Question 1

What is the machine hour rate for the company as a whole for a month when the Artificial Intelligence (AI) was not used?

Accepted Answer

**Answer: (D) ₹34 per hour**

The machine hour rate is computed by dividing the total monthly machine overhead by the **total machine hours** (both with and without AI), since the special machine is used in all cases. The AI hire charges are a separate cost layer added only when AI is used, and are not included in the base machine hour rate.

**Total monthly machine overhead:**
- Depreciation: ₹66,00,000 × 10% ÷ 12 = ₹55,000
- Rent: ₹1,38,000 ÷ 6 = ₹23,000
- Other indirect expenses: ₹4,92,000 ÷ 12 = ₹41,000
- **Total = ₹1,19,000**

**Total machine hours in the month:**
- Without AI: 600 (B) + 900 (E) + 0 (V) = 1,500 hrs
- With AI: 450 (B) + 550 (E) + 1,000 (V) = 2,000 hrs
- **Total = 3,500 hrs**

**Machine Hour Rate = ₹1,19,000 ÷ 3,500 = ₹34 per hour**

This is the rate applicable when AI is **not** used (i.e., only machine overhead is charged, with no AI hire component).

Question 2

XYZ Limited specializes in manufacture of high end office furniture. They use a batch costing system to track production costs. The company received an order for a special production run, Batch A-01, consisting of 20 Ergonomic Executive Chairs. The estimated costs for this specific batch are as follows:

Direct Material               : ₹55,500
Direct Labour:
  Cutting & Shaping           : 300 hours @ ₹50 per hour
  Polishing & Finishing       : 200 hours @ ₹40 per hour
Factory Overheads:
  Cutting & Shaping           : 300 hours @ ₹8 per hour
  Polishing & Finishing       : 200 hours @ ₹8 per hour
Administrative & Selling Overheads : 20% of Works Cost
Profit                              : 25% on Selling Price

You are required to calculate:
(i) Total Cost of the Batch.
(ii) Selling Price …

Accepted Answer

**Statement of Cost and Selling Price — Batch A-01 (20 Ergonomic Executive Chairs)**

**Prime Cost:**
Direct Material amounts to ₹55,500. Direct Labour comprises two departments — Cutting & Shaping (300 hrs @ ₹50 = ₹15,000) and Polishing & Finishing (200 hrs @ ₹40 = ₹8,000), totalling ₹23,000. **Prime Cost = ₹55,500 + ₹23,000 = ₹78,500.**

**Works Cost (Factory Cost):**
Factory Overheads are absorbed on the basis of labour hours — Cutting & Shaping (300 hrs @ ₹8 = ₹2,400) and Polishing & Finishing (200 hrs @ ₹8 = ₹1,600), totalling ₹4,000. **Works Cost = ₹78,500 + ₹4,000 = ₹82,500.**

**Total Cost of the Batch (i):**
Administrative & Selling Overheads = 20% of Works Cost = 20% × ₹82,500 = ₹16,500. **Total Cost of Batch A-01 = ₹82,500 + ₹16,500 = ₹99,000.**

**Selling Price per Chair (ii):**
Profit is 25% on Selling Price, which means Cost = 75% of Selling Price. Therefore, Total Selling Price = ₹99,000 × 100/75 = ₹1,32,000. **Selling Price per Chair = ₹1,32,000 ÷ 20 = ₹6,600.**

Question 3

EXA Ltd. operates a standard costing system for controlling its material costs and has furnished the following information for the month of April, 2026:

Standard Price of raw material                          : ₹30 per kg
Standard Quantity of material required per unit of output: 5 kgs.
Standard labour rate                                     : ₹50 per hour
Standard labour requirement                              : 2.5 hours per unit
Actual Output                                            : 2000 units
Material Price Variance                                  : ₹1,75,000 (Adverse)
Actual Quantity of raw material purchased and consumed   : 14,000 kgs.
Actual wages paid for 6,000 hours                        : ₹3,24,000

You are required to calculate:
(i) Actual price per kg of raw material
…

Accepted Answer

**Solution: Standard Costing — Material and Labour Variances for EXA Ltd. (April 2026)**

**(i) Actual Price per kg of Raw Material**

Using the formula: **Material Price Variance (MPV) = AQ × (SP − AP)**

−1,75,000 = 14,000 × (30 − AP)
→ (30 − AP) = −12.50
→ **AP = ₹42.50 per kg**

**(ii) Material Usage Variance (MUV)**

**MUV = SP × (SQ for Actual Output − AQ)**

Standard Quantity for Actual Output = 2,000 × 5 = 10,000 kgs

MUV = 30 × (10,000 − 14,000) = 30 × (−4,000)

**MUV = ₹1,20,000 (Adverse)**

**(iii) Material Cost Variance (MCV)**

**MCV = Standard Material Cost − Actual Material Cost**

Standard Cost = SP × SQ = 30 × 10,000 = ₹3,00,000
Actual Cost = AP × AQ = 42.50 × 14,000 = ₹5,95,000

MCV = 3,00,000 − 5,95,000

**MCV = ₹2,95,000 (Adverse)**

*(Verification: MCV = MPV + MUV = 1,75,000 (A) + 1,20,000 (A) = ₹2,95,000 (A) ✓)*

**(iv) Labour Rate Variance (LRV)**

Actual Labour Rate (AR) = 3,24,000 ÷ 6,000 = ₹54 per hour

**LRV = AH × (SR − AR)** = 6,000 × (50 − 54) = 6,000 × (−4)

**LRV = ₹24,000 (Adverse)**

**(v) Labour Efficiency Variance (LEV)**

Standard Hours for Actual Output = 2,000 × 2.5 = 5,000 hours

**LEV = SR × (SH − AH)** = 50 × (5,000 − 6,000) = 5…

Question 4

A manufacturing concern reported a net loss of ₹4,20,000 as per the Cost Accounts for the year ended 31st March, 2026. Upon scrutiny of both sets of accounts, the following differences were identified:

| Sr. No. | Particulars | Amount (₹) |
|---|---|---|
| (i) | Profit on sale of investments (Financial Accounts only) | 55,000 |
| (ii) | Factory overheads under-absorbed in Cost Accounts | 70,000 |
| (iii) | Discount allowed to customers (Financial Accounts only) | 30,000 |
| (iv) | Depreciation overcharged in Cost Accounts | 90,000 |
| (v) | Selling overheads over-absorbed in Cost Accounts | 65,000 |
| (vi) | Bad debts written-off (Financial Accounts only) | 1,10,000 |
| (vii) | Over-valuation of closing stock in Cost Accounts | 40,000 |

