PAPER – 3: COST AND MANAGEMENT ACCOUNTING

QUESTIONS
Material Cost
1. A Ltd. produces a product ‘X’ using a raw material ‘D’. To produce one unit of X, 4 kg of D
is required. As per the sales forecast conducted by the company, it will be able to sale
20,000 units of X in the coming year.
The following are the information related to the raw material D:
(i) The Re-order quantity is 400 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 40 kg. more than the average consumption per day.
(iii) There is an opening stock of 2,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is ` 250 per kg.
There is an opening stock of 1,800 units of the finished product X.
The carrying cost of inventory is 14% p.a.
To place an order company has to incur ` 1,340 on paper and documentation work.
From the above information FIND OUT the followings in relation to raw material D:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) Calculate the impact on the profitability of the company by not ordering the EOQ.
[Take 300 days for a year]
Employee Cost
2. JBL Sisters operates a boutique which works for various fashion houses and retail stores.
It has employed 26 workers and pays them on time rate basis. On an average an employee
is allowed 8 hours for boutique work on a piece of garment. In the month of December
2020, two workers M and J were given 15 pieces and 21 pieces of garments respectively
for boutique work. The following are the details of their work:
M J
Work assigned 15 pcs. 21 pcs.
Time taken 100 hours 140 hours

Workers are paid bonus as per Halsey System. The existing rate of wages is ` 60 per hour.
As per the new wages agreement the workers will be paid ` 72 per hour w.e.f. 1 stJanuary

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 53

2021. At the end of the month December 2020, the accountant of the company has wrongly
calculated wages to these two workers taking ` 72 per hour.
Required:
(i) CALCULATE the loss incurred due to incorrect rate selection.
(ii) CALCULATE the loss incurred due to incorrect rate selection, had Rowan scheme of
bonus payment followed.
(iii) CALCULATE the loss/ savings if Rowan scheme of bonus payment had followed.
(iv) DISCUSS the suitability of Rowan scheme of bonus payment for JBL Sisters?
Overheads: Absorption Costing Method
3. A manufacturing unit has purchased and installed a new machine at a cost of ` 24,90,000
to its fleet of 5 existing machines. The new machine has an estimated life of 12 years and
is expected to realise ` 90,000 as scrap value at the end of its working life.
Other relevant data are as follows:
(i) Budgeted working hours are 2,496 based on 8 hours per day for 312 days. Plant
maintenance work is carried out on weekends when production is totally halted. Th e
estimated maintenance hours are 416. During the production hours machine set -up
and change over works are carried out. During the set-up hours no production is done.
A total 312 hours are required for machine set-ups and change overs.
(ii) An estimated cost of maintenance of the machine is ` 2,40,000 p.a.
(iii) The machine requires a component to be replaced every week at a cost of ` 2,400.
(iv) There are three operators to control the operations of all the 6 machines. Each
operator is paid ` 30,000 per month plus 20% fringe benefits.
(v) Electricity: During the production hours including set-up hours, the machine
consumes 60 units per hour. During the maintenance the machine consumes only 10
units per hour. Rate of electricity per unit of consumption is ` 6.
(vi) Departmental and general works overhead allocated to the operation during last year
was ` 5,00,000. During the current year it is estimated to increase by 10%.
Required:
COMPUTE the machine hour rate.

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 54 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

Activity Based Costing

4. The following budgeted information relates to N Ltd. for the year 2021:
Products
X Y Z
Production and Sales (units) 1,00,000 80,000 60,000
(`) (`) (`)
Selling price per unit 90 180 140
Direct cost per unit 50 90 95
Hours Hours Hours
Machine department 3 4 5
(machine hours per unit)
Assembly department 6 4 3
(direct labour hours per unit)
The estimated overhead expenses for the year 2021 will be as below:
Machine Department ` 73,60,000
Assembly Department ` 55,00,000
Overhead expenses are apportioned to the products on the following basis:
Machine Department On the basis of machine hours
Assembly Department On the basis of labour hours
After a detailed study of the activities the following cost pools and their respe ctive cost
drivers are found:
Cost Pool Amount (`) Cost Driver Quantity
Machining services 64,40,000 Machine hours 9,20,000 hours
Assembly services 44,00,000 Direct labour hours 11,00,000 hours
Set-up costs 9,00,000 Machine set-ups 9,000 set-ups
Order processing 7,20,000 Customer orders 7,200 orders
Purchasing 4,00,000 Purchase orders 800 orders
As per an estimate the activities will be used by the three products:
Products
X Y Z
Machine set-ups 4,500 3,000 1,500

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 55

Customer orders 2,200 2,400 2,600

Purchase orders 300 350 150
You are required to PREPARE a product-wise profit statement using:
(i) Absorption costing method;
(ii) Activity-based method.
Cost Sheet
5. RTA Ltd. has the following expenditures for the year ended 31 st December, 2020:
Sl. Amount (`) Amount (`)
No.
(i) Raw materials purchased 5,00,00,000
(ii) Freight inward 9,20,600
(iii) Wages paid to factory workers 25,20,000
(iv) Royalty paid for production 1,80,000
(v) Amount paid for power & fuel 3,50,000
(vi) Job charges paid to job workers 3,10,000
(vii) Stores and spares consumed 1,10,000
(viii) Depreciation on office building 50,000
(ix) Repairs & Maintenance paid for:
- Plant & Machinery 40,000
- Sales office building 20,000 60,000
(x) Insurance premium paid for:
- Plant & Machinery 28,200
- Factory building 18,800 47,000
(xi) Expenses paid for quality control check 18,000
activities
(xii) Research & development cost paid for 20,000
improvement in production process
(xiii) Expenses paid for pollution control and 36,000
engineering & maintenance
(xiv) Salary paid to Sales & Marketing mangers 5,60,000
(xv) Salary paid to General Manager 6,40,000
(xvi) Packing cost paid for:

