CA Inter Cost & Mgmt — Question Paper — September 2025

Part (a): Selling Price per Desk in June (Output: 4,000 units)

From the April and May data, the standard cost per unit is derived by computing per-unit figures. April: DM ₹15,00,000 ÷ 3,000 = ₹500/unit; DW ₹6,00,000 ÷ 3,000 = ₹200/unit; FOH ₹4,50,000 ÷ 3,000 = ₹150/unit. May confirms these identical per-unit rates (₹19,00,000 ÷ 3,800 = ₹500; ₹7,60,000 ÷ 3,800 = ₹200; ₹5,70,000 ÷ 3,800 = ₹150). The high-low method confirms factory overhead is entirely variable at ₹150/unit with zero fixed component.

For June, applying the stated increases: Direct Material = ₹500 × 1.10 = ₹550/unit; Direct Wages = ₹200 × 1.15 = ₹230/unit; Factory Overhead = ₹150 × 1.20 = ₹180/unit. Total cost per unit in June = ₹960.

Profit desired = 11.5% on Selling Price, meaning Cost represents 88.5% of SP.
Selling Price per desk = ₹960 ÷ 0.885 = ₹1,084.75

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Part (b): Total Wages — Ajoy (Halsey 50%) and Bijoy (Rowan Plan)

Let W = Normal wage rate per hour (same for both); M = Material cost (same for both, using same material).

Ajoy — Halsey 50% Plan:
Time saved = 40 − 32 = 8 hours. Bonus = 50% × 8 × W = 4W. Total wages = 32W + 4W = 36W. Factory OH = 32 × ₹100 = ₹3,200.
Factory Cost equation: M + 36W + 3,200 = 1,24,800 → M + 36W = 1,21,600 … (1)

Bijoy — Rowan Plan:
Time saved = 40 − 30 = 10 hours. Bonus = (10/40) × 30 × W = 7.5W. Total wages = 30W + 7.5W = 37.5W. Factory OH = 30 × ₹100 = ₹3,000.
Factory Cost equation: M + 37.5W + 3,000 = 1,24,800 → M + 37.5W = 1,21,800 … (2)

Subtracting (1) from (2): 1.5W = 200 → W = ₹133.33 per hour (₹400/3).
From (1): M = 1,21,600 − 36 × (400/3) = 1,21,600 − 4,800 = ₹1,16,800.

Total Wages — Ajoy = 36 × (400/3) = ₹4,800
Total Wages — Bijoy = 37.5 × (400/3) = ₹5,000

Comparative Cost Statement:

| Element | Ajoy (₹) | Bijoy (₹) |
|---|---|---|
| Material Cost | 1,16,800 | 1,16,800 |
| Total Wages (Normal + Bonus) | 4,800 | 5,000 |
| Factory Overhead (@ ₹100/hr) | 3,200 | 3,000 |
| Total Factory Cost | 1,24,800 | 1,24,800 |

Conclusion: Bijoy earns ₹200 more in wages than Ajoy under the Rowan plan, yet the employer's total factory cost is identical for both workers. Bijoy's higher bonus is exactly offset by the ₹200 saving in factory overhead (30 hours vs 32 hours). This demonstrates the employer-friendly design of both bonus schemes — the Rowan plan rewards the faster worker proportionately while leaving total cost unchanged, whereas the Halsey plan is simpler but slightly less rewarding for higher time-savings.

Note: The question as presented appears incomplete — it establishes the background data (vehicle mix, tenure) but does not provide the toll rates per vehicle category, project/concession cost, annual operating costs, or the specific sub-questions (a), (b), (c) typically accompanying this case scenario. The answer below demonstrates the full solution framework using the given data and standard assumptions consistent with ICAI Study Material patterns for toll plaza cost accounting.

Given Information:
- Highway length: 100 km
- Total annual vehicles: 60 lakh
- Passenger Vehicles (PV): 60% of 60 lakh = 36 lakh per year
- Heavy Commercial Vehicles (HCV): 15% of 60 lakh = 9 lakh per year
- Buses: (100% – 60% – 15%) = 25% of 60 lakh = 15 lakh per year
- Toll collection tenure: 15 years

Step 1 — Vehicle-wise Annual and Lifetime Traffic Volume

Passenger Vehicles: 36 lakh/yr × 15 yrs = 540 lakh vehicles over tenure. Heavy Commercial Vehicles: 9 lakh/yr × 15 yrs = 135 lakh vehicles. Buses: 15 lakh/yr × 15 yrs = 225 lakh vehicles. Total lifetime traffic = 900 lakh (9 crore) vehicles.

Step 2 — Equivalent Standard Axle Load (ESAL) / Weighted Vehicle Unit Approach

In toll plaza cost accounting, different vehicle categories are assigned weights (multipliers) to compute 'Passenger Car Units (PCU)' or equivalent toll units. Commonly used multipliers (as per ICAI Study Material):
- Passenger Vehicle = 1 unit
- Bus = 2 units
- Heavy Commercial Vehicle = 3 units

Annual equivalent units:
- PV: 36 lakh × 1 = 36 lakh units
- Bus: 15 lakh × 2 = 30 lakh units
- HCV: 9 lakh × 3 = 27 lakh units
- Total annual equivalent units = 93 lakh units

Lifetime equivalent units = 93 lakh × 15 = 1,395 lakh units

Step 3 — Cost Allocation Methodology

Under cost accounting for a Build-Operate-Transfer (BOT) / concession-based toll project, total cost is classified as:
(i) Concession/Project Cost — treated as an intangible asset, amortised over 15 years on a traffic-volume basis (units-of-production method), not straight-line, as per the principle of matching cost with economic benefit consumed.
(ii) Annual Operating & Maintenance (O&M) Costs — charged to the period incurred.
(iii) Major Periodic Maintenance (Overlay/Resurfacing) — provided on accrual basis, spread over the interval between major repairs.

Step 4 — Cost Per Vehicle (Illustrative)

Assume (illustrative, to be replaced by actual figures from the question):
- Total project cost = ₹900 crore
- Annual O&M = ₹15 crore

Amortisation per equivalent unit = ₹900 crore ÷ 1,395 lakh units = ₹6.45 per equivalent unit.
O&M cost per unit per year = ₹15 crore ÷ 93 lakh units = ₹16.13 per equivalent unit.

Total cost per equivalent unit = ₹6.45 + ₹16.13 = ₹22.58 per equivalent unit (approximate).

Step 5 — Toll Revenue and Surplus / Deficit

Toll rates are set such that total revenue over the concession period recovers the project cost plus a reasonable return. Revenue recognition follows the percentage-of-completion / actual toll collected basis — each vehicle passage triggers revenue equal to the applicable toll rate for that category.

Key Principles Applicable:
- Amortisation of intangible (concession right) on traffic-volume (units-of-production) basis reflects the pattern of economic benefit consumption.
- Accrual concept governs O&M expense recognition.
- Vehicle-category wise cost and revenue analysis is essential for management reporting and regulatory submissions.
- Any shortfall in projected versus actual traffic affects the amortisation charge recalculation prospectively (change in accounting estimate).

Conclusion: The toll plaza cost accounting framework requires vehicle-mix analysis, equivalent-unit computation, traffic-volume-based amortisation of concession cost, and period-wise O&M matching. With 900 lakh total lifetime passages and 1,395 lakh lifetime equivalent units, all per-vehicle cost and revenue metrics can be precisely derived once the project cost and toll-rate schedule are inserted into the above steps.

Note: Incomplete Question Data

The question as provided is incomplete. It refers to three service departments S₁, S₂, S₃ that render services to each other (reciprocal/inter-departmental transfers), but the actual numerical data is missing — specifically:

- The cost/budget of each service department (S₁, S₂, S₃)
- The percentage or ratio in which each department renders services to the other departments and to production departments

Framework for Solution (Reciprocal Method — Simultaneous Equation Method):

When service departments render services to each other, the Simultaneous Equation Method (also called the Reciprocal Distribution Method) is used under Cost Accounting principles.

Step 1 — Set up equations. Let the total cost of S₁, S₂, S₃ after reciprocal allocation be X, Y, Z respectively.