You are required to:
(i) Prepare a Reconciliation S…

Accepted Answer

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

For the year ended 31st March, 2026

| Particulars | ₹ | ₹ |
|---|---|---|
| **Net Loss as per Cost Accounts** | | **(4,20,000)** |
| **Add:** Items increasing FA profit over CA profit / incomes in FA not in CA: | | |
| Profit on sale of investments (FA only — pure financial income, excluded from CA) | 55,000 | |
| Depreciation overcharged in Cost Accounts (CA charged more → CA profit was lower) | 90,000 | |
| Selling overheads over-absorbed in Cost Accounts (CA charged more than actual → CA profit was lower) | 65,000 | **2,10,000** |
| **Less:** Items decreasing FA profit compared to CA profit / expenses in FA not in CA: | | |
| Factory overheads under-absorbed in Cost Accounts (CA charged less than actual → CA profit was higher) | 70,000 | |
| Discount allowed to customers (FA only — not in CA) | 30,000 | |
| Bad debts written off (FA only — purely financial charge, not in CA) | 1,10,000 | |
| Over-valuation of closing stock in Cost Accounts (higher closing stock in CA inflates CA profit) | 40,000 | **(2,50,000)** |
| **Net Loss as per Financial Accounts** | | **(4,60,000)** |

**Conclusion:** The net result as per Financial Accounts is a **Net Loss of ₹4,60,000**.

**Key logic applied:**
- Items exclusively in Financial Accounts: pure financial incomes (profit on investments) are added; pure financial charges (discount allowed, bad debts) are deducted.
- Over-absorbed overheads in Cost Accounts mean CA c…

Question 5

What is the machine hour rate for the month in respect of the individual jobs — Belting (B), Extrusion (E) and Vulcanizing (V) respectively?

Accepted Answer

**Answer: (A) ₹63.14 (B), ₹59.79 (E) and ₹102 (V) per hour**

The Machine Hour Rate (MHR) is computed by separating two cost pools: (i) general machine overheads spread over **all** machine hours, and (ii) AI system hire charges spread only over hours **where AI is used**.

**Monthly machine overheads:**
- Depreciation: ₹66,00,000 × 10% ÷ 12 = **₹55,000**
- Rent: ₹1,38,000 ÷ 6 = **₹23,000**
- Other indirect expenses: ₹4,92,000 ÷ 12 = **₹41,000**
- **Total machine overhead = ₹1,19,000**

**AI hire charges per month:** ₹4,08,000 ÷ 3 = **₹1,36,000**

Total machine hours = (600+450) + (900+550) + (0+1000) = 1050 + 1450 + 1000 = **3,500 hrs**
Total AI hours = 450 + 550 + 1000 = **2,000 hrs**

**Machine overhead rate** = ₹1,19,000 ÷ 3,500 = **₹34/hr**
**AI cost rate** = ₹1,36,000 ÷ 2,000 = **₹68/hr**

The individual MHR differs per job because the proportion of AI-hours to total hours varies.

- **B:** (1050 × 34 + 450 × 68) ÷ 1050 = ₹66,300 ÷ 1050 = **₹63.14/hr**
- **E:** (1450 × 34 + 550 × 68) ÷ 1450 = ₹86,700 ÷ 1450 = **₹59.79/hr**
- **V:** (1000 × 34 + 1000 × 68) ÷ 1000 = ₹1,02,000 ÷ 1000 = **₹102.00/hr**

Question 6

The cost particulars of cotton yarn manufactured by a textile mill in April 2026 are as follows:

Direct Material:
  - Cotton Bales : 2,000 kgs @ ₹120 per kg
  - Other materials : 600 kgs @ ₹85 per kg
Direct Wages:
  - 75 skilled men @ ₹60 per day for 25 days
  - 40 unskilled men @ ₹30 per day for 25 days
Direct Expenses:
  - Hire charges for Special equipment ₹9,000
  - Power and fuel ₹3,000
Works Overhead                                : 160% of direct wages
Administration overhead related with production: ₹45,000
Selling and distribution expenses             : ₹37,500
Selling Price per kg of cotton yarn           : ₹600

Additional Information:
- 1,500 kgs. of Cotton yarn was produced.
- Waste cotton and chemical scrap realised during the manufacturing process amounted to ₹23,500.
- The…

Accepted Answer

**Cost Statement of Cotton Yarn Manufacturer for April 2026**

**I. Direct Materials:**
Cotton Bales (2,000 kgs × ₹120) = ₹2,40,000; Other Materials (600 kgs × ₹85) = ₹51,000. **Total Direct Materials = ₹2,91,000**

**II. Direct Wages:**
Skilled Men (75 × ₹60 × 25 days) = ₹1,12,500; Unskilled Men (40 × ₹30 × 25 days) = ₹30,000. **Total Direct Wages = ₹1,42,500**

**III. Direct Expenses:**
Hire charges for Special Equipment = ₹9,000; Power and Fuel = ₹3,000. **Total Direct Expenses = ₹12,000**

**(i) Prime Cost = Direct Materials + Direct Wages + Direct Expenses**
= ₹2,91,000 + ₹1,42,500 + ₹12,000 = **₹4,45,500**

**Add: Works Overhead** (160% of Direct Wages = 160% × ₹1,42,500) = **₹2,28,000**

**Gross Works Cost = ₹6,73,500**

**Less: Scrap Realisation** (Waste cotton and chemical scrap) = **₹23,500**

**(ii) Net Works Cost = ₹6,73,500 − ₹23,500 = ₹6,50,000**

**Add: Administration Overhead related to Production = ₹45,000**

**(iii) Cost of Production = ₹6,50,000 + ₹45,000 = ₹6,95,000**

Since there are **no opening or closing stocks** of finished goods, Cost of Goods Sold = Cost of Production = ₹6,95,000.

