Question 1

Find out an avoidable cost till the factory becomes operative. What is its value?

Accepted Answer

**Answer: (D)**

The avoidable cost till the factory becomes operative is **₹40,00,000**.

In cost accounting, **avoidable costs** are those costs that would NOT be incurred if a particular decision or course of action is chosen. These are **differential costs** relevant to a specific decision.

Analyzing the case:

1. **Historical and sunk costs** (2012-2024): Land purchase (₹50,00,000), building construction (₹16,00,000), company setup (₹2,80,000), market survey (₹1,50,000), guard payments, and property tax are **sunk costs** and NOT avoidable as they are already incurred.

2. **Current operational costs** (Noida office): Staff salaries (₹30,00,000/year), electricity/maintenance (₹6,00,000/year), security (₹1,80,000/year), and departmental expenses (₹2,95,000/year) are **committed costs** for ongoing operations. These would be incurred regardless of the factory status.

3. **Mr. Linde's personal salary** (₹35,00,000/year): A **committed cost** for management and ownership.

4. **Key avoidable item**: The proposal to deploy an **additional German manager at ₹20,00,000/year** is explicitly noted as "opposed by German management." This is a **discretionary cost** that can be completely avoided by management decision without affecting core business operations.

5. **Capital items**: Manesar land (₹1.50 crores), factory construction by SPV/REIT (₹85 lacs/year), and building purchase (₹3.75 crores) are strategic capital investments, not operational costs for this avoidable cost a…

Question 2

Find out the total of Sunk and shut down cost in the given case study. Select the correct option from below.

Accepted Answer

**Answer: (D) ₹90,46,000**

In this cost classification problem, we must identify **sunk costs** (irrecoverable historical costs) and **shut down costs** (costs incurred during business closure to maintain assets).

**Sunk Costs** are costs already incurred in 2012 that cannot be recovered regardless of future decisions:
- Land purchased (2012): ₹50,00,000
- Building construction (2012): ₹16,00,000
- Private Limited Company formation: ₹2,80,000
- Market survey (salaries): ₹1,50,000
Total Sunk Costs = **₹70,30,000**

**Shut Down Costs** are costs incurred during the 12-year closure period (2012–2024) to maintain the property:
- Guard salary: ₹12,500/month × 12 months × 12 years = ₹18,00,000
- Property tax: ₹18,000/year × 12 years = ₹2,16,000
Total Shut Down Costs = **₹20,16,000**

**Costs NOT included:**
Current operating costs (salaries, electricity, staff from April 2024 onwards) are relevant costs for future operations, not sunk or shutdown costs. The relocation option and LTCG tax are relevant to the future decision but not historical shutdown costs already incurred. Capital expenditure on Manesar land and factory construction are future investment decisions.

**Total Sunk and Shut Down Costs = ₹70,30,000 + ₹20,16,000 = ₹90,46,000**

Question 3

What is total out-of-pocket cost for the company in Noida branch, after factory land in Manesar is purchased, till the factory operation begins?

Accepted Answer

**Answer: (C) ₹81,50,000**

The question asks for out-of-pocket costs for the Noida branch operations during the period from when the Manesar factory land is purchased until factory operations begin (2-year construction period).

Relevant costs to include:

**Monthly recurring operational costs (Noida):**
- Salaries of staff: ₹2,50,000/month
- Electricity, water & maintenance: ₹50,000/month
- Security staff: ₹15,000/month
- Total monthly: ₹3,15,000

**Annual departmental expenses (excluding salaries):**
- Office & Administration: ₹95,000
- Sales & Marketing: ₹1,12,000
- Accounts & Finance: ₹88,000
- Total annual: ₹2,95,000

**Calculation for 2-year period (until factory operation begins):**
- Staff salaries: ₹2,50,000 × 12 × 2 = ₹60,00,000
- Electricity/water/maintenance: ₹50,000 × 12 × 2 = ₹12,00,000
- Security: ₹15,000 × 12 × 2 = ₹3,60,000
- Departmental expenses: ₹2,95,000 × 2 = ₹5,90,000

**Total = ₹81,50,000**

Note: Factory construction via SPV/REIT and purchase of Manesar land (₹1.50 crores) are separate from Noida branch out-of-pocket costs and are capital investments or structured financing. Mr. Linde's salary and German manager costs, while company-level expenses, appear to be allocated at corporate level rather than direct Noida branch operational costs.

Question 4

What will be out of pocket expenses incurred in relocation of Head office to Manesar?

Accepted Answer

**Answer: (B) ₹1,28,12,500**

The out-of-pocket cost for relocation is the net cash outflow required to complete the property transaction—the difference between the purchase cost of the new office and the net proceeds from selling the old office.

**Step 1: Calculate gain on sale of Noida office**
Sale price: ₹2,50,00,000
Less: Indexed cost of building: ₹2,25,00,000
Long-term capital gain: ₹25,00,000

**Step 2: Calculate LTCG tax**
LTCG tax @ 12.5%: ₹25,00,000 × 12.5% = ₹3,12,500

**Step 3: Calculate net proceeds from sale**
Sale price: ₹2,50,00,000
Less: LTCG tax: ₹3,12,500
Net proceeds: ₹2,46,87,500

**Step 4: Out-of-pocket cost**
Cost of new Manesar building: ₹3,75,00,000
Less: Net proceeds from Noida sale: ₹2,46,87,500
Out-of-pocket expense: ₹1,28,12,500

This represents the additional cash the company must spend from its own resources to complete the relocation after accounting for the sale proceeds and associated capital gains tax liability.

Question 5

How much is the unexpired cost of the Noida office as on 1st October, 2024, if salaries to all the employees are paid till 31st March, 2025?

Accepted Answer

**Answer: (C)**

The unexpired cost as of 1st October 2024 represents the portion of salary costs that remain to be incurred and paid from 1st October 2024 until 31st March 2025.

Calculation period: 1st October 2024 to 31st March 2025 = 6 months

**Salary costs to be included:**
The reopening operations (from April 2024) show the following recurring salary expenses per month:
- Salaries of staff: ₹2,50,000/month
- Security staff: ₹15,000/month

These constitute "all the employees" as referenced in the question. Mr. Linde's salary (₹35,00,000/year) is owner's remuneration and the German manager cost (₹20,00,000/year) is separately specified; both are excluded from employee salaries.

**Unexpired cost calculation:**
Monthly salary for all employees = ₹2,50,000 + ₹15,000 = ₹2,65,000/month
Unexpired cost for 6 months = ₹2,65,000 × 6 months = **₹15,90,000**

This represents the accrued liability for salaries payable to all employees from October 2024 to March 2025, which is the unexpired portion of salary costs as at 1st October 2024.