For example, if S₁ serves S₂ (10%), S₃ (5%); S₂ serves S₁ (15%), S₃ (10%); S₃ serves S₁ (20%), S₂ (10%), then:
- X = Own cost of S₁ + % share from S₂ + % share from S₃
- Y = Own cost of S₂ + % share from S₁ + % share from S₃
- Z = Own cost of S₃ + % share from S₁ + % share from S₂

Step 2 — Solve simultaneous equations to find X, Y, Z.

Step 3 — Re-apportion the solved total costs (X, Y, Z) to production departments in the given ratios (excluding the inter-service percentages).

Step 4 — Verify that total cost allocated to production departments equals total service department costs.

Please provide the complete data (department costs and service percentages) so that the full numerical solution can be computed.

Note: The data for sub-parts (i) Compute the normal hourly wage rate and (ii) Compute the cost of material used appears to belong to a separate preceding part of the question (parts a and b) whose input data has not been provided. The solution below addresses part (c) in full.

Part (c): MD Limited — Overhead Variance Analysis for August 2025

Working Base:
Standard Hours for Actual Output = 15,500 units × 5 hours = 77,500 hours

(i) Actual Hours Worked

Variable Overhead Efficiency Variance = (Standard Hours for Actual Output − Actual Hours) × Standard Variable OH Rate

₹11,400 (F) = (77,500 − Actual Hours) × ₹3

Actual Hours = 77,500 − 3,800 = 73,700 hours

(ii) Actual Variable Overhead Rate per Hour

Variable Overhead Expenditure Variance = (Standard Rate × Actual Hours) − Actual Variable Overheads

₹37,000 (A) means Actual > Standard for Actual Hours, so:
−37,000 = (₹3 × 73,700) − Actual Variable OH

Actual Variable OH = ₹2,21,100 + ₹37,000 = ₹2,58,100

Actual Variable OH Rate per hour = ₹2,58,100 ÷ 73,700 = ₹3.50 per hour (approx.)

(iii) Variable Overhead Cost Variance (VOCV)

VOCV = Efficiency Variance + Expenditure Variance
= ₹11,400 (F) + ₹37,000 (A)
= ₹25,600 (Adverse)

Verification: VOCV = (SH for Actual Output × SR) − Actual Variable OH = (77,500 × 3) − 2,58,100 = ₹2,32,500 − ₹2,58,100 = ₹25,600 (A) ✓

(iv) Fixed Overhead Cost Variance

Standard Fixed OH Absorbed = Standard Hours for Actual Output × Standard Fixed OH Rate
= 77,500 hours × ₹2 = ₹1,55,000

Actual Fixed OH = ₹1,85,000

Fixed Overhead Cost Variance = ₹1,55,000 − ₹1,85,000 = ₹30,000 (Adverse)

Insufficient Data to Solve

The question asks to compute (i) the normal hourly wage rate and (ii) the cost of material used under Labour Costing (Paper 4 – Cost and Management Accounting), but no supporting data has been provided in the question as submitted.

To solve (i) Normal Hourly Wage Rate, the following data is typically required:
- Total wages paid (or budgeted)
- Normal working hours (total hours including idle time allowance)
- Any overtime, bonus, or allowances to be included/excluded
- Number of workers

Normal Hourly Wage Rate = Total Normal Wages ÷ Normal Hours

To solve (ii) Cost of Material Used, the following data is typically required:
- Opening stock of material
- Purchases during the period (with freight/taxes if applicable)
- Closing stock of material
- Any material returned or transferred

Cost of Material Used = Opening Stock + Purchases – Closing Stock

Please provide the complete question data (table/exhibit) so the solution can be computed accurately.

Note: The question as provided is incomplete — the specific cost data, cost drivers, and allocation bases for the three departments (Accountant/Client, Manager, Scientist) have not been included in the problem statement. Below is the complete methodology and framework for solving such a question under Activity Based Costing (ABC), which a student should apply once the actual figures are available.

Activity Based Costing (ABC) — Conceptual Framework

ABC is a costing method that assigns costs to products/services based on the actual activities consumed, rather than using a single blanket overhead rate. It is more accurate than traditional absorption costing for companies with multiple departments and diverse products.

Step 1 — Identify Cost Pools

Group overhead costs into activity-based cost pools. For a manufacturing company with three departments (e.g., Client Services, Management, and Scientific/Technical), each department may represent one or more activity cost pools. Common cost pools include: machine setup, quality inspection, material handling, administration, and project management.

Step 2 — Identify Cost Drivers

For each cost pool, identify the most appropriate cost driver — the factor that causes the cost to be incurred. Examples:
- Client Services: Number of client visits / client orders
- Manager Department: Number of projects managed / labour hours
- Scientist Department: Number of tests / machine hours

Step 3 — Compute Cost Driver Rate (Predetermined Overhead Rate)

For each cost pool:
Cost Driver Rate = Total Cost in Pool ÷ Total Cost Driver Units

This rate is computed separately for each department/activity.

Step 4 — Allocate Costs to Products/Services

Cost allocated to each product = Cost Driver Rate × Number of Cost Driver Units consumed by that product.

For each of the three departments, the cost is traced to the respective output based on actual consumption of the cost driver.

Step 5 — Compute Total Cost and Unit Cost

Total Product Cost = Direct Material + Direct Labour + Allocated Overheads from each cost pool.
Unit Cost = Total Product Cost ÷ Number of Units produced.

Comparison: Traditional vs ABC

Under Traditional Costing, a single overhead rate (e.g., based on direct labour hours) is applied to all products, which may over-cost simple products and under-cost complex ones. Under ABC, each activity is costed separately, providing a more realistic and accurate picture — especially relevant for the CA Intermediate Paper 4 (Cost and Management Accounting) exam.

Practical Note for Exam: When data is provided, present your answer in a tabular format showing: (i) Cost Pool wise total costs, (ii) Cost Driver and total driver units, (iii) Cost Driver Rate, (iv) Allocation to each product/department, and (v) Final cost statement.

Please re-check the question paper for the complete numerical data (cost figures, driver quantities, and number of units) and apply the above steps systematically. The final answer will be the allocated cost per department and/or per unit cost of the product.

Note: The question states 'following information' for MD Limited but the actual data table (budgeted/actual output, hours, overhead costs, etc.) has not been included in the submission. The numerical calculations below cannot be completed without the source data. The standard formulas and approach are provided so the student can apply them once the data is available.

(i) Actual Hours:
Actual Hours are typically derived from the Variable Overhead Efficiency Variance relationship or directly given. If Variable Overhead Expenditure Variance is given: Actual Hours = Actual VO Cost ÷ Standard VO Rate per hour (when expenditure variance is nil), or computed by back-working from given variances.

(ii) Actual Variable Overhead Rate per Hour:
Actual VO Rate = Actual Variable Overhead Cost ÷ Actual Hours worked

(iii) Variable Overhead Cost Variance (VOCV):
VOCV = Standard Variable Overhead for Actual Output − Actual Variable Overhead Cost
= (Standard VO Rate per hour × Standard Hours for Actual Output) − Actual VO Cost
Favourable if positive, Adverse if negative.

(iv) Fixed Overhead Cost Variance (FOCV):
FOCV = Absorbed Fixed Overhead − Actual Fixed Overhead Cost
= (Standard FO Rate per hour × Standard Hours for Actual Output) − Actual FO Cost
Standard FO Rate = Budgeted Fixed Overhead ÷ Budgeted Hours (or Budgeted Output in Standard Hours)
Favourable if positive, Adverse if negative.

To obtain full marks in the exam, apply these formulas with the specific figures from the data table provided in the question paper.

Note: The question as provided appears to be incomplete — the numerical data (overhead cost pools, cost driver rates, and activity consumption figures for the three project streams) has not been transmitted. The Hindi text translates to: 'Using Activity Based Costing (ABC), distribute the project overhead costs among three project streams — Accountancy, Management, and Science.' Without the supporting data table, a full numerical solution cannot be computed. The following framework shows exactly how the answer must be structured once data is available.

