CA INTERMEDIATE

COST AND
MANAGEMENT
ACCOUNTING
Module – 1 & Module - 2
 COST AND MANAGEMENT ACCOCUNTING
INDEX

S. No. CHAPTER NAME PAGE. NO.

Chapter 2 Material Costing 2.1 - 2.31

Chapter 3 Labour Costing 3.1 - 3.24

Chapter 4 Overheads - Absorption Costing Method 4.1 - 4.33

Chapter 7 Cost Accounting System 7.1 - 7.27

Chapter 9 Job Costing and Contract Costing 9.1 - 9.20

Chapter 10 Process & Operation Costing 10.1 - 10.36

Chapter 11 Joint Product & By Product 11.1 - 11.22

Chapter 12 Service Costing 12.1 - 12.23

Chapter 13 Standard Costing 13.1 - 13.20

Chapter 14 Marginal Costing 14.1 - 14.24

Chapter 15 Budget and Budgetary Control 15.1- 15.15

 Chapter 2 : Material Costing 2.1
A. Economic Order Quantity
Question 1—
A Company manufactures a special product which requires a component 'Alpha'. The
following particulars are collected for the year 2013:
(i) Annual demand of Alpha : 8,000 units
(ii) Cost of placing an order : 200 per order
(iii) Cost per unit of Alpha : 400
(iv) Carrying cost % p.a. : 20%
The company has been offered a quantity discount of 4% on the purchase of 'Alpha', provided the
order size is 4,000 components at a time.
Required:
(i) Compute the economic order quantity.
(ii) Advise whether the quantity discount offer can be accepted.
Answer—

2AO
EOQ 
Ci

2  8,000 units  200


400  20%
= 200 units.
Calculation of total inventory cost p.a. at EOQ
( )
Purchase cost = 8,000 units × 400 32,00,000
A 8,000 units 
Ordering cost  O   200  8,000
Q 200 units 
Q 200 units 
Carrying Cost   C i   400 20%  8,000
2 2 
.
32,16,000
Calculation of total inventory cost p.a. with quantity discount
( )
Purchase cost = 8,000 units × ( 400 – 4%) 30,72,000
A 8,000 units 
Ordering Cost  O   200  400
Q 4,000 units 
Q 4,000 units 
Carrying Cost  Ci   384  20%  1,53,600
2 2 
32,26,000
(ii) Quantity discount offered should not be accepted as it results in increase in total cost of inventory
management by 10,000.

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 Chapter 2 : Material Costing 2.2
Question 2—
The following information relating to a type of Raw material is available:
Annual demand 2,000 units
Unit price 20.00
Ordering cost per order 20.00
Storage cost 2% p.a.
Interest rate 8% p.a.
Lead time Half-month
Calculate economic order quantity and total annual inventory cost of the raw material.
Answer—

2  Annual demand  Cost per Order

ECQ 
Storage cost per unit annum

2  2,000 units  20 80,000

   200 units
20  (2  8)% 2
Total annual Inventory cost
Purchasing cost of 2,000 units @ 20 per unit = 40,000
2,000 units
Ordering Cost (  20) 200
200 units

Carrying cost of Inventory ½ (200 units × 20 × 10%) = 200

40,400
Question 3—
KL Limited produces product 'M' which has a quarterly demand of 8,000 units. The product re-
quires 3 kg. quantity of material 'X' for every finished unit of product. The other information are follows:
Cost of material 'X' : 20 per kg.
Cost of placing an order : 1,000 per order
Carrying Cost : 15% per annum of average inventory
You are required:
(i) Calculate the Economic Order Quantity for material 'X'.
(ii) Should the' company accept an offer of 2 percent discount by the supplier, if he wants to supply the
annual requirement of material 'X' in 4 equal quarterly installments?
Answer—
Annual demand of material 'X'
= 8,000 units (per quarter) x 4 (No. of Quarter in a year) x 3 kg. (for every finished product)
= 96,000 kg.
(i) Calculation of Economic Order Quantity (EOQ) for material 'X'

2  Annual demand  Ordering Cost 2  96,000 kg.  1,000

ECQ    8,000 kg.
Carrying cost unit per annum 20 15%

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 Chapter 2 : Material Costing 2.3

Particulars When EOQ is ordered When discount of 2% is accepted

and supply is in 4 equal
installments
Order size 8,000 kg. 24,000 kg.
 96,000 kg. 
 
 4 
No. of orders 12 4
 96,000 kg.   96,000 kg. 
   
 8,000 kg.   24,000 kg. 
Purchases Cost per kg. 20 19.60
{ 20–( 20×2%)}
Total Purchase Cost (A) 19,20,000 18,81,600
(96,000 × 20) (96,000 kg. × 19.6 )
Ordering Cost (B) 12,000 4,000
(12,000 orders × 1,000) (4 orders × 1,000)
Carrying Cost (C) 12,000 35,280
 8,000 kg.   24,000 kg. 
 15%  20   15%  19.6 
 2   2 
Total Cost (A+B+C) 19,44,000 19,20,880
Advice – The total Cost is lower if Company accept an offer of 2 percent discount by the supplier, when
supply of the annual requirement of material 'X' is made in 4 equal installments.
Question 4—
A company manufactures a product from a raw material, which is purchased at 80 per kg. The company
incurs a handling cost of 370 plus freight of 380 per order. The incremental carrying cost of inventory of
raw material is 0.25 per kg per month. In addition, the cost of working capital finance on the investment in
inventory of raw material is 12 per kg per annum. The annual production of the product is 1,00,000 units
and 2.5 units are obtained from one kg. of raw material.
Required:
(i) Calculate the economic order quantity of raw materials.
(ii) Advise, how frequently company should order for procurement be placed.
(iii) If the company proposes to rationalize placement of orders on quarterly basis, what percentage of
discount in the price of raw materials should be negotiated?
Assume 360 days in a year.
Answer—
(i) Calculation of Economic Order Quantity (E.O.Q)

1,00,000 units
Annual requirement (usage) of raw material in kg.(A) A   40,000 kg.
2.5 units per kg.
Ordering Cost (Handling & freight cost) (O) = 370 + 380 = 750
Carrying cost per unit per annum (C) i.e. inventory carrying cost + working capital cost
= ( 0.25×12 months)+ 12

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 Chapter 2 : Material Costing 2.4
= 12 per kg.

2AO 2  40,000 kg.  750

E.O.Q.    2,000 kg.
C 15
(ii) Frequency of placing orders for procurement:
Annual consumption (A) = 40,000 kg.
Quantity per order (E.O.Q) = 2,000 kg.

A 40,000 kg.
No. of orders per annum ( )   20 orders
E.O.Q. 2000 kg.

360 days
Frequency of placing orders (in days)   18 days
20 orders
(iii) Percentage of discount in the price of raw materials to be negotiated:

Particulars On Quartely Basis On E.O.Q. Basis

1. Annual Usage (in Kg.) 40,000 kg. 40,000 kg.

2. Size of the order 10,000 kg. 2,000 kg.

3. No. of orders (1÷2) 4 20

4. Cost of placing orders or Ordering cost 3,000 15,000

(No. of orders × Cost per order) (4 order × 750) (20 orders × 750)

5. Inventory carrying cost 75,000 15,000

(2,000 kg.× ½ ×
(Average inventory × Carrying cost per unit) (10,000 kg. × ½ × 15)
15)

6. Total Cost (4 + 5) 78,000 30,000

When order is placed on quarterly basis the ordering cost and carrying cost increased by 48,000
( 78,000 – 30,000).
So discount required = 48,000
Total annual purchase = 40,000 kg. × 80 = 32,00,000

48,000
So, Percentage of discount to be negotiated   100  1.5%
32,00,000
Question 5—
A company manufactures a product from a raw material, which is purchased at 60 per kg. The company
incurs a handling cost of 360 plus freight of 390 per order. The incremental carrying cost of inventory of
raw material is 0.50 per kg. per month. In addition, the cost of working capital finance on the investment
in inventory of raw material is 9 per kg. per annum. The annual production of the product is 1,00,000
units and 2.5 units are obtained from one kg of raw material.

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 Chapter 2 : Material Costing 2.5
Required
(i) Calculate the economic order quantity of raw materials.
(ii) Advise, how frequently should orders for procurement be placed.
(iii) If the company proposes to rationalize placement of orders on quarterly basis, what percentage of
discount in the price of raw materials should be negotiated?
Answer—

1,00,000
Annual requirement of raw material in kg. (A)   40,000 kg.
2.5 units per kg.
Ordering Cost (Handling & Freight cost) (O) = 360 + 390 = 750
Carrying cost per unit per annum i.e. inventory carrying cost + working capital cost (c × i)
= ( 0.5 × 12 months) + 9
= 15 per kg.

2  40,000 kgs. 750

(i) E.O.Q.   2,000kg.
15
(ii) Frequiency of orders for procurement :
Annual consumptions (A)= 40,000 kg.
Quantity per order (EOQ)= 2,000 kg.

A 40,000 kg.
No. of orders per annum ( )   20 times
EOQ 2,000 kg.

12 months
Frequency of placing (in months)   0.6 months
20 orders

365 days
Or, (in days)   18 days(approx)
20 orders
(iii) Percentage of discount in the price of raw materials to be negotiated:
Quarterly order EOQ
Size of the order 10,000 kg. 2,000 kg.
No. of orders 4 20
Cost of placing 3,000 15,000
(4 order × 750) (20 orders × 750)
Inventory carrying cost 75,000 15,000
(10,000 kg. × ½ × 15) (2,000 kg. × ½ × 15)
Total Cost 78,000 30,000
When order is placed on quarterly basis the ordering cost and carrying cost increased by 48,000 ( 78,000
– 30,000). This increase in total cost should be compensated by reduction in purchase price per kg. to make
quarterly order placement rational.

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 Chapter 2 : Material Costing 2.6

Increase in total cost

Reduction per kg. in the purchase price of raw material 
Annual reqirement

48,000
  1.2 per kg.
40,000 units

1.20
Discount in the price of raw material to be negotiated   2%
60
Question 6—
ZED Company supplies plastic crockery to fast food restaurants in metropolitan city. One of its products
is a special bowl, disposable after initial use, for serving soups to its customers. Bowls are sold in pack 10
pieces at a price of 50 per pack.
The demand for plastic bowl has been forecasted at a fairly steady rate of 40,000 packs every year. The
company purchases the bowl direct from manufacturer at 40 per pack within a three days lead time. The
ordering and related cost is 8 per order. The storage cost is 10% per annum of average inventory invest-
ment.
Required:
(i) Calculate Economic Order Quantity.
(ii) Calculate number of orders needed every year.
(iii) Calculate the total cost of ordering and storage bowls for the year.
(iv) Determine when should the next order to be placed. (Assuming that the company does maintain a
safety stock and that the present inventory level is 333 packs with a year of 360 working days.
Answer—
(i) Economic Order Quantity

2 AO 2  40,000 packs  8

ECQ    400 packs
Ci 40 10%
(ii) Number of orders per year

Annual requirements
E.O.Q.

40,000packs
 100orders a year
400 packs
(iii) Ordering an storage costs
( )
Ordering costs :- 100 orders × 8.00 800
Storage cost :- ½ (400 packs × 10% of 40) 800
Total cost of ordering & storage 1,600
(iv) Timing of next order

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 Chapter 2 : Material Costing 2.7
(a) Day's requirement served by each order.

No. of working days 360

Number of days requirements =   3.6 days supply
No. of order in a year 100
This implies that each order of 400 packs supplies for requirements of 3.6 days only.
(b) Days requirement covered by inventory

Units inventory
  (Day' s requirement served by an order )
Economic order quantity

333 Packs
  3.6 days  3 days requirement
400 packs
(c) Time interval for placing next order
Inventory left for day's requirement - Lead time of delivery 3 days - 3 days = 0 days
This means that next order for the replenishment of supplies has to be placed immediately.
Question 7—
RST Limited has received an offer of quantity discount on its order of materials as under:
Price per ton Order Size (in ton)
9,600 Less than 50
9,360 50 and less than 100
9,120 100 and less than 200
8,880 200 and less than 300
8,640 300 and above
The annual requirement for the material is 500 tons. The ordering cost per order is 12,500 and the stock
holding cost is estimated at 25% of the material cost per annum.
Required
(i) Compute the most economical purchase level.
(ii) Compute EOQ if there are no quantity discounts and the price per ton is 10,500.
Solution—

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 Chapter 2 : Material Costing 2.8
Order Size (Q) *No. Cost of Ordering cost Carrying Cost Total Cost
(units) of purchases A Q (3+4+5)
orders A × Cost  12,500  C  25%
Q 2
A÷Q per unit
(Units)

(1) (2) (3) (4) (5) (6)

40 12.5 48,00,000 1,56,250 48,000 50,04,250
(500 ×  40 
9,600)   9,600  0.25 
 2 
50 10 46,80,000 1,25,000 58,500 48,63,500
(500 ×  50 
9,360)   9,360  0.25
 2 
100 5 45,60,000 62,500 1,14,000 47,36,500
(500  100 
× 9,120)   9,120  0.25 
 2 
200 2.5 44,40,000 31,250 2,22,000 46,93,250
(500 ×  200 
8,880)   8,880  0.25 
 2 
300 1.67 43,20,000 20,875 3,24,000 46,64,875
(500 ×  300 
8640)   8,640  0.25 
 2 
A = Annual requirement
The above table shows that the total cost of 500 units including ordering and carrying cost is minimum
( 46,64,875) where the order size is 300 units. Hence the most economical purchase level is 300 units.
(*Note: Practically number of orders should be rounded off to the nearest whole number)
(ii) Calculation of Economic Order Quantity (EOQ), when no discount is available.