Question 6

The total support cost and its percentage to the cost of goods sold would be:

Accepted Answer

**Answer: (B)**

To calculate the total support cost, we need to sum all activity-based overhead costs:

**Step 1: Identify all support activity costs**
- Delivery cost: ₹1,20,96,000
- Ordering cost: ₹74,88,000
- Shelf stocking cost: ₹82,94,400
- Customer support cost: Total items sold × ₹1 per item
- Carrier cost (directly allocated to Fancy fans): ₹5,76,000

**Step 2: Calculate customer support cost**
Total items sold = 12,09,600 (Fancy fans) + 1,05,98,400 (Home decors) + 29,37,600 (Assembled furniture) = 1,47,45,600 items

Note: This confirms "Sales tripled" — last year's ₹49,15,200 cost at ₹1 per item = 49,15,200 items; this year = 3 × 49,15,200 = 1,47,45,600 items

Customer support cost = 1,47,45,600 × ₹1 = ₹1,47,45,600

**Step 3: Total support cost**
Total support cost = ₹1,20,96,000 + ₹74,88,000 + ₹82,94,400 + ₹1,47,45,600 + ₹5,76,000 = **₹4,32,00,000**

**Step 4: Calculate percentage to COGS**
Total COGS = ₹2,88,00,000 + ₹7,20,00,000 + ₹4,32,00,000 = ₹14,40,00,000

Percentage = (₹4,32,00,000 ÷ ₹14,40,00,000) × 100 = **30%**

Therefore, total support cost is ₹4,32,00,000 and represents 30% of cost of goods sold.

Question 7

Operating income as a percentage of revenues of each product line, namely Fancy fans, Home decors, Assembled furniture, when all the support costs are allocated on the basis of cost of goods sold would be:

Accepted Answer

**Answer: (C)**

When all support costs are allocated based on **Cost of Goods Sold (COGS)**, we move from activity-based costing to traditional volume-based allocation.

**Step 1: Identify all support costs to allocate**
- Delivery: ₹1,20,96,000
- Ordering: ₹74,88,000
- Shelf stocking: ₹82,94,400
- Customer support: ₹1 × 1,47,45,600 items = ₹1,47,45,600
- Carrier cost (Fancy fans): ₹5,76,000
- **Total support costs: ₹4,32,00,000**

**Step 2: Calculate allocation bases**
Total COGS = ₹2,88,00,000 + ₹7,20,00,000 + ₹4,32,00,000 = **₹14,40,00,000**

COGS allocation percentages:
- Fancy fans: 2,88,00,000 ÷ 14,40,00,000 = 20%
- Home decors: 7,20,00,000 ÷ 14,40,00,000 = 50%
- Assembled furniture: 4,32,00,000 ÷ 14,40,00,000 = 30%

**Step 3: Allocate support costs**
- Fancy fans: 20% × ₹4,32,00,000 = ₹86,40,000
- Home decors: 50% × ₹4,32,00,000 = ₹2,16,00,000
- Assembled furniture: 30% × ₹4,32,00,000 = ₹1,29,60,000

**Step 4: Calculate Operating Income**
- Fancy fans: ₹3,80,88,000 – ₹2,88,00,000 – ₹86,40,000 = **₹6,48,000**
- Home decors: ₹10,08,28,800 – ₹7,20,00,000 – ₹2,16,00,000 = **₹72,28,800**
- Assembled furniture: ₹5,80,75,200 – ₹4,32,00,000 – ₹1,29,60,000 = **₹19,15,200**

**Step 5: Calculate as % of Revenue**
- Fancy fans: (6,48,000 ÷ 3,80,88,000) × 100 = **1.70%**
- Home decors: (72,28,800 ÷ 10,08,28,800) × 100 = **7.17%**
- Assembled furniture: (19,15,200 ÷ 5,80,75,200) × 100 = **3.30%**

Question 8

The cost driver rate relating to Delivery, Ordering, Shelf stocking and Customer support would be:

Accepted Answer

**Answer: (A)**

In Activity-Based Costing (ABC), the cost driver rate is calculated as: Cost Driver Rate = Total Activity Cost ÷ Total Activity Quantity (Cost Driver Volume). Each activity must be matched with its appropriate cost driver.

**Delivery Cost Driver Rate:**
Total Delivery Cost ÷ Total Number of Deliveries = ₹1,20,96,000 ÷ 6,300 deliveries = **₹1,920 per delivery**

**Ordering Cost Driver Rate:**
Total Ordering Cost ÷ Total Purchase Orders = ₹74,88,000 ÷ 3,120 purchase orders = **₹2,400 per purchase order**

**Shelf Stocking Cost Driver Rate:**
Total Shelf Stocking Cost ÷ Total Stocking Hours = ₹82,94,400 ÷ 17,280 hours = **₹480 per stocking hour**

**Customer Support Cost Driver Rate:**
As stated in the case, the company provides after-sales phone support at **Re. 1 per item sold**. This is already specified in the activity costs provided.

Therefore, the cost driver rates are: Delivery—₹1,920 per delivery; Ordering—₹2,400 per purchase order; Shelf stocking—₹480 per stocking hour; Customer support—Re. 1 per item sold.

Question 9

Operating income of each product line, namely Fancy fans, Home decors, Assembled furniture, when all the support costs are allocated using an activity-based costing system would be:

Accepted Answer

**Answer: (D)**

Under an Activity-Based Costing system, **operating income is calculated as: Revenue – COGS – Activity-Based Support Costs**. Each support activity cost must be allocated to products based on the appropriate cost driver.

**Step 1: Calculate activity cost per unit (cost driver rate)**

- Delivery cost per delivery = ₹12,096,000 ÷ 6,300 = **₹1,920 per delivery**
- Ordering cost per purchase order = ₹7,488,000 ÷ 3,120 = **₹2,400 per order**
- Shelf stocking cost per hour = ₹8,294,400 ÷ 17,280 = **₹480 per hour**
- Customer support = **₹1 per item sold**
- Carrier cost (direct to Fancy fans) = **₹576,000**

**Fancy fans:**
Revenue ₹38,088,000 – COGS ₹28,800,000 = Gross Profit ₹9,288,000

Allocated support costs:
- Delivery: 600 × ₹1,920 = ₹1,152,000
- Ordering: 720 × ₹2,400 = ₹1,728,000
- Shelf stocking: 1,080 × ₹480 = ₹518,400
- Customer support: 1,209,600 × ₹1 = ₹1,209,600
- Carrier cost = ₹576,000
- **Total support costs = ₹5,184,000**

**Operating Income = ₹9,288,000 – ₹5,184,000 = ₹4,104,000**

**Home decors:**
Revenue ₹100,828,800 – COGS ₹72,000,000 = Gross Profit ₹28,828,800

Allocated support costs:
- Delivery: 4,380 × ₹1,920 = ₹8,409,600
- Ordering: 1,680 × ₹2,400 = ₹4,032,000
- Shelf stocking: 10,800 × ₹480 = ₹5,184,000
- Customer support: 10,598,400 × ₹1 = ₹10,598,400
- **Total support costs = ₹28,224,000**

**Operating Income = ₹28,828,800 – ₹28,224,000 = ₹604,800**

**Assembled furniture:**
Revenue ₹58,075,200 – COGS ₹43,200,000 = Gross Profit ₹14,8…

Question 10

Operating income as a percentage of revenues of each product line, namely Fancy fans, Home decors, Assembled furniture, when all the support costs are allocated using an activity-based costing system would be:

Accepted Answer

**Answer: (B)** 10.78%, 0.60% and 8.75% respectively

Under Activity-Based Costing (ABC), support costs are allocated based on actual consumption of cost drivers. First, calculate the cost driver rate for each activity, then allocate to each product line.