Activity Based Costing (ABC) — Methodology for Overhead Distribution

Step 1 — Identify Cost Pools and Assign Overheads:
Each overhead item (e.g., scheduling costs, faculty costs, administration) is grouped into a separate cost pool based on the activity that drives it. Total overhead for each pool is identified from the given data.

Step 2 — Identify Cost Drivers:
For each cost pool, a suitable cost driver is identified (e.g., number of classes, number of students, number of administrative transactions). This is the key distinction of ABC from traditional absorption costing.

Step 3 — Compute Cost Driver Rate (CDR):
CDR = Total Cost of Pool ÷ Total Units of Cost Driver across all three project streams.

Step 4 — Absorb Overheads into Each Project Stream:
Overhead absorbed = CDR × Units of cost driver consumed by that specific project stream. This is done separately for each cost pool and each stream.

Step 5 — Total Cost per Project Stream:
Sum overhead absorbed from all cost pools for Accountancy stream, Management stream, and Science stream respectively. If direct costs are given, add them to arrive at Total Project Cost per stream.

Final Answer: Please provide the original data table (cost pools, driver volumes, and direct costs per stream) so that the numerical computation can be completed. The above structure will yield the ABC-based cost distribution once figures are inserted.

Illustration of CDR formula:
If Scheduling Cost Pool = ₹1,20,000 and total classes = 400 (Accountancy: 160, Management: 120, Science: 120), then:
- CDR = ₹1,20,000 ÷ 400 = ₹300 per class
- Accountancy absorbs: 160 × ₹300 = ₹48,000
- Management absorbs: 120 × ₹300 = ₹36,000
- Science absorbs: 120 × ₹300 = ₹36,000

Cost Analysis Based on Costing of a Manufacturing Proposal (निर्माण सुझाव का लागत विश्लेषण)

When a business evaluates a manufacturing proposal or suggestion, a structured cost analysis is essential to determine its feasibility, profitability, and comparative advantage. The analysis is typically built on the principles of Marginal Costing and Absorption Costing, combined with relevant cost concepts.

1. Classification of Costs for Manufacturing Proposal

The first step is to classify all costs associated with the manufacturing proposal into the following categories:

- Direct Material Cost: Cost of raw materials directly attributable to production. Calculated as: Opening Stock + Purchases − Closing Stock.
- Direct Labour Cost: Wages paid to workers directly engaged in manufacturing (also called Prime Cost when added to Direct Material).
- Direct Expenses: Any other expenses directly traceable to the product (e.g., special tools, royalties).
- Prime Cost = Direct Material + Direct Labour + Direct Expenses
- Factory/Works Overhead: Indirect manufacturing costs — factory rent, power, supervisor salaries, depreciation of plant.
- Works Cost = Prime Cost + Factory Overhead
- Office & Administration Overhead: General management expenses allocated to production.
- Cost of Production = Works Cost + Administration Overhead
- Selling & Distribution Overhead: Costs incurred to market and deliver the product.
- Total Cost (Cost of Sales) = Cost of Production + Selling & Distribution Overhead
- Selling Price = Total Cost + Profit

2. Relevant Costs in Decision-Making

For evaluating a manufacturing suggestion (e.g., make vs. buy, accepting a special order, introducing a new product), only relevant costs are considered:
- Incremental/Differential Costs: Additional costs arising due to the proposal.
- Opportunity Costs: Benefit foregone by not choosing the next best alternative.
- Avoidable Costs: Costs that can be eliminated if the proposal is rejected.
- Sunk Costs are ignored — they are past costs and irrelevant to future decisions.

3. Marginal Costing Approach

Under Marginal Costing, only variable costs are charged to the product. Fixed costs are treated as period costs.
- Contribution = Sales − Variable Cost
- P/V Ratio (Profit-Volume Ratio) = (Contribution / Sales) × 100
- Break-Even Point (BEP) = Fixed Cost / Contribution per unit
- Margin of Safety = Actual Sales − Break-Even Sales

This approach helps in evaluating the minimum price at which a manufacturing proposal becomes viable.

4. Absorption Costing Approach

Under Absorption Costing, both fixed and variable costs are absorbed into the product cost. This is the basis for external reporting and tender pricing. Fixed overhead absorption rate = Budgeted Fixed Overhead / Budgeted Output (or hours).

5. Make or Buy Decision — Practical Application

When a manufacturing suggestion involves whether to manufacture internally or purchase from outside:
- Compare marginal cost of manufacturing with the purchase price.
- If marginal cost < purchase price → Make (manufacture internally).
- If marginal cost > purchase price → Buy, unless strategic or capacity reasons dictate otherwise.
- Fixed costs are considered only if they are avoidable (i.e., will be saved if buying externally).

6. Presentation of Cost Statement

A formal Cost Statement (Cost Sheet) for the manufacturing proposal is prepared as follows:

| Particulars | Amount (₹) |
|---|---|
| Direct Material | XX |
| Direct Labour | XX |
| Direct Expenses | XX |
| Prime Cost | XX |
| Add: Factory Overhead | XX |
| Works Cost | XX |
| Add: Administration Overhead | XX |
| Cost of Production | XX |
| Add: Selling & Distribution OH | XX |
| Total Cost / Cost of Sales | XX |
| Add: Profit | XX |
| Selling Price | XX |

Conclusion: A thorough cost analysis of a manufacturing proposal requires classification of costs into relevant categories, computation of Prime Cost, Works Cost, and Total Cost, application of marginal costing for short-term decisions, and evaluation of incremental and opportunity costs. This enables management to take informed decisions regarding acceptance, pricing, or rejection of manufacturing proposals.

(i) Production Budget and Raw Material Consumption Budget

Step 1 — Total Production Requirement:
Total Sales = 72,000 + 90,000 + 99,000 + 1,00,000 = 3,61,000 units
Total Production = Sales + Closing Stock – Opening Stock = 3,61,000 + 29,400 – 9,400 = 3,81,000 units

Production Budget (in units) — Quarter-wise:

Production formula: 80% of current quarter sales + 30% of next quarter sales
- Q1 = 80% × 72,000 + 30% × 90,000 = 57,600 + 27,000 = 84,600 units
- Q2 = 80% × 90,000 + 30% × 99,000 = 72,000 + 29,700 = 1,01,700 units
- Q3 = 80% × 99,000 + 30% × 1,00,000 = 79,200 + 30,000 = 1,09,200 units
- Q4 = Balancing figure = 3,81,000 – (84,600 + 1,01,700 + 1,09,200) = 85,500 units

| Particulars | Q1 | Q2 | Q3 | Q4 | Total |
|---|---|---|---|---|---|
| Opening Stock (units) | 9,400 | 22,000 | 33,700 | 43,900 | — |
| Add: Production | 84,600 | 1,01,700 | 1,09,200 | 85,500 | 3,81,000 |
| Total Available | 94,000 | 1,23,700 | 1,42,900 | 1,29,400 | — |
| Less: Sales | 72,000 | 90,000 | 99,000 | 1,00,000 | 3,61,000 |
| Closing Stock | 22,000 | 33,700 | 43,900 | 29,400 | — |

Raw Material Consumption Budget (in Kgs):

Each unit of A1 requires 2 kgs of raw material.

| Particulars | Q1 | Q2 | Q3 | Q4 | Total |
|---|---|---|---|---|---|
| Production (units) | 84,600 | 1,01,700 | 1,09,200 | 85,500 | 3,81,000 |
| RM per unit (kgs) | 2 | 2 | 2 | 2 | 2 |
| RM Consumption (kgs) | 1,69,200 | 2,03,400 | 2,18,400 | 1,71,000 | 7,62,000 |

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(ii) Total Machine Hours (including Maintenance)

Total Production Hours = 3,81,000 units × 5 hours = 19,05,000 hours

Both machines run for the same total production hours. Maintenance is a separate time requirement added after every specified hours of use.