2AO 2  500 tonne  12,500

EOQ    69 tonne
Ci 10,500  25%
Question 8 —
The quarterly production of a company's product which has a steady market is 20,000 units. Each unit of a
product requires 0.5 kg. of raw material. The cost of placing one order for raw material is 100 and the
inventory carrying cost is 2 per annum. The lead time for procurement of raw material is 36 days and a
safety stock of 1,000 kg. of raw materials is maintained by the company. The company has been able to
negotiate the following discount structure with the raw material supplier.
Order quantity (kg.) Discount ( )
Upto 6,000 NIL
6,001 - 8,000 400
8,001 - 16,000 2,000
16,001 - 30,000 3,200
30,001 - 45,000 4,000

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 Chapter 2 : Material Costing 2.9
You are required to
(i) Calculate the re-order point taking 30 days in a month.
(ii) Prepare a statement showing the total cost of procurement and storage of raw material after consid-
ering the discount of the company elects to place one, two, four or six orders in the year.
(iii) State the number of orders which the company should place to minimize the costs after taking EOQ
also into consideration.
Answer—
Working notes
1. Annual production (20,000 units per quarter × 4 quarters) = 80,000 units
2. Raw material required for 80,000 units (80,000 units × 0.5 kg.)= 40,000 kg.

2  40,000kgs. 100
3. EOQ   2,000kgs.
2
4. Total cost of procurement and storage when the order size is equal to EOQ or 2,000 kg. No. of
orders (40,000 kg. ÷ 2,000 kg.) = 20 times
Ordering cost (20 orders × 100) = 2,000
Carrying cost ( )(½ × 2,000 kg. × 2) = 2,000
Total cost 4,000
(i) Re-order point = Safety stock + Lead time consumption

40,000 kg.
= 1,000 kg.   36 days
360 days
= 1,000 kg. + 4,000 kg. = 5,000 kg.
(ii) Statement showing the total cost of procurement and storage of raw materials
(after considering the discount)
Order No. of Total cost of Average Total cost of Discount Total co st
size orders procurement stock storage of
raw
materials
Kg. ( ) Kg. ( ) ( ) ( )
(1) (2) (3)=(2)× 100 (4)=½×( (5)=(4)× 2 (6) (7)=[(3)+(5)–
1) (6)
40,000 1 100 20,000 40,000 4,000 36,100
20,000 2 200 10,000 20,000 3,200 17,000
10,000 4 400 5,000 10,000 2,000 8,400
6666.66 6 600 3,333 6,666 400 6,866
(iii) Number of orders which the company should place to minimize the costs after taking EOQ also into
consideration is 20 orders each of size 2,000 kg. The total cost of procurement and storage in this
case comes to 4,000, which is minimum.
(Refer to working notes 3 and 4)

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 Chapter 2 : Material Costing 2.10
Question 9—
Assume that the following quantity discount schedule for a particular bearing is available to a retail store:
Order size (unit) Discount
0 - 49 0%
50 - 99 5%
100 - 199 10%
200 and above 12%
The cost of a single bearing with no discount is 30. The annual demand is 250 units. Ordering cost is 20
per order and annual inventory carrying cost is 4 per unit. Determine the optimal order quantity
and the associated minimal total cost of inventory and purchasing costs, if shortages are not al-
lowed.
Answer—
Working Notes
1. EOQ without discount

2AO 2  250 units  20

EOQ  
Ci 4

 2,500  50 units
2. Prices with discount for different order size
5% Discount = 30 – 5% = 28.50
10% Discount = 30 – 10% = 27.00
12% Discount = 30 – 12%= 26.40
Statement of Computing Total Cost at various order sizes

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 Chapter 2 : Material Costing 2.11
Order Size No. of orders Ordering Carrying cost Purchase Total Cost
(Units) in a year cost ( ) of average cost ( ) ( )
inventory ( )
(1) (2) (3) (4) (5) (3+4+5)=(6)
50 5 100 100 7,125 7,325
 250 units  (5 orders × 20)  50 units  4  (250 × 28.50)
   
 50 units   2 
100 2.5* 50 200 6,750 7,000
 250 units  (2.5 orders × 20) 100 units  4  (250 × 27)
   
 100 units   2 
125 2 40 250 6,750 7,040
 250 units  (2 orders × 20) 125 units  4  (250 × 27)
   
 125 units   2 
200 1.25* 25 400 6,600 7,025
 250 units  (1.25 orders × 20 )  200 units  (250 × 26.4)
    4
 200 units   2 
250 1 20 500 6,600 7,120
 250 units  (1order × 20)  250 units  (250 × 26.4)
    4
 250 units   2 
Optimal order quantity = 100 units
Minimum total cost of inventory and purchasing cost = 7,000.
Note: Theoretically it may be 2.5 orders, (250 ÷ 100), however practically 3 orders are required. There-
fore ordering cost would be 60 (3 × 20) and total cost 7,010 (60 + 200 + 6750).
Theoretically orders may be in fraction but in practically orders shall be in a whole marker.
B. Stock Levels
Question 10—
A company manufactures 5,000 units of a product per month. The cost of placing an order is 100.
The purchase price of the raw material is 10 per kg. The re-order period is 4 to 8 weeks. The consump-
tion of raw materials varies from 100 kg to 450 kg per week, the average consumption being 275 kg. The
carrying cost of inventory is 20% per annum.
You are required to calculate
(i) Re-order quantity (ii) Re-order level
(iii) Maximum level (iv) Minimum level (v) Average stock level
Answer—
(i) Reorder Quantity (ROQ) = 1,196 kg. (Refer to working note)
(ii) Reorder level (ROL) = Maximum usage × Maximum re-order period
= 450 kg. × 8 weeks = 3,600 kg.
(iii) Maximum level = ROL + ROQ - (Min. usage × Min. re-order period)
= 3,600 kg. + 1,196 kg. - (100 kg.× 4 weeks)

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 Chapter 2 : Material Costing 2.12
= 4,396 kg.
(iv) Minimum level = ROL - (Normal usage × Normal re-order period)
= 3,600 kg. - (275 kg. × 6 weeks)
= 1,950 kg.
(v) Average Stock level = ½ (Maximum level + Minimum level)

1
= ( 4,396kg.  1,950)  3,173kg.
2
Or

1
= Minimum level  ROQ
2

1
= 1,950 kg.   1,196 kg.  2,548 kg.
2
Working Note
Annual consumption of raw material (A) = (275kg. × 52 weeks) = 14,300 kg.
cost of placing an order (O) = 100
Carrying cost per kg. Per annum (c×i) = 10 × 20% = 2

2AO
Economic order quantity (ECQ) 
Ci

2 14,300 kgs. 100

  1,196 kg. (Approx)
2
Question 11—
PQR Ltd., manufactures a special product, which requires 'ZED'. The following particulars were
collected for the year 2013-14:
(i) Monthly demand of Zed : 3,000 units
(ii) Cost of placing an order : 500
(iii) Re-order period : 5 to 8 weeks
(iv) Cost per unit : 60
(v) Carrying cost p.a. : 10%
(vi) Normal usage : 500 units per week
(vii) Minimum usage : 250 units per week
(viii) Maximum usage : 750 units per week
Required:
(i) Re-order quantity.
(ii) Re-order level.

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 Chapter 2 : Material Costing 2.13
(iii) Minimum stock level.
(iv) Maximum stock level.
(v) Average stock level.
Answer—

2AO
(i) Re-order quantity 
Ci

2  3,000 units 12 months  500


60 10%
= 2,450 units (Approx)
(ii) Re-order level
= Maximum re-order period Maximum usage
= 8 weeks × 750 units per week = 6,000 units
(iii) Minimum stock level
= Re-order level - {Normal usage Normal re-order period}
= 6,000 units - (500 units 6.5 weeks) = 2,750 units
(iv) Maximum stock level
= Re-order level + Re-order quantity - (Minimum usage × Minimum re-order period)
= 6,000 units + 2,450 units - (250 units 5 weeks) = 7,200 units
(v) Average stock level
= ½ (Minimum stock level + Maximum stock level)
= ½ (2,750 + 7,200) = 4,975 units
Question 12—
Primex Limited produces product 'P'. It uses annually 60,000 units of a material 'Rex' costing 10 per unit.
Other relevant information are:
Cost of placing an order : 800 per order
Carrying cost : 15% per annum of average inventory
Re-order period : 10 days
Safety stock : 600 units
The company operates 300 days in a year.
You are required to calculated:
(i) Economic Order Quantity for material 'Rex'.
(ii) Re-order Level
(iii) Maximum Stock Level
(iv) Average Stock Level

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 Chapter 2 : Material Costing 2.14
Answer—
(i) Economic Order Quantity (E.O.Q)

2  Annual requirement of ' Rex'  Ordering cost per order


Annual carrying cost per unit per annum

2  60,000 units  800 9,60,00,000

 
10 15% 1.5
= 8,000 units
(ii) Re-order Level = Safety Stock + (Normal daily Usage × Reorder period)

60,000 units
 600  (  10days)
300 days
= 600 + 2,000
= 2,600 units
(iii) Maximum Stock Level = E.O.Q (Re-order Quantity) + Safety Stock
= 8,000 units + 600 units
= 8,600 units
(iv) Average Stock Level = Minimum Stock level + ½ Re-order Quantity

1
 600 *  8,000 units
2
= 4,600 units
Or

Maximum Stock level  Minimum Stock Level

Average Stock Level 
2
8,600 units  600 units

2
= 4,600 units
* Minimum Stock Level = Re-order level – (Normal daily usage × Re-order period)

60,000 units
 2,600 – (  10 days)
300 days
= 2,600 – 2,000
= 600 units
Or
Minimum Stock Level = Safety Stock level = 600 units

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 Chapter 2 : Material Costing 2.15
Question 13—
Aditya Ltd. produces a product 'Exe' using a raw material Dee. To produce one unit of Exe, 2 kg of Dee is
required. As per the sales forecast conducted by the company, it will able to sale 10,000 units of Exe in the
coming year. The following is the information regarding the raw material Dee:
(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 20 kg. more than the average consumption per day.
(iii) There is an opening stock of 1,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is 125 per kg.
There is an opening stock of 900 units of the finished product Exe.
The rate of interest charged by bank on Cash Credit facility is 13.76%.
To place an order company has to incur 720 on paper and documentation work. From the above informa-
tion find out the followings in relation to raw material Dee:
(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 364 days
for a year]
Answer—
Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material 'Dee':

Sales forecast of the product ‘Exe’ 10,000 units

Less: Opening stock of ‘Exe’ 900 units
Fresh units of 'Exe' to be produced 9,100 unit
Fresh Material required to produce 9,100 units of 'Exe' 18,200 kg.
(9,100 units × 2 kg.)
Less: Opening Stock of 'Dee' 1,000 kg.
Annual Demand for raw material 'Dee' 17,200 kg.

(ii) Computation of Economic Order Quantity (EOQ):

2  Annual demand of' Dee'  Ordering cost

EOQ 
Carrying cost per unit per annum

2 17,200kg. 720 2 17,200kg. 720

   1,200kg.
125 13.76% 17.2
(iii) Re-Order level:
= (maximum consumption per day ×Maximum lead time)

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 Chapter 2 : Material Costing 2.16

 Annual Consumption of ' Dee'  

   20kg.  8 days
 364 days  

 18,200 kg.  
   20kg.  8 days  560kg.
 364 days  
(iv) Minimum consumption per day of raw material 'Dee':
Average Consumption per day = 50 Kg.
Hence, Maximum Consumption per day = 50 kg. + 20 kg. = 70 kg.
So Minimum consumption per day will be

Min. consumption  Max. consumption

Average Consumption 
2
Min. consumption  70 kg.
Or, 50 kg. 
2
Or, Min. consumption = 100 kg - 70 kg. = 30 kg.
(a) Re-order Quantity :
EOQ – 200 kg. = 1,200 kg. – 200 kg.= 1,000 kg.
(b) Maximum Stock level:
= Re–order level + Re–order Quantity – (Min. consumption per day × Min. lead time)
= 560 kg. + 1,000 kg. – (30 kg. × 4 days) = 1,560 kg. – 120 kg. = 1,440 kg.
(c) Minimum Stock level:
= Re-order level – (Average consumption per day × Average lead time)
= 560 kg. – (50 kg. × 6 days) = 260 kg.
(d) Impact on the profitability of the company by not ordering the EOQ.
When purchasing the ROQ When purchasing the EOQ
I Order 1,000 kg. 1,200 kg.
quantity
II No. of orders a 17,200 kg. 17,200 kg.
year   17.2 or 18 orders   14.33 or 15 orders
1,000 kg. 1,200 kg.

III Ordering Cost 18 order × 720 = 12,960 15 orders × 720 = 10,800

IV Average 1,000 kg. 1, 200 kg.
Inventory   500 kg.   600 kg .
2 2
V Carrying Cost 500 kg. × 17.2 = 8,600 600 kg. ×17.2 = 10,320
VI Total Cost 21560 21,120
Extra Cost incurred due to not ordering EOQ = 21,560 – 21,120 = 440

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 Chapter 2 : Material Costing 2.17
Question 14—
Following details are related to a manufacturing concern:
Re-order Level 16,000 units
Economic Order Quality 90,000
Minimum Stock Level 100000 units
Maximum Stock Level 190000 units
Average Lead Time 6 days
Difference between minimum lead time and Maximum lead time 4 days
Calculate:
(i) Maximum consumption per day
(ii) Minimum consumption per day
Answer—
Difference between Minimum lead time Maximum lead
time = 4 days Max. lead time - Min. lead time = 4 days
Or, Max. lead time = Min. lead time + 4 days............................................. (i)
(i) Average lead time is given as 6 days i.e.