**Step 1: Calculate Cost Driver Rates**
- Delivery cost per delivery: ₹12,096,000 ÷ 6,300 = ₹1,920 per delivery
- Ordering cost per purchase order: ₹7,488,000 ÷ 3,120 = ₹2,400 per order
- Shelf stocking cost per hour: ₹8,294,400 ÷ 17,280 = ₹480 per hour
- Customer support: ₹1 per item sold

**Step 2: Allocate Support Costs to Each Product Line**

**Fancy Fans:**
Delivery (600 × ₹1,920) + Ordering (720 × ₹2,400) + Shelf stocking (1,080 × ₹480) + Customer support (1,209,600 × ₹1) + Carrier (direct) = ₹1,152,000 + ₹1,728,000 + ₹518,400 + ₹1,209,600 + ₹576,000 = ₹5,184,000

**Home Decors:**
Delivery (4,380 × ₹1,920) + Ordering (1,680 × ₹2,400) + Shelf stocking (10,800 × ₹480) + Customer support (10,598,400 × ₹1) = ₹8,409,600 + ₹4,032,000 + ₹5,184,000 + ₹10,598,400 = ₹28,224,000

**Assembled Furniture:**
Delivery (1,320 × ₹1,920) + Ordering (720 × ₹2,400) + Shelf stocking (5,400 × ₹480) + Customer support (2,937,600 × ₹1) = ₹2,534,400 + ₹1,728,000 + ₹2,592,000 + ₹2,937,600 = ₹9,792,000

**Step 3: Calculate Operating Income and Percentage**

**Fancy Fans:** Operating Income = ₹38,088,000 − ₹28,800,000 − ₹5,184,000 = ₹4,104,000
Percentage = (₹4,104,000 ÷ ₹38,088,000) × 100 = **10.78%**

**Home Decors:** Operating Income = ₹100,828…

Question 11

Mr. A works in a manufacturing company where he is paid bonus according to the Halsey 50% plan, besides the normal wages. The relevant data is: Time Rate (per hour) ₹100; Time allowed 10 hours; Time taken 5 hours; Time saved 5 hours. Mr. A believes that his bonus under Halsey system is getting reduced by 50%, thus intending to shift towards Rowan Premium Plan. You are required to CALCULATE the total earnings of Mr. A as per Halsey plan and Rowan Premium plan & ENUMERATE the reason for difference in both the earnings.

Accepted Answer

**Answer: (C)**

**Halsey 50% Plan Calculation:**
Wages for time taken = 5 hours × ₹100 = ₹500
Bonus = 50% × Time Saved × Time Rate = 50% × 5 × ₹100 = ₹250
Total Earnings = ₹500 + ₹250 = **₹750**

**Rowan Premium Plan Calculation:**
Wages for time taken = 5 hours × ₹100 = ₹500
Bonus = (Time Saved / Time Allowed) × Time Taken × Time Rate
Bonus = (5 hours / 10 hours) × 5 × ₹100 = 50% × ₹500 = ₹250
Total Earnings = ₹500 + ₹250 = **₹750**

**Reason for Equal Earnings:**
Both plans yield identical earnings because the time saved (5 hours) is exactly 50% of the time allowed (10 hours). In this specific scenario, the Halsey bonus rate of 50% matches the Rowan bonus coefficient of (5/10 = 50%), resulting in equal bonus amounts of ₹250 in both cases. Therefore, when actual time taken is 50% of time allowed, earnings under Halsey and Rowan plans are equal. Mr. A's concern about reduced bonus under Halsey is unfounded in this case, as both systems provide identical total compensation.

Question 12

WHICH of the following is the correct journal entry as would appear in the cost books when Material (Direct) is issued to production?

Accepted Answer

**Answer: (D)** Work-in-Process Control A/c Dr. xxx; To Store Ledger Control A/c xxx

When **direct materials** are issued to production from stores in the cost books, the work-in-process account must be debited because the material is entering production and becoming part of the production cost. Simultaneously, the Store Ledger Control account must be credited because the material quantity is being reduced from stores. This entry reflects the fundamental principle that direct materials form part of the prime cost and increase the work-in-process balance while decreasing raw material inventory. Option (A) reverses the debit/credit sides incorrectly. Option (B) credits to Production Overhead Control, which is incorrect because direct materials do not constitute production overhead—overhead is for indirect costs. Option (C) debits Production Overhead Control, which again misclassifies direct materials as overhead costs.

Question 13

A product passes through two processes. The output of Process-I is treated as the raw material of Process-II. The cost incurred at Process-II is as follows: Transferred from Process-I A/c ₹27,85,700; Materials issued ₹10,00,000; Labour ₹2,00,000; Manufacturing overhead ₹5,00,000. The output of each process is: Process-I — 48,750 units output, 2% normal loss; Process-II — 47,000 units output, 5% normal loss. No stock of materials or work-in-process was left at the end. You are required to CALCULATE the value of Abnormal Gain/Loss in Process-II A/c.

Accepted Answer

**Answer: (A)**

**Calculation of Input and Expected Output for Process-II:**

Input to Process-II = Output of Process-I = 48,750 units

Normal loss in Process-II = 5% of input = 48,750 × 0.05 = 2,437.50 units

Expected good output = 48,750 - 2,437.50 = 46,312.50 units

Actual output = 47,000 units

**Identification of Abnormal Gain/Loss:**

Since actual output (47,000 units) exceeds expected output (46,312.50 units), there is **Abnormal Gain** = 47,000 - 46,312.50 = **687.50 units**

**Cost Allocation in Process-II:**

Total cost incurred in Process-II:
- Transferred from Process-I: ₹27,85,700
- Materials issued: ₹10,00,000
- Labour: ₹2,00,000
- Manufacturing overhead: ₹5,00,000
- **Total cost = ₹44,85,700**

In process costing (with no scrap value for normal loss), the total cost is allocated to good output and abnormal units only.

Cost per good unit = Total cost ÷ Expected good output = ₹44,85,700 ÷ 46,312.50 = **₹96.81 per unit (approximately)**

**Value of Abnormal Gain:**

Abnormal Gain value = Abnormal gain units × Cost per unit
= 687.50 × ₹96.81
= **₹66,626 (approximately)**

Question 14

Sterling Industries manages various manufacturing processes. In process I, joint products P1 and P2 are produced in the ratio of 6:4 in units from the raw material input. A normal loss of 2% of the raw material input is expected, with losses having a realizable value of ₹12.5 per kg. Joint costs are apportioned using the physical measure basis. Following information relates to process I for last month: Raw materials input 75,000 kg at cost of ₹4,76,250; Direct labour ₹2,25,000; Direct expenses ₹67,500; Production Overheads 110% of direct labour cost; Abnormal gain 1,250 kg. You are required to CALCULATE the number of units and value of the Normal loss, Abnormal gain and joint products P1 & P2.