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- Primary packing necessary to 46,000

maintain quality
- For re-distribution of finished goods 80,000 1,26,000
(xvii) Fee paid to independent directors 1,20,000
(xviii) Performance bonus paid to sales staffs 1,20,000
(xix) Value of stock as on 1 stJanuary, 2020:
- Raw materials 10,00,000
- Work-in-process 8,60,000
- Finished goods 12,00,000 30,60,000
(xx) Value of stock as on 31 stDecember, 2020:
- Raw materials 8,40,000
- Work-in-process 6,60,000
- Finished goods 10,50,000 25,50,000
Amount realized by selling of scrap and waste generated during manufacturing process –
` 48,000/-
From the above data you are requested to PREPARE Statement of Cost for RTA Ltd. for
the year ended 31st December, 2020, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of
Production, (iv) Cost of goods sold and (v) Cost of sales.
Cost Accounting System
6. The financial books of a company reveal the following data for the year ended 31 st March,
2020:
(`)
Opening Stock:
Finished goods 625 units 1,06,250
Work-in-process 92,000
01.04.2019 to 31.03.2020
Raw materials consumed 16,80,000
Direct Labour 12,20,000
Factory overheads 8,44,000
Administration overheads (production related) 3,96,000
Dividend paid 2,44,000
Bad Debts 36,000
Selling and Distribution Overheads 1,44,000

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Interest received 76,000

Rent received 92,000
Sales 12,615 units 45,60,000
Closing Stock: Finished goods 415 units 91,300
Work-in-process 82,400
The cost records provide as under:
➢ Factory overheads are absorbed at 70% of direct wages.
➢ Administration overheads are recovered at 15% of factory cost.
➢ Selling and distribution overheads are charged at ` 6 per unit sold.
➢ Opening Stock of finished goods is valued at ` 240 per unit.
➢ The company values work-in-process at factory cost for both Financial and Cost Profit
Reporting.
Required:
(i) PREPARE statements for the year ended 31 st March, 2020 showing:
➢ the profit as per financial records
➢ the profit as per costing records.
(ii) PREPARE a statement reconciling the profit as per costing records with the profit as
per financial records.
Job Costing
7. SM Motors Ltd. is a manufacturer of auto components. Following are the details of
expenses for the year 2019-20:
(`)
(i) Opening Stock of Material 15,00,000
(ii) Closing Stock of Material 20,00,000
(iii) Purchase of Material 1,80,50,000
(iv) Direct Labour 90,50,000
(v) Factory Overhead 30,80,000
(vi) Administrative Overhead 20,50,400
During the FY 2020-21, the company has received an order from a car manufacturer where
it estimates that the cost of material and labour will be ` 80,00,000 and ` 40,50,000
respectively. The company charges factory overhead as a percentage of direct labour and
administrative overheads as a percentage of factory cost based on previous year's cost.

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Cost of delivery of the components at customer's premises is estimated at ` 4,50,000.

You are required to:
(i) CALCULATE the overhead recovery rates based on actual costs for 2019-20.
(ii) PREPARE a Job cost sheet for the order received and the price to be quoted if the
desired profit is 25% on sales.
Process Costing
8. A company produces a component, which passes through two processes. During the
month of November, 2020, materials for 40,000 components were put into Process- I of
which 30,000 were completed and transferred to Process- II. Those not transferred to
Process- II were 100% complete as to materials cost and 50% complete as to labour and
overheads cost. The Process- I costs incurred were as follows:
Direct Materials ` 3,00,000
Direct Wages ` 3,50,000
Factory Overheads ` 2,45,000
Of those transferred to Process II, 28,000 units were completed and transferred to finished
goods stores. There was a normal loss with no salvage value of 200 units in Process II.
There were 1,800 units, remained unfinished in the process with 100% complete as to
materials and 25% complete as regard to wages and overheads.
Costs incurred in Process-II are as follows:
Packing Materials ` 80,000
Direct Wages ` 71,125
Factory Overheads ` 85,350
Packing material cost is incurred at the end of the second process as protective packing
to the completed units of production.
Required:
(i) PREPARE Statement of Equivalent Production, Cost per unit and Process I A/c.
(ii) PREPARE statement of Equivalent Production, Cost per unit and Process II A/c.
Service Costing
9. VPS is a public school having 25 buses each plying in different directions for the transport
of its school students. In view of large number of students availing of the bus service, the
buses work two shifts daily both in the morning and in the afternoon. The buses are
garaged in the school. The workload of the students has been so arranged that in the
morning, the first trip picks up senior students and the second trip plying an hour later picks

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 59

up junior students. Similarly, in the afternoon, the first trip takes the juni or students and an
hour later the second trip takes the senior students home.
The distance travelled by each bus, one way is 8 km. The school works 22 days in a month
and remains closed for vacation in May and June. The bus fee, however, is payable by the
students for all the 12 months in a year.
The details of expenses for a year are as under:
Driver's salary – payable for all the 12 in months ` 12,000 per month per driver
Cleaner's salary payable for all the 12 months ` 8,000 per month per cleaner
License fees, taxes etc. ` 8,400 per bus per annum
Insurance Premium ` 15,600 per bus per annum
Repairs and Maintenance ` 20,500 per bus per annum
Purchase price of the bus ` 20,00,000 each
Life of the bus 16 years
Scrap value ` 1,60,000
Diesel Cost ` 78.50 per litre
Each bus gives an average of 5 km. per litre of diesel. The seating capacity of each bus is
40 students.
The school follows differential transportation fees based on distance travelled as under:
Students picked up and dropped within Transportation Percentage of students
the range of distance from the school fee availing this facility
2 km. 25% of Full 15%
4 km. 50% of Full 30%
8 km. Full 55%
Due to a pandemic, lockdown imposed on schools and the school remained closed from
April 2020 to December 2020. Drivers and cleaners were paid 75% of their salary during
the lockdown period. Repairing cost reduced to 75% for the year 2020.
Ignore the interest cost.
Required:
(i) PREPARE a statement showing the expenses of operating a single bus and the fleet
of 25 buses for a year.
(ii) FIND OUT transportation fee per student per month in respect of:
(a) Students coming from a distance of upto 2 km. from the school.
(b) Students coming from a distance of upto 4 km. from the school; and