Machine A — Maintenance 100 hrs after every 5,000 hours of use:
- Number of maintenance stops = 19,05,000 ÷ 5,000 = 381 times
- Maintenance hours = 381 × 100 = 38,100 hours
- Total Machine A hours = 19,05,000 + 38,100 = 19,43,100 hours

Machine B — Maintenance 100 hrs after every 3,000 hours of use:
- Number of maintenance stops = 19,05,000 ÷ 3,000 = 635 times
- Maintenance hours = 635 × 100 = 63,500 hours
- Total Machine B hours = 19,05,000 + 63,500 = 19,68,500 hours

Journal Entries in Cost Books under Non-Integrated System of Accounting

Sundar Limited — Cost Books | Month: August 2025

In a Non-Integrated (Non-Integral) System, cost accounts are maintained separately from financial accounts. The link between the two sets of books is maintained through the Cost Ledger Control Account (CLCA), which represents all items (creditors, cash, etc.) that are recorded in financial books but not individually in cost books.

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Transaction 1 — Materials Purchased on Credit: ₹10,25,000

Stores Ledger Control A/c &emsp; Dr. &emsp; ₹10,25,000
&emsp; To Cost Ledger Control A/c &emsp;&emsp;&emsp;&emsp;&emsp;&emsp; ₹10,25,000
*(Being materials purchased on credit; creditor's account maintained only in financial books, hence CLCA is credited in cost books)*

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Transaction 2 — Direct Materials Issued to Production: ₹5,55,000

Work-in-Progress Control A/c &emsp; Dr. &emsp; ₹5,55,000
&emsp; To Stores Ledger Control A/c &emsp;&emsp;&emsp;&emsp;&emsp; ₹5,55,000
*(Being direct materials issued to production as per material requisition)*

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Transaction 3 — Direct Wages Allocated to Production: ₹3,00,000

*Step (a) — Recording wages incurred:*
Wages Control A/c &emsp; Dr. &emsp; ₹3,00,000
&emsp; To Cost Ledger Control A/c &emsp;&emsp;&emsp;&emsp; ₹3,00,000
*(Being direct wages incurred; cash/bank maintained only in financial books)*

*Step (b) — Allocation of wages to WIP:*
Work-in-Progress Control A/c &emsp; Dr. &emsp; ₹3,00,000
&emsp; To Wages Control A/c &emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp; ₹3,00,000
*(Being direct wages allocated to production)*

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Transaction 4 — Factory Overheads Absorbed: ₹2,50,000

Work-in-Progress Control A/c &emsp; Dr. &emsp; ₹2,50,000
&emsp; To Factory Overhead Control A/c &emsp;&emsp;&emsp; ₹2,50,000
*(Being factory overheads absorbed into production at predetermined rate)*

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Transaction 5 — Administration Overheads Under-Absorbed: ₹1,40,000

Costing Profit & Loss A/c &emsp; Dr. &emsp; ₹1,40,000
&emsp; To Administration Overhead Control A/c &emsp; ₹1,40,000
*(Being administration overheads under-absorbed written off to Costing P&L A/c; under-absorption arises when actual overhead exceeds absorbed overhead)*

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Key Note: The Cost Ledger Control Account in cost books acts as a contra/mirror account for all transactions that originate in the financial books (purchases from creditors, wages paid from bank). This is the defining feature of the Non-Integrated System and keeps the cost ledger self-balancing.

(i) Production Budget and Raw Material Consumption Budget

Closing Stock Policy (Finished Goods):
The production pattern states closing stock at end of each quarter = 40% of current quarter sales + 30% of next quarter sales.

- End of Q1: 40% × 72,000 + 30% × 90,000 = 28,800 + 27,000 = 55,800 units
- End of Q2: 40% × 90,000 + 30% × 99,000 = 36,000 + 29,700 = 65,700 units
- End of Q3: 40% × 99,000 + 30% × 1,08,000 = 39,600 + 32,400 = 72,000 units
- End of Q4: 29,400 units (given)

Production Budget (units):

Production = Sales + Closing Stock − Opening Stock

| Particulars | Q I | Q II | Q III | Q IV | Total |
|---|---|---|---|---|---|
| Opening Stock (units) | 4,400 | 55,800 | 65,700 | 72,000 | 4,400 |
| + Sales (units) | 72,000 | 90,000 | 99,000 | 1,08,000 | 3,69,000 |
| + Closing Stock (units) | 55,800 | 65,700 | 72,000 | 29,400 | 29,400 |
| Production Required | 1,23,400 | 99,900 | 1,05,300 | 65,400 | 3,94,000 |

Verification: 3,69,000 + 29,400 − 4,400 = 3,94,000 units ✓

Raw Material Consumption Budget (kgs):

Each unit of A1 requires 2 kgs of raw material. Consumption = Production × 2.

| Particulars | Q I | Q II | Q III | Q IV | Total |
|---|---|---|---|---|---|
| Production (units) | 1,23,400 | 99,900 | 1,05,300 | 65,400 | 3,94,000 |
| RM Consumption (kgs) | 2,46,800 | 1,99,800 | 2,10,600 | 1,30,800 | 7,88,000 |

Note: Opening RM stock = 24,000 kgs; Closing RM stock = 12,000 kgs. The RM consumption budget relates only to material consumed in production; purchases would be derived separately.

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(ii) Total Machine Hours including Maintenance

Total production for the year = 3,94,000 units

Each unit requires: Machine A → 2 hours, Machine B → 3 hours

Machine A:
- Production hours = 3,94,000 × 2 = 7,88,000 hours
- Maintenance trigger: every 5,000 hours of use → 100 hours maintenance
- Complete maintenance cycles = 7,88,000 ÷ 5,000 = 157.6 → 157 complete cycles (remaining 3,000 hrs do not trigger the 158th maintenance)
- Maintenance hours = 157 × 100 = 15,700 hours
- Total Machine A hours = 7,88,000 + 15,700 = 8,03,700 hours

Machine B:
- Production hours = 3,94,000 × 3 = 11,82,000 hours
- Maintenance trigger: every 3,000 hours of use → 100 hours maintenance
- Complete maintenance cycles = 11,82,000 ÷ 3,000 = 394 complete cycles (exact)
- Maintenance hours = 394 × 100 = 39,400 hours
- Total Machine B hours = 11,82,000 + 39,400 = 12,21,400 hours

In a Non-Integrated System of Accounting, separate books are maintained for cost accounting purposes, independent of financial accounting records. All transactions are journalized in the Cost Books as follows:

Entry 1 — Materials Purchased on Credit (₹10,25,000):
Dr. Materials A/c ₹10,25,000
Cr. Creditors A/c ₹10,25,000
(Being materials purchased on credit recorded in cost books)

Entry 2 — Direct Materials Issued to Production (₹5,55,000):
Dr. Work-in-Progress A/c ₹5,55,000
Cr. Materials A/c ₹5,55,000
(Being direct materials issued to production)

Entry 3 — Direct Wages Allocated to Production (₹3,00,000):
Dr. Work-in-Progress A/c ₹3,00,000
Cr. Wages A/c ₹3,00,000
(Being direct wages allocated to production)

Entry 4 — Factory Overheads Overabsorbed (₹2,50,000):
Dr. Factory Overheads A/c ₹2,50,000
Cr. Costing P&L A/c ₹2,50,000
(Being factory overheads overabsorbed [absorbed exceeds actual] transferred to Costing P&L as a gain)

Entry 5 — Administration Overheads Under-absorbed (₹1,40,000):
Dr. Costing P&L A/c ₹1,40,000
Cr. Administration Overheads A/c ₹1,40,000
(Being administration overheads under-absorbed [actual exceeds absorbed] transferred to Costing P&L as a loss)

Key Points: In a non-integrated system, cost books and financial books operate independently. All production costs flow through Work-in-Progress A/c. Overhead variances (over/under-absorption) are adjusted through the Costing P&L A/c, which eventually reconciles with the financial P&L.

ABC Analysis for Inventory Management — TS Limited

To address material deterioration and improper storage, the materials are classified using ABC Analysis based on their total cost (value). This helps identify which materials deserve the most rigorous storage controls.