Accepted Answer

**Answer: (C)**

Calculation of outputs and values using **physical measure apportionment basis** for joint products:

**Normal Loss:**
Normal loss = 2% of raw material input = 2% × 75,000 kg = **1,500 kg**
Value of normal loss = 1,500 kg × ₹12.5 per kg = **₹18,750**

**Total Joint Costs:**
Raw materials: ₹4,76,250
Direct labour: ₹2,25,000
Direct expenses: ₹67,500
Production overheads (110% of labour): ₹2,47,500
Total joint costs = **₹10,16,250**

**Cost Apportionment:**
Apportion joint costs across all units (75,000 kg = expected output after normal loss).
Cost per unit for apportionment = ₹10,16,250 ÷ 75,000 = ₹13.55 per kg

Allocation to normal loss: 1,500 × ₹13.55 = ₹20,325
But normal loss realizable value = ₹18,750 (less than allocated cost)
Favorable variance = ₹20,325 - ₹18,750 = ₹1,575 (credited to good output)

Net cost for P1 + P2 = ₹10,16,250 - ₹18,750 + variance adjustment
Effective cost per unit for products = ₹10,16,250 × (73,500/75,000) ÷ 73,500 = ₹13.5689 per kg

**Expected Output (before abnormal gain):**
P1: (6/10) × 73,500 = 44,100 kg
P2: (4/10) × 73,500 = 29,400 kg

**Abnormal Gain Treatment:**
Abnormal gain = 1,250 kg (excess over expected output)
Allocated in same ratio 6:4
P1 abnormal: (6/10) × 1,250 = 750 kg
P2 abnormal: (4/10) × 1,250 = 500 kg
Abnormal gain value = 1,250 × ₹13.5689 = **₹16,964**

**Actual Output & Valuation:**
P1: 44,100 + 750 = **44,850 kg** at cost **₹6,08,678**
P2: 29,400 + 500 = **29,900 kg** at cost **₹4,05,786**

Question 15

PR Ltd. sells two types of pen, ball pen and gel pen. Currently, the company is expecting to sell 6,000 units of ball pen along with 3,600 units of gel pen in the coming month. Other information: Ball pen — Selling price ₹150/unit, Variable cost ₹90/unit, Contribution ₹60/unit; Gel pen — Selling price ₹100/unit, Variable cost ₹60/unit, Contribution ₹40/unit; Fixed Costs ₹3,36,000. You are required to CALCULATE the Composite Break-even Batch and individual break-even of the pens (in units).

Accepted Answer

**Answer: (C)**

In composite break-even analysis for multiple products, we must determine the sales mix ratio and calculate the weighted average contribution per unit.

**Step 1: Determine Sales Mix Ratio**
Ball pen : Gel pen = 6,000 : 3,600 = 5 : 3 (simplified)
This means for every batch, 5 units of ball pen and 3 units of gel pen are sold, totaling 8 units per batch.

**Step 2: Calculate Weighted Average Contribution per Batch**
Contribution per batch:
- Ball pen: 5 units × ₹60 = ₹300
- Gel pen: 3 units × ₹40 = ₹120
- Total contribution per batch = ₹420

Weighted average contribution per unit = ₹420 ÷ 8 = ₹52.50 per unit

**Step 3: Calculate Composite Break-even Point**
Composite break-even in units = Fixed Costs ÷ Weighted Average Contribution per unit
= ₹3,36,000 ÷ ₹52.50 = 6,400 units

Composite break-even batches = 6,400 units ÷ 8 units per batch = **800 batches**

**Step 4: Calculate Individual Break-even Units**
Using the sales mix ratio (5:3):
- Break-even units of Ball pen = 800 batches × 5 = **4,000 units**
- Break-even units of Gel pen = 800 batches × 3 = **2,400 units**

**Verification:** Total contribution at break-even = (4,000 × ₹60) + (2,400 × ₹40) = ₹2,40,000 + ₹96,000 = ₹3,36,000 ✓

Question 16

Catalist Ltd. is a distributor of industrial chemicals, providing the chemical in drum packaging. Each drum costs ₹200 from a supplier and is sold for ₹240. Annual demand is estimated at 2,50,000 drums. Cost of delivery is ₹100 per order and annual variable holding cost per drum is ₹180 plus 10% of purchase cost. The managing director calculates EOQ as the basis for purchasing decisions. The purchasing manager states that the managing director has ignored his bonus of 10% of the amount by which total annual inventory holding and order costs (before such remuneration) are below ₹2,00,000. The supplier also offers quantity discounts: for order size 1,000 drums or above, price per drum is ₹199.60 (compared to ₹200 for orders between 500 and 999 drums).

Accepted Answer

**PART (i): CALCULATION OF ECONOMIC ORDER QUANTITY**

The EOQ formula is: **EOQ = √(2DS/H)**

Where:
- **D** = Annual demand = 2,50,000 drums
- **S** = Ordering cost per order = ₹100
- **H** = Annual holding cost per drum = ₹180 + 10% of purchase cost = ₹180 + (10% × ₹200) = **₹200 per drum**

**Calculation:**

EOQ = √(2 × 2,50,000 × 100 ÷ 200)

EOQ = √(50,000,000 ÷ 200)

EOQ = √2,50,000

**EOQ = 500 drums**

---

**PART (ii): EVALUATION OF QUANTITY DISCOUNT WITH PURCHASING MANAGER'S BONUS**

A comparison of total annual costs at two order quantities is necessary:

**At EOQ = 500 drums (Price: ₹200):**
- Annual holding cost = (500 ÷ 2) × ₹200 = ₹50,000
- Annual ordering cost = (2,50,000 ÷ 500) × ₹100 = ₹50,000
- Total inventory-related costs = ₹1,00,000
- Purchasing manager's bonus = 10% × (₹2,00,000 − ₹1,00,000) = **₹10,000**
- Annual purchase cost = 2,50,000 × ₹200 = **₹5,00,00,000**
- **Total annual cost = ₹5,00,10,000** (inventory-related costs + bonus + purchase cost)

**At 1,000 drums (Price: ₹199.60):**
- Holding cost per drum = ₹180 + (10% × ₹199.60) = **₹199.96**
- Annual holding cost = (1,000 ÷ 2) × ₹199.96 = ₹99,980
- Annual ordering cost = (2,50,000 ÷ 1,000) × ₹100 = ₹25,000
- Total inventory-related costs = ₹1,24,980
- Purchasing manager's bonus = 10% × (₹2,00,000 − ₹1,24,980) = **₹7,502**
- Annual purchase cost = 2,50,000 × ₹199.60 = **₹4,99,00,000**
- **Total annual cost = ₹4,99,32,482**

**Annual savings = ₹5,00,10,000 − ₹4,99,32,482 = ₹77,518**

**COMMENT:** …

Question 17

Pi and Qu are part of a manufacturing team that handles multiple jobs within the production process. Standard working hours for the month are 210. Overtime is compensated at twice the sum of basic wages and dearness allowance. The employer's contributions to State Insurance and Provident Fund are equal to the employees' contributions. Details: Pi — Basic Wages ₹12,000, DA 50%, PF contribution 10% on basic wages, ESI 1.75% on basic wages, Overtime 8 hours; Qu — Basic Wages ₹15,000, DA 50%, PF contribution 10% on basic wages, ESI 1.75% on basic wages, Overtime nil. Job allocation ratios — Jobs A:S:D — Worker Pi: 30%:30%:40%; Worker Qu: 30%:50%:20%. Overtime was done on job S. You are required to CALCULATE the earnings of Pi and Qu and allocate the employee cost to each job A, S, and D.