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(c) Students coming from a distance of upto 8 km. from the school.
(iii) CALCULATE the minimum bus fare that has to be recovered from the students for
the year 2020.
Standard Costing
10. LM Limited produces a product 'SX4' which is sold in a 10 Kg. packet. The standard cost
card per packet of 'SX4' is as follows:
(`)
Direct materials 10 kg @ ` 90 per kg 900
Direct labour 8 hours @ ` 80 per hour 640
Variable Overhead 8 hours @ ` 20 per hour 160
Fixed Overhead 250
1,950
Budgeted output for a quarter of a year was 10,000 Kg. Actual output is 9,000 Kg.
Actual costs for this quarter are as follows:
(`)
Direct Materials 8,900 Kg @ ` 92 per Kg. 8,18,800
Direct Labour 7,000 hours @ ` 84 per hour 5,88,000
Variable Overhead incurred 1,40,000
Fixed Overhead incurred 2,60,000
You are required to CALCULATE:
(i) Material Usage Variance
(ii) Material Price Variance
(iii) Material Cost Variance
(iv) Labour Efficiency Variance
(v) Labour Rate Variance
(vi) Labour Cost Variance
(vii) Variable Overhead Cost Variance
(viii) Fixed Overhead Cost Variance
Marginal Costing (Short- term Decision making)
11. Aditya Limited manufactures three different products and the following information has
been collected from the books of accounts:

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Products
S T U
Sales Mix 35% 35% 30%
Selling Price ` 300 ` 400 ` 200
Variable Cost ` 150 ` 200 ` 120
Total Fixed Costs ` 18,00,000
Total Sales ` 60,00,000
The company has currently under discussion, a proposal to discontinue the manufacture of
Product U and replace it with Product M, when the following results are anticipated:
Products
S T M
Sales Mix 50% 25% 25%
Selling Price ` 300 ` 400 ` 300
Variable Cost ` 150 ` 200 ` 150
Total Fixed Costs ` 18,00,000
Total Sales ` 64,00,000
Required
(i) COMPUTE the PV ratio, total contribution, profit and Break-even sales for the existing
product mix.
(ii) COMPUTE the PV ratio, total contribution, profit and Break-even sales for the
proposed product mix.
Budget and Budgetary Control
12. RS Ltd manufactures and sells a single product and has estimated sales revenue of
` 302.4 lakh during the year based on 20% profit on selling price. Each unit of product
requires 6 kg of material A and 3 kg of material B and processing time of 4 hours in machine
shop and 2 hours in assembly shop. Factory overheads are absorbed at a blanket rate of
20% of direct labour. Variable selling & distribution overheads are ` 60 per unit sold and
fixed selling & distribution overheads are estimated to be ` 69,12,000.
The other relevant details are as under:
Purchase Price: Material A ` 160 per kg
Materials B ` 100 per kg
Labour Rate: Machine Shop ` 140 per hour
Assembly Shop ` 70 per hour

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Finished Stock Material A Material B

Opening Stock 2,500 units 7,500 kg 4,000 kg
Closing Stock 3,000 units 8,000 kg 5,500 kg
Required:
(i) CALCULATE number of units of product proposed to be sold and selling price per
unit,
(ii) PREPARE Production Budget in units, and
(iii) PREPARE Material Purchase Budget in units.
Miscellaneous
13. (a) WRITE note on cost-plus-contracts.
(b) HOW apportionment of joint costs upto the point of separation amongst the joint
products using market value at the point of separation and net realizable value
method is done? DISCUSS.
(c) DISCUSS cost classification based on variability and controllability.
(d) DESCRIBE the salient features of budget manual.

SUGGESTED HINTS/ANSWERS

1. Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘D’:
Sales forecast of the product ‘X’ 20,000 units
Less: Opening stock of ‘X’ 1,800 units
Fresh units of ‘X’ to be produced 18,200 units
Raw material required to produce 18,200 units of ‘X’ 72,800 kg.
(18,200 units × 4 kg.)
Less: Opening Stock of ‘D’ 2,000 kg.
Annual demand for raw material ‘D’ 70,800 kg.
(ii) Computation of Economic Order Quantity (EOQ):
2  Annualdemandof 'D'  Orderingcos t
EOQ =
Carryingcos t per unit per annum

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2  70,800kg. ` 1,340 2  70,800kg. ` 1,340

= = = 2,328 kg.
` 250 14% ` 35

(iii) Re- Order level:

= (Maximum consumption per day × Maximum lead time)
 AnnualConsumptionof 'D'  
=  + 40kg.   8 days 
 300days  

 70,800kg.  
=  + 40kg.   8 days  = 2,208 kg.
 300days  
(iv) Minimum consumption per day of raw material ‘D’:
Average Consumption per day = 236 Kg.
Hence, Maximum Consumption per day = 236 kg. + 40 kg. = 276 kg.
So Minimum consumption per day will be
Min.consumption+ Max.consumption
Average Consumption =
2
Min.consumption + 276 kg.
Or, 236 kg. =
2
Or, Min. consumption = 472 kg – 276 kg. = 196 kg.
(a) Re-order Quantity :
EOQ – 400 kg. = 2,328 kg. – 400 kg.= 1,928 kg.
(b) Maximum Stock level:
= Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead time)
= 2,208 kg. + 1,928 kg. – (196 kg. × 4 days) = 4,136 kg. – 784 kg. = 3,352 kg.
(c) Minimum Stock level:
= Re-order level – (Average consumption per day × Average lead time)
= 2,208 kg. – (236 kg. × 6 days) = 792 kg.
(d) Impact on the profitability of the company by not ordering the EOQ.
When purchasing the ROQ When purchasing the EOQ
I Order quantity 1,928 kg. 2,328 kg.
II No. of orders a 70,800kg. 70,800kg.
= 36.72or 37orders = 30.41or 31orders
year 1,928kg. 2,328kg.