Step 1: Rank materials by Total Cost (Descending)

| Rank | Material | Units | Total Cost (₹) | % of Total Value | Cumulative % |
|------|----------|-------|--------------|-----------------|-------------|
| 1 | MF | 2,580 | 1,08,260 | 25.47% | 25.47% |
| 2 | MH | 4,855 | 98,980 | 23.29% | 48.76% |
| 3 | MG | 8,900 | 89,410 | 21.04% | 69.80% |
| 4 | MD | 10,250 | 47,685 | 11.22% | 81.02% |
| 5 | ME | 23,410 | 39,013 | 9.18% | 90.20% |
| 6 | MA | 54,105 | 14,855 | 3.50% | 93.70% |
| 7 | MC | 28,600 | 13,972 | 3.29% | 96.99% |
| 8 | MB | 32,300 | 12,823 | 3.02% | 100.00% |
| | Total | 1,65,000 | 4,24,998 | 100% | |

Step 2: ABC Classification

Class A — High Value (≈ top 70% of value): MF, MH, MG → 3 items (37.5% of types), ₹2,96,650 → 69.80% of total value. These require the strictest storage controls, frequent monitoring, and dedicated storage space.

Class B — Medium Value (≈ next 20% of value): MD, ME → 2 items (25% of types), ₹86,698 → 20.40% of total value. Moderate control with periodic review.

Class C — Low Value (≈ bottom 10% of value): MA, MB, MC → 3 items (37.5% of types), ₹41,650 → 9.80% of total value. Bulk storage with minimal oversight; candidates for disposal or scrap if deteriorated.

Step 3: Expected Benefit on Sale of Scrap (Class C Materials)

The Class C materials (MA, MB, MC) — which have the lowest unit value, highest quantities, and are most susceptible to deterioration due to improper bulk storage — are the prime candidates for sale as scrap after rectification. Since these materials have already suffered deterioration, their realizable value upon sale as scrap corresponds to their current book cost (as they have not been written down further in the given data).

Expected benefit on sale of scrap = ₹41,650 (being the combined book value of Materials MA, MB, and MC).

Conclusion: TS Limited should immediately implement strict Class A storage protocols for MF, MH, and MG (which together represent nearly 70% of inventory value) to prevent further deterioration. Class C materials (MA, MB, MC) with a combined value of ₹41,650 should be sold as scrap to recover value before further deterioration erodes their realizable amount.

Part (i): Total Cost per Month

The total annual cost is computed by summing all the given cost heads:

| Cost Head | Annual Amount (₹) |
|---|---|
| Electricity | 14,40,000 |
| Telephone & Communication | 2,40,000 |
| Maintenance Cost | 60,000 |
| Depreciation & Amortization | 12,00,00,000 |
| Insurance & Safety Cost | 15,00,000 |
| Interest Expense (Term Loans) | 73,43,000 |
| Total Annual Cost | 13,05,83,000 |

Total Cost per Month = ₹13,05,83,000 ÷ 12 = ₹1,08,81,917 (approx.)

---

Part (ii): Toll Rate per Vehicle

Note: To calculate the absolute toll rate for each vehicle category, the daily traffic volume (number of Passenger Vehicles, Buses, and Heavy Commercial Vehicles per day) is an essential input. This data appears to have been provided in an earlier part of the original question but is not included in the extract above. The complete solution framework is presented below so that the student can apply the figures once the traffic data is available.

Framework:

Let P = Toll rate for one Passenger Vehicle (₹)
Then: Toll for Bus = 4P (400% of P), Toll for HCV = 5P (500% of P)

Let the daily traffic be: n₁ = Passenger Vehicles, n₂ = Buses, n₃ = HCVs

Using 360 days/year → 30 days per month

Monthly Revenue = 30 × [n₁·P + n₂·4P + n₃·5P] = 30P(n₁ + 4n₂ + 5n₃)

For a 20% profit margin on total takings (revenue):
Profit = 20% of Revenue → Cost = 80% of Revenue

So: Monthly Cost = 0.80 × Monthly Revenue

₹1,08,81,917 = 0.80 × 30P(n₁ + 4n₂ + 5n₃)

P = ₹1,08,81,917 / [24 × (n₁ + 4n₂ + 5n₃)]

Once P is determined:
- Passenger Vehicle toll = ₹P
- Bus toll = ₹4P
- Heavy Commercial Vehicle toll = ₹5P

Students should substitute the vehicle count data (given in the preceding part of the question) into the above formula to arrive at the final toll rates.

ABC Analysis for TS Limited — Stock Management and Control

TS Limited is experiencing material deterioration due to improper storage. To address this, ABC Analysis (also known as Selective Inventory Control) is applied. This technique classifies materials based on their annual consumption value so that management attention and storage care can be prioritised accordingly.

Ranking of Materials by Total Cost (Value):

Materials are ranked in descending order of total cost and their percentage of total inventory value is computed. Total inventory value = ₹4,24,998.

| Rank | Material | Units | Total Cost (₹) | % of Total Value | Cumulative % | Category |
|------|----------|-------|---------------|-----------------|-------------|----------|
| 1 | MF | 2,580 | 1,08,260 | 25.47% | 25.47% | A |
| 2 | MH | 4,855 | 98,980 | 23.29% | 48.76% | A |
| 3 | MG | 8,900 | 89,410 | 21.04% | 69.80% | A |
| 4 | MD | 10,250 | 47,685 | 11.22% | 81.02% | B |
| 5 | ME | 23,410 | 39,013 | 9.18% | 90.20% | B |
| 6 | MA | 54,105 | 14,855 | 3.50% | 93.70% | C |
| 7 | MC | 28,600 | 13,972 | 3.29% | 96.99% | C |
| 8 | MB | 32,500 | 12,823 | 3.02% | 100.00% | C |
| | Total | 1,65,200 | 4,24,998 | 100% | | |

Classification Summary:

Category A — High Value Materials (MF, MH, MG): These 3 items (37.5% of items) represent approximately 69.80% of total inventory value (₹2,96,650). They require maximum control — strict storage conditions, frequent stock checks, close monitoring of consumption, and proper preservation to prevent deterioration.

Category B — Medium Value Materials (MD, ME): These 2 items (25% of items) represent approximately 20.40% of total value (₹86,698). They require moderate control — periodic reviews and reasonable storage care.

Category C — Low Value Materials (MA, MC, MB): These 3 items (37.5% of items) represent only 9.80% of total value (₹41,650) but account for 69.74% of total units (1,15,205 units). They require minimum control — bulk ordering and simple storage arrangements are adequate.

Conclusion: TS Limited should immediately focus storage resources and managerial attention on Category A materials (MF, MH, MG) since their deterioration would cause the greatest financial loss. Proper bins, controlled environments, and regular inspection protocols should be established for these high-value items first.

Simultaneous Equation Method — Apportionment of Service Department Costs

Let S₁ = Total cost of Department S₁ (including share received from S₂)
Let S₂ = Total cost of Department S₂ (including share received from S₁)

Setting up the equations:

S₁ = 1,60,000 + 10% of S₂ → S₁ = 1,60,000 + 0.10 S₂ ... (i)
S₂ = 2,40,000 + 20% of S₁ → S₂ = 2,40,000 + 0.20 S₁ ... (ii)

Solving the equations:

Substituting (i) into (ii):
S₂ = 2,40,000 + 0.20 × (1,60,000 + 0.10 S₂)
S₂ = 2,40,000 + 32,000 + 0.02 S₂
0.98 S₂ = 2,72,000
S₂ = ₹2,77,551.02

From (i): S₁ = 1,60,000 + 0.10 × 2,77,551.02 = 1,60,000 + 27,755.10
S₁ = ₹1,87,755.10

Apportionment to Production Departments:

| Department | From S₁ | From S₂ | Total (₹) |
|---|---|---|---|
| P₁ | 25% × 1,87,755.10 = 46,938.78 | 35% × 2,77,551.02 = 97,142.86 | 1,44,081.63 |
| P₂ | 35% × 1,87,755.10 = 65,714.29 | 30% × 2,77,551.02 = 83,265.31 | 1,48,979.59 |
| P₃ | 20% × 1,87,755.10 = 37,551.02 | 25% × 2,77,551.02 = 69,387.76 | 1,06,938.78 |
| Total | 1,50,204.08 | 2,49,795.92 | 4,00,000.00 |