Accepted Answer

**Earnings of Pi:**

Basic Wages: ₹12,000
Dearness Allowance (50% of basic): ₹6,000
Overtime Compensation: Pi worked 8 hours of overtime. Overtime rate = 2 × hourly rate based on (basic + DA) = 2 × (18,000/210) per hour. Overtime earnings = 8 × 2 × (18,000/210) = ₹1,371.43
Employee PF Contribution (10% of basic): ₹1,200
Employee ESI Contribution (1.75% of basic): ₹210
**Total Earnings of Pi: ₹20,781.43**

Employer's Contributions to Pi:
PF Contribution (equal to employee's): ₹1,200
ESI Contribution (equal to employee's): ₹210
**Total Cost for Pi (including employer contributions): ₹22,191.43**

**Earnings of Qu:**

Basic Wages: ₹15,000
Dearness Allowance (50% of basic): ₹7,500
Overtime: Nil
Employee PF Contribution (10% of basic): ₹1,500
Employee ESI Contribution (1.75% of basic): ₹262.50
**Total Earnings of Qu: ₹24,262.50**

Employer's Contributions to Qu:
PF Contribution (equal to employee's): ₹1,500
ESI Contribution (equal to employee's): ₹262.50
**Total Cost for Qu (including employer contributions): ₹26,025.00**

**Allocation of Employee Cost to Jobs:**

Pi's regular cost (excluding overtime) = ₹20,820
Allocation based on job ratios (30%:30%:40%):
- Job A: 30% × 20,820 = ₹6,246
- Job S: 30% × 20,820 = ₹6,246
- Job D: 40% × 20,820 = ₹8,328
Overtime cost (₹1,371.43) allocated to Job S

Qu's total cost = ₹26,025
Allocation based on job ratios (30%:50%:20%):
- Job A: 30% × 26,025 = ₹7,807.50
- Job S: 50% × 26,025 = ₹13,012.50
- Job D: 20% × 26,025 = ₹5,205.00

**Final Job Co…

Question 18

X Corp. produces two products, X and Y. The production division has two manufacturing departments P1 and P2 and two support departments S1 and S2. Pre-determined overhead rates are applied: Department P1 based on direct machine hours, Department P2 based on direct labour hours. Service department apportionment: S1 allocated to P1 and P2 in ratio 3:3 (equally); S2 allocated to P1 and P2 in ratio 30:15 (i.e., 2:1). Budgeted factory overheads: P1 ₹2,80,50,000; P2 ₹2,39,25,000; S1 ₹66,00,000; S2 ₹49,50,000. Products X and Y — Budgeted output: 1,00,000 and 60,000 units; Raw material cost per unit (all used in Dept. P1): ₹660 and ₹825; Budgeted time per unit: P1 — 1.5 machine hrs and 1.0 machine hr; P2 — 2 direct labour hrs and 2.5 direct labour hrs; Average wage rate in Dept. P2: ₹396/hr and ₹4…

Accepted Answer

**Answer to Overhead Absorption Problem - X Corp.**

**PART (i): PREDETERMINED OVERHEAD RATES**

**Step 1: Allocate Service Departments to Production Departments**

S1 allocation (₹66,00,000 in ratio 3:3 = 1:1):
- To P1: ₹66,00,000 × 1/2 = ₹33,00,000
- To P2: ₹66,00,000 × 1/2 = ₹33,00,000

S2 allocation (₹49,50,000 in ratio 30:15 = 2:1):
- To P1: ₹49,50,000 × 2/3 = ₹33,00,000
- To P2: ₹49,50,000 × 1/3 = ₹16,50,000

**Step 2: Total Overhead for Production Departments**

Department P1:
- Direct overhead: ₹2,80,50,000
- S1 allocation: ₹33,00,000
- S2 allocation: ₹33,00,000
- **Total: ₹3,46,50,000**

Department P2:
- Direct overhead: ₹2,39,25,000
- S1 allocation: ₹33,00,000
- S2 allocation: ₹16,50,000
- **Total: ₹2,88,75,000**

**Step 3: Budgeted Absorption Bases**

Department P1 (Machine Hours):
- Product X: 1,00,000 × 1.5 = 1,50,000 hrs
- Product Y: 60,000 × 1.0 = 60,000 hrs
- **Total: 2,10,000 machine hours**

Department P2 (Labour Hours):
- Product X: 1,00,000 × 2 = 2,00,000 hrs
- Product Y: 60,000 × 2.5 = 1,50,000 hrs
- **Total: 3,50,000 labour hours**

**Step 4: Predetermined Overhead Rates**

**Department P1: ₹3,46,50,000 ÷ 2,10,000 = ₹165 per machine hour**

**Department P2: ₹2,88,75,000 ÷ 3,50,000 = ₹825 per labour hour**

---

**PART (ii): COMPARATIVE COST STATEMENT FOR DECEMBER 2024**

| Particulars | Product X (₹) | Product Y (₹) | Total (₹) |
|---|---|---|---|
| **BUDGETED COST (8,000 & 6,000 units)** | | | |
| Raw Materials | 52,80,000 | 49,50,000 | 1,02,30,000 |
| …

Question 19

The figures listed below are derived from the Trial Balance of EVS & Co. as of 31st March. Opening Inventories: Finished Stock ₹10,96,000; Raw Materials ₹19,18,000; Work-in-Process ₹27,40,000. Office Appliances ₹2,38,380; Plant & Machinery ₹63,08,850; Building ₹27,40,000; Sales ₹1,35,21,600; Sales Return and Rebates ₹1,91,800; Cash discount allowed on sales ₹1,17,820; Materials Purchased ₹43,84,000; Freight on Materials ₹2,19,200; Purchase Returns ₹65,760; Direct employee cost ₹21,92,000; Indirect employee cost ₹2,46,600; Drawing and Designing cost ₹1,37,000; Repairs and maintenance of factory ₹1,91,800; Heat, Light and Power expenses ₹8,90,500; Pollution Control Expenses ₹2,56,190; Sales Commission ₹4,60,320; Sales Promotion ₹3,08,250; Distribution Deptt. Salaries and Expenses ₹2,46,600; …

Accepted Answer

**CONDENSED PROFIT AND LOSS STATEMENT OF EVS & CO. FOR THE YEAR ENDED 31ST MARCH**

**Schedule I: Cost of Sales**

Raw Materials Consumed:
Opening Raw Materials ₹19,18,000
Add: Purchases ₹43,84,000
Add: Freight on Materials ₹2,19,200
Less: Purchase Returns (₹65,760)
Raw Materials Available ₹65,55,440
Less: Closing Raw Materials (₹24,66,000)
**Raw Materials Consumed ₹40,89,440**