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III Ordering Cost 37 orders × ` 1,340 31 orders × ` 1,340

= ` 49,580 = ` 41,540
IV Average 1,928kg. 2,328kg.
= 964kg. = 1,164kg.
Inventory 2 2
V Carrying Cost 964 kg. × ` 35 = ` 33,740 1,164 kg. × ` 35 = ` 40,740
VI Total Cost ` 83,320 ` 82,280
Extra Cost incurred due to not ordering EOQ = `83,320 - `82,280 = `1,040
2. Workings Notes:
Calculation of Total hours saved:
M J
No. of garments assigned (Pieces.) 15 21
Hour allowed per piece (Hours) 8 8
Total hours allowed (Hours) 120 168
Hours Taken (Hours) 100 140
Hours Saved (Hours) 20 28
(i) Calculation of loss incurred due to incorrect rate selection:
(While calculating loss only excess rate per hour has been taken)
M J Total
(`) (`) (`)
Basic Wages 1,200 1,680 2,880
(100 Hrs. × `12) (140 Hrs. × `12)
Bonus (as per Halsey Scheme) 120 168 288
(50% of Time Saved × Excess (50% of 20 Hrs. × `12) (50% of 28 Hrs. × `12)
Rate)
Excess Wages Paid 1,320 1,848 3,168
(ii) Calculation of loss incurred due to incorrect rate selection had Rowan scheme
of bonus payment followed:
M J Total
(`) (`) (`)
Basic Wages 1,200 1,680 2,880
(100 Hrs. × `12) (140 Hrs. × `12)

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Bonus (as per Rowan Scheme) 200 280 480

 Time Taken   100   140 
 Time Allowed  TimeSaved  ExcessRate    20  ` 12    28  `12 
   120   168 

Excess Wages Paid 1,400 1,960 3,360

(iii) Calculation of amount that could have been saved if Rowan Scheme were
followed
M J Total (`)
(`) (`)
Wages paid under Halsey Scheme 1,320 1,848 3,168
Wages paid under Rowan Scheme 1,400 1,960 3,360
Difference (loss) (80) (112) (192)
(iv) Rowan Scheme of incentive payment has the following benefits, which is suitable with
the nature of business in which JBL Sisters operates:
(a) Under Rowan Scheme of bonus payment, workers cannot increase their
earnings or bonus by merely increasing its work speed. Bonus under Rowan
Scheme is maximum when the time taken by a worker on a job is half of the time
allowed. As this fact is known to the workers, therefore, they work at such a
speed which helps them to maintain the quality of output too.
(b) If the rate setting department commits any mistake in setting standards for time
to be taken to complete the works, the loss incurred will be relatively low.
3. Working Note:
1. Effective machine hour:
= Budgeted working hours – Machine Set-up time
= 2,496 hours – 312 hours = 2,184 hours.
2. Operators’ salary per annum:
Salary (3 operators × `30,000 × 12 months) ` 10,80,000
Add: Fringe benefits (20% of `10,80,000) ` 2,16,000
` 12,96,000
3. Depreciation per annum
` 24,90,000 − ` 90,000
= ` 2,00,000
12years

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Computation of Machine hour Rate

Amount Amount per
p.a. (`) hour (`)
Standing charges
 `12,96,000 1  12,96,000 98.90
Operators’ Salary  × 
 6machines 2,184 hours 
Departmental and general overheads:
(` 5,00,000 × 110%) 5,50,000 41.97
 `5,50,000 1 
 × 
 6machines 2,184 hours 
(A) 18,46,000 140.87
Machine Expenses
 `2,00,000  2,00,000 91.58
Depreciation  
 2,184hours 
Electricity:
During working hours (2,496 hours × 60 units `6) 8,98,560 411.43
During maintenance hours (416 hours × 10 units `6) 24,960 11.43
Component replacement cost (2,400 × 52 weeks) 1,24,800 57.14
Machine maintenance cost 2,40,000 109.89
(B) 14,88,320 681.47
Machine Hour Rate (A + B) 822.34
4. (i) Profit Statement using Absorption costing method:
Particulars Product Total
X Y Z
A. Sales Quantity 1,00,000 80,000 60,000 2,40,000
B. Selling price per unit (`) 90 180 140
C. Sales Value (`) [A×B] 90,00,000 1,44,00,000 84,00,000 3,18,00,000
D. Direct cost per unit (`) 50 90 95
E. Direct Cost (`) [A×D] 50,00,000 72,00,000 57,00,000 1,79,00,000
F. Overheads:

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(i) Machine department 24,00,000 25,60,000 24,00,000 73,60,000

(`) (Working note-1)
(ii) Assembly department 30,00,000 16,00,000 9,00,000 55,00,000
(`) (Working note-1)
G. Total Cost (`) [E+F] 1,04,00,000 1,13,60,000 90,00,000 3,07,60,000
H. Profit (C-G) (14,00,000) 30,40,000 (6,00,000) 10,40,000
(ii) Profit Statement using Activity based costing (ABC) method:
Particulars Product Total
X Y Z
A. Sales Quantity 1,00,000 80,000 60,000
B. Selling price per unit 90 180 140
(`)
C. Sales Value (`) [A×B] 90,00,000 1,44,00,000 84,00,000 3,18,00,000
D. Direct cost per unit (`) 50 90 95
E. Direct Cost (`) [A×D] 50,00,000 72,00,000 57,00,000 1,79,00,000
F. Overheads: (Refer
working note-3)
(i) Machining services (`) 21,00,000 22,40,000 21,00,000 64,40,000
(ii) Assembly services (`) 24,00,000 12,80,000 7,20,000 44,00,000
(iii) Set-up costs (`) 4,50,000 3,00,000 1,50,000 9,00,000
(iv) Order processing (`) 2,20,000 2,40,000 2,60,000 7,20,000
(v) Purchasing (`) 1,50,000 1,75,000 75,000 4,00,000
G. Total Cost (`) [E+F] 1,03,20,000 1,14,35,000 90,05,000 3,07,60,000
H. Profit (`) (C-G) (13,20,000) 29,65,000 (6,05,000) 10,40,000
Working Notes:
1.
Products
X Y Z Total
A. Production (units) 1,00,000 80,000 60,000
B. Machine hours per unit 3 4 5
C. Total Machine hours 3,00,000 3,20,000 3,00,000 9,20,000
[A×B]