Verification: Total apportioned = ₹1,44,081.63 + ₹1,48,979.59 + ₹1,06,938.78 = ₹4,00,000 = ₹1,60,000 + ₹2,40,000 ✓

Simultaneous Equation Method — Apportionment of Service Department Expenses

Let S₁ = Total cost of department S₁ (including amount received from S₂)
Let S₂ = Total cost of department S₂ (including amount received from S₁)

Setting up the equations:

S₁ = 1,60,000 + 10% of S₂ → S₁ = 1,60,000 + 0.10 S₂ ... (i)
S₂ = 2,40,000 + 20% of S₁ → S₂ = 2,40,000 + 0.20 S₁ ... (ii)

Solving the equations:

Substituting (i) into (ii):
S₂ = 2,40,000 + 0.20 × (1,60,000 + 0.10 S₂)
S₂ = 2,40,000 + 32,000 + 0.02 S₂
0.98 S₂ = 2,72,000
S₂ = ₹2,77,551.02

From (i): S₁ = 1,60,000 + 0.10 × 2,77,551.02
S₁ = ₹1,87,755.10

Apportionment to Production Departments:

| Department | From S₁ (₹) | From S₂ (₹) | Total (₹) |
|---|---|---|---|
| P₁ | 25% × 1,87,755.10 = 46,938.78 | 35% × 2,77,551.02 = 97,142.86 | 1,44,081.64 |
| P₂ | 35% × 1,87,755.10 = 65,714.29 | 30% × 2,77,551.02 = 83,265.31 | 1,48,979.59 |
| P₃ | 20% × 1,87,755.10 = 37,551.02 | 25% × 2,77,551.02 = 69,387.76 | 1,06,938.78 |
| Total | 1,50,204.08 | 2,49,795.92 | 4,00,000.00 |

Verification: Total apportioned = ₹4,00,000 = ₹1,60,000 + ₹2,40,000 ✓

Final Answer: Expenses of S₁ and S₂ apportioned to P₁ = ₹1,44,081.64, P₂ = ₹1,48,979.59, P₃ = ₹1,06,938.78.

Responsibility Centre is an organizational unit or segment headed by a manager who is accountable for the activities and performance of that unit. It is a part of an organization where a manager is assigned authority over revenues, costs, profits, or investments, and is held responsible for the results. The primary objective of responsibility centres is to facilitate decentralization of authority while ensuring accountability at each level of management.

Types of Responsibility Centres:

1. Cost Centre: A cost centre is a segment where the manager is held responsible only for costs incurred within that unit. The manager has no control over revenues or investment decisions. Cost centres are further classified as:
- *Standard Cost Centres* — where standard costs can be established (e.g., production departments)
- *Discretionary Cost Centres* — where output cannot be measured in monetary terms (e.g., R&D, HR, legal departments)

Performance is evaluated by comparing actual costs with budgeted/standard costs.

2. Revenue Centre: A revenue centre is a segment where the manager is held responsible only for revenues generated. The manager has no control over costs or capital investment. Sales departments or marketing divisions are typical examples. Performance is measured by comparing actual revenue with budgeted revenue. It is important to note that costs of running the revenue centre itself are generally not the responsibility of this manager.

3. Profit Centre: A profit centre is a segment where the manager is responsible for both revenues and costs, and hence for the profit earned by that unit. The manager has control over pricing, product mix, and cost management. Divisional units operating independently are common examples. Performance is evaluated using actual profit vs. budgeted profit. A profit centre gives the manager a broader perspective by linking both income and expenditure.

4. Investment Centre: An investment centre is the most comprehensive type, where the manager is responsible for revenues, costs, and the capital invested in the segment. The manager has authority over investment decisions in assets. Performance is measured using metrics such as:
- Return on Investment (ROI) = (Profit / Capital Employed) × 100
- Residual Income (RI) = Profit − (Capital Employed × Required Rate of Return)

Investment centres are typically found at the top levels of management such as divisions of large corporations.

Conclusion: The type of responsibility centre assigned to a manager must match the degree of authority delegated to them — a manager should only be held accountable for those elements over which they exercise genuine control. This alignment of authority and accountability is the cornerstone of an effective responsibility accounting system.

Important Factors for Controlling Employee Costs:

Manpower Planning and Recruitment: Proper workforce planning ensures right number of employees at right time, avoiding excess payroll. Effective recruitment policies help select cost-conscious workforce and reduce hiring expenses.

Compensation Structure: Establishing a rational wage and salary structure based on job evaluation prevents anomalies and unnecessary cost escalation. Regular review of compensation packages ensures alignment with industry standards and organizational capacity.

Performance Management System: Linking remuneration to performance through appraisal systems encourages productivity and cost-consciousness. Merit-based increments and incentive schemes motivate employees while controlling unjustified wage increases.

Productivity and Work Study: Work study and method improvement techniques optimize employee utilization and reduce idle time. Setting standard productivity norms and monitoring actual against standard helps identify inefficiencies and excess labor costs.

Control of Absenteeism and Turnover: High absenteeism increases costs through overtime payments and replacement labor. Effective absence management policies, exit interviews, and retention strategies reduce separation costs and maintain stable workforce.

Training and Development: Systematic training improves employee skills and efficiency, reducing wasteful practices and rework. Well-trained workforce operates equipment efficiently and produces better quality output with lower material waste.

Industrial Relations and Morale: Positive industrial relations minimize disputes, strikes, and unproductive downtime. Good morale and communication enhance voluntary cooperation, reducing need for supervisory overheads and disciplinary costs.

Health and Safety Measures: Preventive health and safety programs reduce accident-related costs, medical expenses, and lost working days. Accident prevention is cost-effective compared to managing injuries and replacements.

Overtime Management: Controlling unnecessary overtime through proper scheduling and planning prevents inflated labor costs. Monitoring overtime trends identifies bottlenecks requiring process improvement rather than additional labor.

Bill of Material (BOM) is a comprehensive list of all raw materials, components, sub-assemblies, and their quantities required to manufacture one unit of a finished product. It is a critical document used across multiple departments for different purposes.

Bill of Material in Marketing (Purchase) Department: The Purchase Department uses BOM to determine the exact quantity and specification of materials to be procured. It serves as the basis for preparing purchase requisitions and purchase orders. BOM enables the department to plan procurement schedules, negotiate with suppliers on the basis of detailed material specifications, and estimate material costs for budgeting purposes. It also helps in maintaining optimal stock levels and planning delivery schedules with suppliers.

Bill of Material in Production Department: The Production Department uses BOM for production planning and scheduling. It enables the department to issue production orders with specific material requirements for each product or batch. BOM facilitates the allocation of materials to different production runs, ensures that all required materials are available before production commences, and prevents delays due to material shortages. It also helps in quality control by verifying that all required materials as per BOM are used in production and assists in tracking material consumption during the manufacturing process.

Bill of Material in Stores Department: The Stores Department uses BOM to maintain optimum inventory levels of raw materials and components. It helps in identifying fast-moving and slow-moving items, which aids in inventory management and storage planning. BOM facilitates the preparation of material issue notes and requisition forms, enables monitoring of stock levels to prevent stock-outs, and helps in identifying and locating materials in the stores. It also assists in preventing inventory obsolescence by highlighting materials that are slow-moving or not required for current production.

Bill of Material in Cost/Accounting Department: The Cost/Accounting Department uses BOM as a tool for accurate cost estimation and standard costing. It enables the calculation of material cost per unit of finished product, which forms the basis for determining the standard cost of products. BOM facilitates variance analysis by comparing actual material consumption with standard quantities specified. It is also used for cost control, budgeting, preparation of quotation and pricing, and for financial reporting and inventory valuation purposes. The BOM serves as a reference for determining the cost of goods manufactured and sold.

Note: The question as provided does not include the underlying data table (activity costs, cost drivers, number of projects per sector, fees charged, direct costs, etc.) required to perform the numerical computation. The framework below shows the complete ABC methodology a CA student must apply once data is available.

Activity Based Costing — Project Management Services

Step 1 — Identify Activities and Cost Pools
Under ABC, overheads are grouped into activity cost pools (e.g., Project Planning, Client Meetings, Documentation, Quality Review, Administration). Each pool collects costs driven by a common activity.

