveries per order placed.

Statement of Profit Lost on Account of Labour Turnover for 2022-23 — Super Ltd.

The profit lost due to labour turnover is computed by identifying two categories: (a) lost contribution arising from unproductive hours and vacancies unfilled, and (b) abnormal costs directly incurred due to labour turnover.

Step 1 — Contribution per hour:
Total Contribution = ₹2,16,80,000 × 15% = ₹32,52,000. This contribution was earned over the total actual hours worked of 2,50,000 hours. Hence, Contribution per hour = ₹32,52,000 ÷ 2,50,000 = ₹13.008 per hour.

Step 2 — Unproductive training hours:
Out of 60,000 training hours, 40% = 24,000 hours were unproductive. These hours consumed labour cost but produced no output or contribution.

Step 3 — Lost contribution due to unproductive training hours:
24,000 hours × ₹13.008 = ₹3,12,192.

Step 4 — Lost contribution due to hours lost (Personnel Department delays):
95,000 hours × ₹13.008 = ₹12,35,760. These are potential productive hours lost solely because vacancies caused by labour turnover were not filled in time.

Step 5 — Cost of rectification of defective output:
Defective units produced during training = 1,500 units; Rectification cost = 1,500 × ₹40 = ₹60,000.

Step 6 — Separation and replacement costs:
Settlement cost = ₹2,37,880; Recruitment and Selection = ₹1,40,000; Training and Induction = ₹1,61,950. These are entirely attributable to labour turnover.

Total Profit Lost = ₹3,12,192 + ₹12,35,760 + ₹60,000 + ₹2,37,880 + ₹1,40,000 + ₹1,61,950 = ₹21,47,782.

Note: Since fixed costs remain unchanged irrespective of output level, any additional contribution that could have been earned (from the lost hours) would have flowed directly as profit — hence contribution lost = profit lost.

Break-Even Analysis — PQR Ltd.

Step 1: Calculate P/V Ratio using Marginal Costing principle

Since fixed costs remain constant, the change in profit is entirely due to change in contribution:

P/V Ratio = Change in Profit ÷ Change in Sales
= [11,20,000 − (−3,80,000)] ÷ (2,40,00,000 − 1,80,00,000)
= 15,00,000 ÷ 60,00,000 = 25%

Step 2: Calculate Fixed Cost

Using 2023-24 data:
Contribution = 2,40,00,000 × 25% = ₹60,00,000
Fixed Cost = Contribution − Profit = 60,00,000 − 11,20,000 = ₹48,80,000

*Verification (2022-23):* Contribution = 1,80,00,000 × 25% = ₹45,00,000; Profit = 45,00,000 − 48,80,000 = (₹3,80,000) ✓

(i) Break-Even Sales

BEP Sales = Fixed Cost ÷ P/V Ratio = 48,80,000 ÷ 25% = ₹1,95,20,000

(ii) Sales Volume to Earn Profit of ₹15,00,000 in 2024-25

Original variable cost ratio = 100% − 25% = 75%

Variable cost increases by 5%:
New Variable Cost Ratio = 75% × 1.05 = 78.75%
New P/V Ratio = 100% − 78.75% = 21.25%

New Fixed Cost = 48,80,000 − 4,80,000 = ₹44,00,000

Required Sales = (Fixed Cost + Target Profit) ÷ New P/V Ratio
= (44,00,000 + 15,00,000) ÷ 21.25%
= 59,00,000 ÷ 0.2125
= ₹2,77,64,706 (approx.)

PQR Ltd. must achieve sales of approximately ₹2,77,64,706 in 2024-25 to earn a target profit of ₹15,00,000.

Part (i): Net Operating Income per flight (Normal scenario)

Passengers at 70% occupancy = 180 × 70% = 126 passengers

Revenue:
Fare Revenue = 126 × ₹12,500 = ₹15,75,000

Costs:
Fuel cost (variable per flight, unaffected by passenger count) = ₹2,28,000
Food cost = 126 × ₹370 = ₹46,620
Commission to agents = 7.5% × ₹15,75,000 = ₹1,18,125
Lease & landing charges = ₹9,12,000
Salaries of flight crew = ₹90,000
Total Operating Cost = ₹13,94,745

Net Operating Income = ₹15,75,000 − ₹13,94,745 = ₹1,80,255 per flight

---

Part (ii): Evaluation of Revised Fare Proposal (144 passengers at ₹11,670)

Revised Revenue:
Fare Revenue = 144 × ₹11,670 = ₹16,80,480

Revised Costs:
Fuel cost (unchanged) = ₹2,28,000
Food cost = 144 × ₹370 = ₹53,280
Commission to agents = 7.5% × ₹16,80,480 = ₹1,26,036
Lease & landing charges = ₹9,12,000
Salaries of flight crew = ₹90,000
Total Revised Operating Cost = ₹14,09,316

Revised Net Operating Income = ₹16,80,480 − ₹14,09,316 = ₹2,71,164 per flight

Advice: The proposal should be implemented. The revised fare of ₹11,670 with 144 passengers generates a net operating income of ₹2,71,164 compared to ₹1,80,255 at normal occupancy, resulting in an incremental gain of ₹90,909 per flight. Despite the lower fare per seat, the higher occupancy (144 vs 126 passengers) more than compensates for the reduction in revenue per passenger, while fixed costs (fuel, lease, salaries) remain the same.

PART (I): BASELINE SCENARIO ANALYSIS (75% OCCUPANCY)

Passenger Occupancy: 75% × 180 seats = 135 passengers

Revenue Calculation:
Total revenue = 135 passengers × ₹9,200 = ₹12,42,000

Variable Costs Per Passenger:
- Commission to travel agents = 7.5% × ₹9,200 = ₹690
- Food cost = ₹270
- Total variable cost per passenger = ₹960

Total variable costs = 135 × ₹960 = ₹1,29,600

Contribution Analysis:
Contribution margin = ₹12,42,000 − ₹1,29,600 = ₹11,12,400
Contribution per customer = ₹9,200 − ₹960 = ₹8,240

Fixed Costs:
Total fixed costs = ₹9,12,000 + ₹90,000 = ₹10,02,000

Operating Income (Customer-Level):
Operating income per customer = ₹8,240 − (₹10,02,000 ÷ 135) = ₹8,240 − ₹7,422.22 = ₹817.78 per passenger

Operating Income Metrics:
Total operating income = ₹11,12,400 − ₹10,02,000 = ₹1,10,400
Operating income as % of revenue = (₹1,10,400 ÷ ₹12,42,000) × 100 = 8.88%

Profitability Assessment: While the airline operates profitably, the operating margin is relatively modest at 8.88%. Customer-level profitability of ₹817.78 per passenger provides a thin cushion, indicating high operational leverage and sensitivity to occupancy changes.