**Add: Selling and Distribution Expenses = ₹37,500**

**(iv) Cost of Sales = ₹6,95,000 + ₹37,500 = ₹7,32,500**

**(v) Sales = 1,500 kgs × ₹600 = ₹9,00,000**

**Total Profit = Sales − Cost of Sales = ₹9,00,000 − ₹7,32,500 = ₹1,67,500**

**Summary (per kg of output — 1,500 kgs produced):** Cost of Production per kg = ₹463.33; Cost of Sales per kg = ₹488.33; Selling Price pe…

Question 7

PQR Ltd is a manufacturing company that operates at 80% capacity, generating a profit of ₹7,50,000 by selling 36,000 units. The cost details are as follows:

| Particulars | Amount (in ₹) |
|---|---|
| Material Cost per unit | 25 |
| Labour Cost per unit | 15 |
| Semi Variable Cost (Variable Component = ₹10 per unit) | 8,20,000 |
| Contribution per unit | 50 |
| Margin of Safety Sales at the current level of sales | 15,00,000 |
| Fixed Cost upto 80% Capacity (Including depreciation of ₹1,90,000) | 5,90,000 |
| Additional Fixed Cost (Beyond 80% Capacity) | 1,50,000 |

You are required to ascertain:
(i) Break Even Point in units at current Capacity utilisation.
(ii) Total Sales value and Cash Break Even Sales Quantity at current capacity utilization.
(iii) Capacity utilisation & Margin of sa…

Accepted Answer

**Preliminary Working — Key Figures:**

Variable cost per unit = Material (₹25) + Labour (₹15) + Variable component of semi-variable cost (₹10) = **₹50 per unit**

Given Contribution per unit = ₹50, therefore **Selling Price per unit = ₹100**.

Semi-variable cost total = ₹8,20,000; Variable portion = 36,000 × ₹10 = ₹3,60,000; therefore **Fixed component of semi-variable = ₹4,60,000**.

**Total Fixed Costs at 80% capacity** = ₹5,90,000 + ₹4,60,000 = **₹10,50,000** (including depreciation ₹1,90,000).

Verification: Contribution (36,000 × ₹50 = ₹18,00,000) − Fixed Costs (₹10,50,000) = **Profit ₹7,50,000** ✓

P/V Ratio = 50/100 = **50%**. Verification of given MOS: ₹7,50,000 ÷ 50% = ₹15,00,000 ✓

---

**(i) Break Even Point (BEP) in Units at Current Capacity:**

**BEP (Units) = Total Fixed Costs ÷ Contribution per unit**
= ₹10,50,000 ÷ ₹50 = **21,000 units**

---

**(ii) Total Sales Value and Cash BEP Sales Quantity:**

**Total Sales Value** (at 80% capacity) = 36,000 units × ₹100 = **₹36,00,000**

For **Cash BEP**, non-cash items (depreciation) are excluded from fixed costs:
Cash Fixed Costs = ₹10,50,000 − ₹1,90,000 = **₹8,60,000**

**Cash BEP (Units)** = Cash Fixed Costs ÷ Contribution per unit
= ₹8,60,000 ÷ ₹50 = **17,200 units**

---

**(iii) Capacity Utilisation and Margin of Safety if Target Profit = ₹9,37,500:**

First, check if target output falls within or beyond 80% capacity:
100% capacity = 36,000 ÷ 0.80 = **45,000 units**

Required units ignoring additional fixed cost…

Question 8

What is the amount of overheads per month for using the special machine without the aid of Artificial Intelligence (AI) system?

Accepted Answer

**Answer: (C) ₹51,000**

The total overhead expenses for the special machine are computed on a per-month basis and then apportioned between hours used with and without the AI system. Total machine hours in the first month are 3,500 (1,500 without AI + 2,000 with AI). The machine overhead rate works out to ₹34 per hour, and multiplying by 1,500 hours (without AI) gives ₹51,000.

Question 9

Apex Chemicals Ltd. processes a basic chemical raw material in Department I, which yields two joint products, A and B, at the split-off point in the ratio 60:40. The input-output ratio of Department I is 100:90.

Product A can either be sold at split-off or further processed in Department II to produce A-Prime. Department II is used exclusively for Product A, and its input-output ratio is 100:80.

**Production & Cost Data:**

| Particulars | Department I | Department II |
|---|---|---|
| Raw Material Input | 1,20,000 kg @ ₹7/kg | — |
| **Conversion Costs:** | | |
| Other Direct Material | ₹4,50,000 | ₹1,00,000 |
| Direct Labour | ₹4,00,000 | ₹1,40,000 |
| Variable Overhead | ₹6,00,000 | ₹2,60,000 |
| Fixed Overhead | ₹5,50,000 | ₹40,000 |
| Total Conversion Cost | ₹20,00,000 | ₹5,40,000 |
…

Accepted Answer

**Part (i): Joint Cost Apportionment Statement (Sales Value at Split-off Basis)**

**Step 1 — Compute Department I Output:**
Raw material input = 1,20,000 kg. With input-output ratio of 100:90, total output = 1,08,000 kg.
Product A (60%) = 64,800 kg | Product B (40%) = 43,200 kg

**Step 2 — Compute Total Joint Cost (Department I):**
Raw material cost = 1,20,000 kg × ₹7 = ₹8,40,000
Conversion costs = ₹20,00,000
**Total Joint Cost = ₹28,40,000**

**Step 3 — Sales Value at Split-off:**
Product A: 64,800 kg × ₹45 = ₹29,16,000
Product B: 43,200 kg × ₹45 = ₹19,44,000
Total Sales Value = ₹48,60,000

**Joint Cost Apportionment Statement:**

| Particulars | Product A | Product B | Total |
|---|---|---|---|
| Output (kg) | 64,800 | 43,200 | 1,08,000 |
| Sales Value at Split-off (₹) | 29,16,000 | 19,44,000 | 48,60,000 |
| Apportionment Ratio | 60% | 40% | 100% |
| Joint Cost Apportioned (₹) | **17,04,000** | **11,36,000** | **28,40,000** |

Note: Since both products carry the same selling price of ₹45/kg, the sales-value ratio coincides with the physical output ratio (60:40).