Max. lead time  Min. lead time

 6 days ....................................... (ii)
2
Putting the value of (i) in (ii) ,

Min. lead time  4 days  Min. lead time

 6 days
2
Or, Min. lead time + 4 days + min. lead time = 12 days
Or, 2 Min. lead time = 8days

8 days
Or, Minimum lead time   4 days
2
Putting this Minimum lead time value in (i), we get
Maximum lead time = 4 days + 4 days = 8 days
(i) Maximum consumption per day:
Re-order level = Max. Re-order period × Maximum Consumption per day
1,60,000 units = 8 days × Maximum Consumption per day

1,60,000 units
Or, Maximum Consumption per day   20,000 units
8 days
(ii) Minimum Consumption per day:
Maximum stock level =
Re-order level + Re-order Quantity – (Min. lead time × Min. Consumption per day)
Or, 1,90,000 units = 1,60,000 units + 90,000 units – (4 days × Min. Consumption per day) Or, 4 days

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 Chapter 2 : Material Costing 2.18
× Min. Consumption per day = 2,50,000 units – 1,90,000 units

60,000 units
Or, Minimum Consumption per day   15,000 units
4 days
Question 15—
Re-order quantity of material 'X' is 5,000 kg.; Maximum level 8,000 kg.; Minimum usage 50 kg. per hour;
minimum re-order period 4 days; daily working hours in the factory is 8 hours. You are required to
calculate the re-order level of material 'X'.
Answer—
Maximum Level = Re-order level + Re-order Quantity – (Min. usage × Min. Re-order Period)
Re-order Level = Maximum Level – [Re-order Quantity – (Min. usage × Min. Re-order Period)
= 8,000 kg. – [5,000 kg. – (400 kg* × 4 days)] = 8,000 kg. – 3,400 kg. = 4,600 kg.
Hence, Re-order level is 4,600 kg.
*Minimum usage per day = 50 kg. × 8 hours = 400 kg.
Question 16—
A company uses three raw materials A, B and C for a particular product for which the following data apply
:—

Raw Usage per Re- Price Deliv ery period (in Re- Minimum
Material unit of order per weeks) order level
product Quantity Kg. Minimum Average Maximum level (Kg.)
(Kg.) (Kg.) (`) (Kg.)

A 10 10,000 0.10 1 2 3 8,000 ?

B 4 5,000 0.30 3 4 5 4,750 ?
C 6 10,000 0.15 2 3 4 ? 2,000

Weekly production varies from 175 to 225 units, averaging 200 units of the said product. What would be the
following quantities:-
(i) Minimum Stock of A?
(ii) Maximum Stock of B?
(iii) Re-order level of C?
(iv) Average stock level of A?
Answer—
(i) Minimum stock of A
Re-order level - (Average consumption × Average time required to obtain delivery)
= 8,000 kg. - (200 units × 10 kg. × 2 weeks) = 4,000 kg.
(ii) Maximum stock of B
Re-order level - (Min. Consumption × Min. Re-order period) + Re-order quantity
= 4,750 kg. - (175 units × 4 kg. × 3 weeks) + 5,000 kg.

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 Chapter 2 : Material Costing 2.19
= 9,750 - 2,100 = 7,650 kg.
(iii) Re-order level of C
Maximum re-order period × Maximum Usage
= 4 weeks × (225 units × 6 kg.) = 5,400 kg.
OR
= Minimum stock of C + (Average consumption × Average delivery time)
= 2,000 kg. + [(200 units × 6 kg.) × 3 weeks] = 5,600 kg.
(iv) Average stock level of A
= Minimum stock level of A+½ Re-order quantity
= 4,000 kg. + ½ 10,000 Kg. = 4,000 + 5,000 = 9,000 kg.
Or

Minimum stock  Maximum Stock

 (Refer to Working Note)
2
4,000  16,250
  10,125 kg.
2
Working Note:
Maximum Stock of A = ROL + ROQ – (Minimum Consumption × Minimum re-order period)
= 8,000 kg. + 10,000 kg. – [(175 units × 10 kg.) × 1 week] = 16,250kg.
C. Stores Ledger
Question 17—
The following transactions in respect of material Y occurred during the six months ended 30th June, 2014:

Month Purchase Price per unit Issued

(units) ( ) units
January 200 25 Nil
February 300 24 250
March 425 26 300
April 475 23 550
May 500 25 800
June 600 20 400
Required
The chief accountant argues that the value of closing stock remains the same no matter which method of
pricing of material issues is used. Do you agree? Why or why not? Detailed stores ledgers are not required.
Answer—
Assumption: There was no opening stock as on 1st January 2014

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 Chapter 2 : Material Costing 2.20
Materials Cost and Control
Month Opening Purchases Issues Closing
balance (units) (units) balance
(units) (units)
January, 2014 Nil 200 – 200
February 200 300 250 250
March 250 425 300 375
April 375 475 550 300
May 300 500 800 Nil
June, 2014 Nil 600 400 200
At the end of May 2014, there was no closing stock, i.e. no opening stock on 1st June, 2014. But there was
closing of 200 units at the end of June 2014.
Value of closing stock at the end of June 2014
FIFO 200 Units at 20 = 4,000
LIFO 200 Units at 20 = 4,000
Weighted average 20 = 4,000
Hence the argument of Chief Accountant is correct. He is correct only in the above case. If there was closing
stock at the end of May 2014, the argument of the Chief Accountant would not be correct.
Question 18— The following are the details of receipts and issues of a material of stores in a manufaturing
company for the period of three months ending 30th June, 2014.
Date Quantity Rate per kg.
(kg.) ( )
April 10 1,600 5.00
April 20 2,400 4.90
May 5 1,000 5.10
May 17 1,100 5.20
May 25 800 5.25
June 11 900 5.40
June 24 1,400 5.50
There was 1,500 kg. in stock at April 1, 2014 which was valued at 4.80 per kg. Issues:
Date Quantity
(kg.)
April 4 1,100
April 24 1,600
May 10 1,500
May 26 1,700
June 15 1,500
June 21 1,200
Issues are to be priced on the basis of weighted average method.
The stock verifier of the company reported a shortage of 80 kgs. on 31st May, 2014 and 60 kgs. on 30th
June, 2014. The shortage is treated as inflating the price of remaining material on account of shortage.
You are required to prepare a Stores Ledger Account.

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 Chapter 2 : Material Costing 2.21
Answer—
(a) Stores Ledger Account
for the three months ending 30th June, 2014
(Weighted Average Method)
Date Receipt Issues Balance Rate of further
GRN Qty. Rates Amounts MR No. Qty Rates Amount Qty. Amount issue ( )
No. (Kg.) ( ) (kg.) ( ) ( ) (kg.) ( )
PR
No.
2014
April 1 1,500 7,200 4.80
April 4 1,100 4.80 5,280 400 1,920 4.80
April 1,600 5.00 8,000 2,000 9,920 9 ,920
10  4.96
2 ,000
April 2,400 4.90 11,760 4,400 21,680 21,680
20  4 .93
4 ,400
April 1,600 4.93 7,888 2,800 13,792 13, 792
24  4. 93
2 ,800
May 5 1,000 5.10 5,100 3,800 18,892 18, 892
 4.97
3, 800
May 1,500 4.97 7,455 2,300 11437 11437
10  4.97
2 ,300
May 1,100 5.20 5,720 3,400 17,157 17 ,157
17  5 .05
3, 400
May 800 5.25 4,200 4,200 21,357 21,357
25  5 .09
4 ,200
May 1,700 5.09 8,653 2,500 12,704 12, 704
26  5. 09
2 ,500
May shortage 80 2,420 12,704 12, 704
31  5. 25
2 ,420
June 900 5.40 4,860 3,320 17,564 17 ,564
11  5. 29
3 ,320
June 1,500 5.29 7,935 1,820 9,629 9 ,629
15  5 .29
1,820
June 1,200 5.29 6,348 620 3,281 3, 281
21  5 .29
620
June 1,400 5.50 7,700 2,020 10,981 10, 981
24  5 .44
2020
June Shortage 60 1,960 10,981 10, 981
30  5 .60
1960

Question19—
Prepare a Store Ledger Account from the following transactions of XY Company Ltd. April, 2014
1 Opening balance 200 units @ 10 per unit.

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 Chapter 2 : Material Costing 2.22
5 Receipt 250 units costing 2,000
8 Receipt 150 units costing 1,275
10 Issue 100 units
15 Receipt 50 units costing 500
20 Shortage 10 units
21 Receipt 60 units costing 540
22 Issue 400 units
The issues upto 10-4-14 will be priced at LIFO and from 11-4-14 issues will be priced at FIFO. Shortage will
be charged as overhead.
Answer—
(a) Store Ledger Account
Name — Max. Stock Level— Bin No.
Code No.— Min. Stock Level— Location Code—
Description— Re-order level Re-order Quantity
Date Receipts Issues Balance
Qty. Rate Amount Qty. Rate Amount Qty. Rate Amount
Units ( ) ( ) Units ( ) ( ) units ( ) ( )
April 1 200 10 2,000
April 5 250 8 2,000 200 10
4,000
250 8
April 8 150 8.50 1,275 200 10
250 8 5,275
150 8.50
April 10 100 8.50 850 200 10
250 8 4,425
50 8.50
April 15 50 10 500 200 10
250 8
50 8.50
50 10 4,925
April 20 10 10 100 190 10
(shortage)
250 8 4,825
50 8.50
50 10
April 21 60 9 540 190 10
250 8
50 8.50 5,365
50 10
60 9
April 22 190 10 3580 40 8 1,785
210 8 50 8.50 (Closing
50 10 Stock)
60 9

Question 20—

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 Chapter 2 : Material Costing 2.23
Aditya Ltd. is engaged in heavy engineering works on the basis of job order received from industrial cus-
tomers. The company has received a job order of making turbine from a power generating company. Below
are some details of stores receipts and issues of copper wire, used in the manufacturing of turbine:
Feb. 1 Opening stock of 1,200 Kgs. @ 475 per kg.
Feb. 5 Issued 975 kgs. to mechanical division vide material requisition no. Mec
09/13
Feb. 6 Received 3,500 kgs. @ 460 per kg vide purchase order no. 159/2013
Feb. 7 Issued 2,400 kgs. to electrical division vide material requisition no.
Ele 012/13
Returned to stores 475 kgs. by electrical division against material
Feb. 9
requisition no. Ele 012/13.
Feb. 15 Received 1,800 kgs. @ 480 per kg. vide purchase order no. 161/ 2013
Returned to supplier 140 kgs. out of quantity received vide purchase order
Feb. 17
no. 161/2013.
Issued 1,900 kgs. to electrical division vide material requisition no. Ele
Feb. 20
165/ 2013
On 28th February, 2014 it was found that 180 kgs. of wire was fraudulently misappropriated by the stores
assistant and never recovered by the company.
From the above information you are required to prepare the Stock Ledger account using 'Weighted Average'
method of valuing the issues.
Answer—
Store Ledger of Aditya Ltd. (Weighted Average Method)
Date Receipts Issues Balance of Stock
Feb. Qty. Rate Amount Qty Rate Amount Qty Rate Amount
(kg.) ( ) ( ) (kg.) ( ) ( ) (kg.) ( ) ( )

1 – – – – – – 1,200 475.00 5,70,000

5 – – – 975 475.00 4,63,125 225 475.00 1,06,875
6 3,500 460.00 16,10,000 – – – 3,725 460.91 17,16,875
7 – – – 2,400 460.91 11,06,175 1,325 460.91 6,10,700
9 475 460.91 2,18,932 – – – 1,800 460.91 8,29,632
15 1,800 480.00 8,64,000 – – – 3,600 470.45 16,93,632
17 – – – 140 480 67,200 3,460 470.07 16,26,432
20 – – – 1,900 470.07 8,93,133 1,560 470.06 7,33,299
28 – – – 180* 470.06 84,611 1,380 470.06 6,48,688
* 180 kgs. is abnormal loss, hence it will be transferred to Costing Profit & Loss A/c.
Question 21—

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 Chapter 2 : Material Costing 2.24
After the annual stock taking you come to know of some significant discrepancies between book stock and
physical stock. You gather the following information:–

Item Stock card Stores Ledger Physical Check Cost/unit

Units Units Units ( )
A 600 600 560 60
B 380 380 385 40
C 750 780 720 10

(a) What action should be taken to record the information shown.

(b) Suggest reasons for the shortage and discrepancies disclosed above and recommended a possible
course of action by management to prevent future losses.
Answer—
(a) Item A: The shortage of 40 units may be entered in the Stock Card and Stores Ledger. That means,
stock card should reflect the physical quantity only. The value is 2,400 (i.e. 40 units at 60 per unit).
Accounting treatment
1. If the shortage is normal—
Production Overhead control A/c Dr. 2,400
To Stores Ledger Control A/c 2,400
2. If the shortage is abnormal:—
Costing P&L A/c Dr. 2,400
To Stores Ledger control A/c 2,400
3. If the shortage is due to non-recording or short-recording of direct material issued to production:—
WIP Control A/c Dr. 2,400
To Stores Ledger Control A/c 2,400
4. If the shortage is due to non-recording or short-recording of indirect material issued:—
Production Overhead control A/c Dr. 2,400
To Stores Ledger control A/c 2,400
5. Clerical errors, if any, should be rectified.
Item B: Excess physical units is 5 units valuing 5 unit × 40 = 200.
Accounting Treatment
1. If the excess is due to normal causes:
Stores Ledger Control A/c Dr. 200
To Production Overhead Contral A/c 200
2. If the excess is due to abnormal causes:
Stores Ledger Control A/c Dr. 200
To Costing P & L A/c 200
3. If the excess is due to wrong recording of direct materil :
Stores Ledger control A/c Dr. 200

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 Chapter 2 : Material Costing 2.25
To WIP control A/c 200
4. If the excess is due to wrong recording of indirect material:
Stores Ledger control A/c Dr. 200
To Production Overhead control A/c 200
Item C: Units
Physical stock 720
Stock Card 750
Shortage 30
Value 30 untis at 10 = 300
Accounting treatment is the same as given in case of item A.
Stock Card 750
Stores Ledger 780
Difference 30
Reasons for difference of 30 units between stock card and stores Ledger:
1. One issue voucher of 30 units might not have been posted in Stores Ledger
2. There may be clerical errors in balancing, posting etc. After ascertaining, these may be rectified.
3. One receipt of 30 units might not have been posted in Stock Card. After posting of this stock card
balance will be 780 units. Then the shortage will be 60 units as compared to physical quantity of 720
units.
(b) Reasons for shortage and discrepancies:
1. Wastage of material due to spoilage, breakages, evaporation etc. it may be normal or abnormal.
2. Theft or pilferage.
3. Issued but not entered in stock card.
4. Over issues.
5. Entering the issue in the wrong stock card.
6. Clerical errors in balancing or posting etc.
7. Incorrect entries in stock card.
8. Goods received and deposited in the wrong bins.
9. Small defective units - nails, screws etc.
10. Purchase in kg. but issues to production in numbers i.e. bolts, nuts etc.
Recommended course of action to prevent future losses
1. The entries should be correctly entered in stock cards.
2. Internal check system should be introduced by double checking on the entries.
3. Entry in the stores should be restricted to authorized persons only.
4. To avoid pilferage, the store room should be well guarded and protected. (Just like cash room).
5. Proper accounting should be done for all stock movements.
6. FIFO system should be followed while issuing materials (pricing of issue of materials may be a
different method). This will avoid losses due to deterioration or obsolescence.