PART (II): PROPOSED SCENARIO ANALYSIS

*Note: The question states fare is "reduced to ₹11,670" but this represents an increase from the current ₹9,200. Proceeding with analysis at ₹11,670 and 144 passengers.*

Proposed Scenario Details:
- Occupancy: 144 passengers (80% of capacity)
- Fare per passenger: ₹11,670

Revised Variable Costs:
- Commission = 7.5% × ₹11,670 = ₹875.25 per passenger
- Food = ₹270 per passenger
- Total = ₹1,145.25 per passenger

Proposed Scenario Results:
Total revenue = 144 × ₹11,670 = ₹16,80,480
Total variable costs = 144 × ₹1,145.25 = ₹1,64,916
Contribution margin = ₹16,80,480 − ₹1,64,916 = ₹15,15,564
Fixed costs = ₹10,02,000 (unchanged)
Operating income = ₹15,15,564 − ₹10,02,000 = ₹5,13,564

Operating income as % of revenue = (₹5,13,564 ÷ ₹16,80,480) × 100 = 30.56%
Operating income per customer = ₹5,13,564 ÷ 144 = ₹3,566.42

COMPARATIVE ANALYSIS & RECOMMENDATION:

The proposal should be STRONGLY ACCEPTED. Key benefits:

1. Absolute Profitability: Operating income increases by ₹4,03,164 (366% improvement) from ₹1,10,400 to ₹5,13,564

2. Margin Improvement: Operating margin expands dramatically from 8.88% to 30.56%, indicating significantly enhanced operational efficiency and profitability

3. Customer-Level Returns: Per-passenger operating income increases 336% from ₹817.78 to ₹3,566.42, demonstrating improved unit economics

4. Contribution Margin: Contribution per customer increases from ₹8,240 to ₹10,524.75 (27.7% improvement), more than offsetting any revenue concerns

Conclusion: Despite reduced occupancy rates or price adjustments, the fare increase to ₹11,670 combined with occupancy rising to 144 passengers creates a significantly more profitable operation. The proposal materially strengthens the airline's financial position and should be implemented.

Feedback Control and Feedforward Control are two fundamental approaches in budgetary control systems, each serving distinct but complementary roles in organizational management.

FEEDBACK CONTROL SYSTEM

Feedback control operates on the principle of comparing actual results with predetermined budgets or standards and identifying variances after the fact. In this system, actual performance data is collected, analyzed, and compared against budgeted targets. Variance analysis forms the cornerstone—differences between actual and budgeted amounts are calculated and investigated. Corrective actions are then initiated based on identified variances.

Key characteristics include: (i) Reactive in nature—focuses on what has already occurred; (ii) Based on historical data and actual results; (iii) Helps diagnose problems and their causes; (iv) Enables management to understand deviations and their impact on performance; (v) Supports accountability and performance evaluation.

Example: A manufacturing company budgets ₹10,00,000 for raw materials. Actual spending is ₹11,50,000. The unfavorable variance of ₹1,50,000 is identified, analyzed for causes (price increases, usage inefficiency, or both), and corrective measures are planned for future periods.

Advantages: Provides concrete data for analysis; Identifies actual performance gaps; Enables learning from actual outcomes; Cost-effective to implement. Disadvantages: Cannot prevent variances that have already occurred; Reactive rather than preventive; Time lag between variance occurrence and corrective action; May be too late to avoid significant losses.

FEEDFORWARD CONTROL SYSTEM

Feedforward control is a proactive approach that anticipates potential deviations before they occur. Instead of waiting for actual results, this system uses forecasts and projections to predict future performance based on current trends and conditions. Management intervenes preventively to ensure variances do not materialize.

Key characteristics include: (i) Preventive in nature—aims to forestall problems; (ii) Based on forecasts, projections, and predictive analysis; (iii) Continuous monitoring of key variables that drive performance; (iv) Allows corrective action before outcomes materialize; (v) Focuses on future performance potential.

Example: A sales manager, observing declining inquiry rates and extended sales cycles, projects a shortfall in quarterly revenue. Rather than waiting for the quarter to end, management immediately implements promotional campaigns and enhances sales efforts to prevent the projected shortfall.

Advantages: Preventive—avoids losses before they occur; Enables proactive management; Reduces crisis management; Better resource utilization; Supports strategic initiatives. Disadvantages: Relies on forecast accuracy; May be expensive to implement; Requires sophisticated information systems; Forecasts can be uncertain.

COMPARATIVE ANALYSIS

Feedback control addresses "What went wrong?" while feedforward control addresses "What might go wrong?" Feedback is backward-looking; feedforward is forward-looking. In practice, effective budgetary control systems integrate both. Feedback control provides accountability and learning; feedforward control provides prevention and strategy alignment.

Modern organizations increasingly emphasize feedforward approaches (rolling forecasts, scenario planning) while maintaining feedback systems for accountability. The optimal approach combines early warning indicators (feedforward) with performance measurement and variance analysis (feedback) to enable both prevention and continuous improvement.

Feedback Control System is a post-action control mechanism that compares actual performance against budgeted standards after the activity has been completed. It operates on the principle of variance analysis, where deviations between actual and budgeted figures are identified, analyzed, and corrective measures are initiated to prevent recurrence.

Mechanism of Feedback Control: Actual results are measured periodically (monthly, quarterly), compared with budgeted figures, variances are computed and investigated to identify causes, and corrective actions are taken for future periods. This is a reactive approach that relies on historical data to improve future performance.

Advantages of Feedback Control: (1) Provides actual performance data for accurate variance analysis; (2) Helps identify root causes of deviations; (3) Enables learning from past mistakes; (4) Supports evidence-based decision-making; (5) Useful for performance evaluation and accountability.

Limitations of Feedback Control: (1) Corrects after damage is done – by the time variance is identified and corrected, losses may already have occurred; (2) Time lag between action and control; (3) Cannot prevent negative variances; (4) May be too late to address seasonal or cyclical deviations; (5) Focuses on historical rather than future performance.

Feedforward Control System is a preventive/predictive control mechanism that anticipates future deviations and takes corrective action before they occur. It uses forecasting, projections, and predictive models to adjust inputs and processes proactively.

Mechanism of Feedforward Control: Expected future conditions are forecasted using historical trends, external data, and predictive models; potential deviations are identified in advance; corrective measures are implemented before the actual activity occurs; the system continuously monitors leading indicators to refine predictions.

Advantages of Feedforward Control: (1) Preventive in nature – stops problems before they arise; (2) More effective in minimizing losses; (3) Allows timely adjustment of resources and operations; (4) Particularly useful for controlling scarce resources; (5) Enhances operational efficiency; (6) Better suited for volatile or uncertain environments.

Limitations of Feedforward Control: (1) Heavily dependent on accuracy of forecasts and assumptions; (2) Requires sophisticated forecasting models and expertise; (3) More costly to implement; (4) Forecasting errors can lead to incorrect preventive measures; (5) Less useful when historical data is unreliable; (6) Requires continuous monitoring of leading indicators.

Comparison: While feedback control is suited for stable, predictable environments and provides accountability through performance measurement, feedforward control is superior for dynamic environments where early intervention is critical. Effective budgetary control typically employs both systems – feedforward for prevention and feedback for evaluation and learning.

Cost Control and Cost Reduction are both important cost management techniques but differ fundamentally in their nature and approach.