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D. Rate per hour (`) 8 8 8

E. Machine Dept. cost 24,00,000 25,60,000 24,00,000 73,60,000
[C×D]
F. Labour hours per unit 6 4 3
G. Total labour hours [A×F] 6,00,000 3,20,000 1,80,000 11,00,000
H. Rate per hour (`) 5 5 5
I Assembly Dept. cost 30,00,000 16,00,000 9,00,000 55,00,000
[G×H]

`73,60,000
Machine hour rate = =`8
9,20,000hours

`55,00,000
Labour hour rate = =`5
11,00,000hours

2. Calculation of cost driver rate

Cost Pool Amount Cost Driver Quantity Driver rate
(`) (`)
Machining 64,40,000 Machine hours 9,20,000 hours 7.00
services
Assembly 44,00,000 Direct labour hours 11,00,000 hours 4.00
services
Set-up costs 9,00,000 Machine set-ups 9,000 set-ups 100.00
Order processing 7,20,000 Customer orders 7,200 orders 100.00
Purchasing 4,00,000 Purchase orders 800 orders 500.00

3. Calculation of activity-wise cost

Products
X Y Z Total
A. Machining hours (Refer 3,00,000 3,20,000 3,00,000 9,20,000
Working note-1)
B. Machine hour rate (`) 7 7 7
(Refer Working note-2)
C. Machining services 21,00,000 22,40,000 21,00,000 64,40,000
cost (`) [A×B]

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 69

D. Labour hours (Refer 6,00,000 3,20,000 1,80,000 11,00,000

Working note-1)
E. Labour hour rate (`) 4 4 4
(Refer Working note-2)
F. Assembly services 24,00,000 12,80,000 7,20,000 44,00,000
cost (`) [D×E]
G. Machine set-ups 4,500 3,000 1,500 9,000
H. Rate per set-up (`) 100 100 100
(Refer Working note-2)
I. Set-up cost (`) [G×H] 4,50,000 3,00,000 1,50,000 9,00,000
J. Customer orders 2,200 2,400 2,600 7,200
K. Rate per order (`) (Refer 100 100 100
Working note-2)
L. Order processing cost 2,20,000 2,40,000 2,60,000 7,20,000
(`) [J×K]
M. Purchase orders 300 350 150 800
N. Rate per order (`) (Refer 500 500 500
Working note-2)
O. Purchasing cost (`) 1,50,000 1,75,000 75,000 4,00,000
[M×N]
5. Statement of Cost of RTA Ltd. for the year ended 31 st December, 2020:
Sl. Particulars Amount (`) Amount (`)
No.
(i) Material Consumed:
- Raw materials purchased 5,00,00,000
- Freight inward 9,20,600
Add: Opening stock of raw materials 10,00,000
Less: Closing stock of raw materials (8,40,000) 5,10,80,600
(ii) Direct employee (labour) cost:
- Wages paid to factory workers 25,20,000
(iii) Direct expenses:
- Royalty paid for production 1,80,000
- Amount paid for power & fuel 3,50,000
- Job charges paid to job workers 3,10,000 8,40,000

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 70 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

Prime Cost 5,44,40,600

(iv) Works/ Factory overheads:
- Stores and spares consumed 1,10,000
- Repairs & Maintenance paid for plant & 40,000
machinery
- Insurance premium paid for plant & 28,200
machinery
- Insurance premium paid for factory 18,800
building
- Expenses paid for pollution control and
engineering & maintenance 36,000 2,33,000
Gross factory cost 5,46,73,600
Add: Opening value of W-I-P 8,60,000
Less: Closing value of W-I-P (6,60,000)
Factory Cost 5,48,73,600
(v) Quality control cost:
- Expenses paid for quality control check 18,000
activities
(vi) Research & development cost paid for 20,000
improvement in production process
(vii) Less: Realisable value on sale of scrap and (48,000)
waste
(viii) Add: Primary packing cost 46,000
Cost of Production 5,49,09,600
Add: Opening stock of finished goods 12,00,000
Less: Closing stock of finished goods (10,50,000)
Cost of Goods Sold 5,50,59,600
(ix) Administrative overheads:
- Depreciation on office building 50,000
- Salary paid to General Manager 6,40,000
- Fee paid to independent directors 1,20,000 8,10,000
(x) Selling overheads:
- Repairs & Maintenance paid for sales 20,000
office building

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- Salary paid to Manager- Sales & 5,60,000

Marketing
- Performance bonus paid to sales staffs 1,20,000 7,00,000
(xi) Distribution overheads:
- Packing cost paid for re-distribution of
finished goods 80,000
Cost of Sales 5,66,49,600
6. (i) Statement of Profit as per financial records
(for the year ended March 31, 2020)
(`) (`)
To Opening stock of Finished 1,06,250 By Sales 45,60,000
Goods
To Work-in-process 92,000 By Closing stock of finished 91,300
Goods
To Raw materials consumed 16,80,000 By Work-in-Process 82,400
To Direct labour 12,20,000 By Rent received 92,000
To Factory overheads 8,44,000 By Interest received 76,000
To Administration overheads 3,96,000
To Selling & distribution 1,44,000
overheads
To Dividend paid 2,44,000
To Bad debts 36,000
To Profit 1,39,450
49,01,700 49,01,700

Statement of Profit as per costing records

(for the year ended March 31,2020)
(`)
Sales revenue (A) 45,60,000
(12,615 units)
Cost of sales:
Opening stock 1,50,000
(625 units × ` 240)
Add: Cost of production of 12,405 units 43,28,140

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 72 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

(Refer to working note 2)