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 Chapter 2 : Material Costing 2.26
7. All issues of stock should be made on the basis of stores requisition duly signed by authorised
person.
8. To minimise losses due to breakage in case of heavy and bulky materials, materials handling equip-
ment like forklift trucks and cranes should be provided.
9. Wrong issues should be avoided by accurate measuring and weighing equipment should be in-
spected / checked periodically.
10. Proper storage conditions should be provided, particularly in the case of perishable items and items
of lesser shelf life.
11. No movement of materials from one place to another place without proper authorisation and docu-
mentation.
D. MISCELLANCEOUS
Question 22—
The following data are available in respect of material X for the year ended 31st March, 2014:
Opening stock 90,000
Purchases during the year 2,70,000
Closing stock 1,10,000
Calculate: (i) Inventory turnover ratio and (ii) the number of days for which the average inventory is held.
Answer—
Working Notes
( )
(a) Opening stock 90,000
Add: Purchases 2,70,000
3,60,000
Less: Closing stock 1,10,000
Material consumed during the year 2,50,000

Opening Stock  Closing Stock

(b) Average Stock =
2
90,000  1,10,000
=  1,00,000
2

Meterial Consumed 2,50,000

(i) Inventory Turnover Ratio =   2.5times
Average Stock 1,00,000
(ii) No. of days for which the average inventory is held

No. days in a year 365 days

  146 days
Inventory Turnover Ratio 2.5 times

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 Chapter 2 : Material Costing 2.27
Question 23—
Raw materials 'AXE' costing 150 per kg. and 'BXE' costing 90 per kg. are mixed in equal proportions for
making product 'A'. The loss of material in processing works out to 25% of the product. The production
expenses are allocated at 40% of direct material cost. The end product is priced with a margin of 20% over
the total cost.
Material 'BXE' is not easily available and substitute raw material 'CXE' has been found for 'BXE' costing
75 per kg. It is required to keep the proportion of this substitute material in the mixture as low as possible
and at the same time maintain the selling price of the end product at existing level and ensure the same
quantum of profit as at present.
You are required to compute the ratio of the mix of the raw materials 'AXE' and 'CXE'.
Answer—
Working Notes:
(i) Computation of material mix ratio:
Let 1 kg. of product A requires 1.25 kg. of input of materials A X E and B X E Raw materials are
mixed in equal proportions.
Then raw material A X E = ½×1.25 kg. = 0.625 kg.
Then raw material B X E = ½ ×1.25 kg.= 0.625 kg.
(ii) Computation of selling price per kg. of Product A
( )
Raw material A X E 0.625kg × 150 = 93.75
Raw material B X E 0.625kg. × 90 = 56.25 150.00
Production expenses (40% of material cost) 60.00
Total Cost 210.00
Add: Profit 20% of total cost 42.00
Selling Price 252.00
Computation of proportions of materials A X E and C X E in 'A'
Let material C X E required in product A be 'm' kg.
Then for producing 1 kg of product 'A', material A X E requirement = (1.25 – m)kg.
To maintain same level of profit and selling price as per Working note (ii), it is required that the
total cost of material in 1 kg. of product A should not exceed 150.
i.e., m kg. × 75 + (1.25 – m)kg. × 150 = 150
or 75 m + 187.5 – 150 m = 150
or 75m = 37.5
or m = 0.5 kg.
Raw material AXE requirements in product A = 1.25 –0.5 = 0.75kg.
So, proportion of material AXE and CXE = 0.75:0.50 i.e. 3:2
Question 24—
Aditya Agro Ltd. produces edible oils of different varieties. The monthly demand pattern for the finished
products are as follows:

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 Chapter 2 : Material Costing 2.28
Mustard oil 45,000 Litre
Soybean oil 15,000 Litre
Olive oil 3,000 Litre
To produce one litre of Mustard oil, Soybean oil and Olive oil, 5 kg. of mustards, 6 kg. of soybeans and 4.5
kg. of olives are required respectively. There is no opening and closing stock of materials.
Aditya Agro Ltd. can purchase the materials either from the farmers directly or from the wholesale market.
The company can purchase any quantity of materials from the wholesale market but in case of purchase
from the farmers, it has to purchase the minimum specified quantity of materials at a time. Following is the
material-wise summary related with the purchase of materials:

Wholesale Farmers
Market
Mustard:
Minimum Quantity to be purchased Any quantity 13,50,000 kg.
Purchase price per kg. ( ) 15.00 12.50
Central Sales Tax (CST)* 2% –
Transportation cost per purchase 6,000 15,000
Sorting and piling cost per purchase – 1,200
Loading cost per 50 kg. 10.00 5.00
Unloading cost per 50 kg. 2.00 2.00
Soybean:
Minimum Quantity to be purchased Any Quantity 2,70,000 kg.
Purchase price per kg. (`) 11.00 9.00
Value Added Tax (VAT)** 4% –
Transportation cost per purchase 9,000 12,000
Sorting and piling cost per purchase – 800
Loading cost per 50 kg. 10.00 3.00
Unloading cost per 50 kg. 2.00 2.00
Olive:
Minimum Quantity to be purchased Any Quantity 1,62,000 kg.
Purchase Price per kg. ( ) 36.00 28.00
Import duty** – 10%
Transportation Cost per purchase ( ) 3,000 11,000
Sorting and piling cost per purchase 1,800 –
Loading Cost per 50kg. 10.00 25.00
Unloading cost per 50 kg. 2.00 2.00

The company is paying 12.5% p.a. as interest to its bank for cash credit facility and 100 per 100 kg. as rent
to the warehouse.
[*CST will be added with the purchase price of mustards; **VAT will not be added with the purchase price
of soybeans; ***Import duty will be added with the purchase price of olives.]
You are required to
(i) Calculate the purchase cost of each material

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 Chapter 2 : Material Costing 2.29
(a) from Wholesale market
(b) from the Farmers
(ii) Calculate Economic Order Quantity of each material under the both options.
(iii) Recommend the best purchase option for the material 'olive'.
Answer—
(i) Calculation of Purchase Cost per Kg. of Materials

Wholesale Market Farmers

( ) ( )
Mustard:
Purchase price 15.00 12.50
Add: Central Sales Tax @ 2% 0.30 –
Add: Loading Cost 0.20 0.10
( 10 ÷ 50 Kg.) ( 5 ÷ 50 Kg.)
Add: Unloading Cost 0.04 0.04
( 2 ÷ 50 Kg.) ( 2 ÷ 50 Kg.)
15.54 12.64
Soybean:
Purchase price 11.00 9.00
Add: Loading Cost 0.20 0.06
( 10 ÷ 50 Kg.) ( 3 ÷ 50 Kg.)
Add: Unloading Cost 0.04 0.04
( 2 ÷ 50 Kg.) ( 2 ÷ 50 Kg.)
11.24 9.10
Olive:
Purchase price 36.00 28.00
Add: Import duty @ 10% – 2.80
Add: Loading Cost 0.20 0.50
( 10÷50 kg.) ( 25÷50 kg.)
Add: Unloading Cost 0.04 0.04
( 2 ÷ 50 kg.) ( 2 ÷ 50 kg.)
36.24 31.34

2  Annual Requirement  Ordering cost

(ii) Economic Order Quantity (E.O.Q) = 
Carrying cost per kg. per annum

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 Chapter 2 : Material Costing 2.30
Annual Requitement (A):
Commodity Quantity
(Kg.)
Mustard (45,000 Ltr. × 5 Kg. × 12 months) 27,00,000
Soybean (15,000 Ltr. × 6 Kg. × 12 months) 10,80,000
Olive (3,000 Ltr. × 4.5 Kg. × 12 months) 1,62,000
Cost per Order (O):
Wholesale Ma rket Farmers ( )
( )
Mustard:
- Transportation cost 6,000 15,000
- Sorting and piling cost --- 1,200
6,000 16,200
Soybean:
- Transportation cost 9,000 12,000
- Sorting and piling cost --- 800
9,000 12,800
Olive:
- Transportation cost 3,000 11,000
- Sorting and piling cost 1,800 ---
4,800 11,000
Carrying Cost per Kg. per annum (C × i):

Wholesale Market ( ) Farmers ( )

Mustard:
– Interest on cash credit 1.9425 1.5800
( 15.54 × 12.5%) ( 12.64 × 12.5%)
– Warehouse rent* 1.0000 1.0000
2.9425 2.5800
Soybelan:
– Interest on cash credit 1.4050 1.1375
( 11.24×12.5%) ( 9.10×12.5%)
– Warehouse rent 1.0000 1.0000
2.4050 2.1375

Olive:
– Interest on cash credit 4.5300 3.9175
( 36.24×12.5%) ( 31.34×12.5%)
– Warehouse rent 1.0000 1.0000
5.5300 4.9175

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 Chapter 2 : Material Costing 2.31

100
(iii) *Warehouse rent per Kg.   1
100Kg.
Calculation of E.O.Q. for each material under the both options
Wholesale Market (Kg.) Farmers (Kg.)
Mustard 2  27,00,000Kg.  6,000 2  27,00,000Kg.  16,200
2.9425 2.5800
=1,04,933.53 =1,84,138.47
Soybean 2  10,80,000 Kg.  9,000 2 10,80,000Kg.  12,800
2.4050 2.1375
=89,906.40 =1,13,730.98
Olive 2  1,62,000Kg. 4,800 2 1,62,000Kg.  11,000
5.5300 4.9175
=16,769.90 =26,921=34
(iii) Selection of best purchase option for the puchase of Olives

Wholesale Market Farmers

Annual Requirement (A) (Kg.) 1,62,000 1,62,000
Order Quantity (Q) 16,769.90 1,62,000
A 9.66 or 10 1
No. of orders 
Q
Q 8,384.95 81,000
Average Inventory  ( kg.)
2
Ordering Cost ( ) (i) 48,000 11,000
(10 Orders × 4,800) (1 Order × 11,000)
Carrying Cost ( ) (ii) 46,368.77 3,98,317.5
(Average Inventory × Carrying cost per kg.) (8,384.95 × 5.5300) (81,000kg. × 4.9175)
Purchase Cost ( ) (iii) 58,70,880 50,77,080
(1,62,000 kg. × 36.24) (1,62,000 kg.× 31.34
Total Cost (i) + (ii) + (iii) 59,65,248.77 54,86,397.50

Puchasing Olives direct from the farmers is the best purchase option for the Aditya Agro.

******************

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 Chapter 3 : Labour Costing 3.1
A. CALCULATION OF LABOUR
Question 1—
From the following information, calculate Labour turnover rate and Labour flux rate: No. of workers as on
01.01.2013 = 7,600
No. of workers as on 31.12.2013 = 8,400
During the year, 80 workers left while 320 workers were discharged 1,500 workers were recruited during
the year of these, 300 workers were recruited because of exits and the rest were recruited in accordance with
expansion plans.
Answer—
Labour turnover rate:
It comprises of computation of labour turnover by using following methods:
(i) Separation Method:
No. of workers left  No. of workers discharged
 100
Average Number of Workers
(80  320) 400
  100   100  5%
(7,600  8,400)  2 8,000
(ii) Replacement Method:
No. of workers replaced 300
  100   100  3.75%
Average number of workers 8,000
(iii) New Recruitment:
No. of workers newly recruited
  100
Average number of workers
No. Recruitments – No. of Replacements
  100
Average number of workers
1,500 – 300 1,200
 100  100  15%
8,000 8,000
Flux Method:
No. of separations  No. of accessions
  100
Average number of workers
(400  1,500) 1,900
 100   100  23.75%
(7,600  8,400)  2 8,000
Question 2—
Accountant of your company had computed labour turnover rates for the quarter ended 30th Sep-
tember, 2013 as 14%, 8% and 6% under Flux method, Replacement method and Separation method respec-
tively. If the number of workers replaced during 2nd quarter of the financial year 2013-14 is 36, find the
following:
(i) The number of workers recruited and joined; and
(ii) The number of workers left and discharged.
 Chapter 3 : Labour Costing 3.2
Answer—
No. of workers replaced
Labour Turnover Rate (Replacement method) 
Average No. of workers
8 36
Or, 
100 Average No. of workers
Or, Average No. of workers = 450
No. of workers separated
Labour Turnover Rate (Separation Mehtod) 
Average No. of workers
6 No. of workers separated
Or,  
100 450
Or, No. of workers separated = 27
No. of Separations  No. of accession (Joinings)
Labour Turnover Rate (Flux Method) 
Average No. of workers
14 27  No. of accessions (Joinnings)
Or, 
100 450
Or, 100(27 + No. of Accessions) = 6,300
Or, No. of Accessions = 36
(i) The No. of workers recruited and Joined = 36
(ii) The No. of workers left and discharged = 27
Question 3—
Human Resources Department of A Ltd. computed labour turnover by replacement method at 3% for the
quarter ended June 2015. During the quarter, fresh recruitment of 40 workers was made. The number of
workers at the beginning and end of the quarter was 990 and 1,010 respectively.
You are required to calculate the labour turnover rate by Separation Method and Flux Method.
Answer—
No. of workers replaced during the quarter
Labour Turnover by Replacement Method 
Average no. of workers onroll during the quarter
No. of workers replaced during the quarter
Or, 0.03 
(990  1,010)  2
Or, No. of workers replaced during the quarter = 0.03×1000= 30 workers
(i) Labour Turnover by Separation Method
No. of Workers during the quarter
 100
Average no. of workers on roll during the quarter
Worker at begining  Fresh recruitment  Replacements – Workers at closing
  100
Average No. of workers on rull during the quarter
990  40  30 – 1,010 50 workers
  100   100  5%
(990  1010)  2 1,000 workers
 Chapter 3 : Labour Costing 3.3
(ii) Labour Turnover by Flux Method
No. of workers (Separated  Replaced  Fresh Recruitment) during the quarter
 100
Average no. of workers on roll during the quarter
50  30  40 120 workers
  100  100  12%
(990  1,010)  2 1,000 workers
Question 4—
Corrs Consultancy Ltd. is engaged in BPO industry. One of its trainee executives in the Personnel depart-
ment has calculated labour turnover rate 24.92% for the last year using Flux method.
Following is the some data provided by the Personnel department for the last year:
Employees At the Joined Left At the
beginning end
Data Processors 540 1,080 60 1,560
Payroll Processors ? 20 60 40
Supervisors ? 60 --- ?
Voice Agents ? 20 20 ?
Assistant Managers ? 20 --- 30
Senior Voice Agents 4 --- --- 12
Senior Data 8 --- --- 34
Processors
Team Leaders ? --- --- ?
Employees transferred from the Subsidiary Company
Senior Voice Agents --- 8 --- ---
Senior Data – 26 – –
Processors
Employees transferred to the Subsidiary Company
Team Leaders – – 60 –
Assistant Managers – – 10 –
At the beginning of the year there were total 772 employees on the payroll of the company. The
opening strength of the Supervisors, Voice Agents and Assistant Managers were in the ratio of 3 : 3 : 2.
The company has decided to abandon the post of Team Leaders and consequently all the Team Leaders
were transferred to the subsidiary company.
The company and its subsidiary are maintaining separate set of books of account and separate Personnel
Department.
You are required to calculate:
(a) Labour Turnover rate using Replacement method and Separation method.
(b) Verify the Labour turnover rate calculated under Flux method by the trainee executive of the Corrs
Consultancy Ltd.
Answer—
Working Notes:
(i) Calculation of no. of employees at the beginning and end of the year
 Chapter 3 : Labour Costing 3.4