Cost Control is a preventive and regulatory function aimed at maintaining costs within predetermined levels or standards. It involves continuous monitoring and comparison of actual costs against budgeted or standard costs. The primary objective is to ensure that costs do not exceed the limits set in budgets and standards. Cost control operates through a system of budgets, standard costing, and variance analysis. It is an ongoing, routine activity performed at regular intervals. The scope of cost control is limited to ensuring efficiency within existing operations and preventing wasteful expenditure. Methods include setting budgets, analyzing variances, investigating unfavorable deviations, and taking corrective action. Cost control is primarily defensive in nature—it stops costs from rising beyond acceptable limits.

Cost Reduction, by contrast, is a progressive and dynamic function aimed at permanently lowering the cost of products or services below the existing standard or budget levels. It involves deliberate and systematic efforts to cut costs through process improvements, technological innovations, elimination of waste, and operational enhancements. The primary objective is to achieve lasting, permanent reductions in costs through positive and constructive measures. Cost reduction is not routine; it is a special initiative undertaken to improve competitiveness and profitability. The scope extends beyond current operations to include innovation, re-engineering processes, changing product design, sourcing alternatives, and improving efficiency. Cost reduction focuses on "how to do better" rather than "preventing worse."

Key Distinctions:

(1) Nature: Cost control is preventive; cost reduction is progressive.

(2) Objective: Cost control maintains standards; cost reduction improves beyond standards.

(3) Scope: Cost control works within existing parameters; cost reduction seeks structural changes.

(4) Methods: Cost control uses budgets and variance analysis; cost reduction uses innovation and process re-engineering.

(5) Frequency: Cost control is continuous and repetitive; cost reduction is periodic and special.

(6) Time Horizon: Cost control has ongoing effect; cost reduction creates permanent reduction.

(7) Approach: Cost control is reactive (correcting deviations); cost reduction is proactive (seeking improvements).

Both are complementary functions essential for sound cost management. Cost control ensures efficiency in current operations while cost reduction drives strategic improvements in long-term competitiveness.

Cost Control vs. Cost Reduction

Cost Control refers to the process of regulating the costs of operating a business and keeping them within predetermined standards or targets. It is essentially concerned with maintaining costs in accordance with established norms. Cost control is a preventive function — it ensures that costs do not exceed the budgeted or standard levels. Once the target is achieved, the process of cost control is said to be complete. It does not necessarily aim to reduce costs below the established standard; it merely ensures adherence to it.

Cost Reduction, on the other hand, is a more dynamic and continuous process. It aims at achieving a genuine and permanent reduction in the unit cost of goods produced or services rendered without impairing their suitability for the use intended. It challenges the existing standards themselves and seeks to establish new, lower benchmarks. Cost reduction is a corrective function — it questions whether the current standards are optimal and attempts to improve upon them.

The following are the key points of distinction:

1. Meaning and Objective: Cost control aims to achieve the cost targets set in advance, whereas cost reduction aims to bring costs down below the previously accepted standards.

2. Nature: Cost control is preventive in nature — it tries to prevent costs from exceeding the standard. Cost reduction is corrective in nature — it tries to improve upon existing standards.

3. Scope: Cost control has a limited scope as it is bound by established standards. Cost reduction has a wider scope as it continuously looks for ways to permanently lower costs.

4. Standards: In cost control, standards are treated as fixed and final. In cost reduction, standards are treated as challenges to be improved upon — no standard is considered permanent.

5. Emphasis: Cost control places emphasis on the past and present performance vis-à-vis standards. Cost reduction places emphasis on the future — finding better and more efficient ways.

6. Process: Cost control is achieved through budgetary control and standard costing. Cost reduction is achieved through value analysis, work study, job evaluation, rationalization, and process improvement.

7. End Result: Cost control is said to be complete once costs conform to standards. Cost reduction is a continuous and ongoing process — there is no end point.

8. Permanence: Cost control does not guarantee a permanent reduction in costs. Cost reduction aims at a genuine and permanent reduction in cost per unit.

In summary, cost control is about keeping costs within limits, while cost reduction is about pushing those limits downward permanently. Both are essential tools of management accounting, but cost reduction is considered the more progressive of the two.

Distinction between Waste and Scrap:

Waste refers to material that is lost, destroyed, or evaporated during the manufacturing process without any recovery or residual value. Waste is an inevitable consequence of normal production and cannot be recovered. Examples include evaporation of liquids, burn-off in melting processes, and normal spillage. Waste has no monetary value and represents a complete loss.

Scrap, by contrast, consists of materials remaining after production that possess some recovery or residual value. Scrap can be sold in the market, recycled, or reused in production. Examples include metal off-cuts, trimmings, broken or defective items that can be melted down, and packaging materials. Scrap has monetary realization potential.

Treatment of Normal Scrap in Cost Accounts:

Normal scrap is that which is anticipated and expected to occur under normal operating conditions. It is an inherent part of the production process. The accounting treatment is as follows:

The recovery value (sale proceeds or realization value) of normal scrap should be credited against the cost of production. This credit reduces the total production cost of the batch or product. In process costing, the scrap value is credited to the relevant process account. The net effect is that the material cost is reduced by the recovery value of normal scrap. If scrap is recovered during the production process, it is credited immediately; if recovered after production completion, it is credited to the cost of the finished product. Normal scrap is therefore absorbed in the product cost as an adjustment.

Treatment of Abnormal Scrap in Cost Accounts:

Abnormal scrap is that which is not anticipated and arises due to inefficiency, damage, theft, poor quality control, or abnormal operating conditions. This scrap should NOT be absorbed in the normal product cost. The accounting treatment is as follows:

Abnormal scrap is recognized and valued separately. Its recovery value should be credited directly to the Costing Profit & Loss Account or shown as a separate item. The abnormal scrap account is not charged to the product cost but may be allocated to the department or cost center responsible for the inefficiency or damage. This treatment ensures that abnormal scrap does not distort the standard cost or normal product cost. It serves as a tool for variance analysis and management control, enabling management to identify and investigate the causes of abnormal losses and take corrective action.

Illustrative Entries:
Normal scrap: Debit Process/Product account, Credit Scrap Realization account.
Abnormal scrap: Debit Abnormal Loss account, Credit Scrap Realization account; then transfer Abnormal Loss to Costing P&L.

Distinction between Waste and Scrap:

Waste refers to that portion of raw material which is lost during the production process and has no recoverable value. It may arise due to evaporation, shrinkage, chemical reaction, or inherent nature of the material. Waste either disappears in the process or remains as a residue with nil realisable value. Examples include gases evaporated during chemical processing, sawdust with no sale value, etc.

Scrap, on the other hand, is the incidental residue from certain manufacturing operations which has a measurable but relatively small recoverable value. Unlike waste, scrap can be sold or reused. Examples include metal turnings, filings, short ends of material, and defective castings.

Key differences: (1) Waste has no realisable value; scrap has some realisable value. (2) Waste is often invisible or immeasurable; scrap is tangible and measurable. (3) Waste represents a complete loss; scrap partially recovers cost. (4) Waste does not appear in cost records as a recoverable item; scrap is credited to the process or job.