Less: Closing stock (1,44,795)
 ` 43,28,140  415 units 
 
 12,405 units 
Production cost of goods sold (12,615 units) 43,33,345
Selling & distribution overheads
(12,615 units × ` 6) 75,690
Cost of sales: (B) 44,09,035
Profit: {(A) – (B)} 1,50,965
(ii) Statement of Reconciliation
(Reconciling the profit as per costing records with the profit as per financial
records)

(`) (`)
Profit as per Cost Accounts 1,50,965
Add: Administration overheads over absorbed 1,68,540
(` 5,64,540 – ` 3,96,000)
Opening stock overvalued 43,750
(`1,50,000 – ` 1,06,250)
Interest received 76,000
Rent received 92,000
Factory overheads over recovered 10,000 3,90,290
(` 8,54,000 – ` 8,44,000)
5,41,255
Less: Selling & distribution overheads under recovery 68,310
(` 1,44,000 – ` 75,690)
Closing stock overvalued (`1,44,795 – ` 91,300) 53,495
Dividend 2,44,000
Bad debts 36,000 (4,01,805)
Profit as per financial accounts 1,39,450

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 73

Working notes:
1. Number of units produced
Units
Sales 12,615
Add: Closing stock 415
Total 13,030
Less: Opening stock (625)
Number of units produced 12,405
2. Cost Sheet
(`)
Raw materials consumed 16,80,000
Direct labour 12,20,000
Prime cost 29,00,000
Factory overheads 8,54,000
(70% of direct wages)
Factory cost 37,54,000
Add: Opening work-in-process 92,000
Less: Closing work-in-process (82,400)
Factory cost of goods produced 37,63,600
Administration overheads 5,64,540
(15% of factory cost)
Cost of production of 12,405 units 43,28,140
(Refer to working note 1)
Cost of production per unit:
TotalCost of Pr oduction `43,28,140
= = = ` 348.90
No.of unitsproduced 12,405units

7. (i) Calculation of Overhead Recovery Rate:

Factory Overheadin 2019 − 20
Factory Overhead Recovery Rate = 100
Direct Labour Costsin 2019 − 20
` 30,80,000
= 100 = 34% of Direct labour
` 90,50,000

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 74 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

Administrative Overhead Recovery Rate

Administrative Overheadin 2019 − 20
= 100
Factory Costs in 2019 − 20(W.N.)

= ` 20,50,400 100 = 6.91% of Factory Cost

` 2,96, 80,000

Working Note:
Calculation of Factory Cost in 2019-20
Particulars Amount (`)
Opening Stock of Material 15,00,000
Add: Purchase of Material 1,80,50,000
Less: Closing Stock of Material (20,00,000)
Material Consumed 1,75,50,000
Direct Labour 90,50,000
Prime Cost 2,66,00,000
Factory Overhead 30,80,000
Factory Cost 2,96,80,000
(ii) Job Cost Sheet for the order received in 2020-21
Particulars Amount (`)
Material 80,00,000
Labour 40,50,000
Factory Overhead (34% of ` 40,50,000) 13,77,000
Factory Cost 1,34,27,000
Administrative Overhead (6.91% of ` 1,34,27,000) 9,27,806
Cost of delivery 4,50,000
Total Cost 1,48,04,806
Add: Profit @ 25% of Sales or 33.33% of cost 49,34,935
Sales value (Price to be quoted for the order) 1,97,39,741

Hence the price to be quoted is ` 1,97,39,741

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 75

8. Process I
Statement of Equivalent Production and Cost
Input Particulars Output Equivalent Production
(Units) Units Materials Labour Overheads
(%) Units (%) Units (%) Units
40,000 Completed 30,000 100 30,000 100 30,000 100 30,000
Closing WIP 10,000 100 10,000 50 5,000 50 5,000
40,000 40,000 40,000 35,000 35,000

Particulars Materials Labour Overhead Total

Cost incurred (`) 3,00,000 3,50,000 2,45,000 8,95,000
Equivalent units 40,000 35,000 35,000
Cost per equivalent unit (`) 7.50 10.00 7.00 24.50

Process-I Account
Particulars Units (`) Particulars Units (`)
To Materials 40,000 3,00,000 By Process-II A/c 30,000 7,35,000
(30,000 units × `24.5)
To Labour 3,50,000 By Closing WIP* 10,000 1,60,000
To Overhead 2,45,000
40,000 8,95,000 40,000 8,95,000

* (Material 10,000 units × ` 7.5) + (Labour 5,000 units × ` 10) + (Overheads 5,000 units × `7)
= ` 75,000 + ` 50,000 + ` 35,000 = ` 1,60,000

Process II
Statement of Equivalent Production and Cost
Input Particulars Output Equivalent Production
(Units) Units Materials Labour Overheads
(%) Units (%) Units (%) Units
30,000 Completed 28,000 100 28,000 100 28,000 100 28,000
Normal loss 200 -- -- --
Closing WIP 1,800 100 1,800 25 450 25 450
30,000 30,000 29,800 28,450 28,450

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 76 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

Particulars Materials Labour Overhead Total

Process-I Cost 7,35,000 -- -- 7,35,000
Cost incurred (`) -- 71,125 85,350 1,56,475
Equivalent units 29,800 28,450 28,450 --
Cost per equivalent unit (`) 24.6644 2.5000 3.0000 30.1644

Process-II Account
Particulars Units (`) Particulars Units (`)
To Process-I A/c 30,000 7,35,000 By Normal loss A/c 200 --
To Packing Material -- 80,000 By Finished Goods 28,000* 9,24,604
Stock A/c
To Direct Wages -- 71,125 By Closing WIP 1,800** 46,871
To Factory Overhead -- 85,350
30,000 9,71,475 30,000 9,71,475
* 28,000 × ` 30.1644 = ` 8,44,603 + ` 80,000 (Packing Material Cost) = ` 9,24,604
** 1,800 units × ` 24.6644 + 450 units × (` 2.5 + `3) = ` 46,871
9. (i) Statement showing the expenses of operating a single bus and
the fleet of 25 buses for a year
Particulars Per bus Fleet of 25
per annum buses
(`) per annum
(`)
Running costs : (A)
Diesel (Refer to working note 1) 2,21,056 55,26,400
Repairs & maintenance costs: (B) 20,500 5,12,500
Fixed charges:
Driver's salary 1,44,000 36,00,000
(` 12,000 × 12 months)
Cleaners salary 96,000 24,00,000
(` 8,000 × 12 months)
Licence fee, taxes etc. 8,400 2,10,000
Insurance 15,600 3,90,000
 ` 20,00,000 − `1,60,000  1,15,000 28,75,000
Depreciation  
 16 years 