---

**Part (ii): Decision — Sell at Split-off OR Process Further into A-Prime**

**Output of A-Prime:** Department II processes 64,800 kg of Product A with input-output ratio 100:80.
Output of A-Prime = 64,800 × 80/100 = **51,840 kg**

**Incremental Analysis Statement:**

| Particulars | ₹ |
|---|---|
| **Incremental Revenue:** | |
| Revenue from A-Prime (51,840 kg × ₹75) | 38,88,000 |
| Less: Selling Expenses (A…

Question 10

Alpha Limited uses Standard Costing System for manufacturing its single product 'STAR'. The following data has been gathered from the cost records of the company to compute various fixed overhead variances for a specific period:

| Particulars | Value |
|---|---|
| Number of budgeted working days | 25 |
| Budgeted man-hours per day | 12,000 |
| Output (budgeted) per man-hour (in units) | 1 |
| Fixed overhead cost as budgeted | ₹6,00,000 |
| Actual number of working days | 28 |
| Actual man-hours per day | 12,500 |
| Actual output per man-hour (in units) | 0.9 |
| Actual fixed overhead incurred | ₹6,24,000 |

You are required to ascertain the following:
(i) Fixed Overhead Expenditure Variance
(ii) Fixed Overhead Volume Variance
(iii) Fixed Overhead Calendar Variance
(iv) Fixed Overhead Cost…

Accepted Answer

**Key Computed Figures (before variance calculations):**

**Budgeted output** = 25 days × 12,000 hrs/day × 1 unit/hr = **3,00,000 units**

**Actual man-hours worked** = 28 days × 12,500 hrs/day = **3,50,000 hours**

**Actual output** = 3,50,000 hrs × 0.9 units/hr = **3,15,000 units**

**Standard fixed overhead rate per unit** = ₹6,00,000 ÷ 3,00,000 units = **₹2 per unit**

**Standard fixed overhead rate per man-hour** = ₹6,00,000 ÷ 3,00,000 hrs = **₹2 per man-hour**

---

**(i) Fixed Overhead Expenditure Variance (Spending Variance)**

= Budgeted Fixed Overhead − Actual Fixed Overhead
= ₹6,00,000 − ₹6,24,000
= **₹24,000 (Adverse)**

The company spent ₹24,000 more than budgeted on fixed overheads.

---

**(ii) Fixed Overhead Volume Variance**

= Standard Fixed Overhead absorbed on Actual Output − Budgeted Fixed Overhead
= (3,15,000 units × ₹2) − ₹6,00,000
= ₹6,30,000 − ₹6,00,000
= **₹30,000 (Favourable)**

Actual output exceeded budgeted output, leading to over-absorption of fixed overhead.

---

**(iii) Fixed Overhead Calendar Variance**

This variance arises due to the difference between actual working days and budgeted working days.

= (Actual Working Days − Budgeted Working Days) × Budgeted Man-hours per Day × Standard Rate per Man-hour
= (28 − 25) × 12,000 hrs × ₹2
= 3 × 12,000 × ₹2
= **₹72,000 (Favourable)**

The company worked 3 extra days compared to budget, which is favourable.

---

**(iv) Fixed Overhead Cost Variance (Total)**

= Standard Fixed Overhead absorbed on …

Question 11

What is the amount of overheads per month for using the special machine with the aid of Artificial Intelligence (AI) system?

Accepted Answer

**Answer: (A) ₹2,04,000**

The overhead for using the special machine **with AI** comprises two components: (1) the proportionate machine overhead for the hours the machine ran with AI, and (2) the full AI hire charges for the month.

**Machine overhead per month:**
- Depreciation: ₹66,00,000 × 10% ÷ 12 = ₹55,000
- Rent: ₹1,38,000 ÷ 6 = ₹23,000
- Other indirect expenses: ₹4,92,000 ÷ 12 = ₹41,000
- **Total machine overhead per month = ₹1,19,000**

**Machine hours during the month:**
- Without AI: 600 + 900 + 0 = 1,500 hours
- With AI: 450 + 550 + 1,000 = 2,000 hours
- **Total = 3,500 hours**

Machine overhead rate = ₹1,19,000 ÷ 3,500 = ₹34 per hour

Machine overhead for hours **with AI** = 2,000 × ₹34 = ₹68,000

AI hire charges per month = ₹4,08,000 ÷ 3 = ₹1,36,000

**Total overhead for machine with AI = ₹68,000 + ₹1,36,000 = ₹2,04,000**

Question 12

ZED Ltd. manufactures two categories of products, Omega and Theta. These products are sold through two primary distribution channels, Online Portals and Retail Stores. In the current financial year, Omega performed exceptionally well online due to a viral trend, while Theta saw a surge in retail stores.

The following information is available for the year 2025-26:

| Product | Channel | Budgeted Sales | Actual Sales | Selling Price per unit (For Budgeted and Actual Sales) |
|---|---|---|---|---|
| Omega | Online | 1000 units | 1200 units | ₹15,000 |
| Omega | Retail | 800 units | 700 units | ₹18,000 |
| Theta | Online | 500 units | 450 units | ₹40,000 |
| Theta | Retail | 400 units | 500 units | ₹45,000 |

Market research indicates that Omega series is facing stiff competition offline, the…

Accepted Answer

**Part (ii): Statement Showing Budgeted and Actual Sales for 2025-26**

The selling price per unit is the same for both budgeted and actual sales in each product-channel combination. Sales value is calculated as Units × Selling Price per unit.

| Product | Channel | Budgeted Units | Budgeted Sales (₹) | Actual Units | Actual Sales (₹) |
|---------|---------|:--------------:|-------------------:|:------------:|------------------:|
| Omega | Online | 1,000 | 1,50,00,000 | 1,200 | 1,80,00,000 |
| Omega | Retail | 800 | 1,44,00,000 | 700 | 1,26,00,000 |
| Theta | Online | 500 | 2,00,00,000 | 450 | 1,80,00,000 |
| Theta | Retail | 400 | 1,80,00,000 | 500 | 2,25,00,000 |
| **Total** | | **2,700** | **6,74,00,000** | **2,850** | **7,11,00,000** |

Overall, actual sales exceeded budgeted sales by ₹37,00,000. Omega Online and Theta Retail outperformed their budgets (driven by the viral trend and luxury status respectively), while Omega Retail and Theta Online fell short — consistent with the scenario described.