Treatment of Normal Scrap in Cost Accounts:

Normal scrap is the expected and unavoidable scrap that arises under efficient operating conditions. It is the scrap that is anticipated in the production process.

The treatment depends on whether the scrap has realisable value:

(a) When normal scrap has realisable value: The sale proceeds of normal scrap are credited to the Process Account or Job Account from which the scrap arose. This reduces the net cost of production. In other words, the cost of input is reduced by the scrap value, and the net cost is spread over the good output only.

(b) When normal scrap has no realisable value: No entry is made in the cost accounts for the scrap itself. The cost of normal scrap is absorbed by the good output as it forms part of the overall process cost. The cost per unit of good output is thus higher, absorbing the cost of normal scrap automatically.

Illustration: If input is 1,000 units at ₹10 each = ₹10,000, normal scrap is 50 units sold at ₹2 each = ₹100. Net cost = ₹9,900 spread over 950 good units. Cost per good unit = ₹9,900 ÷ 950 = ₹10.42.

Treatment of Abnormal Scrap in Cost Accounts:

Abnormal scrap arises due to unexpected or avoidable reasons such as carelessness, machine breakdown, use of substandard material, or inefficient handling. It is over and above the normal expected level of scrap.

The treatment of abnormal scrap is as follows:

(a) Abnormal scrap is valued at the cost of good output (i.e., at the same rate per unit as normal production). This is because abnormal scrap should not reduce the cost of good output — the cost of inefficiency should be separately identified.

(b) The realisable value of abnormal scrap (if any) is credited to the Abnormal Scrap Account.

(c) The net loss (cost of abnormal scrap less its realisable value) is transferred to the Costing Profit and Loss Account as an abnormal loss, since it represents avoidable inefficiency.

Journal Treatment:
- Debit: Abnormal Scrap Account (at cost of good output)
- Credit: Process Account
- On sale: Debit Bank/Debtor, Credit Abnormal Scrap Account
- Net loss: Debit Costing P&L Account, Credit Abnormal Scrap Account

Summary: Normal scrap is treated as a reduction in cost of production (its sale proceeds reduce process cost), while abnormal scrap is separately identified, valued at production cost, and the irrecoverable portion is written off to Costing Profit and Loss Account. This ensures that the cost of good output is not distorted by abnormal inefficiencies.

Unit Costing is a costing method applied in industries with continuous, large-scale production of homogeneous products. Under unit costing, the total cost incurred during a period is divided by the total number of units produced to determine the cost per unit. The entire production is treated as a single cost center, and all manufacturing costs (materials, labor, and overheads) are accumulated and apportioned to individual units on a periodic basis. This method assumes minimal product variation and is suitable for standardized mass production where detailed batch-wise identification is unnecessary. Examples include: (1) Textile Industry - large-scale production of standardized cloth; (2) Sugar Industry - continuous refinement and production of uniform sugar units; (3) Petroleum Refining - mass production of refined petroleum products with homogeneous specifications.

Batch Costing is a costing method used when production occurs in distinct groups or batches, with each batch treated as a separate cost center. All costs attributable to a specific batch are accumulated separately, and the cost per unit is determined by dividing the total batch cost by the number of units in that batch. This method is applicable when products are produced in identifiable lots, and batches may have different specifications, raw materials, or processing requirements. Batch costing provides detailed cost information for each batch and is particularly useful for controlling quality and managing inventory by batch. Examples include: (1) Pharmaceutical Industry - production of medicines in defined batches with separate quality control and batch numbering; (2) Bakery Industry - manufacturing of bread, pastries, and confectionery items in separate production runs; (3) Printing Industry - production of books, journals, and printed materials in customer-specific batches with varying specifications.

The key distinction is that unit costing applies to continuous, uniform production, while batch costing applies to production organized into separate identifiable groups with potential variations between batches.

Unit Costing (also called Single or Output Costing) is a method of cost accounting used when homogeneous products are manufactured in a continuous flow or mass production. The total cost of production accumulated during a period is divided by the number of units produced to determine the cost per unit. Formula: Cost per Unit = Total Production Cost / Number of Units Produced. This method is simple and applicable where production is standardized with minimal variation.

Batch Costing is a method where costs are collected for a specific batch or lot of identical products manufactured together. Each batch is treated as a separate cost unit. Costs are accumulated for the entire batch and then divided by the number of units in that batch to derive cost per unit. Formula: Cost per Unit = Total Batch Cost / Number of Units in Batch. This method is suitable when production is organized in distinct batches, though products within a batch are identical.

Industries using Unit Costing:
1. Sugar Manufacturing – Sugarcane processing into sugar involves continuous production of homogeneous output
2. Cement Industry – Continuous manufacturing of cement clinker and finished cement with standardized specifications
3. Textile Mills – Mass production of yarn and fabric with continuous spinning and weaving processes

Industries using Batch Costing:
1. Pharmaceutical Manufacturing – Medicines and drugs produced in specific batches with defined formulations and specifications
2. Biscuit/Bakery Industry – Different varieties and types of biscuits manufactured in batches according to customer orders or market demand
3. Paint Manufacturing – Production of different colors and paint types in distinct batches with specific chemical formulations

Idle Time refers to the period during which a worker or machine is available and paid but not productively engaged in production due to various reasons. It represents the difference between total time paid and actual productive time worked. Idle time must be analyzed, classified, and treated appropriately in cost accounts to ensure accurate product costing.

Treatment of Idle Time in the Given Situations:

(i) Setting Up Time for Machine – Direct Worker Mr. A:
Setting up time is the period required to prepare the machine, tools, and workplace before actual production commences. This is classified as Direct Idle Time and treated as follows:
- The wages earned during setting up time are charged directly to the job/product as a Direct Labour Cost component
- Since setting up is a necessary and unavoidable part of the production process, it is considered an integral part of the product cost
- The time is allocated to the specific batch or job for which the setup is done
- It increases the per-unit cost of the product but is essential for manufacturing

(ii) Normal Break Time for Lunch – Indirect Worker Mr. B:nNormal break time (lunch, tea breaks) is a regular and statutory entitlement during the working day. For an Indirect Worker, this is classified as Normal Idle Time and treated as follows:
- The wages paid during normal break time are treated as Indirect Labour Cost or part of Manufacturing Overhead
- Since this is an indirect worker, their idle time cannot be directly attributed to any specific product
- The cost is allocated to Factory Overhead and recovered from all products through appropriate allocation bases (labour hours, machine hours, or units produced)
- It is treated as a normal operational expense and should be absorbed in product costs as part of overhead recovery

(iii) Time Lost Due to Machine Breakdown – Worker Mr. C:
Machine breakdown may be classified as Normal or Abnormal based on its nature. Treatment differs accordingly:

If Normal Breakdown (regular wear and tear, expected downtime): Classified as Normal Idle Time, the wages during breakdown are included in Factory Overhead and allocated to all products.