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 77

Total fixed charges: (C) 3,79,000 94,75,000

Total expenses: (A+B+C) 6,20,556 1,55,13,900
(ii) Average cost per student per month in respect of students coming from a
distance of:
(a) 2 km. from the school {` 6,20,556 / (236 students × 12 months)} ` 219.12
(Refer to Working Note 2)
(b) 4 km. from the school (` 219.12 × 2) ` 438.24
(c) 8 km. from the school (` 219.12 × 4) ` 876.48
(iii) Calculation of minimum bus fare to be recovered from the students during the
year 2020:
Statement showing the expenses of operating a single bus in year 2020
Particulars Per bus
per annum
(`)
Running costs : (A)
Diesel (Refer to working note 3) 66,316.80
Repairs & maintenance costs: (B) 15,375
(` 20,500 x 0.75)
Fixed charges:
Driver's salary 1,17,000
{` 12,000 × 3 months + (75% of ` 12,000 × 9 months)}
Cleaners salary 78,000
{` 8,000 × 3 months + (75% of ` 8,000 × 9 months)}
Licence fee, taxes etc. 8,400
Insurance 15,600
 ` 20,00,000 − `1,60,000  1,15,000
Depreciation  
 16 years 
Total fixed charges: (C) 3,34,000
Total expenses: (A+B+C) 4,15,691.80
Minimum bus fare to be recovered:
(a) 2 km. from the school {` 4,15,691.8 / (236 students × 12 months)} ` 146.78
(Refer to Working Note 2)
(b) 4 km. from the school (` 146.78 × 2) ` 293.56
(c) 8 km. from the school (`146.78 × 4) ` 587.12

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 78 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

Working Notes:
1. Calculation of diesel cost per bus:
No. of trips made by a bus each day 4
Distance travelled in one trip both ways (8 km. × 2 trips) 16 km.
Distance travelled per day by a bus (16 km. × 4 shifts) 64 km.
Distance travelled during a month ( 64 km. × 22 days) 1,408 km.
Distance travelled per year (1,408 × 10 months) 14,080 km.
No. of litres of diesel required per bus per year 2,816 litres
(14,080 km. ÷ 5 km.)
Cost of diesel per bus per year (2,816 litres × ` 78.50) ` 2,21,056
2. Calculation of equivalent number of students per bus:
Bus capacity of 2 trips (40 students × 2 trips) 80 students
1/ th fare students (15% × 80 students) 12 students
4

½ fare students (30% × 80 students × 2) (equivalent to 1/ th

4 48 students
fare students)
Full fare students (55% × 80 students × 4) (equivalent to 1/4th 176 students
fare students)
Total students equivalent to 1/4th fare students 236 students
3. Calculation of diesel cost per bus in Year 2020:
Distance travelled during a month ( 64 km. × 22 days) 1,408 km.
Distance travelled during the year 2020 (1,408 × 3 months) 4,224 km.
No. of litres of diesel required per bus per year 844.8 litres
(4,224 km. ÷ 5 km.)
Cost of diesel per bus per year (844.8 litres × ` 78.50) ` 66,316.80
10. (i) Material Usage Variance = Std. Price (Std. Quantity – Actual Quantity)
= ` 90 (9,000 kg. – 8,900 kg.)
= ` 9,000 (Favourable)
(ii) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
= 8,900 kg. (` 90 – ` 92) = ` 17,800 (Adverse)
(iii) Material Cost Variance = Std. Material Cost – Actual Material Cost
= (SQ × SP) – (AQ × AP)

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 79

= (9,000 kg. × ` 90) – (8,900 kg. × ` 92)

= ` 8,10,000 – ` 8,18,800
= ` 8,800 (Adverse)
(iv) Labour Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)
9,000
= ` 80 (  8hours – 7,000 hrs.)
10
= ` 80 (7,200 hrs. – 7,000 hrs.)
= ` 16,000 (Favourable)
(v) Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)
= 7,000 hrs. (` 80 – ` 84)
= ` 28,000 (Adverse)
(vi) Labour Cost Variance = Std. Labour Cost – Actual Labour Cost
= (SH × SR) – (AH × AR)
= (7,200 hrs. × ` 80) – (7,000 hrs. × ` 84)
= ` 5,76,000 – ` 5,88,000
= ` 12,000 (Adverse)
(vii) Variable Cost Variance = Std. Variable Cost – Actual Variable Cost
= (7,200 hrs. × ` 20) – ` 1,40,000
= ` 4,000 (Adverse)
(viii) Fixed Overhead Cost Variance = Absorbed Fixed Overhead – Actual Fixed Overhead
` 250
=  9,000kgs. − ` 2,60,000
10 kgs.
= ` 2,25,000 – ` 2,60,000 = ` 35,000 (Adverse)
11. (i) Computation of PV ratio, contribution and break-even sales for existing product
mix
Products
Total
S T U
Selling Price (`) 300 400 200
Less: Variable Cost (`) 150 200 120

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 80 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