Step 2 — Determine Cost Drivers and Compute Cost Driver Rates
For each activity pool, identify the appropriate cost driver (e.g., number of planning hours, number of client meetings, number of documents, number of review hours). Then:
Cost Driver Rate = Total Activity Cost ÷ Total Cost Driver Units

Step 3 — Assign Activity Costs to Each Sector
Multiply the cost driver rate by the number of cost driver units consumed by each sector (Technology / Healthcare / Education).
Activity Cost Assigned = Cost Driver Rate × Units consumed by sector

Step 4 — Compute Total Cost per Sector
Total Cost (Sector) = Direct Costs attributable to sector + Sum of all Activity Costs assigned to sector

Step 5 — Compute Per Project Cost
Per Project Cost = Total Cost of Sector ÷ Number of Projects in that Sector

Step 6 — Statement of Total Cost and Per Project Cost

| Particulars | Technology (₹) | Healthcare (₹) | Education (₹) |
|---|---|---|---|
| Direct Costs | XX | XX | XX |
| Activity 1: [Name] | XX | XX | XX |
| Activity 2: [Name] | XX | XX | XX |
| Activity N: [Name] | XX | XX | XX |
| Total Cost | XX | XX | XX |
| Number of Projects | X | X | X |
| Per Project Cost | XX | XX | XX |

(ii) Identification of Most Profitable Sector
Profitability % on Fees Charged = [(Fees Charged − Total Cost) ÷ Fees Charged] × 100
The sector with the highest profitability percentage is the most profitable sector.

| Sector | Fees Charged (₹) | Total Cost (₹) | Profit (₹) | Profitability % |
|---|---|---|---|---|
| Technology | XX | XX | XX | XX% |
| Healthcare | XX | XX | XX | XX% |
| Education | XX | XX | XX | XX% |

Conclusion: [Sector with highest %] is the most profitable sector based on profitability percentage on fees charged.

Please provide the data table from the question (activity costs, cost drivers, project counts, fees) for a fully worked numerical solution.

Activity Based Costing — SM Limited

Part (i): Statement of Total Cost and Per Project Cost using ABC

Step 1 — Cost Driver Rate Calculation

Total cost drivers across all sectors are first aggregated:
- Number of Projects: 20 + 10 + 10 = 40 projects
- Consulting Hours: 6,400 + 5,600 + 2,000 = 14,000 hours
- Client Meetings: 30 + 20 + 40 = 90 meetings
- Software Development Hours: 10,000 + 7,000 + 5,000 = 22,000 hours

Cost Driver Rates (CDR):
- Management of Projects: ₹8,10,000 ÷ 40 = ₹20,250 per project
- Consulting Service Delivery: ₹4,20,000 ÷ 14,000 = ₹30 per consulting hour
- Client Interaction & Meetings: ₹6,30,000 ÷ 90 = ₹7,000 per meeting
- Administration and Support: ₹15,40,000 ÷ 22,000 = ₹70 per software dev hour

Step 2 — Overhead Allocation to each Sector

Technology Sector (20 Projects):
- Management of Projects: 20 × ₹20,250 = ₹4,05,000
- Consulting Service Delivery: 6,400 × ₹30 = ₹1,92,000
- Client Interaction & Meetings: 30 × ₹7,000 = ₹2,10,000
- Administration and Support: 10,000 × ₹70 = ₹7,00,000
- Total Cost = ₹15,07,000 | Per Project = ₹75,350

Healthcare Sector (10 Projects):
- Management of Projects: 10 × ₹20,250 = ₹2,02,500
- Consulting Service Delivery: 5,600 × ₹30 = ₹1,68,000
- Client Interaction & Meetings: 20 × ₹7,000 = ₹1,40,000
- Administration and Support: 7,000 × ₹70 = ₹4,90,000
- Total Cost = ₹10,00,500 | Per Project = ₹1,00,050

Education Sector (10 Projects):
- Management of Projects: 10 × ₹20,250 = ₹2,02,500
- Consulting Service Delivery: 2,000 × ₹30 = ₹60,000
- Client Interaction & Meetings: 40 × ₹7,000 = ₹2,80,000
- Administration and Support: 5,000 × ₹70 = ₹3,50,000
- Total Cost = ₹8,92,500 | Per Project = ₹89,250

*Verification: ₹15,07,000 + ₹10,00,500 + ₹8,92,500 = ₹34,00,000 = Total overheads (₹8,10,000 + ₹4,20,000 + ₹6,30,000 + ₹15,40,000) ✓*

Part (ii): Most Profitable Sector

The question requires identification of the most profitable sector based on profitability percentage on fees charged (Profit/Fees × 100). The fees (revenue) data for each sector is not provided in the case scenario as presented. To determine profitability, one would compute: Profit = Fees Charged − Total Cost Allocated, and then Profitability % = (Profit ÷ Fees Charged) × 100 for each sector. The sector with the highest such percentage would be identified as most profitable. If fees data were available, the sector with the lowest cost relative to fees — which based on per-project cost analysis would likely be Technology (₹75,350 per project) compared to Healthcare (₹1,00,050) — could indicate a cost advantage, subject to actual revenue earned.

Step 1 – Calculation of Contribution per Unit

The variable cost per unit for each product is determined by summing raw material, wages, direct expenses, and variable overhead (fixed overhead is excluded as it is period cost).

Product A: Selling Price ₹1,800 – Variable Cost (₹300 + ₹150 + ₹200 + ₹80) = ₹1,800 – ₹730 = Contribution ₹1,070 per unit

Product B: Selling Price ₹1,500 – Variable Cost (₹400 + ₹100 + ₹300 + ₹120) = ₹1,500 – ₹920 = Contribution ₹580 per unit

Step 2 – Raw Material (kg) per Unit

Since both products use the same grade of raw material at ₹20 per kg:
- Product A: ₹300 ÷ ₹20 = 15 kg per unit
- Product B: ₹400 ÷ ₹20 = 20 kg per unit

Total requirement at full capacity = (5,000 × 15) + (3,500 × 20) = 75,000 + 70,000 = 1,45,000 kg > 1,10,000 kg available. Raw material is indeed the binding constraint.

Step 3 – Contribution per kg (Limiting Factor Ranking)

- Product A: ₹1,070 ÷ 15 kg = ₹71.33 per kg → Rank 1
- Product B: ₹580 ÷ 20 kg = ₹29.00 per kg → Rank 2

Step 4 – Optimum Product Mix

Allocate the 1,10,000 kg available to Product A first (higher ranking), then balance to Product B.

| Priority | Product | Units | kg/unit | kg Used | Cumulative kg |
|----------|---------|-------|---------|---------|----------------|
| 1st | A | 5,000 (max) | 15 | 75,000 | 75,000 |
| 2nd | B | 1,750 | 20 | 35,000 | 1,10,000 |

Remaining kg after A = 1,10,000 – 75,000 = 35,000 kg; B units = 35,000 ÷ 20 = 1,750 units (within max 3,500).

Step 5 – Maximum Profit

| | Product A | Product B | Total |
|-|-----------|-----------|-------|
| Units | 5,000 | 1,750 | |
| Contribution/unit | ₹1,070 | ₹580 | |
| Total Contribution | ₹53,50,000 | ₹10,15,000 | ₹63,65,000 |
| Less: Fixed Overhead | ₹2,50,000 | ₹3,30,000 | ₹5,80,000 |
| Profit | | | ₹57,85,000 |

The optimum product mix is 5,000 units of Product A and 1,750 units of Product B, generating a maximum profit of ₹57,85,000.

Optimum Product Mix with Material as Limiting Factor

Step 1: Calculation of Contribution per Unit

The contribution per unit is calculated as Selling Price minus all Variable Costs (Raw Material + Wages + Direct Expenses + Variable Overhead).

For Product A: ₹1,000 − (₹200 + ₹150 + ₹200 + ₹80) = ₹1,000 − ₹630 = ₹370 per unit

For Product B: ₹1,500 − (₹400 + ₹100 + ₹300 + ₹120) = ₹1,500 − ₹920 = ₹580 per unit

Step 2: Material Consumption per Unit (Limiting Factor)

Raw material is priced at ₹20 per kg.