If Abnormal Breakdown (unexpected, exceptional, non-recurring): Classified as Abnormal Idle Time, the wages are charged to the Costing Profit & Loss Statement as an abnormal loss and are not allocated to products. This preserves product cost integrity and separately identifies abnormal losses for management attention.

In practice, unless specified as routine maintenance downtime, machine breakdowns are typically treated as abnormal idle time and excluded from normal product costing.

Idle Time refers to the time during which workers are on payroll but are not engaged in productive work. It represents paid time that does not contribute to production and must be classified and appropriately treated in cost accounts.

(i) Setting up time for machine (Direct Worker Mr. A): Setup time is the time spent preparing and adjusting machinery before actual production commences. This is directly attributable to a specific job and is avoidable. Treatment: Wages for setup time should be charged as direct labour cost to that specific job/order. Setup time becomes an integral part of the job cost, ensuring the job bears its full direct cost of production.

(ii) Normal break time for lunch (Indirect Worker Mr. B): Break time is a regular, unavoidable component of employment (rest periods, meal breaks, etc.). This is unavoidable idle time. Treatment: Wages for normal break time should NOT be charged to any specific job. Instead, it should be treated as indirect labour and allocated to factory overhead. The cost is recovered through overhead absorption rates applied proportionately to all products, treating it as a normal operating cost.

(iii) Time lost due to breakdown of machine (Worker Mr. C): Machine breakdown causes productive work stoppage. Treatment depends on the nature of breakdown:

Normal/Expected Breakdown: When breakdowns are regular and foreseeable (routine maintenance, periodic repairs), the idle time cost should be treated as factory overhead and recovered through standard overhead rates. This reflects it as a regular operating expense absorbed by all products.

Abnormal/Unexpected Breakdown: When the breakdown is abnormal and unexpected (sudden equipment failure, unforeseen mechanical problem), the idle time cost should be charged to Costing Profit & Loss Account as an abnormal loss and NOT absorbed in product costs. This separates extraordinary costs from normal manufacturing costs for proper cost control.

Cost Control and Cost Reduction are two distinct concepts in cost management, often confused but fundamentally different in nature and objective.

Meaning:
Cost Control refers to the process of regulating costs by setting predetermined standards or targets and ensuring that actual costs do not exceed these standards. It is essentially a process of maintaining costs within acceptable limits as laid down by management. Cost control ends when the target is achieved.

Cost Reduction, on the other hand, refers to the achievement of a real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the intended use or diminishing product quality. It challenges the existing standards themselves and aims to bring about a lasting reduction.

Key Distinctions:

1. Nature and Objective:
Cost control aims to *attain* or *maintain* the costs as per predetermined standards. Cost reduction aims to *lower* those very standards — it questions whether existing cost levels are optimal at all.

2. Assumption about Standards:
Cost control *assumes* that existing standards are correct and efficient; it simply monitors adherence. Cost reduction *does not accept* existing standards as final — it continuously seeks to improve upon them.

3. Permanency:
Cost control is a continuous process of monitoring and corrective action; its benefits last only as long as controls are applied. Cost reduction results in a permanent and genuine reduction in costs — once a saving is achieved, it is retained even without further effort.

4. Preventive vs. Corrective:
Cost control is largely preventive in nature — it prevents costs from exceeding standards. Cost reduction is largely corrective and innovative — it finds new and better ways to do things at a lower cost.

5. Scope:
Cost control covers all cost elements and departments but is confined to keeping within laid-down limits. Cost reduction has a wider scope — it encompasses product design, production methods, marketing, administration, and even the redefinition of standards themselves.

6. Tools and Techniques:
Cost control uses tools such as Budgetary Control, Standard Costing, and Variance Analysis. Cost reduction uses techniques such as Value Analysis/Value Engineering, Work Study, Method Study, Organisation and Methods (O&M), Product Standardisation, and Improvement in Design.

7. Finality:
Cost control process ends when actual costs conform to standard costs — the target is achieved. Cost reduction is a never-ending process — there is always scope to reduce costs further through innovation.

8. Focus:
Cost control focuses on past and present performance by comparing actuals with standards. Cost reduction focuses on the future by challenging current methods and discovering better alternatives.

Tabular Summary:

| Basis | Cost Control | Cost Reduction |
|---|---|---|
| Aim | Achieve/maintain standards | Reduce unit costs permanently |
| Standards | Accepted as given | Challenged and improved |
| Nature | Preventive | Corrective and innovative |
| Permanency | Temporary (needs monitoring) | Permanent |
| End point | When standard is met | Continuous, no end point |
| Tools | Budgetary Control, Standard Costing | Value Analysis, Work Study |

In essence, cost control ensures efficiency within established norms, while cost reduction strives to establish better norms by fundamentally improving processes, methods, and designs.

Distinction between Waste and Scrap:

Waste refers to the loss of material during the production process which has no recoverable value. It simply disappears — either by evaporation, shrinkage, chemical reaction, or absorbed into the product — and cannot be collected or sold. Examples include evaporation of solvents, smoke from combustion, and sawdust lost in the air. Waste has nil realisable value.

Scrap, on the other hand, is the incidental residue arising from a manufacturing process. It is a discarded material which has some measurable but relatively minor recoverable value. Scrap can be collected and sold. Examples include metal turnings in a machine shop, trimmings from cloth, and off-cuts of wood. Scrap has a positive (though small) realisable value.

In summary: Waste has no value and cannot be collected; Scrap has some residual value and can be sold or reused.

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Treatment of Normal and Abnormal Scrap in Cost Accounts:

Normal Scrap is the expected or unavoidable scrap that arises under efficient operating conditions. It is inherent to the production process and is anticipated in advance.

*Treatment of Normal Scrap:*

(1) When scrap has no value: The cost of normal scrap is absorbed by the good output. No separate credit is given; the cost per unit of good output rises accordingly.

(2) When scrap has realisable value: The sale proceeds (scrap value) are credited to the Process Account or the Cost of Production Account, thereby reducing the net cost of production. The good output bears only the net cost after deducting scrap realisation.

Formula: Net Cost of Production = Gross Input Cost − Scrap Realisable Value

The cost per unit of good output = Net Cost ÷ Units of Good Output (i.e., Input units − Normal Scrap units)

Abnormal Scrap is scrap in excess of the normal or expected level. It arises due to inefficiency, machine breakdown, negligence, or substandard material, and is NOT anticipated under normal conditions.

*Treatment of Abnormal Scrap:*

(1) Abnormal scrap is valued at the same cost per unit as good output (i.e., at the normal cost of production per unit).

(2) The realisable value of abnormal scrap is credited to the Abnormal Scrap Account.

(3) The net loss (= Value of Abnormal Scrap at cost − Realisable Value) is transferred to the Costing Profit & Loss Account as an abnormal loss, since it represents an inefficiency that should not inflate product cost.

*Key principle:* Good output and normal scrap together should bear only the cost attributable to normal operations. Any excess loss (abnormal scrap) is written off to Costing P&L so that the cost of good production is not distorted.