Prime Cost:
Raw Materials Consumed ₹40,89,440
Add: Direct Employee Cost ₹21,92,000
Add: Outstanding Direct Employee Cost ₹1,09,600
**Prime Cost ₹63,91,040**

Gross Works Cost:
Prime Cost ₹63,91,040
Add: Factory Overheads (see below) ₹40,70,280
**Gross Works Cost ₹1,04,61,320**

Factory Overheads:
Indirect Employee Cost ₹2,46,600
Drawing and Designing ₹1,37,000
Repairs and Maintenance ₹1,91,800
Heat, Light & Power (70% × ₹8,90,500) ₹6,23,350
Pollution Control ₹2,56,190
Plant & Machinery Depreciation (40% × ₹63,08,850) ₹25,23,540
Building Depreciation (70% × 10% × ₹27,40,000) ₹1,91,800
**Total Factory Overheads ₹40,70,280**

Cost of Production:
Opening Work-in-Process ₹27,40,000
Add: Gross Works Cost ₹1,04,61,320
Less: Closing Work-in-Process (₹26,30,400)
**Cost of Production ₹1,05,70,920**

Cost of Goods Sold:
Opening Finished Stock ₹10,96,000
Add: Cost of Production ₹1,05,70,920
Cost Available ₹1,16,66,920
Less: Closing Finished Stock (₹15,75,500)
**Cost of Goods Sold ₹1,00,91,420**

Cost of Sales:
Cost of Goods Sold ₹1,00,91,420
Add: Packing Cost ₹3,15,100
**Cost of Sales ₹1,04,06,520**

**Schedule I…

Question 20

Amy Ltd. uses a batch costing system that is fully integrated with its financial accounts. Opening balances: Stores Ledger Control Account ₹4,83,250; Work-in-Process Control Account ₹3,86,600; Finished Goods Control Account ₹6,76,550. Other information: Materials purchased during the period ₹14,49,750; Materials issued to production ₹5,79,900; Total wages paid (1/6th being indirect) ₹5,79,900; Direct wages charged to batches ₹3,86,600; Payment for non-productive time of direct workers — 1/5th of direct wages paid; Production Overheads incurred ₹2,31,960; Sales ₹19,33,000; Cost of Finished Goods Sold ₹15,46,400; Cost of Goods completed and transferred into finished goods ₹12,56,450; Physical value of Work-in-Process at end of period ₹7,73,200; Production overhead absorption rate — 130% of d…

Accepted Answer

**Working:**

**Opening balances:** Stores ₹4,83,250 | WIP ₹3,86,600 | FG ₹6,76,550

**Key calculations:**
- Total wages paid: ₹5,79,900 (Indirect 1/6 = ₹96,650; Direct = ₹4,83,250)
- Direct wages charged to batches: ₹3,86,600
- Non-productive time (1/5 of direct wages paid): ₹96,650 → goes to overheads
- Overheads absorbed: 130% × ₹3,86,600 = ₹5,02,580
- Total overheads incurred and allocated: ₹2,31,960 + ₹96,650 + ₹96,650 = ₹4,25,260
- Over-absorption: ₹5,02,580 - ₹4,25,260 = ₹77,320

---

**(i) STORES LEDGER CONTROL ACCOUNT**

| Debit | ₹ | Credit | ₹ |
|---|---|---|---|
| Opening Balance | 4,83,250 | Materials Issued to Production | 5,79,900 |
| Materials Purchased | 14,49,750 | Closing Balance | 13,12,100 |
| **Total** | **18,92,000** | **Total** | **18,92,000** |

---

**(ii) WAGES CONTROL ACCOUNT**

| Debit | ₹ | Credit | ₹ |
|---|---|---|---|
| Wages Paid | 5,79,900 | Indirect Wages (to Overheads) | 96,650 |
| | | Direct Wages (to WIP) | 3,86,600 |
| | | Non-Productive Time (to Overheads) | 96,650 |
| **Total** | **5,79,900** | **Total** | **5,79,900** |

---

**(iii) PRODUCTION OVERHEAD CONTROL ACCOUNT**

| Debit | ₹ | Credit | ₹ |
|---|---|---|---|
| Production Overheads Incurred | 2,31,960 | Overheads Absorbed to WIP (130% of ₹3,86,600) | 5,02,580 |
| Indirect Wages | 96,650 | | |
| Non-Productive Time | 96,650 | | |
| | | Over-Absorption to P&L Account | 77,320 |
| **Total** | **5,02,580** | **Total** | **5,79,900** |

*Note: Transferred balance over-absorption ₹7…

Question 21

X Ltd. provides the following cost details for calculating the selling price of Job No. X2X: Materials ₹1,330; Direct wages 18 hours @ ₹47.50 = ₹855 (Deptt. X: 8 hrs; Deptt. Y: 6 hrs; Deptt. Z: 4 hrs); Chargeable expenses ₹95; Prime cost ₹2,280; Add 1/3rd for expenses cost ₹760; Total ₹3,040. Analysis of the Profit/Loss Account for current financial year: Materials used ₹28,50,000; Direct wages — Deptt. X ₹1,90,000, Deptt. Y ₹2,28,000, Deptt. Z ₹1,52,000 (Total ₹5,70,000); Special stores items ₹76,000; Overheads — Deptt. X ₹95,000, Deptt. Y ₹1,71,000, Deptt. Z ₹38,000 (Total ₹3,04,000); Works cost ₹38,00,000; Gross profit ₹9,50,000; Sales ₹47,50,000; Selling expenses ₹3,80,000; Net profit ₹5,70,000. Average hourly rates for Departments X, Y and Z are similar. You are required to prepare a …

Accepted Answer

**Job Cost Sheet for Job No. X2X**

**1. Prime Cost Calculation:**
Materials: ₹1,330
Direct Wages (18 hours): ₹855
  - Department X (8 hrs @ ₹47.50): ₹380
  - Department Y (6 hrs @ ₹47.50): ₹285
  - Department Z (4 hrs @ ₹47.50): ₹190
Chargeable Expenses: ₹95
**Prime Cost: ₹2,280**

**2. Manufacturing Overheads (using Departmental Rates from P&L):**
Department X rate: ₹95,000 ÷ ₹1,90,000 = 50%
Department Y rate: ₹1,71,000 ÷ ₹2,28,000 = 75%
Department Z rate: ₹38,000 ÷ ₹1,52,000 = 25%

Overheads allocated:
  - Department X: ₹380 × 50% = ₹190.00
  - Department Y: ₹285 × 75% = ₹213.75
  - Department Z: ₹190 × 25% = ₹47.50
**Total Manufacturing Overheads: ₹451.25**

**3. Works Cost (Factory Cost): ₹2,731.25**

**4. Selling & Distribution Expenses:**
Rate: ₹3,80,000 ÷ ₹38,00,000 = 10% of Works Cost
Expenses: ₹2,731.25 × 10% = ₹273.13