Product A: ₹200 ÷ ₹20 = 10 kg per unit
Product B: ₹400 ÷ ₹20 = 20 kg per unit

Step 3: Contribution per kg of Material (Key Ratio)

Since raw material is the limiting factor, products are ranked by contribution per kg.

Product A: ₹370 ÷ 10 kg = ₹37 per kg → Rank I
Product B: ₹580 ÷ 20 kg = ₹29 per kg → Rank II

Step 4: Optimum Product Mix

Total material available = 1,10,000 kgs

First priority — Product A (maximum 5,000 units):
Material used = 5,000 × 10 kg = 50,000 kgs
Remaining material = 1,10,000 − 50,000 = 60,000 kgs

Second priority — Product B (maximum 3,500 units requiring 70,000 kgs):
Units produced = 60,000 ÷ 20 = 3,000 units (limited by material)

Optimum Mix: Product A = 5,000 units; Product B = 3,000 units

Step 5: Maximum Profit

Total Contribution = (5,000 × ₹370) + (3,000 × ₹580) = ₹18,50,000 + ₹17,40,000 = ₹36,90,000

Less: Total Fixed Overheads = ₹2,50,000 + ₹3,30,000 = ₹5,80,000

Maximum Profit = ₹36,90,000 − ₹5,80,000 = ₹31,10,000

Part (a): ABC Analysis — Ranking and Selective Control

Note: The numerical data table (units and unit prices for MA, MB, MC, MG, MH) appears to have been omitted from the question as provided. The methodology and classification framework are presented below; the same steps apply once the data is substituted.

Step 1 — Calculate Annual Value: For each material, multiply Annual Consumption (units) × Unit Cost (₹) to arrive at Total Annual Value.

Step 2 — Rank Materials: Arrange materials in descending order of their total annual value.

Step 3 — Classify under ABC:

| Category | Criterion (Annual Value) | Control Focus |
|----------|--------------------------|---------------|
| A | ₹50,000 and above | Tight control; continuous review; low safety stock |
| B | ₹15,000 to ₹50,000 | Moderate control; periodic review |
| C | Below ₹15,000 | Loose control; bulk ordering; maximum safety stock |

Management Implication: The storekeeper's argument is flawed. ABC analysis is based on value, not quantity. Materials MA, MB and MC may be in bulk by units but if their total value is low, they fall in Category C and require minimal control. Materials MG and MH, though few in units, may carry high per-unit value — placing them in Category A — and therefore warrant the highest degree of care. The deterioration of even a few units of MG/MH represents a disproportionately large monetary loss, which is precisely why selective control is important.

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Part (b): Economic Order Quantity (EOQ) and Number of Orders

Given:
- Ordering Cost (O) = ₹1,250 per order
- Carrying Cost (C) = ₹25 per unit per annum
- Annual Demand (D) = 90,000 gadgets × 1 component each = 90,000 units

(i) Economic Order Quantity:

EOQ = √(2DO / C) = √(2 × 90,000 × 1,250 / 25) = √(9,000,000) = 3,000 units

(ii) Number of Orders per Year:

Number of Orders = D / EOQ = 90,000 / 3,000 = 30 orders per year

Conclusion: The company should place orders of 3,000 units each, 30 times a year, to minimise total inventory costs.

ABC Analysis — TS Limited

Note: The question as presented does not include the data table (units in stock and cost per unit for each material). The solution below uses assumed illustrative data consistent with the narrative and the given ABC criteria, to demonstrate the complete methodology. In the actual exam, substitute the given figures.

Assumed Data:

| Material | Units in Stock | Cost per Unit (₹) | Total Value (₹) |
|----------|---------------|-------------------|------------------|
| MA | 5,000 | 6 | 30,000 |
| MB | 3,000 | 8 | 24,000 |
| MC | 8,000 | 1.50 | 12,000 |
| MG | 100 | 650 | 65,000 |
| MH | 80 | 700 | 56,000 |

Step 1 — Rank materials by total value (descending):

| Rank | Material | Total Value (₹) | ABC Category |
|------|----------|------------------|--------------|
| 1 | MG | 65,000 | A |
| 2 | MH | 56,000 | A |
| 3 | MA | 30,000 | B |
| 4 | MB | 24,000 | B |
| 5 | MC | 12,000 | C |

Step 2 — Apply ABC Criteria:

- Category A (₹50,000 & above): MG (₹65,000), MH (₹56,000) — High Value; Require maximum control, close supervision, accurate records, and frequent review.
- Category B (₹15,000 to ₹50,000): MA (₹30,000), MB (₹24,000) — Medium Value; Moderate control with periodic review.
- Category C (Below ₹15,000): MC (₹12,000) — Low Value; Simple controls, bulk ordering, minimum attention.

Conclusion — Flaw in Storekeeper's Argument:

The storekeeper's reasoning is based on volume/quantity (bulk = more care), which is incorrect. ABC Analysis demonstrates that care and control must be proportional to monetary value, not physical quantity. MG and MH, though stored in small quantities, fall under Category A (highest value). Their deterioration represents the most significant financial loss. The storekeeper should have devoted maximum attention and protective storage to MG and MH, while MA, MB, and MC (being B and C category) required relatively lesser priority despite being in bulk. The management is correct in educating the storekeeper about value-based selective inventory control.

Final Answer: MG and MH → Category A; MA and MB → Category B; MC → Category C.

Economic Order Quantity (EOQ) and Number of Orders

The Economic Order Quantity (EOQ) is the order size that minimises the total of ordering costs and carrying costs. It is calculated using the standard EOQ formula.

Given Information:
- Annual Demand (D) = 90,000 units (since each gadget requires one component)
- Ordering Cost per order (Co) = ₹1,250
- Carrying Cost per unit per annum (Cc) = ₹25

(i) Economic Order Quantity:

EOQ = √(2 × D × Co / Cc)

EOQ = √(2 × 90,000 × 1,250 / 25)

EOQ = √(9,00,00,000 / 25)

EOQ = √(36,00,000)

EOQ = 3,000 units

(ii) Number of Orders per Year:

Number of Orders = Annual Demand / EOQ

Number of Orders = 90,000 / 3,000

Number of Orders = 30 orders per year

Completed Table: Accounting Entries for Over/Under Absorption of Overheads

Row 1: Under-absorption - Stock of Finished Goods Account
- Absorption of Overhead: Under-absorption
- Accounts: Stock of Finished Goods A/c (Dr.) / Overhead Control A/c (Cr.)
- Dr/Cr: Dr. Stock of Finished Goods A/c; Cr. Overhead Control A/c
- Calculation of Amount Formula: Under-absorption × (Cost of Finished Goods / Total Cost of Production)

Row 2: Over-absorption - Stock of Semi-finished Goods (WIP) Account
- Absorption of Overhead: Over-absorption
- Accounts: Overhead Control A/c (Dr.) / Stock of WIP A/c (Cr.)
- Dr/Cr: Dr. Overhead Control A/c; Cr. Stock of WIP A/c
- Calculation of Amount Formula: Over-absorption × (Cost of WIP / Total Cost of Production)

Row 3: Under-absorption - Cost of Sales Account
- Absorption of Overhead: Under-absorption
- Accounts: Cost of Sales A/c (Dr.) / Overhead Control A/c (Cr.)
- Dr/Cr: Dr. Cost of Sales A/c; Cr. Overhead Control A/c
- Calculation of Amount Formula: Under-absorption × (Cost of Goods Sold / Total Cost of Production)

Key Principles:

Under-absorption occurs when actual overhead exceeds absorbed overhead. Since insufficient overhead has been charged to production, the deficiency is allocated to inventory and expense accounts by debiting them to increase cost values.

Over-absorption occurs when absorbed overhead exceeds actual overhead. Since excess overhead has been charged to production, the surplus is allocated by crediting relevant accounts to reduce cost values.

Allocation Method: The total under/over-absorption is distributed among accounts based on the proportion of costs in each account relative to total production cost. This ensures equitable distribution and accurate reflection of actual overhead incurred across all production categories.