Illustration in brief:
If input = 1,000 units at ₹10 each (Total: ₹10,000); Normal Scrap = 50 units (realisable @ ₹2 each); Actual output = 920 units (meaning actual scrap = 80 units, abnormal scrap = 30 units):
— Normal cost per unit of expected output (950 units) = (₹10,000 − ₹100) ÷ 950 = ₹9,900 ÷ 950 ≈ ₹10.42
— Abnormal Scrap (30 units) valued at ₹10.42 × 30 = ₹312.63; less realisation of 30 × ₹2 = ₹60; net loss ₹252.63 → charged to Costing P&L.

Conclusion: Normal scrap is treated as part of the process and its value reduces input cost; abnormal scrap is isolated and charged to Costing P&L to ensure product costs reflect only efficient operations.

Unit Costing is a method of cost accounting applied when homogeneous products or identical units are produced continuously in a process or against specific customer orders. Under this method, all costs incurred during a period are accumulated and allocated to the units produced during that period. The cost per unit is determined by dividing the total cost incurred by the total number of units manufactured. This method is suitable for industries producing standardized, identical products on a continuous basis with uniform production processes.

Batch Costing is a variant of job costing methodology used when identical or similar products are manufactured in discrete groups, lots, or batches rather than individually or as a continuous process. Each batch is treated as a separate cost unit. All direct and indirect costs attributable to a batch are accumulated and collected, and the cost per unit is calculated by dividing the total batch cost by the number of units produced in that batch. This method is appropriate where production occurs in distinct groups or where customer orders call for production in specific quantities.

Three Industries Using Unit Costing:

1. Cement Manufacturing – Cement is produced in large, continuous quantities with homogeneous output. All production costs (raw materials, labor, overheads) are accumulated for a period and divided by total bags/tonnes produced to arrive at cost per unit.

2. Steel Production – Steel plants operate continuous processes where identical steel ingots or rods are manufactured. Total production costs are assigned to the homogeneous output, and per-unit costs are derived.

3. Sugar Manufacturing – Sugar factories process sugarcane continuously, producing standardized sugar output. Costs are accumulated periodically and allocated to the total production output.

Three Industries Using Batch Costing:

1. Pharmaceutical Industry – Medicines (tablets, capsules, injections) are manufactured in distinct batches. Each batch receives a batch number, and all production costs for that batch are collected. The cost per tablet/capsule is calculated by dividing batch cost by units in the batch.

2. Confectionery and Biscuit Manufacturing – Products like biscuits, chocolates, and candies are produced in batches. Different recipes or flavors may constitute separate batches, and costs are assigned batch-wise.

3. Footwear Industry – Shoes and sandals are produced in batches based on size, design, or style. Each batch incurs specific costs, and per-unit cost is derived on a batch basis.

Idle Time refers to the time during which workers are on the payroll and receive wages but are not engaged in productive work. It represents unproductive time that arises due to various business reasons during normal operations or unforeseen circumstances.

Idle time is classified into two categories: (1) Normal Idle Time – time that is inherent to the production process and unavoidable (e.g., setup, routine breaks), and (2) Abnormal Idle Time – time arising from unforeseen circumstances beyond normal control (e.g., machine breakdown, accidents).

The accounting treatment differs based on this classification:

(i) Setting up time for Direct Worker Mr. A: Setup time is classified as normal idle time as it is an integral and unavoidable part of the production process. The wages paid to the direct worker during setup constitute productive cost. Treatment: Charge to the product cost. This may be treated as part of direct labor cost or absorbed in factory overhead and recovered through the normal overhead absorption rate. The cost is included in the cost of goods manufactured.

(ii) Normal break time for lunch for Indirect Worker Mr. B: Normal break time (lunch) is classified as normal idle time, being inherent to employment relationships and unavoidable. Since Mr. B is an indirect worker, his wages are charged to factory overhead/manufacturing burden. Treatment: Wages paid during normal breaks should be charged to factory overhead. This cost is absorbed in the overhead recovery rate and recovered through products manufactured in the period. It forms part of the product cost indirectly.

(iii) Time lost due to machine breakdown for Worker Mr. C: Machine breakdown represents abnormal idle time as it is an unforeseen event beyond normal management control. Treatment: Wages paid during breakdown should be charged to an Abnormal Idle Time Account. This cost is NOT included in product cost but is separately identified as an abnormal loss/expense. It should be highlighted distinctly in cost accounts and not absorbed in normal overhead rates. The amount is treated as an abnormal charge against profits rather than product cost.

Reconciliation Statement of Cost and Financial Accounts
(For the year ended 31.03.2024 — Profit as per Cost Accounts as Base)

(i) Reconciliation Statement

| Particulars | ₹ | ₹ |
|---|---:|---:|
| Net Profit as per Cost Accounts | | 5,40,000 |
| Add: Items increasing Financial Profit relative to Cost Profit | | |
| Administrative overheads over absorbed (cost accounts charged more OH than actual; cost profit understated) | 24,000 | |
| Interest and Dividend received (income only in financial books) | 65,200 | |
| Notional rent of own premises charged in cost accounts (expense only in cost books; financial profit is higher) | 60,000 | |
| Store adjustments credited in financial books (credit reduces expense in financial books; not in cost accounts) | 7,500 | |
| Depreciation over charged in cost accounts (cost accounts charged more; cost profit understated) | 40,000 | 1,96,700 |
| | | 7,36,700 |
| Less: Items decreasing Financial Profit relative to Cost Profit | | |
| Factory overheads under absorbed (cost accounts charged less OH than actual; cost profit overstated) | 84,800 | |
| Over-revaluation of closing stock of finished goods in cost accounts (higher closing stock → lower COGS → higher cost profit) | 1,25,000 | |
| Interest on bank borrowings (expense only in financial books) | 50,000 | |
| Loss on sale of fixed assets and investments (loss only in financial books) | 48,000 | |
| Donations and subscriptions (expense only in financial books) | 18,800 | |
| Income tax provided (only in financial books; not a cost concept) | 1,50,000 | (4,76,600) |
| Net Profit as per Financial Accounts (Derived) | | 2,60,100 |

Note: Based on the given data, the reconciled profit works out to ₹2,60,100. The question states financial books show ₹2,40,000, indicating a likely discrepancy of ₹20,100 in the source data. The reconciliation logic and classification for each item above is correct per standard treatment.

(ii) When is Reconciliation of Cost and Financial Accounts NOT Required?

Reconciliation between cost accounts and financial accounts is not required when an organisation follows an Integrated (or Integral) Accounting System.

Under an integrated system, cost accounts and financial accounts are maintained as a single unified set of books. There is no separate cost ledger — both financial and cost data are recorded in the same ledger using a single chart of accounts. Since there is only one set of books and no duplication of records, the question of differences between the two sets does not arise, and hence no reconciliation is needed.

In contrast, reconciliation is necessary only when an organisation maintains a Non-Integrated (or Interlocking) Accounting System, where separate cost ledgers and financial ledgers are maintained independently, giving rise to differences due to items appearing in one set but not the other (e.g., notional charges, appropriations, purely financial items).