Contribution per unit (`) 150 200 80

P/V Ratio (Contribution/Selling price) 50% 50% 40%
Sales Mix 35% 35% 30%
Contribution per rupee of sales
17.5% 17.5% 12% 47%
(P/V Ratio × Sales Mix)
Present Total Contribution (`60,00,000 × 47%) ` 28,20,000
Less: Fixed Costs ` 18,00,000
Present Profit ` 10,20,000
Present Break Even Sales (`18,00,000/0.47) ` 38,29,787
(ii) Computation of PV ratio, contribution and break-even sale for proposed product
mix
Products
S T M Total
Selling Price (`) 300 400 300
Less: Variable Cost (`) 150 200 150
Contribution per unit (`) 150 200 150
P/V Ratio (Contribution/Selling price) 50% 50% 50%
Sales Mix 50% 25% 25%
Contribution per rupee of sales
25% 12.5% 12.5% 50%
(P/V Ratio x Sales Mix)
Proposed Total Contribution (`64,00,000 x 50%) ` 32,00,000
Less: Fixed Costs ` 18,00,000
Proposed Profit ` 14,00,000
Proposed Break Even Sales (`18,00,000/0.50) ` 36,00,000
12. Workings:
Statement Showing “Total Variable Cost for the year”
Particulars Amount
(`)
Estimated Sales Revenue 3,02,40,000
Less: Desired Profit Margin on Sale @ 20% 60,48,000

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 81

Estimated Total Cost 2,41,92,000

Less: Fixed Selling and Distribution Overheads 69,12,000
Total Variable Cost 1,72,80,000
Statement Showing “Variable Cost per unit”
Particulars Variable Cost
p.u. (`)
Direct Materials:
A: 6 Kg. @ ` 160 per kg. 960
B: 3 Kg. @ ` 100 per kg. 300
Labour Cost:
Machine Shop: 4 hrs. @ ` 140 per hour 560
Assembly Shop: 2 hrs. @ ` 70 per hour 140
Factory Overheads: 20% of (` 560 + ` 140) 140
Variable Selling & Distribution Expenses 60
Total Variable Cost per unit 2,160
(i) Calculation of number of units of product proposed to be sold and selling price
per unit:
Number of Units Sold = Total Variable Cost / Variable Cost per unit
= ` 1,72,80,000 / ` 2,160
= 8,000 units
Selling Price per unit = Total Sales Value / Number of Units Sold
= ` 3,02,40,000 / 8,000 units
= ` 3,780
(ii) Production Budget (units)
Particulars Units
Budgeted Sales 8,000
Add: Closing Stock 3,000
Total Requirements 11,000
Less: Opening Stock (2,500)
Required Production 8,500

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(iii) Materials Purchase Budget (Kg.)

Particulars Material Material
A B
Requirement for Production 51,000 25,500
(8,500 units × 6 Kg.) (8,500 units × 3 Kg.)
Add: Desired Closing Stock 8,000 5,500
Total Requirements 59,000 31,000
Less: Opening Stock (7,500) (4,000)
Quantity to be purchased 51,500 27,000

13. (a) These contracts provide for the payment by the contractee of the actual cost of
construction plus a stipulated profit, mutually decided between the two parties.
The main features of these contracts are as follows:
(i) The practice of cost-plus contracts is adopted in the case of those contracts
where the probable cost of the contracts cannot be ascertained in advance with
a reasonable accuracy.
(ii) These contracts are preferred when the cost of material and labour is not steady
and the contract completion may take number of years.
(iii) The different costs to be included in the execution of the contract are mutually
agreed, so that no dispute may arise in future in this respect. Under such type
of contracts, contractee is allowed to check or scrutinize the concerned books,
documents and accounts.
(iv) Such a contract offers a fair price to the contractee and also a reasonable profit
to the contractor.
The contract price here is ascertained by adding a fixed and mutually pre -decided
component of profit to the total cost of the work.
(b) Apportionment of Joint Cost amongst Joint Products using:
Market value at the point of separation: This method is used for apportionment of
joint costs to joint products upto the split off point. It is difficult to apply if the market
value of the product at the point of separation is not available. It is useful method
where further processing costs are incurred disproportionately.

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 PAPER – 3: COST AND MANAGEMENT ACCOUNTING 83

Net realizable value Method: From the sales value of joint products (at finished
stage) the followings are deducted:
− Estimated profit margins
− Selling & distribution expenses, if any
− Post split off costs.
The resultant figure so obtained is known as net realizable value of joint products.
Joint costs are apportioned in the ratio of net realizable value.
(c) Cost classification based on variability
(i) Fixed Costs – These are the costs which are incurred for a period, and which,
within certain output and turnover limits, tend to be unaffected by fluctuatio ns in
the levels of activity (output or turnover). They do not tend to increase or de -
crease with the changes in output. For example, rent, insurance of factory
building etc., remain the same for different levels of production.
(ii) Variable Costs – These costs tend to vary with the volume of activity. Any
increase in the activity results in an increase in the variable cost and vice-versa.
For example, cost of direct labour, etc.
(iii) Semi-variable Costs – These costs contain both fixed and variable components
and are thus partly affected by fluctuations in the level of activity. Examples of
semi variable costs are telephone bills, gas and electricity etc.
Cost classification based on controllability
(i) Controllable Costs - Cost that can be controlled, typically by a cost, profit or
investment centre manager is called controllable cost. Controllable costs
incurred in a particular responsibility centre can be influenced by the action of
the executive heading that responsibility centre. For example, direct costs
comprising direct labour, direct material, direct expenses and some of the
overheads are generally controllable by the shop level management.
(ii) Uncontrollable Costs - Costs which cannot be influenced by the action of a
specified member of an undertaking are known as uncontrollable costs. For
example, expenditure incurred by, say, the tool room is controllable by the
foreman in-charge of that section but the share of the tool-room expenditure
which is apportioned to a machine shop is not to be controlled by the machine
shop foreman.

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 84 INTERMEDIATE (NEW) EXAMINATION: MAY, 2021

(d) Salient features of Budget Manual

• Budget manual contains much information which is required for effective
budgetary planning.
• A budget manual is a collection of documents that contains key information for
those involved in the planning process.
• An introductory explanation of the budgetary planning and control process,
including a statement of the budgetary objective and desired results is included
in Budget Manual.
• Budget Manual contains a form of organisation chart to show who is responsible
for the preparation of each functional budget and the way in which the budgets
are interrelated.
• In contains a timetable for the preparation of each budget.
• Copies of all forms to be completed by those responsible for preparing budgets,
with explanations concerning their completion is included in Budget Manual.

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