At the At the end of

Beginning the year
of the year
Data Processors 540 1,560
Payroll Processors [Left- 60 + Closing- 40 – Joined- 20] 80 40
Supervisors* 30 90
Voice Agents* 30 30
Assistant Managers* 20 30
Senior Voice Agents 4 12
Senior Data Processors 8 34
Team Leaders 60 0
Total 772 1,796
(*) At the beginning of the year:
Strength of Supervisors, Voice Agents and Asst. Managers =
[772–{540 + 80 + 4 + 8+60} employees] or [772 – 692 = 80 employees]
3 3 2
[{Supervisors 80   30 , Voice Agents 80   30 & Asst. Managers 80   20 }employes]
8 8 8
At the end of the year:
[Supervisor-(Opening- 30 + 60 Joining) = 90; Voice Agents- (Opening- 30 + 20 Joined - 20 Left) = 30]
(ii) No. of Employees Separated, Replaced and Newly recruited during the year
Total
Particulars Separations New Replacement
Joining
Recruitment
Data Processors 60 1,020 60 1,080
Payroll Processors 60 -- 20 20
Supervisors -- 60 -- 60
Voice Agents 20 -- 20 20
Assistant Managers 10 10 10 20
Sr. Voice Agents -- 8 -- 8
Sr. Data Processors -- 26 -- 26
Team Leaders 60 -- -- --
Total 210 1,124 110 1,234
(Since, Corrs Consultancy Ltd. and its subsidiary are maintaining separate Personnel Department, so trans-
fer-in and transfer-out are treated as recruitment and separation respectively.)
(a) Calculation of Labour Turnover:
No. of employees replaced during the year
Replacement Method   100
Average no. of employees on roll
110 110
 100   100  8.57%
(772  1,796) / 2 1,284
 Chapter 3 : Labour Costing 3.5

No. of employees separated during the year

Separation Method  100
Average no. of employees on roll
210
 100  16.36%
1,284
(b) Labour Turnover under Flux Method:
No. of employees (Joined  Separated) during the year
  10
Average no. of employees on roll
No. of employees (Re - placed  New recruited  Separated) during the year
  100
Average no. of employees on roll
1,234  210
 10  112.46%
1,284
Labour Turnover calculated by the executive trainee of the Personnel department is incorrect as it has not
taken the No. of new recruitment while calculating the labour turnover under Flux method.
Question 5—
X Y Z Ltd. wants to ascertain the profit lost during the year 2013-14 due to increased labour turnover. For
this purpose, they have given you the following information:
(1) Training period of the new recruits is 50,000 hours. During this period their productivity is 60%
of the experienced workers. Time required by an experienced worker is 10 hours per unit.
(2) 20% of the output during training period was defective. Cost of rectification of a defective unit was
25.
(3) Potential productive hours lost due to delay in recruitment were 1,00,000 hours.
(4) Selling price per unit is 180 and P/V ratio is 20%.
(5) Settlement cost of the workers leaving the organization was 1,83,480.
(6) Recruitment cost was 1,56,340
(7) Training cost was 1,13,180.
You are required to calculate the profit lost by the company due to increased labour turnover during
the year 2013-14.
Answer—

50,000
Output by experienced workers in 50,000 hours   5,000units
60
 Output by new recruits = 60% of 5,000 = 3,000 units
Less of output = 5,000 – 3,000 = 2,000 units
Total loss of output = 10,000 + 2,000 = 12,000 units
Contribution per unit = 20% of 180 = 36
Total contribution cost = 36 × 12,000 = 4,30,000
Cost of repairing defective units = 3,000 × 0.2 × 25 = 15,000
 Chapter 3 : Labour Costing 3.6
Profit for gone due to labour turnover
( )
Loss of Contribution 4,32,000
Cost of repairing defective units 15,000
Recruitment cost 1,56,340
Training cost 1,13,180
Settlement cost of workers leaving 1,83,480
Profit forgone in 2013–14 9,00,000
B. CALCULATION OF EFFECTIVE HOWLY WAGE RATE,
INCENTIVEFS AND TOTAL EARNINGS
Question 6—
You are given the following information of a worker:
(i) Name of worker : Mr. Roger
(ii) Ticket No. : 002
(iii) Work started : 1-4-14 at 8 a.m.
(iv) Work finished : 5-4-14 at 12 noon
(v) Work allotted : Production of 2,160 units
(vi) Work done and approved : 2,000 units
(vii) Time and units allowed : 40 units per hour
(viii) Wage rate : 25 per hour
(ix) Mr. Roger worked 9 hours a day.
You are required to calculate the remuneration of Mr. Roger on the following basis:
(i) Halsey plan and
(ii) Rowan plan
Answer—
No. of units produced and approved = 2,000 units
Standard time = 40 units per hour
Hourly Wage Rate = 25
2,000 units
Time allowed =
40 units = 50 hours

Time Taken = (4 days × 9 hours) + 4 hours = 40 hours

(i) Calculation of Remuneration under Halsey Plan:
Standard time allowed for 2,000 units 50 hours
Actual time allowed for 2,000 units 40 hours
Time Saved 10 hours
Basic wages for time taken 40 hours @ 25 1,000
50
Bonus : 50% of time saved (  10 hours  25) 125
100
Total Remuneration 1,125
 Chapter 3 : Labour Costing 3.7
(ii) Calculation of Remuneration under Rowan Plan:
Wages for time taken 40 hours @ 25 1,000
Time saved
Bonus   Time taken  Hourly rate
Time allowed
10 hours
  40 hours  25 = 200
50 hours
Total Remuneration 1,200

Question 7—
Mr. Michael executes a piece of work in 120 hours as against 150 hours allowed to him. His hourly
rate is 10 and he gets a dearness allowance @ 30 per day of 8 hours worked in addition to his
wages. You are required to calculate total wages received by Mr. Michael under the following
incentive schemes:
(i) Rowan Premium Plan

Answer—
Time Allowed = 150 hours
Time Taken = 120 hours
Time Saved = 30 hours
Rowan Premium Plan ( )
Normal wages ( 10 × 20 hours) 1,200
120 hours
D.A. for 15 days i.e. ( 30  15 days) 450
8 hours
Time saved
Bonus:   Time taken  Hourly rate
Time allowed
30 hours
 120 hours  10 240
150 hours
Total Wages 1,890
45%
Question 8—
A skilled worker is paid a guaranteed wage rate of 120 per hour. The standard time allowed for a
job is 6 hour. He took 5 hours to complete the job. He is paid wages under Rowan Incentive Plan.
(i) Calculate his effective hourly rate of earnings under Rowan Incentive Plan.
(ii) If the worker is placed under Halsey Incentive Scheme (50%) and he wants to maintain the same
effective hourly rate of earnings, calculate the time in which he should complete the job.
Answer
(i) Effective hourly rate of earnings under Rowan Incentive Plan
Earnings under Rowan Incentive plan =
 Chapter 3 : Labour Costing 3.8

Time saved
(Actual time taken × wage rate)   Time taken  Wage rate
Time allowed
 1 hour 
= (5 hours × 120) +   5 hours  120 
 6 hours 
= 600 + 100 = 700
Effective hourly rate = 700/5 hours = 140/hour
(ii) Let time taken = X
Earnings under Halsay Scheme
 Effective hourly rate 
Time Taken
Or, Efffective hourly rate under Rowan Incentive plan =
(Time taken  Rate)  [50% Rate  (Time allowed – Time taken)]
Time Taken
(X  120)  [50% 120  (6 – X)]
Or, 140 
X
Or, 140X = 120X + 360 – 60X
Or, 80X = 360
360
Or, X  4.5 hours
80
Therefore, to earn effective hourly rate of 140 under Halsey Incentive Scheme worker has to
complete the work in 4.5 hours.
Question 9—
The finishing shop of a company employs 60 direct workers. Each worker is paid 400 as wages per week
of 40 hours. When necessary, overtime is worked up to a maximum of 15 hours per week per worker at
time rate plus one-half as premium. The current output on an average is 6 units per man hour which may be
regarded as standard output. If bonus scheme is introduced, it is expected that the output will increase to 8
units per man hour. The workers will, if necessary, continue to work overtime up to the specified limit
although no premium on incentives will be paid.
The company is considering introduction of either Halsey Scheme or Rowan Scheme of wages incentive
system. The budgeted weekly output is 19,200 units. The selling price is 11 per unit and the direct
material cost is 8 per unit. The variable overheads amount to 0.50 per direct labour hour and the fixed
overhead is 9,000 per week.
Prepare a statement to show the effect on the company's weekly profit of the proposal to introduce (a)
Halsey Scheme, and (b) Rowan Scheme.
Answer—
Working Notes:
1. Total available hours per week 2,400
(60 workers × 40 hours)
2. Total standard hours required to produce 19,200 units 3,200
(19,200 units ÷ 6 units per hour)
 Chapter 3 : Labour Costing 3.9
3. Total labour hours required after the 2,400
introduce of bonus scheme to produce 19,200 units
(19,200 units ÷ 8 units per man hour)
4. Time saved in hours 800
(3,200 hours – 2,400 hours)
5. Wage rate per hour ( ) 10
( 400 ÷ 40 hours)
6. Bonus:
(i) Halsey Scheme = ½ × Time saved × Wage rate per hour
= ½×800 hours × 10 = 4,000
Time saved
(ii) Rowan Scheme   Time Taken  Wage rate per hour
Time allowed
800 hours
  2,400 hours  10  6,000
3,200 hours
Statement showing the effect on the company's weekly
present profit by the introduction of Halsey
Present ( ) Halsey ( ) Rowan( )
Sales Revenue:(A) 2,11,200 2,11,200 2,11,200
(19,200 units × 11)
Direct Material Cost (19,200 units × 8) 1,53,600 1,53,600 1,53,600
Direct Wages (Refer to working notes 2 & 3) 32,000 24,000 24,000
(3,200 hrs.× 10) (2,400 hrs. × 10) (2,400 hrs.× 10)
Overtime Premium 4,000 – –
(800 hrs. × 5)
Bonus (Refer to working notes 6(i) &(ii)) – 4,000 6,000
Variable Overheads 1,600 1,200 1,200
(3,200 hr. × 0.50) (2,400 hr. × 0.50) (2,400 hr. × 0.50)
Fixed overheads 9,000 9,000 9,000
Total Cost :(B) 2,00,200 1,91,800 1,93,800
Profit:{(A)– (B)} 11,000 19,400 17,400

Question 10—
'Under the Rowan Premium Bonus system, a less efficient worker can obtain same bonus as a highly
efficient worker.' Discuss with suitable examples
Answer—
 Chapter 3 : Labour Costing 3.10

Time Taken
Bonus under Rowan System   Time Saved  Rate per hour
Time allowed
The statement that under Rowan Premium bonus system, a less efficient worker and a highly efficient
worker can obtain same amount of bonus, can be proved with the help of an example. Let time allowed for
a job is 4 hours and Labour rate per hour is 5.
Case I : Less efficient worker, If time taken = 3 hours.