Step 1: Overhead Recovery Rate

Production overheads of ₹3,00,000 are recovered as a percentage of direct wages.
Total direct wages = ₹52,000 + ₹78,000 = ₹1,30,000
Overhead recovery rate = (3,00,000 ÷ 1,30,000) × 100 = 230.77% (rounded)
Process P overhead = ₹52,000 × 230.77% = ₹1,20,000
Process Q overhead = ₹78,000 × 230.77% = ₹1,80,000

---

(i) Process P Account

Input = 10,000 units | Normal loss = 6% × 10,000 = 600 units (scrap @ ₹5 = ₹3,000)
Expected output = 10,000 − 600 = 9,400 units
Actual output = 9,200 units → Abnormal Loss = 9,400 − 9,200 = 200 units

Net cost to process = (8,00,000 + 52,000 + 8,600 + 1,20,000) − 3,000 = ₹9,77,600
Cost per unit = ₹9,77,600 ÷ 9,400 = ₹104 per unit

Output disposition: 3/4 × 9,200 = 6,900 units → Process Q | 1/4 × 9,200 = 2,300 units → Sold

| Dr | Units | ₹ | Cr | Units | ₹ |
|---|---|---|---|---|---|
| Raw Material | 10,000 | 8,00,000 | Normal Loss A/c (@ ₹5) | 600 | 3,000 |
| Direct Wages | — | 52,000 | Abnormal Loss A/c (@ ₹104) | 200 | 20,800 |
| Other Expenses | — | 8,600 | Process Q A/c (@ ₹104) | 6,900 | 7,17,600 |
| Production Overhead | — | 1,20,000 | Finished Goods/Sales (@ ₹104) | 2,300 | 2,39,200 |
| Total | 10,000 | 9,80,600 | Total | 10,000 | 9,80,600 |

---

(ii) Process Q Account

Input = 6,900 units (from P) | Normal loss = 10% × 6,900 = 690 units (scrap @ ₹8 = ₹5,520)
Expected output = 6,900 − 690 = 6,210 units
Actual output = 6,400 units → Abnormal Gain = 6,400 − 6,210 = 190 units

Total cost before adjusting scrap = 7,17,600 + 78,000 + 11,100 + 1,80,000 = ₹9,86,700
Net cost = ₹9,86,700 − ₹5,520 = ₹9,81,180
Cost per unit = ₹9,81,180 ÷ 6,210 = ₹158 per unit

| Dr | Units | ₹ | Cr | Units | ₹ |
|---|---|---|---|---|---|
| Process P A/c (@ ₹104) | 6,900 | 7,17,600 | Normal Loss A/c (@ ₹8) | 690 | 5,520 |
| Direct Wages | — | 78,000 | Finished Goods/Sales (@ ₹158) | 6,400 | 10,11,200 |
| Other Expenses | — | 11,100 | | | |
| Production Overhead | — | 1,80,000 | | | |
| Abnormal Gain A/c (@ ₹158) | 190 | 30,020 | | | |
| Total | 7,090 | 10,16,720 | Total | 7,090 | 10,16,720 |

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(iii) Abnormal Loss Account & Abnormal Gain Account

Abnormal Loss Account (Process P — 200 units):

| Dr | Units | ₹ | Cr | Units | ₹ |
|---|---|---|---|---|---|
| Process P A/c (@ ₹104) | 200 | 20,800 | Bank/Scrap Sales (@ ₹5) | 200 | 1,000 |
| | | | Costing P&L A/c (loss) | — | 19,800 |
| Total | 200 | 20,800 | Total | 200 | 20,800 |

Abnormal Gain Account (Process Q — 190 units):

| Dr | Units | ₹ | Cr | Units | ₹ |
|---|---|---|---|---|---|
| Normal Loss A/c (scrap foregone @ ₹8) | 190 | 1,520 | Process Q A/c (@ ₹158) | 190 | 30,020 |
| Costing P&L A/c (gain) | — | 28,500 | | | |
| Total | 190 | 30,020 | Total | 190 | 30,020 |

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(iv) Costing Profit & Loss Account

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| Cost of Sales — Process P (2,300 × ₹104) | 2,39,200 | Sales — Process P (2,300 × ₹130) | 2,99,000 |
| Cost of Sales — Process Q (6,400 × ₹158) | 10,11,200 | Sales — Process Q (6,400 × ₹190) | 12,16,000 |
| Abnormal Loss A/c | 19,800 | Abnormal Gain A/c | 28,500 |
| Management & Selling Expenses | 1,70,000 | | |
| Net Profit | 1,03,300 | | |
| Total | 15,43,500 | Total | 15,43,500 |

Net Profit for the period = ₹1,03,300

Part (i): Calculation of Under-absorption of Production Overheads

The written-off value of obsolete stores (₹42,000) is an abnormal item and is excluded from production overheads for absorption purposes. Such non-recurring costs are not considered while computing under/over absorption via the predetermined rate.

Adjusted Actual Production Overheads = ₹4,20,000 − ₹42,000 = ₹3,78,000

Overhead Absorbed = Actual machine hours × Predetermined rate = 43,000 × ₹8 = ₹3,44,000

Under-absorption = ₹3,78,000 − ₹3,44,000 = ₹34,000

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Part (ii): Treatment of Under-absorption in Cost Accounts

The total under-absorption of ₹34,000 is analysed as follows:

A. ₹6,800 (20% — Defective Planning): This portion arises from abnormal reasons (avoidable inefficiency). It is written off directly to the Costing Profit & Loss Account and does not affect product costs.

B. ₹27,200 (80% — Normal increase in costs): This is attributable to genuine cost escalation in indirect materials and labour, i.e., a normal cause. The appropriate treatment is to apply a supplementary overhead rate to adjust the cost of all output proportionately.

Total equivalent units of production:
- Finished goods sold: 10,000 units
- Finished goods in stock: 8,000 units
- WIP (5,000 × 40%): 2,000 equivalent units
- Total: 20,000 equivalent units

Supplementary rate = ₹27,200 ÷ 20,000 = ₹1.36 per unit

The ₹27,200 is then spread as:
- Cost of Goods Sold (10,000 units × ₹1.36) = ₹13,600 → charged to Costing P&L Account
- Finished Goods Stock (8,000 units × ₹1.36) = ₹10,880 → added to Closing Stock valuation
- Work-in-Progress (2,000 equiv. units × ₹1.36) = ₹2,720 → added to WIP valuation

C. ₹42,000 (Obsolete stores written off): Being an abnormal loss, this is written off entirely to the Costing Profit & Loss Account.

Summary of Treatment:

| Item | Amount (₹) | Treatment |
|---|---|---|
| Obsolete stores written off | 42,000 | Costing P&L Account |
| Under-absorption — defective planning (20%) | 6,800 | Costing P&L Account |
| Under-absorption — normal cost increase (80%) | 27,200 | Supplementary rate (see above) |
| Total Actual Overhead | 4,20,000 | Fully accounted |

The final answer: Under-absorption = ₹34,000.

Part (i): Amount of Under-Absorption of Production Overheads

The actual production overheads of ₹4,50,000 include ₹42,000 on account of written-off obsolete stores, which is an abnormal item and must be excluded from the overhead absorption computation. It is transferred directly to the Costing Profit & Loss Account.