---

**Part (i): Sales Budget for 2026-27**

**Step 1 — Revised Selling Prices for 2026-27:**

Omega faces competition offline, so prices are **reduced by 10% across both channels**:
- Omega Online: ₹15,000 × 90% = **₹13,500**
- Omega Retail: ₹18,000 × 90% = **₹16,200**

Theta has gained luxury status, so prices are **increased by ₹5,000 per unit**:
- Theta Online: ₹40,000 + ₹5,000 = **₹45,000**
- Theta Retail: ₹45,000 + ₹5,000 = **₹50,000**

**Step 2 — Base Units (Original 20…

Question 13

The labour turnover rates for the quarter ended 31st March, 2026 are computed as 12%, 6% and 4% under Flux method, Replacement method and Separation method respectively. The number of workers replaced during that quarter is 54.

You are required to ascertain —
(i) Average number of workers on roll for the quarter.
(ii) Number of workers recruited and joined.
(iii) Number of workers left and discharged.

Accepted Answer

**Labour Turnover — Determination of Key Figures**

The three methods of measuring labour turnover use the following formulae:

**Replacement Method** = (Number of Replacements / Average Workers on Roll) × 100

**Separation Method** = (Number of Separations / Average Workers on Roll) × 100

**Flux Method** = (Number of Separations + Number of Accessions / Average Workers on Roll) × 100

Let N = Average number of workers on roll, S = Number of workers left/discharged (Separations), A = Number of workers recruited and joined (Accessions). Workers replaced = 54.

**(i) Average Number of Workers on Roll:**

Using the **Replacement Method**:
6% = (54 / N) × 100
N = 54 / 0.06 = **900 workers**

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

First, using the **Separation Method**:
4% = (S / 900) × 100
S = 36 workers left/discharged

Then, using the **Flux Method**:
12% = ((S + A) / 900) × 100
S + A = 108
A = 108 − 36 = **72 workers recruited and joined**

**(iii) Number of Workers Left and Discharged:**
As computed above using the Separation Method, **S = 36 workers** left and were discharged during the quarter.

Question 14

What is the machine hour rate for the company as a whole for a month when the Artificial Intelligence (AI) system was used?

Accepted Answer

**Answer: (B) ₹102 per hour**

The Machine Hour Rate when the AI system is used is computed by splitting the machine overhead (spread over **all** machine hours) and the AI hire charges (spread over only the hours **with** AI use).

**Machine overhead per month:**
- Depreciation: ₹66,00,000 × 10% ÷ 12 = ₹55,000
- Rent: ₹1,38,000 ÷ 6 = ₹23,000
- Other indirect expenses: ₹4,92,000 ÷ 12 = ₹41,000
- **Total = ₹1,19,000 per month**

**Total machine hours (all jobs, both modes):** Without AI: 600 + 900 = 1,500 hrs; With AI: 450 + 550 + 1,000 = 2,000 hrs; **Grand total = 3,500 hrs**

Machine cost per hour = ₹1,19,000 ÷ 3,500 = **₹34 per hour**

**AI hire charges per month:** ₹4,08,000 ÷ 3 = ₹1,36,000; spread over 2,000 AI hours = **₹68 per hour**

**Machine Hour Rate with AI = ₹34 + ₹68 = ₹102 per hour**, confirming option (B).

Question 15

XYZ Private Limited manufactures two products, Mini and Maxi, utilising the same production methods. The company operates under the Absorption Costing System. The details of the products for financial year 2025-26 are provided below:

| Particulars | Mini | Maxi |
|---|---|---|
| Number of units produced | 8000 units | 10000 units |
| Number of units sold | 6400 units | 8000 units |
| Direct Material Cost per unit | ₹250 | ₹400 |
| Direct Labour Hours per unit | 4 Hours | 5 Hours |
| Selling price per unit sold during year | ₹950 | ₹1180 |

Using the traditional method, all the Production overheads were of ₹54,00,000, which were directly distributed on the basis of units produced. Direct labour hour rate is ₹50 per hour.

Further, the Board of Directors is considering transitioning to an A…

Accepted Answer

**Part (i): Total Sales and Total Profit under Absorption Costing System**

Under the traditional Absorption Costing method, production overheads of ₹54,00,000 are distributed on the basis of units produced.

Total units produced = 8,000 (Mini) + 10,000 (Maxi) = **18,000 units**
**Overhead per unit** = ₹54,00,000 ÷ 18,000 = **₹300 per unit**

**Cost per unit:**

| Particulars | Mini (₹) | Maxi (₹) |
|---|---|---|
| Direct Material | 250 | 400 |
| Direct Labour (4 hrs × ₹50 / 5 hrs × ₹50) | 200 | 250 |
| Production Overhead (per unit) | 300 | 300 |
| **Total Cost per unit** | **750** | **950** |

**Statement of Sales and Profit — Absorption Costing:**

| Particulars | Mini (₹) | Maxi (₹) |
|---|---|---|
| Total Sales (6,400 × ₹950 / 8,000 × ₹1,180) | 60,80,000 | 94,40,000 |
| Less: Cost of Sales (6,400 × ₹750 / 8,000 × ₹950) | 48,00,000 | 76,00,000 |
| **Total Profit** | **12,80,000** | **18,40,000** |

---

**Part (ii): Total Sales and Total Profit under Activity-Based Costing (ABC) System**

Under ABC, overheads are traced to products using cost drivers.

**Step 1 — Compute Cost Driver Rates:**

| Activity | Total Cost (₹) | Total Driver Units | Rate |
|---|---|---|---|
| Set-up costs | 9,00,000 | 300 setups (100+200) | ₹3,000 per setup |
| Machine Running costs | 18,00,000 | 1,800 runs (750+1,050) | ₹1,000 per run |
| Inspection costs | 27,00,000 | 270 inspections (60+210) | ₹10,000 per inspection |

**Step 2 — Overhead Allocated to each Product:**

| Activity | Mini (₹) | …

Question 16

The following information has been furnished by the management accountant of CMC Limited:

| Particulars | Value |
|---|---|
| Margin of Safety | 5600 units |
| Break even sales | 2400 units |
| Margin of Safety | ₹9,80,000 |
| Total Cost | ₹11,94,200 |

You are required to calculate:
(i) Profit
(ii) Profit Volume (P/V) Ratio
(iii) Break even sales value
(iv) Fixed Cost

Accepted Answer

**Given Data:**
Margin of Safety (units) = 5,600 units; Break Even Sales (units) = 2,400 units; Margin of Safety (₹) = ₹9,80,000; Total Cost = ₹11,94,200.