**5. Total Cost: ₹3,004.38**

**6. Markup (20% on Total Cost):**
₹3,004.38 × 20% = ₹600.88

**Selling Price = ₹3,004.38 + ₹600.88 = ₹3,605.26**

(Or rounded to **₹3,605**)

Question 22

Following data are available for a product for the month of July, 2024: Process-I — Direct materials ₹6,00,000; Labour ₹1,20,000; Factory overheads ₹2,40,000; Units received in process 40,000; Units completed and transferred 36,000; Closing work-in-progress 2,000; Normal loss in process 2,000. Process-II — Labour ₹1,60,000; Factory overheads ₹2,00,000; Units received in process 36,000; Units completed and transferred 32,000; Closing work-in-progress (missing figure); Normal loss in process 1,500. Opening work-in-progress is nil for both processes. Production remaining in process is to be valued as: Materials 100%, Labour 50%, Overheads 50%. There has been no abnormal loss in Process-II. The company follows the weighted average method for valuing inventory. PREPARE Process Accounts after wo…

Accepted Answer

**SOLUTION:**

**Process-I Analysis:**

First, verify unit balance: Input 40,000 = Output: Completed 36,000 + Closing WIP 2,000 + Normal Loss 2,000. ✓

**Equivalent Units (Weighted Average Method):**

Materials (100% for all outputs):
- Completed & transferred: 36,000 EU
- Closing WIP: 2,000 × 100% = 2,000 EU
- Normal loss: 2,000 × 100% = 2,000 EU
- Total: 40,000 EU

Labour (50% for WIP, 100% for completed/loss):
- Completed & transferred: 36,000 EU
- Closing WIP: 2,000 × 50% = 1,000 EU
- Normal loss: 2,000 × 100% = 2,000 EU
- Total: 39,000 EU

Overheads (50% for WIP, 100% for completed/loss):
- Completed & transferred: 36,000 EU
- Closing WIP: 2,000 × 50% = 1,000 EU
- Normal loss: 2,000 × 100% = 2,000 EU
- Total: 39,000 EU

**Cost per Equivalent Unit:**
- Materials: ₹6,00,000 ÷ 40,000 = ₹15.00 per EU
- Labour: ₹1,20,000 ÷ 39,000 = ₹3.08 per EU
- Overheads: ₹2,40,000 ÷ 39,000 = ₹6.15 per EU
- **Total cost per good unit: ₹24.23**

**Cost Allocation:**
- Transferred to Process-II (36,000 units): ₹8,72,308
- Closing WIP: Materials 30,000 + Labour (1,000 @ 3.08) 3,080 + Overheads (1,000 @ 6.15) 6,151 = ₹39,231
- Normal Loss (2,000 units @ ₹24.23): ₹48,462
- **Total: ₹9,60,001** (balanced with ₹1 rounding)

---

**Process-II Analysis:**

**Missing Figure — Closing WIP Units:**
Units received: 36,000 = Completed 32,000 + Closing WIP + Loss 1,500
**Closing WIP = 2,500 units**

**Equivalent Units (Weighted Average Method):**

Labour (50% for WIP, 100% for completed/loss):
- Completed…

Question 23

JB Ltd. manufactures three chemical products, XR, YS, and ZT. Input material is processed in common plant facility to generate two intermediate products X and Y in 4:1 proportion after a normal loss of 1/12th of input material. There is no market for these intermediate products. X is processed further through finishing process R to yield XR; Y is converted into YS by process S. Process S also produces waste material Z (no market value), which is converted into saleable by-product ZT through process T. 11,40,000 kg of common input material processed each month. Output after all finishing processes: XR 7,60,000 kg at market price ₹38.80/kg; YS 1,90,000 kg at ₹72.00/kg; ZT 19,000 kg at ₹24.00/kg. Material and processing costs — Common plant: Direct material ₹97,28,000; Direct labour ₹45,60,00…

Accepted Answer

**Step 1: Determine output at split-off point**
Input material: 11,40,000 kg
Normal loss (1/12th of input): 1/12 × 11,40,000 = 95,000 kg
Output at split-off point: 11,40,000 - 95,000 = 10,45,000 kg
X and Y in 4:1 proportion:
  - X: (4/5) × 10,45,000 = 8,36,000 kg → Process R → XR: 7,60,000 kg
  - Y: (1/5) × 10,45,000 = 2,09,000 kg → Process S → YS: 1,90,000 kg
  - Waste from S (19,000 kg) → Process T → By-product ZT: 19,000 kg

**Step 2: Calculate Net Realisable Value (NRV) at split-off point**
For XR: Sales value - Further processing cost (Process R)
  = (7,60,000 × ₹38.80) - ₹1,24,64,000 = ₹29,48,80,000 - ₹1,24,64,000 = ₹28,24,16,000

For YS: Sales value - Further processing cost (Process S)
  = (1,90,000 × ₹72.00) - ₹41,04,000 = ₹13,68,00,000 - ₹41,04,000 = ₹13,26,96,000

Total NRV of joint products: ₹28,24,16,000 + ₹13,26,96,000 = ₹41,51,12,000

**Step 3: By-product treatment**
NRV of by-product ZT = Sales value - Process T cost
  = (19,000 × ₹24.00) - ₹3,04,000 = ₹4,56,000 - ₹3,04,000 = ₹1,52,000

Joint cost after deducting by-product net benefit:
  = ₹1,67,20,000 - ₹1,52,000 = ₹1,65,68,000

**Step 4: Allocate joint costs based on NRV ratio**
XR proportion: ₹28,24,16,000 ÷ ₹41,51,12,000 = 0.6809 (68.09%)
YS proportion: ₹13,26,96,000 ÷ ₹41,51,12,000 = 0.3191 (31.91%)

Allocation to XR: ₹1,65,68,000 × 0.6809 = ₹1,12,81,750
Allocation to YS: ₹1,65,68,000 × 0.3191 = ₹52,86,250

**Step 5: Calculate total cost and cost per unit**
For XR:
  Total cost = Joint cost + Process R c…

Question 24

Mr. Intell newly sets up a Home Stay in Hanle, Ladakh offering two types of room — single and double. Expected occupancy: Single rooms (20 rooms) 100%; Double rooms (10 rooms) 80%. Annual forecasted expenses: Staff salaries ₹30,20,000; Food and beverage costs ₹20,16,000; Lighting and power ₹8,60,000; Repairs and renovation ₹4,94,000; Laundry charges ₹3,22,000; Building rent ₹14,40,000; Miscellaneous expenses ₹6,12,000. Room attendants paid @ ₹125 per room day. Emergency power backup is charged separately @ ₹200 per room if requested. The rent of the double room is to be fixed at 1.5 times the single room rent. Profit is required @ 25% on total taking. In June, Mr. Matrix with family booked a double bedroom for one night and also requested emergency power backup. You are required to CALCULA…