Normal actual overheads = ₹4,50,000 − ₹42,000 = ₹4,08,000

Overheads absorbed are computed on the basis of actual machine hours worked at the predetermined rate:
Overheads Absorbed = 43,000 machine hours × ₹8 = ₹3,44,000

Under-Absorption = ₹4,08,000 − ₹3,44,000 = ₹64,000

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Part (ii): Treatment of Under-Absorption in Cost Accounts

The under-absorption of ₹64,000 is analysed as follows:

20% due to defective planning (abnormal cause) = ₹12,800 → This is written off to the Costing Profit & Loss Account as it represents an avoidable inefficiency.

80% due to normal increase in costs of indirect materials and indirect labour = ₹51,200 → This is absorbed using a supplementary overhead rate, spread over all units on which overheads were originally absorbed i.e., completed units and equivalent WIP units.

Equivalent units for supplementary rate:
- Finished goods produced: 18,000 units
- WIP (equivalent): 5,000 × 40% = 2,000 units
- Total equivalent units = 20,000 units

Supplementary Rate = ₹51,200 ÷ 20,000 = ₹2.56 per unit

Application of supplementary rate:
- Cost of Sales (10,000 units sold): 10,000 × ₹2.56 = ₹25,600 → Charged to Profit & Loss
- Closing Finished Goods Stock (8,000 units): 8,000 × ₹2.56 = ₹20,480 → Added to stock valuation
- Work-in-Progress (2,000 equivalent units): 2,000 × ₹2.56 = ₹5,120 → Added to WIP valuation

Additionally, the ₹42,000 obsolete stores written off is transferred directly to the Costing Profit & Loss Account as an abnormal item, irrespective of under-absorption treatment.

Summary of Disposition:
| Item | Amount (₹) | Treatment |
|---|---|---|
| Obsolete stores (abnormal) | 42,000 | Costing P&L |
| Under-absorption – defective planning (20%) | 12,800 | Costing P&L |
| Under-absorption – normal causes (80%) via supplementary rate | 51,200 | Apportioned to Cost of Sales, Closing Stock & WIP |
| Total | 1,06,000 | |

Statement of Profit Lost Due to Labour Turnover — Super Ltd. (Year 2022-23)

Step 1 — Contribution and Rate per Productive Hour

Contribution = Sales × P/V Ratio = ₹2,16,80,000 × 15% = ₹32,52,000

Out of 60,000 training hours, unproductive training hours = 60,000 × 40% = 24,000 hours

Productive hours that actually generated output = 5,00,000 − 24,000 = 4,76,000 hours

Contribution per productive hour = ₹32,52,000 ÷ 4,76,000 = ₹6.84 per hour (approx.)

Step 2 — Lost Contribution from Unproductive Training Hours

The 24,000 unproductive training hours represent direct output lost. Lost contribution = 24,000 × ₹6.84 = ₹1,64,160

Step 3 — Lost Contribution from Vacant Hours

Due to delays by the Personnel Department in filling vacancies, 95,000 potential productive hours were not utilised (these are additional to the actual 5,00,000 hours — they were never worked). Lost contribution = 95,000 × ₹6.84 = ₹6,49,800

Step 4 — Cost of Rectification of Defective Output

1,500 defective units × ₹40 per unit = ₹60,000

Step 5 — Replacement Costs (Direct Costs of Labour Turnover)

These include settlement costs of departing workers (₹2,37,880), recruitment and selection costs (₹1,40,000), and training and induction costs (₹1,61,950).

Statement of Total Profit Lost Due to Labour Turnover

| Particulars | ₹ |
|---|---|
| Lost contribution — unproductive training hours (24,000 × ₹6.84) | 1,64,160 |
| Lost contribution — hours lost due to unfilled vacancies (95,000 × ₹6.84) | 6,49,800 |
| Cost of rectification of defective output (1,500 × ₹40) | 60,000 |
| Settlement cost of leaving workers | 2,37,880 |
| Recruitment and selection cost | 1,40,000 |
| Training and induction cost | 1,61,950 |
| Total Profit Lost | 14,13,790 |

Total profit lost by Super Ltd. on account of labour turnover for 2022-23 = ₹14,13,790

Note: The question as provided appears to have significant transcription/translation issues — key terms, conditions for Preference Shares P and Q, dividend rates, redemption terms, and sub-part marks are missing or garbled. The answer below applies the correct framework under Ind AS 32 – Financial Instruments: Presentation using the figures available (₹9,200, ₹6,400, ₹1,70,000) and addresses each sub-part to the extent possible.

Applicable Standard: Ind AS 32 – Financial Instruments: Presentation

Under Ind AS 32, the classification of preference shares as financial liability or equity depends on the substance of the contractual arrangement, not its legal form.

(i) Classification Criteria for Preference Shares:

A preference share is classified as a Financial Liability if:
- It carries a mandatory obligation to deliver cash (mandatory dividend or mandatory redemption), OR
- It is mandatorily redeemable on a fixed/determinable future date.

A preference share is classified as Equity if:
- The issuer has discretion over dividend payment, AND
- There is no mandatory redemption obligation.

If the instrument has both a liability component (fixed dividend/redemption) and an equity component (discretionary element), it is a Compound Financial Instrument and must be split (bifurcated).

(ii) Accounting for Preference Q (Compound Instrument — assuming ₹1,70,000 proceeds):

If Preference Q is a compound instrument:
- Liability Component = Present Value of future contractual cash flows (dividends + redemption amount) discounted at market rate for a similar pure-debt instrument.
- Equity Component (Residual) = Total Proceeds − Liability Component.

Using the figure given (₹1,70,000 as total proceeds for Preference Q):
- Liability Component = PV of ₹6,400 annual dividend + PV of redemption value, discounted at applicable market rate.
- Equity Component = ₹1,70,000 − Liability Component.

(Exact split cannot be computed without redemption period, redemption value, and market discount rate — which appear missing from the question.)

(iii) Treatment of Preference Dividend:

- If Preference Q is classified as a Financial Liability: the periodic dividend is treated as Finance Cost (Interest Expense) in the Statement of Profit and Loss, not as an appropriation of profit.
- If classified as Equity: dividend is an appropriation of retained earnings, disclosed in Statement of Changes in Equity.
- This distinction is critical for correct income statement presentation under Ind AS.

(iv) General Disclosure / Presentation Requirements:

Under Ind AS 32, the issuer must:
- Present financial liability and equity components separately in the Balance Sheet.
- Disclose the terms and conditions of each class of preference share.
- Disclose the effective interest rate used for computing the liability component of compound instruments.
- Under Schedule III to the Companies Act, 2013: separately disclose number of shares, rights, restrictions, and details of shareholders holding >5% shares for each class.

Final Answer: Without complete question data (redemption terms, dividend rate, tenor, discount rate), a precise numerical split cannot be computed. The framework above is the correct approach under Ind AS 32 for the May 2026 attempt. If the question is from a specific ICAI Study Material illustration, please provide the complete original question for a precise solution.