**Step 1 — Derive Selling Price per unit:**
Total Sales units = BES units + MOS units = 2,400 + 5,600 = **8,000 units**.
Selling Price per unit = MOS (₹) ÷ MOS (units) = ₹9,80,000 ÷ 5,600 = **₹175 per unit**.
Total Sales Value = 8,000 × ₹175 = **₹14,00,000**.

**(i) Profit:**
Profit = Total Sales – Total Cost = ₹14,00,000 – ₹11,94,200 = **₹2,05,800**.

**(ii) P/V Ratio:**
Using the relationship: **Profit = Margin of Safety × P/V Ratio**,
P/V Ratio = Profit ÷ MOS (₹) = ₹2,05,800 ÷ ₹9,80,000 = **21%**.

**(iii) Break Even Sales Value:**
BES Value = BES Units × Selling Price per unit = 2,400 × ₹175 = **₹4,20,000**.

**(iv) Fixed Cost:**
Using the relationship: **BES Value = Fixed Cost ÷ P/V Ratio**,
Fixed Cost = BES Value × P/V Ratio = ₹4,20,000 × 21% = **₹88,200**.

**Verification:** Contribution = ₹14,00,000 × 21% = ₹2,94,000. Profit = ₹2,94,000 – ₹88,200 = ₹2,05,800 ✓

Question 17

AMC Travels is running 4 luxury buses between two cities which are 60 kms. apart. The seating capacity of each bus is 50 passengers. The actual passengers carried were 70% of the seating capacity. All the four buses run for 30 days for the month. Each bus made one round trip per day. During the month of April 2026, AMC incurred total cost of ₹25,05,000. What is the cost per passenger kilometer for the month of April 2026?

Accepted Answer

**Answer: (D) ₹4.97**

The total passenger kilometers are computed by multiplying the number of buses, actual passengers per bus (70% of 50 = 35), round-trip distance (60 × 2 = 120 km), and number of days (30). This gives 4 × 35 × 120 × 30 = **5,04,000 passenger kilometers**. Dividing total cost of ₹25,05,000 by 5,04,000 yields **₹4.97 per passenger kilometer**.

Question 18

Which system of inventory management is known as 'Demand Pull' or 'Pull through' system of production? Explain. Also, specify the two principles on which this system is based.

Accepted Answer

**Just-in-Time (JIT) Inventory System** is known as the **'Demand Pull'** or **'Pull Through'** system of production.

**Meaning and Concept:**

The Just-in-Time (JIT) system is an inventory management philosophy that advocates producing or procuring goods **only when there is an actual demand**, and only in the **quantity needed**, at the **exact time it is needed**. It was originally developed by **Toyota Motor Corporation** in Japan and is widely used in lean manufacturing environments.

Under this system, production is triggered by actual customer demand rather than forecasts or pre-planned schedules. Materials and components are 'pulled through' the production process based on real-time demand signals — hence the name **Demand Pull or Pull Through system**. This is in direct contrast to the traditional **'Push'** system, where goods are produced based on sales forecasts and pushed through the supply chain irrespective of actual demand.

The primary objective of JIT is the **elimination of waste (muda)** in all forms — waste of time, materials, storage space, and effort. Under JIT, **inventory is treated as a liability** (not an asset) because holding inventory locks up capital, incurs storage costs, and can hide inefficiencies in the production process.

**Two Principles on Which JIT Is Based:**

**1. Elimination of Waste:**
JIT aims to eliminate all forms of waste from the production process. Waste includes excess inventory, overproduction, waiting time, unnecessary tra…

Question 19

Distinguish between cost control and cost reduction.

Accepted Answer

**Distinction between Cost Control and Cost Reduction**

**Cost Control** is the process of regulating the costs of operating an undertaking. It involves setting predetermined targets (standards or budgets), measuring actual performance, comparing it with the targets, and taking corrective action when deviations arise. Cost control is essentially a **preventive function** — it aims to keep costs within the established limits and does not necessarily result in a reduction of costs.

**Cost Reduction**, on the other hand, is the achievement of **real and permanent reduction in the unit cost** of goods manufactured or services rendered without impairing their suitability for the use intended. It is a **corrective function** that challenges the standards themselves and seeks to improve upon them.

The key distinctions are as follows:

**1. Nature of Function:** Cost control is preventive in nature — it seeks to prevent costs from exceeding the set standards. Cost reduction is corrective — it questions the validity of existing standards and attempts to lower them permanently.

**2. Standards / Targets:** In cost control, predetermined standards, budgets, or norms are fixed, and actual costs are kept within those limits. In cost reduction, there are no predetermined standards — the objective is to continuously find ways to reduce costs below current levels.

**3. Permanency:** Cost control is a **temporary** or ongoing regulatory measure. Cost reduction implies a **permanent and ge…

Question 20

A factory employing 3000 workers faces issues of proxy attendance and payroll errors under the manual system. The Plant Head has recommended using an automated method, the Bio-Metric Attendance system. Discuss briefly the features of this Bio-Metric Attendance System.

Accepted Answer

**Features of Bio-Metric Attendance System**

A **Bio-Metric Attendance System** uses unique physiological or behavioural characteristics of individuals to authenticate identity and record attendance. The key features relevant to a factory environment are as follows:

**1. Unique Biological Identification:** The system captures and stores unique biological traits such as **fingerprints, iris patterns, facial geometry, hand geometry, or voice recognition**. Since these traits cannot be replicated or transferred, proxy attendance is completely eliminated.

**2. Automatic Time and Attendance Recording:** The system automatically records the **exact time of entry and exit** of each worker. This eliminates manual entries and the associated errors, ensuring accurate computation of working hours, overtime, and late arrivals.

**3. Integration with Payroll System:** Bio-metric systems can be **seamlessly integrated with the payroll processing module**. Attendance data flows directly into the payroll system, reducing manual intervention and payroll errors arising from incorrect or manipulated attendance records.

**4. Real-Time Data Availability:** Attendance data is captured and available **in real time**. The Plant Head and HR department can access current attendance status, enabling prompt action on absenteeism or scheduling issues.