Accepted Answer

**Calculation of Rent for Mr. Matrix**

**Step 1: Calculate Expected Room Days Per Annum**

Single rooms: 20 rooms × 100% occupancy × 360 days = 7,200 room days

Double rooms: 10 rooms × 80% occupancy × 360 days = 2,880 room days

Total room days = 10,080 days

**Step 2: Calculate Total Annual Costs**

Fixed costs:
- Staff salaries ₹30,20,000
- Food & beverage ₹20,16,000
- Lighting & power ₹8,60,000
- Repairs & renovation ₹4,94,000
- Laundry charges ₹3,22,000
- Building rent ₹14,40,000
- Miscellaneous ₹6,12,000
- **Subtotal: ₹87,64,000**

Variable costs (room attendants):
- ₹125 per room day × 10,080 days = ₹12,60,000

**Total Annual Cost = ₹100,24,000**

**Step 3: Calculate Required Turnover**

Profit required = 25% of turnover

Therefore: Cost = 75% of turnover

Turnover = Cost ÷ 0.75 = ₹100,24,000 ÷ 0.75 = **₹1,33,65,333.33**

**Step 4: Determine Room Rates Using D = 1.5S Constraint**

Let S = single room rent per night

Let D = double room rent per night = 1.5S

Total revenue equation:
7,200S + 2,880(1.5S) = 1,33,65,333.33

7,200S + 4,320S = 1,33,65,333.33

11,520S = 1,33,65,333.33

S = ₹11,601.85 per night

D = 1.5 × ₹11,601.85 = **₹17,402.78 per night**

**Step 5: Calculate Charge for Mr. Matrix**

Double bedroom for one night: ₹17,402.78

Emergency power backup (charged separately): ₹200.00

**Total Rent Charged = ₹17,602.78**

Question 25

COMPUTE the missing data indicated by the question marks from the following: Material A — Standard Price/unit ₹12, Actual Price/unit ₹15, Standard Input 50 kgs., Actual Input (?), Material Price Variance (?), Material Usage Variance (?), Material Cost Variance (?). Material B — Standard Price/unit ₹15, Actual Price/unit ₹20, Standard Input (?), Actual Input 70 kgs., Material Price Variance (?), Material Usage Variance ₹300 Adverse, Material Cost Variance (?). Material mix variance for both products together was ₹45 Adverse.

Accepted Answer

**Material variances are calculated using standard formulas:**

**Material Price Variance (MPV)** = (Actual Price − Standard Price) × Actual Quantity
**Material Usage Variance (MUV)** = (Actual Quantity − Standard Quantity) × Standard Price
**Material Cost Variance (MCV)** = MPV + MUV
**Material Mix Variance** = (Actual Qty − Standard Mix Qty) × Standard Price for each material

**Step 1: Find Standard Input of Material B**

Given MUV of B = ₹300 Adverse
MUV = (AQ − SQ) × SP
₹300 = (70 − SQ) × 15
SQ of B = 50 kgs

**Step 2: Find Actual Input of Material A using Mix Variance**

Total Standard Quantity = 50 + 50 = 100 kgs
Total Actual Quantity = AI of A + 70
Standard Mix ratio = 50:50 (i.e., 50% each)

Standard Mix of A in actual total = 0.5 × (AI of A + 70)
Standard Mix of B in actual total = 0.5 × (AI of A + 70)

Mix Variance = [AI of A − 0.5(AI of A + 70)] × ₹12 + [70 − 0.5(AI of A + 70)] × ₹15
−₹45 = [0.5 × AI of A − 35] × 12 + [35 − 0.5 × AI of A] × 15
−45 = 6 × AI of A − 420 + 525 − 7.5 × AI of A
−45 = −1.5 × AI of A + 105
AI of A = 100 kgs

**Step 3: Calculate all variances for Material A**

MPV of A = (₹15 − ₹12) × 100 = ₹300 Adverse
MUV of A = (100 − 50) × ₹12 = ₹600 Adverse
MCV of A = ₹300 + ₹600 = ₹900 Adverse

**Step 4: Calculate remaining variances for Material B**

MPV of B = (₹20 − ₹15) × 70 = ₹350 Adverse
MCV of B = ₹350 + ₹300 = ₹650 Adverse

**Summary of Missing Data:**

**Material A:**
- Actual Input: **100 kgs**
- Material Price Variance: **₹300 Adverse**
- …

Question 26

Gourmet Food Products is a new entrant in the market for chocolates. It has introduced a new product — Sweetee, a small rectangular chocolate bar wrapped in aluminium foil and packed in cartons of 50 bars. A carton is the basic sales unit. Income Statements for the last two quarters: First Quarter — Sales 50,000 × ₹24 = ₹12,00,000; Cost of Goods Sold ₹7,00,000; Gross Margin ₹5,00,000; Selling and Administration ₹6,50,000; Net Loss before Tax ₹(1,50,000); Tax (40%) ₹(60,000); Net Loss ₹(90,000). Second Quarter — Sales 70,000 × ₹24 = ₹16,80,000; Cost of Goods Sold ₹8,80,000; Gross Margin ₹8,00,000; Selling and Administration ₹6,90,000; Net Income before Tax ₹1,10,000; Tax (40%) ₹44,000; Net Income ₹66,000. There were virtually no inventories at end of each quarter. The firm's overall margina…

Accepted Answer

**Cost Structure Determination:** From the two quarters' data, changes in volume and costs are analyzed to separate fixed and variable components. Change in COGS: ₹1,80,000 for 20,000 additional cartons = ₹9 per carton variable COGS. Fixed COGS: ₹7,00,000 − (50,000 × ₹9) = ₹2,50,000. Change in S&A: ₹40,000 for 20,000 cartons = ₹2 per carton. Fixed S&A: ₹6,50,000 − (50,000 × ₹2) = ₹5,50,000. **Total fixed costs = ₹8,00,000 per quarter. Total variable cost per carton = ₹11. Contribution per carton = ₹24 − ₹11 = ₹13.**

**(a) Break-even Analysis:** Break-even occurs when contribution equals fixed costs. **Break-even units = Fixed costs ÷ Contribution per unit = ₹8,00,000 ÷ ₹13 = 61,538.46 cartons (approximately 61,539 cartons).** **Break-even revenue = 61,538.46 × ₹24 = ₹14,76,923.08.**

**(b) Target Profit Calculation:** For 20% annual after-tax return on ₹30,00,000 investment: Annual after-tax profit required = ₹30,00,000 × 20% = ₹6,00,000. Quarterly after-tax profit = ₹6,00,000 ÷ 4 = ₹1,50,000. **Before-tax profit = ₹1,50,000 ÷ (1 − 0.40) = ₹2,50,000.** **Units required = (₹8,00,000 + ₹2,50,000) ÷ ₹13 = 80,769.23 cartons.** **Quarterly revenue required = 80,769.23 × ₹24 = ₹19,38,461.54.**

**(c) Pricing Decision Evaluation:** Under the proposed plan: New price = ₹24 − ₹1.50 = ₹22.50 per carton. New sales volume = 70,000 × 1.20 = 84,000 cartons. **New contribution per carton = ₹22.50 − ₹11 = ₹11.50.** **Current Q2 scenario:** Contribution = 70,000 × ₹13 = ₹9,10,000; Fixed cost…

CA Inter Cost & Mgmt

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