3 hours
Bonus   1 hour  5  3.75
4 hours
Case II : Highly efficient worker, if time taken = 1 hour

1 hours
Bonus   3 hour  5  3.75
4 hours
So, it can be concluded that under Rowan System, the less efficient worker and highly efficient worker can
get the same bonus.
Question 11—
Two workmen, Andrew and Baker, produce the same product using the same material. Andrew is paid
bonus according to Halsey plan, while Baker is paid bonus according to Rowan plan. The time allowed to
manufacture the product is 100 hours. Andrew has taken 60 hours and Baker has taken 80 hours to com-
plete the product. The normal hourly rate of wages of workman Andrew is 24 per hour. The total earnings
of both the workers are same. Calculate normal hourly rate of wages of workman Baker.
Answer—
Andrew Baker
Time allowed (Hours) 100 100
Time taken (Hours) 60 80
Time saved (Hours) 40 20
Let the rate of wages of the worker Baker's is 'L' per hour
Normal Wages 1,440 80 L
(60 hours × 24) (80 hours × L)
Bonus 480 16L**
Total Earnings 1,920 96L
*Bonus under Halsey System = ½ × Time saved × Rate per hour
= ½ × 40 hours × 24 = 480

Time saved
** Bonus under Rowan System   Time worked  Rate per hour
Time allowed
20hours
  80 hours  L  16L
100 hours
According to the problem,
Total earning of Andrew = Total earnings of Baker
 Chapter 3 : Labour Costing 3.11
1,920 = 96L
L = 20
Therefore, Hourly rate of wages of Baker is 20 per hour.
Question 12—
Standard Time for a job is 90 hours. The hourly rate of guaranteed wages is 50. Because of the saving in
time a worker A gets an effective hourly rate of wages of 60 under Rowan premium bonus system. For the
same saving in time, calculate the hourly rate of wages a worker B will get under Halsey premium bonus
system assuring 40% to worker.
Answer—
Increase in hourly rate of wages under Rowan Plan is 10 i.e.( 60 – 50)

Time Saved
This is Equal to   Rate per hour (Please refer Working Note)
Time Allowed
Time Saved
Or,   50  10
Time Allowed

Time Saved
Or,   50  10
90 hours
Therefroe, Time Saved = 18 hours and Time Taken is 72 hours i.e. (90 hours – 18 hours)
Effective Hourly Rate under Halsey System:
Time Saved = 18 hours
Bonus @40% = 18 hours × 40% × 50 = 360
Total Wages = ( 50 × 72 hours) + 360 = 3960
Effective Hourly Rate = 3,960 ÷ 72 hours = 55
Working Note:
Effective hourly Rate =

Time Taken
(Time Taken  Rate per hour)   Time Saved  Rate per hour
 Time Allowed
Time Taken

Time Taken
 Time Saved  Rate per hour
Or, Time Taken  Rate per hour Time Allowed
60  
Time Taken Time Taken

Time Taken  Rate per hour Time Taken 1

Or 60 –   Time Saved  Rate per hour 
Time Taken Time Allowed Time Taken
 Chapter 3 : Labour Costing 3.12

Time Saved
Or, 60 – 50   50
Time Allowed
Question 13—
The management of a company wants to formulate an incentive plan for the workers with a view to
increase productivity. The following particulars have been extracted from the books of company:
Piece Wage rate 10
Weekly Working hours 40
Hourly wages rate 40 (guaranteed)
Standard/normal time per unit 15 minutes. Actual output for a week:
Worker A: 176 pieces
Worker B: 140 pieces
Differential piece rate: 80% of piece rate when output below normal and 120% of piece rate when output
above normal.
Under Halsey scheme, worker gets a bonus equal to 50% of Wages of time saved.
Calculate:
(i) Earning of workers under Halsey's and Rowan's premium scheme.

Answer—
Caluation of earnings for workers under different incentive plans:
(i) Halsey's Premium plan:
Worker – A Worker –B
Actual Time taken 40 hours 40 hours
Standard time for actual production 44 hours 35 hours

176Pcs  15 Min. 140Pcs  15 Min.

( ) ( )
60 Min 60 Min
Minimum Wages 1,600 1,600
(40 hours × 40) (40 hours × 40)
Bonus 80 No bonus
{50% (44 – 40) × 40}
1,680 1,600
Rowan's Premium Plan:
Minimum Wages (as above) 1,600 1,600
Bonus 145.45 No bonus

4hours
(  40 hours  40)
44 hours
Earning 1,745.45 1,600
 Chapter 3 : Labour Costing 3.13
Question 14—
What are the main features of Halsey and Rowan method of payment of remuneration? State how Rowan
Scheme is better than Halsey Scheme. Given time allowed of 30 hours for a job and the wage rate of 1.00
per hour, illustrate your answer by assuming your own figure for time taken to do the job.
Solution:
F.A. Halsey, an American engineer, brought out his plan in 1891. The main features of his plan were as
follows:
(i) Time rate is guaranteed.
(ii) Standard time is fixed for the job or operation.
(iii) In case a worker completes the job or operation in less time than allowed time (or standard time) he
is paid a fixed percentage of saving in time, which is usually 50%.
(iv) Under this plan, the employer is benefited to the extent of remaining 50% of time saved. Employer
is not protected against over speeding jobs by workers resulting in waste, damages etc.
Rowan Scheme was introduced by James Rowan in Glasgow in the year 1898. It is similar to Halsey Scheme
but the premium concept here is different. The main features of Rowan Scheme are:
(i) Time rate is guaranteed.
(ii) Bonus is based on time saved.
(iii) Instead of fixed percentage of time saved, bonus is in proportion of time saved to time allowed.
(iv) Protects employer against loose rate setting.
(v) Employer shares the benefit of increased output.
The Rowan Scheme is better than Halsey Scheme because of the following reasons:
(i) In Halsey Scheme, bonus is set at 50% of time saved. It does not serve as a strong incentive. If
workers over speed, the quality of the products deteriorates.
(ii) In Rowan Scheme, there is an automatic check on the earnings and thus over speeding is arrested.
In Halsey Scheme if two third of the time is saved, the worker can double his earning per hour and
in Rowan Scheme, this is not possible.
(iii) The earning per hour in Rowan Scheme is higher upto 50% of time saved and falls thereafter whereas
in Halsey Scheme the earnings per hour increases at a slow speed and can be doubled.
Consider the following example in which the time allowed for performing the job is 30 hours and the wage
rate is 1.00 per hour. We will depict with the help of imaginary figures in the following example, how the
earnings per hour under Halsey and Rowan plan will vary.

Question 15—
Jigyasa Boutiques LLP. (JBL) takes contract on job works basis. It 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 2 hours for boutique work on a piece of garment. In the month of March 2014, two workers
Margaret and Jennifer were given 30 pieces and 42 pieces of garments respectively for boutique work. The
following are the details of their work:

Margaret Jennifer
Work assigned 30 pcs. 42 pcs.
Time taken 28 hours 40 hours
 Chapter 3 : Labour Costing 3.14
Workers are paid bonus as per Halsey System. The existing rate of wages is 50 per hour. As per the new
wages agreement the workers will be paid 55 per hour w.e.f. 1st April 2014. At the end of the month March
2014, the accountant of the company has calculated wages to these two workers taking 55 per hour.
(i) From the above information calculate the amount of loss that the company has incurred due to
incorrect rate selection.
(ii) What would be the loss incurred by the JBL due to incorrect rate selection if it had followed Rowan
scheme of bonus payment.
(iii) Amount that could have been saved if Rowan scheme of bonus payment was followed.
(iv) Do you think Rowan scheme of bonus payment is suitable for JBL?

Answer—
Margarte Jennifer
No. of Garmetns assigned 30 42
Hows Allowed per piece (Hours) 2 2
Total Howrs Allowed (Hows) 60 84
Hours Taken (Hours) 28 40
Hows Sarved (Hours) 32 44

(i) Calculation of loss incurred due to incorrect rate selection.

(While calculating loss only excess rate per hour has been taken)
Margaret Jennifer Total
( ) ( ) ( )
Basic Wages 140 200 340
(28 Hrs. × 5) (40 Hrs. × 5)
Bonus (as per Halsey Scheme) 80 110 190
(50% of Time Saved × excees Rate) (50% of 32 Hrs. × 5) (50% of 44 Hrs. × 5)
Excess Wages Paid 220 310 530

(ii) Amount of loss if Rowan scheme of bonus payment were followed

Margaret ( ) Jennifer ( ) Total ( )
Basic Wages 140.00 200.00 340.00
(28 Hrs. × 5) (40 Hrs. × 5)
Bonus (as per Rowan Scheme) 74.67 104.76 179.43

 Time Taken   28   40 
  Time Saved  Excess Rate    32  5    44  5 
 Time Allowed   60   84 
Excess Wages Paid 214.67 304.76 519.43
 Chapter 3 : Labour Costing 3.15
(iii) Calculation of amount that could have been saved if Rowan Scheme were followed
Margaret ( ) Jennifer ( ) Total ( )
Wages paid under Halsey Scheme 220.00 310.00 530.00
Wages paid under Rowan Scheme 214.67 304.76 519.43
Difference (Savings) 5.33 5.24 10.57

(iv) Rowan Scheme of incentive payment has the following benefits, which is suitable with the nature
of business in which Jigyasa Boutique LLP 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.
Question 16—
The existing Incentive system of Alpha Limited is as under:
Normal Working Week 5 days of 8 hours each plus 3 late shifts of 3 hours each
Rate of Payment Day work: 160 per hour
Late shift: 225 per hour
Average output per operator for 49-hours week 120 articles
i.e. including 3 late shifts
In order to increase output and eliminate overtime, it was decided to switch on to a system of payment by
results. The following information is obtained.
Time-rate (as usual) : 160 per hour
Basic time allowed for 15 articles: 5 hours
Piece-work rate : Add 20% to basic piece-rate
Premium bonus : Add 50% to time.
Required:
(i) Prepare a Statement showing hours worked, weekly earnings, number of articles produced and
labour cost per article for one operator under the following systems:
(a) Existing time-rate
(b) Straight piece-work
(c) Rowan system
(d) Halsey premium system
Assume that 135 articles are produced in a 40-hour week under straight piece work, Rowan Pre-
mium system, and Halsey premium system above and worker earns half the time saved under Halsey pre-
mium system.
 Chapter 3 : Labour Costing 3.16
Answer—
Table showing Labour Cost per Article
Method of Payment Hours Weekly Number Labour cost
worked earnings of per article
( ) articles ( )
produced
Existing time rate (WN-1) 49 8,425.00 120 70.21
Straight piece rate system (WN-2) 40 8,640.00 135 64.00
Rowan Premium System (WN-3) 40 9,007.41 135 66.72
Halsey Premium System (WN-4) 40 8,600.00 135 63.70

Working Notes:
1. Existing Time Rate
Weekly wages:
Normal Shift (40 hours × 160) 6400
Late shift (9 hours × 225) 2,025
8425
2. Piece Rate System
15 articles are produced in 5 hours

5 hours
Therefore, to produce 135 articles, hours required is  135 articles  45 hours
15 articles
Cost of producing 135 articles:
At basic time rate (45 hours × 160) = 7,200
Add: Bonus @20% on basic Piece Rate

 7,200 
  20% 135articles   1,440
 135 articles 
Earning for the week 8640
3. Rowan Premium System

 5 hours 
(i) Time allowed for producing 135 articles  135articles 150 %   67.5 hours
 15 articles 
(ii) Time taken to produce 135 articles = 40.0 hours
(iii) Time saved = 27.5 hours
Earnings under Rowan Premium system:

 Time saved 
=(Time taken + Rate per hour) +   Time taken  Rate per hour 
 Time allowed 
 Chapter 3 : Labour Costing 3.17

 27.5 hours 
 (40 hours  160)    40 hours  160   9007.41
 67.5 hours 
4. Halsey Premium System
= (Time Taken× Rate per hour) +(½×Time saved × Rate per hour)
= (40 hours × 160) + (½ × 27.5hours× 160)= 6,400 + 2,200 = 8,600
Question 17—
A Company is undecided as to what kind of wage scheme should be introduced. The following particulars
have been compiled in respect of three systems, which are under consideration of the management.
Workers
A B C
Actual hours worked in a week 38 40 34
Hourly rate of wages 6 5 7.20
Production in units
Product – P 21 – 60
Product – Q 36 – 135
Product – R 46 25 –
Standard time allowed per unit of each product is:
P Q R
Minutes 12 18 30
For the purpose of piece rate, each minute is valued at 0.10
You are required to calculate the wages of each worker under:
(i) Guaranteed hourly rates basis
(ii) Premium bonus basis where the worker receives bonus based on Rowan scheme.

Solution:
(i) Computation of wages of each worker under guraranteed hourly rate basis

Workers Actual hours Hourly rate of W ages

worked in a week wages ( ) ( )
(a) (b) (c) (d) = (b) × (c)
A 38 6.00 228.00
B 40 5.00 200.00
C 34 7.20 244.80
 Chapter 3 : Labour Costing 3.18
Working Notes:
1. Time allowed to each worker
Worker A= (21 units × 12 minutes) + (36 units × 18 minutes) + (46 units × 30 minutes)
= 2,280 minutes or 38 hours
Worker B = 25 units × 30 minutes
= 750 minutes or 12.5 hours
Worker C = (60 units × 12 minutes) + (135 units × 18 minutes)
= 3,150 minutes or 52.5 hours
(ii) Computation of wages of each worker under Premium bonus basis (where each worker
receives bonus based on Rowan Scheme)
Workers Time Time Time Wage Earnings Bonus Total of
allowed taken saved rate/hour earning &
hours hours hours bonus
( ) ( ) ( ) ( )
A 38.0 0 38.00 - 6.00 228.00 - 228.00
B 12.5 0 40.00 - 5.00 200.00 - 200.00
C 52.5 0 34.00 18.50 7.20 244.80 86.26* 331.06

*Bonus under Rowan Scheme

Time saved
  Time taken  Rate per hour
Time Allowed
18.5 hours
  34 hours  7.20 = 86.26
52.5 hours

Question 18—
ZED Limited is working by employing 50 skilled workers, it is considering the introduction of incentive
scheme-either Halsey scheme (with 50% bonus) or Rowan scheme of wage payment for increasing the
labour productivity to cope up the increasing demand for the product by 40%. It is believed that proposed
incentive scheme could bring about an average 20% increase over the present earnings of the workers; it
could act as sufficient incentive for them to produce more.
Because of assurance, the increase in productivity has been observed as revealed by the figures for the
month of April,2014
Hourly rate of wages (guaranteed) 30
Average time for producing one unit by one worker at the previous
performance (This may be taken as time allowed) 1.975 hours
Number of working days in the month 24
Number of working hours per day of each worker 8
Actual production during the month 6,120 units
 Chapter 3 : Labour Costing 3.19
Required:
(i) Calculate the effective rate of earnings under the Halsey scheme and the Rowan scheme.
(ii) Calculate the savings to the ZED Limited in terms of direct labour cost per piece.
(iii) Advise ZED Limited about the selection of the scheme to fulfill their assurance.
Answer—
Working notes:
1. Computation of time saved (in hours) per month:
(Standard production time for 6,120 units) – (Actual time taken by the workers)
= (6,120 units × 1.975 hours) – (24 days × 8 hours per day × 50 skilled workers)
= (12,087 hours – 9,600 hours)
= 2,487 hours

2. Computation of bonus for time saved under Halsey and Rowan schemes:
Time Saved = 2,487 hours
(Refer to working note 1)
Wage rate per hour = 30
Bonus under Halsey Scheme = ½ × 2,487 hours × 30
(with 50% bonus) = 37,305