**5. Centralised Database Management:** All employee bio-metric data and attendance records are stored in a **centralised, secured database**. This fa…

Question 21

OR (in lieu of the above 6(c)):

Explain the meaning of spoiled work and defective work. Discuss the treatment of defective work under the following circumstances:
(i) Where a percentage of defective work is allowed in a particular batch, as it cannot be avoided.
(ii) Where the defect is due to bad workmanship.
(iii) Where the defect is due to the Inspection Department wrongly accepting incoming material of poor quality.

Accepted Answer

**Spoiled Work** refers to work or production that is so damaged or defective during the manufacturing process that it cannot be rectified or brought back to the desired standard. Such work is disposed of as scrap or waste, and the sale proceeds (if any) are credited either to the job or to the overhead account.

**Defective Work** refers to work or production that does not meet the required quality standards but which can be rectified or reworked by incurring additional costs (material, labour, or overheads). After rectification, defective units can be brought up to the standard specification and sold as good units.

**Key Distinction:** The fundamental difference is that spoiled work is beyond economic repair, whereas defective work can be economically rectified.

**Treatment of Defective Work under the given circumstances:**

**(i) Where a percentage of defective work is allowed in a particular batch, as it cannot be avoided:**
When defective production within a normal or expected percentage is inherent to the process and cannot be avoided, the cost of rectification (additional material, labour, and overheads incurred to bring the defective units to standard) is treated as **normal cost of production**. The rectification cost is charged to the **job or batch concerned** by including it in the total cost of the batch. This means the cost per unit of good output increases to absorb the rectification expense.

**(ii) Where the defect is due to bad workmanship:**
When defectiv…

Question 22

The following information has been extracted from the records of XYZ Ltd. for two consecutive years:

| Particulars | Year 1 | Year 2 |
|---|---|---|
| Sales (₹) | 1,80,00,000 | 2,40,00,000 |
| Profit (₹) | 24,00,000 | 42,00,000 |

What is the Break-even Sales Value?

Accepted Answer

**Answer: (A) ₹1,00,00,000**

Using the **Marginal Costing approach**, the P/V Ratio is calculated from the change in profit relative to change in sales between the two years. With a P/V Ratio of **30%** and Fixed Costs of **₹30,00,000**, the Break-even Sales = Fixed Costs ÷ P/V Ratio = ₹30,00,000 ÷ 0.30 = **₹1,00,00,000**.

Question 23

The management of Gamma Limited has provided the following information for Product X:

Maximum Stock Level: 1125 units
Re-Ordering Level (ROL): 750 units
Minimum rate of consumption per day: 25 units
Minimum lead time: 5 days

What is the Re-Order Quantity (ROQ)?

Accepted Answer

**Answer: (C) 500 units**

Using the formula: **Maximum Stock Level = Re-Ordering Level + Re-Order Quantity − (Minimum Consumption × Minimum Lead Time)**, substituting the given values: 1125 = 750 + ROQ − (25 × 5), which gives ROQ = 1125 − 750 + 125 = **500 units**.

Question 24

The following information pertains to a worker G:

Basic Pay: ₹25,000 per month
Dearness Allowance: ₹5,000 per month
Other Allowances: ₹2,000 per month

The number of working days in a year is 325 of 8 hours each. G has availed 25 days as holidays on full pay in a year.

What is the wage rate per hour of worker G?

Accepted Answer

**Answer: (B) ₹160**

The annual wages of worker G are computed by summing Basic Pay, DA, and Other Allowances (₹32,000/month × 12 = ₹3,84,000). Since G availed 25 days of paid holidays, the actual hours worked = (325 − 25) days × 8 hours = 2,400 hours. Dividing annual wages by actual hours worked gives ₹3,84,000 ÷ 2,400 = **₹160 per hour**.

Question 25

The following information pertains to Job Number 501 undertaken by PCM Limited:

Direct Materials: ₹60,000
Direct Wages: ₹50,000
Factory Overheads: 60% of Direct Wages
Administrative Overheads: 25% of Factory Cost
Profit percentage on total cost: 25%

What is the selling price of Job Number 501?

Accepted Answer

**Answer: (C) ₹2,18,750**

The selling price is calculated by building up the cost statement for Job No. 501. Factory Cost = Direct Materials (₹60,000) + Direct Wages (₹50,000) + Factory Overheads (₹30,000) = **₹1,40,000**. Adding Administrative Overheads at 25% of Factory Cost (₹35,000) gives **Total Cost = ₹1,75,000**. A profit of 25% on total cost = ₹43,750, so **Selling Price = ₹1,75,000 + ₹43,750 = ₹2,18,750**.

Question 26

What is the transfer price of pencils (including inter process profit) transferred to Finished Stock account from the Casing & Shaping Process?

Accepted Answer

**Answer: (C) ₹60,00,000**

The Casing & Shaping Process account is prepared by aggregating all inputs, deducting closing stock to arrive at cost of output, and then grossing up for the 10% profit on transfer price.

Total inputs to Casing & Shaping Process = Opening Stock (₹7,75,000) + Transfer from Core Manufacturing Process (₹25,00,000) + Direct Materials (₹8,95,000) + Direct Wages (₹9,50,000) + Direct Expenses (₹3,80,000) + Factory Overheads (₹5,00,000) = **₹60,00,000**.

Deducting Closing Stock of ₹6,00,000 gives **Cost of Output = ₹54,00,000**.

Since the transfer is made at **10% profit on transfer price**, cost represents 90% of the transfer price. Therefore, **Transfer Price = ₹54,00,000 ÷ 0.90 = ₹60,00,000**.

Question 27

What is the amount of total profit realized by Graphite Core Industries on sale of finished stock of pencils which is transferred to the Costing Profit and Loss Account?