Time saved
Bonus under Rowan Scheme   Time taken  Rate per hour
Time Allowed

2,487 hours
  9,600 hours  30
12,087 hours
= 59,258.38
(i) Computation of effective rate of earnings under the Halsey and Rowan scheme:
Total earnings (under Halsey Scheme) (Refer to working note 2)
Total earnings (under Halsey scheme) (Refer to working note 2)
= Time wages + Bonus
= (24 days × 8 hours x 50 skilled workers × 30) + 37,305
= 2,88,000 + 37,305 = 3,25,305
Total earnings (under Rowan scheme) (Refer to working note 2)
= Time wages + Bonus
= 2,88,000 + 59,258.38
= 3,47,258.38
3,25,305
Effective rate of earnings per hour (under Halsey Plan)   33.89
9,600 hours
 Chapter 3 : Labour Costing 3.20

3,47,258.38
Effective rate of earnings per hour (under Rowan Plan)   36.17
9,600 hours
(ii) Savings to the Zed Ltd., in terms of direct labour cost per piece:
( )
Direct labour cost (per unit) under time wages system 59.25
(1.975 hours per unit × 30)

 3,25,305 
Direct labour cost (per unit) under Halsey Plan   53.15
 6,120 units 

 3,47,258 
Direct labour cost (per unit) cunder Rowan Plan   56.74
 6,120 units 
Saving of direct labour cost under:
Halsey Plan ( 59.25 – 53.15) 6.10
Rowan Plan ( 59.25 – 56.74) 2.51
(iii) Advise to ZED Ltd.: (about the selection of the scheme to fulfill assurance)
Halsey scheme brings more savings to the management of ZED Ltd., over the present earnings of
2,88,000 but the other scheme i.e. Rowan scheme fulfils the promise of 20% increase over the
present earnings of 2,88,000 by paying 20.58% in the form of bonus. Hence Rowan Plan may be
adopted.
 Chapter 3 : Labour Costing 3.21
C. Computation of Labour Costing
Question 19—
Two workers 'A' and 'B' produce the same product using the same material. Their normal wage
rate is also the same. 'A' is paid bonus according to Rowan scheme while 'B' is paid bonus according to
Halsey scheme. The time allowed to make the product is 50 hours. 'A' takes 30 hours while 'B' takes 40
hours to complete the product. The factory overhead rate is 5 per person-hour actually worked. The
factory cost of product manufactured by 'A' is 3,490 and for product manufactured by 'B' is 3,600.
Required:
(i) Compute the normal rate of wages.
(ii) Compute the material cost.
(iii) Prepare a statement comparing the factory cost of the product as made by two workers.
Answer—
Workings
1. Let 'M' be the cost of material and 'L' be the normal rate of wages per hour
Worker A ( ) Worker B ( )
Material cost M M
Labour wages 30 L 40 L
Bonus 12 L* 5 L**
Overheads 150 200
(30 hours × 5); (40 hours × 5)
Factory cost
{M + (30 L + 12 L) + 150 = 3,490} M + 42 L = 3,340 ........(i) M + 45 L = 3,400.... (ii)
{M + (40 L + 5 L) + 200 = 3,600}

Time saved
* Bonus uner Rowan system   Time worked  Rate per hour
Time allowed
20 hours
  30 hours  L  12L
50 hours
** Bonus under Halsey system
= ½ ×Time saved × Rate per hour
= ½ × 10 hours × L= 5L
2. Solving (i) and (ii) to get the value of 'M' and 'L'
M + 42 L = 3,340......................(i)
M + 45 L = 3,460.......................(ii)
– 3L = –60
L = 20
By substituting the value of 'L' in (i), we will get the value of M
M + 42 × 20 = 3,340 or, M = 2,500
(i) Normal rate of wages is 20 per hour. (working Note – 2)
(ii) Cost of materials = 2,500. (Working Note – 2)
 Chapter 3 : Labour Costing 3.22
(iii) Comparative Statement of Factory Cost
Worker A ( ) Worker B ( )
Material cost 2,500 2,500
Wages
(30 hours × 20); (40 hours × 20) 600 800
Bonus
(12 × 20); (5 × 20) 240 100
Overheads
(30 hours × 5); (40 hours × 5) 150 200
Factory cost 3,490 3,600
Question 20—
Calculate the earnings of A and B from the following particulars for a month and allocate the labour cost to
each job X, Y and Z:
A B
(i) Basic Wages 100 160
(ii) Dearness Allowance 50% 50%
(iii) Contribution to provident Fund (on basic wages) 8% 8%
(iv) Contribution to Employees' State Insurance (on basic wages) 2% 2%
(v) Overtime 10 hours
The normal working hours for the month are 200. Overtime is paid at double the total of normal
wages and dearness allowance. Employer's contribution to state Insurance and Provident Fund are at equal
rate with employees' contributions. The two workers were employed on jobs X, Y and Z in the following
proportions:
Jobs
X Y Z
Worker A 40% 30% 30%

Worker B 50% 20% 30%

Overtime was done on job Y.
Solution—
Statement Showing Earnings of Workers A and B
Workers A( ) B( )
Basic Wages 100.00 160.00
Dearness Allowance (50% of Basic Wages) 50.00 80.00
Overtime Wages (Refer to Working Note 1) 15.00 ----
Gross Wages earned 165.00 240.00
Less: Provident Fund (8% × 100); (8% × 160) (8.00) (12.80)
– ESI (2% × 100); (2% × 160) (2.00) ( 3.20)
Net Wages paid 155.00 224.00
 Chapter 3 : Labour Costing 3.23
Statement of Labour Cost
A( ) B( )
Gross Wages (excluding overtime) 150.00 240.00
Employer’s contribution to P.F. and E.S.I. 10.00 16.00
160.00 256.00
Ordinary wages Labour Rate per hour 0.80 1.28
( 160 ÷ 200 hours); ( 256 ÷ 200 hours)
Statement Showing Allocation of Wages to Jobs
To tal Jobs
Wa ges
X Y Z
Worker A
Ordinary Wages (4:3:3) 160.00 64.00 48.00 48.00
Overtime 15.00 -- 15.00 --
Worker B
Ordinary Wages(5:2:3) 256.00 128.00 51.20 76.80
431.00 192.00 114.20 124.80
Working Notes
1. Normal Wages are considered as basic wages

2  (Basic wage  D.A.)  10 hours

Overtime 
200 hours
150
 2  10hours
200
= 1.50 × 10 hours = 15
Question 21—
An article passes through five hand operations as follows:
Operation Time per article Grade of Wage rate per hour
No. worker ( )
1 15 minutes A 0.65
2 25 minutes B 0.50
3 10 minutes C 0.40
4 30 minutes D 0.35
5 20 minutes E 0.30
The factory works 40 hours a week and the production target is 600 dozens per week. Prepare a
statement showing for each operation and in total the number of operations required, the labour cost per
dozen and the total labour cost per week to produce the total targeted output.
 Chapter 3 : Labour Costing 3.24
Answer—
Statement of number of operators required and labour cost per dozen and per week. Production target is
600 dozen or 7,200 article per week.
Particulars Operation No. Total
1 2 3 4 5
Time per article (minutes) 15 25 10 30 20
Total time in hours for 1,800 3,000 1,200 3,600 2,400
production. of 600 (120 × 15 (120 ×25 (120 × 10 (120 × 30 (120 × 20
 600 doz 12  min.) min.) min) min.) min.)
dozen   120 
 60 min 
No. of operators 45 75 30 90 60 300
 Total Time 
 
 40 min 
Labour cost per dozen ( ) 1.95 2.50 0.80 2.10 1.20 8.55
Total Time  Rate per hour
600 dozen
Labour cost per week ( ) 1,170 1,500 480 1,260 720 5,130
(Cost per doz. × 600 doz.)

**************************
Chapter 4 : Overhead - Absorption Costing Method 4.1

CHAPTER – 4
Question 1.
ABC Ltd. has three production departments P1, P2 and P3 and two service departments S1 and
S2. The following data are extracted from the records of the Company for the month of October, 2013:

(`)
Rent and rates 62,500
General lighting 7,500
Indirect Wages 18,750
Power 25,000
Depreciation on machinery 50,000
Insurance of machinery 20,000
Other Information:
P1 P2 P3 S1 S2
Direct wages (`) 37,500 25,000 37,500 18,750 6,250
Horse Power of Machines used 60 30 50 10 –
Cost of machinery (`) 3,00,000 4,00,000 5,00,000 25,000 25,000
Floor space (Sq. ft) 2,000 2,500 3,000 2,000 500
Number of light points 10 15 20 10 5
Production hours worked 6,225 4,050 4,100 – –
Expenses of the service departments S1 and S2 are reapportioned as below:

P1 P2 P3 S1 S2
S1 20% 30% 40% – 10%
S2 40% 20% 30% 10% –
Required:
I. Compute overhead absorption rate per production hour of each production department.
II. Determine the total cost of product X which is processed for manufacture in department P1, P2
and P3 for 5 hours, 3 hours and 4 hours respectively, given that its direct material cost is ` 625
and direct labour cost is ` 375.
Answer
Primary Distribution Summary
Item of cost Basis of Total P1 P2 P3 S1 S2
apportionment (`) (`) (`) (`) (`) (`)
Direct wages Actual 25,000 – – – 18,750 6,250
Rent Floor area 62,500 12,500 15,625 18,750 12,500 3,125
and (4 : 5 : 6 : 4 : 1)
Rates
General Light points 7,500 1,250 1,875 2,500 1,250 625
lighting (2 : 3 : 4 : 2 : 1)
Indirect wages Direct wages 18,750 5,625 3,750 5,625 2813 938
(6 : 4 : 6 : 3 : 1)
Power Horse Power of 25,000 10,000 5,000 8,333 1,667
machines used
(6 : 3 : 5 : 1)
Chapter 4 : Overhead - Absorption Costing Method 4.2

Depreciation Value of 50,000 12,000 16,000 20,000 1,000 1,000

of machinery machinery
(12 : 16 : 20 : 1 : 1)
Insurance Value of 20,000 4,800 6,400 8,000 400 400
of machinery
machinery (12 : 16 : 20 : 1 : 1)
2,08,750 46,175 48,650 63,208 38,380 12,338

Overheads of service cost centres Let S1 be the overhead of service cost centre S1 and S2 be the overhead
of service cost centre S2.
S1 = 38,380 + 0.10 S2
S2 = 12,338 + 0.10 S1
Substituting the value of S2 in S1 we get
S1 = 38,380 + 0.10 (12,338 + 0.10 S1)
S1 = 38,380 + 1,233.80 + 0.01 S1
0.99 S1 = 39,613.80
 S1 = `40,014.
 S2 = 12,338 + 0.10 × 40,014.
= `16,339
Secondary Distribution Summary
Particulars Total (`) P1 (`) P2 (`) P3 (`)

Allocated and Apportioned 1,58,033 46,175 48,650 63,208

over- heads as per primary
distribution
S1 40,014 8,003 12,004 16,006
S2 16,339 6,536 3,268 4,902
60,714 63,922 84,116
(i) Overhead rate per hour
P1 P2 P3
Total overheads cost `60,714 `63,922 `84,116
Production hours worked 6,225 4,050 4,100
Rate per hour (`) `9.75 `15.78 `20.52
(ii) Cost of Product X
(`)
Direct material 625.00
Direct labour 375.00
Prime cost 1,000.00
Production on overheads
P1 5 hours × `9.75 = 48.75
P2 3 hours × `15.78 = 47.34
P3 4 hours × `20.52 = 82.08 178.17
Factory cost 1,178.17
Chapter 4 : Overhead - Absorption Costing Method 4.3

Question 2
The following account balances and distribution of indirect charges are taken from the accounts of a
manufacturing concern for the year ending on 31st March, 2014:
Total Production Departments Service
Item Amount Departments
(`) X (`) Y (`) Z (`) A (`) B (`)
Indirect Material 1,25,000 20,000 30,000 45,000 25,000 5,000

Indirect Labour 2,60,000 45,000 50,000 70,000 60,000 35,000

Superintendent's Salary 96,000 – – 96,000 – –

Fuel & Heat 15,000

Power 1,80,000

Rent & Rates 1,50,000

Insurance 18,000

Meal Charges 60,000

Depreciation 2,70,000
The following departmental data are also available:
Production Departments Service Departments
X Y Z A B
Area (Sq. ft.) 4,400 4,000 3,000 2,400 1,200

Capital Value of 4,00,000 6,00,000 5,00,000 1,00,000 2,00,000

Assets (`)
Kilowatt Hours 3,500 4,000 3,000 1,500 –
Radiator Sections 20 40 60 50 30
No. of Employees 60 70 120 30 20
Expenses charged to the service departments are to be distributed to other departments by the following
percentages:
X Y Z A B
Department A (%) 30 30 20 – 20
Department B (%) 25 40 25 10 –
Prepare an overhead distribution statement to show the total overheads of production departments after
re-apportioning service departments' overhead by using simultaneous equation method. Show all the
calculations to the nearest rupee.
Chapter 4 : Overhead - Absorption Costing Method 4.4

Answer
Primary Distribution of Overheads
Item Basis Total Production Departments Service
Amount Departments
(`) X (`) Y (`) Z (`) A (`) B (`)
Indirect Material Actual 1,25,000 20,000 30,000 45,000 25,000 5,000
Indirect Labour Actual 2,60,000 45,000 50,000 70,000 60,000 35,000
Superintendent’s Actual 96,000 – – 96,000 – –
Salary

Fuel & Heat Radiator 15,000 1,500 3,000 4,500 3,750 2,250
Sections
{2:4:6:5:3}
Power Kilowatt 1,80,000 52,500 60,000 45,000 22,500 –
Hours
{7:8:6:3:-}

Rent & Rates Area (Sq. ft.) 1,50,000 44,000 40,000 30,000 24,000 12,000
{22:20:15:12
:6}

Insurance Capital 18,000 4,000 6,000 5,000 1,000 2,000

Valu
e
of Assets
{4:6:5:1:2}

Meal Charges No of 60,000 12,000 14,000 24,000 6,000 4,000

Employees
{6:7:12:3:2}
Depreciation Capital Value 2,70,000 60,000 90,000 75,000 15,000 30,000
of Assets
{4:6:5:1:2}
Total overheads 11,74,000 2,39,000 2,93,000 3,94,500 1,57,250 90,250