Accepted Answer

**Answer: (D) ₹25,32,500**

**Step 1 — Core Manufacturing Process:**
Cost of output = Opening Stock + All costs − Closing Stock = 5,10,000 + 4,90,000 + 3,60,000 + 3,40,000 + 3,00,000 − 2,50,000 = **₹17,50,000**
Transfer Price (30% profit on TP → Cost = 70% of TP): TP = 17,50,000 ÷ 0.70 = **₹25,00,000**; Profit = ₹7,50,000

**Step 2 — Casing & Shaping Process:**
Total debits = 7,75,000 + 25,00,000 + 8,95,000 + 9,50,000 + 3,80,000 + 5,00,000 = ₹60,00,000
Less Closing WIP (at prime cost) = ₹6,00,000 → Cost of output = **₹54,00,000**
Transfer Price (10% profit on TP → Cost = 90% of TP): TP = 54,00,000 ÷ 0.90 = **₹60,00,000**; Profit = ₹6,00,000

**Step 3 — Finished Stock Account (at Casing TP):**
Opening: 14,00,000 + Receipts: 60,00,000 = ₹74,00,000; Less Closing: 10,00,000 → **COGS at TP = ₹64,00,000**

**Step 4 — Total Apparent Profit (including all inter-process profits):**
Core profit: 7,50,000 + Casing profit: 6,00,000 + Sales profit (75,00,000 − 64,00,000): 11,00,000 = **₹24,50,000**

**Step 5 — Add: Unrealized Profit in Opening Stocks (already realized this period):**
Casing & Shaping WIP: 75,000 + Finished Stock: 3,20,000 = **₹3,95,000**

**Step 6 — Less: Unrealized Profit in Closing Stocks:**

*Closing WIP of Casing & Shaping (₹6,00,000 at prime cost):*
Total inter-process profit in total prime costs (₹55,00,000) = Core profit (₹7,50,000) + Opening stock profit (₹75,000) = ₹8,25,000
Profit % = 8,25,000 ÷ 55,00,000 = 15%
Unrealized profit = 6,00,000 × 15% = **₹90,000**

*…

Question 28

What is the Profit of the Core Manufacturing Process?

Accepted Answer

**Answer: (B) ₹7,50,000**

The Core Manufacturing Process account is prepared by summing all input costs (opening stock + direct materials + direct wages + direct expenses + factory overheads), deducting the closing stock to arrive at the **cost of output transferred**. Since the transfer is made at **30% profit on transfer price**, the cost represents 70% of the transfer price. Dividing cost of output by 0.70 gives the transfer price, and the difference is the process profit.

Cost of Output = (5,10,000 + 4,90,000 + 3,60,000 + 3,40,000 + 3,00,000) − 2,50,000 = **₹17,50,000**

Transfer Price = 17,50,000 ÷ 0.70 = **₹25,00,000**

**Profit = ₹25,00,000 − ₹17,50,000 = ₹7,50,000**

Question 29

What is the Prime Cost (including Inter Process Profit) of Casing & Shaping Process?

Accepted Answer

**Answer: (D) ₹55,00,000**

The **Prime Cost (including Inter Process Profit)** of the Casing & Shaping Process comprises all direct debits to the process account (i.e., Direct Materials including transferred-in goods, Direct Wages, and Direct Expenses) but excludes Factory Overheads.

**Step 1 — Determine Transfer Price from Core Manufacturing Process:**

Total cost in Core Manufacturing Process = Opening Stock + Direct Materials + Direct Wages + Direct Expenses + Factory Overheads − Closing Stock = ₹5,10,000 + ₹4,90,000 + ₹3,60,000 + ₹3,40,000 + ₹3,00,000 − ₹2,50,000 = **₹17,50,000**

Since transfer is at **30% profit on transfer price**: Cost = 70% of Transfer Price → Transfer Price = ₹17,50,000 ÷ 0.70 = **₹25,00,000**

**Step 2 — Compute Prime Cost of Casing & Shaping Process:**

Prime Cost includes opening stock (b/f WIP) + transferred-in materials at transfer price + own direct materials, wages, and expenses:

| Particulars | ₹ |
|---|---|
| Opening Stock (Casing & Shaping) | 7,75,000 |
| Transfer from Core Manufacturing Process | 25,00,000 |
| Direct Materials (Casing & Shaping) | 8,95,000 |
| Direct Wages (Casing & Shaping) | 9,50,000 |
| Direct Expenses (Casing & Shaping) | 3,80,000 |
| **Prime Cost (including Inter Process Profit)** | **55,00,000** |

Factory Overheads of ₹5,00,000 are excluded as they are not part of prime cost.

**Prime Cost (including Inter Process Profit) = ₹55,00,000**

Question 30

What is the amount of profit included in the closing stock of Casing & Shaping Process?

Accepted Answer

**Answer: (A) ₹90,000**

The closing stock of the Casing & Shaping Process is valued at **prime cost**. The inter-process profit embedded in that closing stock arises solely from the Core Manufacturing Process transfer (which is made at 30% profit on transfer price). To find profit in closing stock, we apply the profit-to-prime-cost ratio to the closing stock value.

**Step 1 — Transfer price from Core Manufacturing Process:**
Actual cost of Core Process = Opening Stock + Direct Materials + Wages + Direct Expenses + Factory OH = ₹5,10,000 + ₹4,90,000 + ₹3,60,000 + ₹3,40,000 + ₹3,00,000 − ₹2,50,000 (Closing Stock) = ₹17,50,000. Since transfer is at 30% profit on transfer price, cost = 70% of transfer price. Transfer price = ₹17,50,000 / 0.70 = **₹25,00,000**. Profit in transfer = ₹25,00,000 − ₹17,50,000 = ₹7,50,000.

**Step 2 — Total prime cost pool of Casing & Shaping:**
Opening Stock (at prime cost) + Core transfer + Direct Materials + Direct Wages + Direct Expenses = ₹7,75,000 + ₹25,00,000 + ₹8,95,000 + ₹9,50,000 + ₹3,80,000 = **₹55,00,000** (Factory Overheads excluded as prime cost = DM + DW + DE).

**Step 3 — Total profit in prime cost pool:**
Profit in opening stock (given) + Profit from Core transfer this month = ₹75,000 + ₹7,50,000 = **₹8,25,000**.

**Step 4 — Profit ratio:**
₹8,25,000 / ₹55,00,000 = **15%**.

**Step 5 — Profit in closing stock:**
₹6,00,000 × 15% = **₹90,000**.

The profit included in the closing stock of the Casing & Shaping Process is **₹90,000**.

CA Inter Cost & Mgmt

Drill 5 questions from this paper — instant grading

Worked Solution

Write it like this

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