Re-distribution of Overheads of Service Department A and B

Total overheads of Service Departments may be distributed using simultaneous equation method
Let, the total overheads of A = a and the total overheads of B= b
a = 1,57,250 + 0.10 b (i)
or, 10a - b = 15,72,500 [(i) x10]
b = 90,250 + 0.20 a (ii)
or, -0.20a + b = 90,250
Solving equation (i) & (ii)
10a – b = 15,72,500
– 0.20a + b = 90,250
9.8a = 16,62,750
a = 1,69,668
Putting the value of a in equation (ii), we get
b = 90,250 + 0.20 × 1,69,668
Chapter 4 : Overhead - Absorption Costing Method 4.5

b = 1,24,184
Secondary Distribution of Overheads
Production Departments
X (`) Y (`) Z (`)
Total overhead as per primary distribution 2,39,000 2,93,000 3,94,500
Service Department A (80% of 1,69,668) 50,900 50,900 33,934
Service Department B (90% of 1,24,184) 31,046 49,674 31,046
Total 3,20,946 3,93,574 4,59,480
Question 3
Arnav Ltd. has three production departments M, N and O and two service departments P and
Q. The following particulars are available for the month of September, 2013:
(`)
Lease rental 35,000
Power & Fuel 4,20,000
Wages to factory supervisor 6,400
Electricity 5,600
Depreciation on machinery 16,100
Depreciation on building 18,000
Payroll expenses 21,000
Canteen expenses 28,000
ESI and Provident Fund Contribution 58,000
Followings are the further details available:
Particulars M N O P Q
Floor space (square meter) 1,200 1,000 1,600 400 800

Light points (nos.) 42 52 32 18 16

Cost of machines (`) 12,00,000 10,00,000 14,00,000 4,00,000 6,00,000

No. of employees (nos.) 48 52 45 15 25

Direct Wages (`) 1,72,800 1,66,400 1,53,000 36,000 53,000

HP of Machines 150 180 120 - -

Working hours (hours) 1,240 1,600 1,200 1,440 1,440

The expenses of service department are to be allocated in the following manner:
M N O P Q
P 30% 35% 25% – 10%
Q 40% 25% 20% 15% –
You are required to calculate the overhead absorption rate per hour in respect of the three production
Chapter 4 : Overhead - Absorption Costing Method 4.6

departments.
Answer:
Primary Distribution Summary
Basis of Total Production Dept. Service Dept.
apportionment
Item of cost M N O P Q
(`) (`) (`) (`) (`) (`)
Lease rental Floor space 35,000 8,400 7,000 11,200 2,800 5,600
5:6:8:2:4
Power & Fuel HP of Machine × 4,20,000 1,26,408 1,95,728 97,864 – –
Working hours
(93: 144:72)
Supervisor's Working hours 6,400 1,964 2,534 1,901 – –
Wages* (31:40:30)
Electricity Light points 5,600 1,470 2,535 1,901 – –
(21:26:16:9:8)
Depreciation Value of machinery 16,100 4,200 3,500 4,900 1,400 2,100
on machinery
Depreciation Floor space 18,000 4,320 3,600 5,760 1,440 2,880
of building (6:5:8:2:4)
Payroll No. of employees 21,000 5,448 5,903 5,108 1,703 2,838
Expenses (48:52:45:15:25)
Canteen No. of Employees 28,000 7265 7,870 6,811 2,270 3,784
Expenses (48: 52:45:15:25)
ESI and PF Direct Wages 58,000 17,244 16,606 15,268 3,593 5,289
contribution (864:832:765:180:26
5)
6,08,100 1,76,719 2,44,562 1,49,932 13,836 23,0 51

* Wages to supervisor is to be distributed to production departments only.

Let ‘P’ be the overhead of service department P and ‘Q’ be the overhead of service department Q.
P = 13,836 + 0.15 Q
Q = 23,051 + 0.10 P
Substituting the value of Q in P we get
P = 13,836 + 0.15 (23,051 + 0.10 P)
P = 13,836 + 3,457.65 + 0.015 P
0.985 P = 17,293.65
P = ` 17,557
Q = 23,051 + 0.10 × 17,557
= ` 24,806.70 or ` 24,807
Secondary Distribution Summary
Total M N O
Particulars (`) (`) (`) (`)
Allocated and Apportioned 5,71,213 1,76,719 2,44,562 1,49,932
over-heads as per primary
Chapter 4 : Overhead - Absorption Costing Method 4.7

distribution
P (90% of `17,557) 15,801 5,267 6,145 4,389
Q (85% of `24,807) 21,086 9,923 6,202 4,961
1,91,909 2,56,909 1,59,282
Overhead rate per hour
M N O
Total overheads cost (`) 1,91,909 2,56,909 1,59,282
Working hours 1,240 1,600 1,200
Rate per hour (`) 154.77 160.57 132.74

Question 4:
A company has three production departments (M1, M2 and A1) and three service department, one of
which Engineering service department, servicing the M1 and M2 only. The relevant information are as
follows:
Product Product
X Y
M1 10 Machine hours 6 Machine hours
M2 4 Machine hours 14 Machine hours
A1 14 Direct Labour hours 18 Direct Labour hours
The annual budgeted overhead cost for the year are
Indirect Wages Consumable
(`) Supplies(`)
M1 46,520 12,600

M2 41,340 18,200

A1 16,220 4,200

Stores 8,200 2,800

Engineering Service 5,340 4,200

General Service 7,520 3,200

(`)
– Depreciation on Machinery 39,600
– Insurance of Machinery 7,200
– Insurance of Building 3,240 (Total building insurance cost for
M1 is one third of annual
premium )
– Power 6,480
– Light 5,400
– Rent 12,675 (The general service deptt. is
located in a building owned by
the company. It is valued at
`6,000 and is changed into cost
at notional value of 8% per
annum. This cost is additional to
Chapter 4 : Overhead - Absorption Costing Method 4.8

the rent shown above )

The value of issues of materials to the production departments are in the same proportion as shown
above for the Consumable supplies.
The following data are also available:
Department Book value Area (Sq. Effective Production Capacity
Machinery ft.) H.P. hours Direct Machine
(`) % Labour hour
hour
M1 1,20,000 5,000 50 2,00,000 40,000

M2 90,000 6,000 35 1,50,000 50,000

A1 30,000 8,000 05 3,00,000 –

Stores 12,000 2,000 – – –

Engg. Service 36,000 2,500 10 – –

General Service 12,000 1,500 – – –
Required:
(i) Prepare a overhead analysis sheet, showing the bases of apportionment of overhead to
departments.
(ii) Allocate service department overheads to production department ignoring the apportionment of
service department costs among service departments.
(iii) Calculate suitable overhead absorption rate for the production departments.
(iv) Calculate the overheads to be absorbed by two products, X and Y.
Answer:
(i) Summary of Apportionment of Overheads
Basis of Total Production Deptt. Service Deptt.
Apportionmen Amount
Items M1 M2 A1 Store Engineering General
t
Service Service Service
Indirect Allocation given 1,25,140 46,520 41,340 16,220 8,200 5,340 7,520
wages
Consumable Allocation given 45,200 12,600 18,200 4,200 2,800 4,200 3,200
stores
Depreciation Capital value of 39,600 15,840 11,880 3,960 1,584 4,752 1,584
machine
(20:15:5:2:6:2)
Insurance of Capital value of 7,200 2,880 2,160 720 288 864 288
Machine machine
(20:15:5:2: 6:2)
Insurance on 1/3rd to M1 3,240 1,080 648 864 216 270 162
Building Balance area
basis
(12:16:4:5:3)
Power HP Hr% 6,480 3,240 2,268 324 – 648 –
Light Area 5,400 1,080 1,296 1,728 432 540 324
(10:12:16:4:5:3)
Rent* Area 12,675 2697 3,236 4,315 1,079 1,348 –
Total 2,44,935 85,937 81,028 32,331 14,599 17,962 13,078
*Rent to be apportioned among the departments which actually use the rented building. The notional rent
 Chapter 4 : Overhead - Absorption Costing Method 4.9

is imputed cost and is not included in the calculation.

(ii) Allocation of Service department overheads
Production Deptt. Service Deptt.
Service Basis of
Deptt. Apportionment M1 M2 A1 Store Engineering General
Service Service Service
Store Ratio of
consumable value 5,256 7,591 1,752 (14,599) – –
(126 :182 : 42)

Engineerin In Machine hours

g service Ratio of 7,983 9,979 – – (17,962) –
M1 and M2 (4 : 5)
General Labour hour Basis
service (20 : 15 : 30) 4,024 3,018 6,036 – – (13,078)

Production 85,937 81,028 32,331

Department
allocated in
(i)
Total 1,03,200 1,01,616 40,119
(iii) Overhead Absorption rate
M1 M2 A1
Total overhead allocated 1,03,200 1,01,616 40,119
Machine hours 40,000 50,000 –
Labour hours – – 3,00,000
Rate per machine hour 2.58 2.032 –
Rate per Direct labour – – 0.134
(iv) Statement showing overhead absorption for Product X and Y

Machine Deptt. Absorption Rate Product X Product Y

Hours (`) Hours (`)
M1 2.58 10 25.80 6 15.48
M2 2.032 4 8.13 14 28.45
A1 0.134 14 1.88 18 2.41
35.81 46.34
Question 5.
E-books is an online book retailer. The Company has four departments. The two sales departments are
Corporate Sales and Consumer Sales. The two support – departments are Administrative (Human
Resources Accounting) and Information Systems each of the sales departments conducts merchandising
and marketing operations independently.
The following data are available for October, 2013:
Departments Revenues Number of Processing time
Employees used (in
minutes)
Corporate Sales ` 16,67,750 42 2,400

Consumer Sales ` 8,33,875 28 2,000

Administrative – 14 400
Chapter 4 : Overhead - Absorption Costing Method 4.10

Information system – 21 1,400

Cost incurred in each of four departments for October, 2013 are as follow:
Corporate Sales `12,97,751
Consumer Sales `6,36,818
Administrative `94,510
Information Systems `3,04,720
The company uses number of employees as a basis to allocate Administrative costs and processing time
as a basis to allocate Information systems costs.

Required:
(i) Allocate the support department costs to the sales departments using the direct method.
(ii) Rank the support departments based on percentage of their services rendered to other support
departments. Use this ranking to allocate support costs based on the step-down allocation
method.
(iii) How could you have ranked the support departments differently?
(iv) Allocate the support department costs to two sales departments using the reciprocal allocation
method.
Answer:
(i) Statement showing the allocation of support department costs to the sales departments
(using the Direct Method)

Sales department Support department

Particulars Basis of Corpora Consumer sales Administrat Information
allocation ive
te sales (`) systems (`)
(`) (`)
Cost incurred 12,97,751 6,36,818 94,510 3,04,720
Re-allocation of Number of 56,706 37,804 (94,510) –
cost of employees
administrative (6:4:–:–)
department
Re-allocation of Processing 1,66,211 1,38,509 --- (3,04,720)
costs of time (6:5:–
information
systems :–)
department
Total 15,20,668 8,13,131

(ii) Ranking of support departments based on percentage of their services rendered to other support
departments
 21100 
• Administration support department provides 23.077%   of its service to
 42  28  21 
information systems support department. Thus 23.077% of `94510 = `21,810.
 400 
• Information system support department provides 8.33%  100  of its
 2,400  2,000  400 
services to Administration support department. Thus 8.33% of `3,04,720 = `25383.
Chapter 4 : Overhead - Absorption Costing Method 4.11

Statement showing allocation of support costs

(By using step-down allocation method)
Sales department Support department
Particulars Basis of Corporate Consumer Administrativ Information
allocation sales sales e systems.
(`) (`) (`) (`)
Cost incurred 12,97,751 6,36,818 94,510 3,04,720
Re-allocation of cost Number of 43,620 29,080 (94,510) 21,810
of administrative employees 3,26,530
department (6:4:–:3)
Re-allocation of Processing 1,78,107 1,48,423 (3,26,530)
costs of information time (6:5:–:–
systems department )
Total 15,19,478 8,14,321
(iii) An alternative ranking is based on the rupee amount of services rendered to other service
departments, using the rupee figures obtained under requirement (ii) This approach would use
the following sequence of ranking.
Allocation of information systems overheads as first (`25,383 provided to administrative).
Allocated administrative overheads as second (`21,810 provided to information systems).
(iv) Working notes:
Percentage of services provided by each service department to other service department and
sales departments.
Service departments Sale departments
Particulars Administrative Informati Corporat Consume
on e Sales r Sales
system
Administrative – 23.08% 46.15% 30.77%
Information systems 8.33% – 50% 41.67%
Total cost of the support department: (By using simultaneous equation method).
Let AD and IS be the total costs of support departments Administrative and Information systems
respectively. These costs can be determined by using the following simultaneous equations:
AD = 94,510 + 0.0833 IS
IS = 3,04,720 + 0.2308 AD
Or, AD = 94,510 + 0.0833 {3,04,720 + 0.2308 AD}
Or, AD = 94,510 + 25,383 + 0.01922 AD
Or, 0.98077AD = 1,19,893
Or, AD = `1,22,243
and IS = `3,32,934
Chapter 4 : Overhead - Absorption Costing Method 4.12

Statement showing the allocation of support department costs to the sales departments
(Using reciprocal allocation method)
Sales department
Particulars Corporate Consumer
sales sales
(`) (`)
Costs incurred 12,97,751 6,36,818
Re-allocation of cost administrative 56,427 37,614
department (46.16% and 30.77% of
`1,22,243)
Re-allocation of costs of information systems 1,66,467 1,38,734
department (50% and 41.67% of `3,32,934)
Total 15,20,645 8,13,166

Absorption of Overheads
Question 6.
ABC Ltd. manufactures a single product and absorbs the production overheads at a pre-determined rate of
`10 per machine hour.
At the end of financial year 2013-14, it has been found that actual production overheads incurred were
` 6,00,000. It included `45,000 on account of 'written off' obsolete stores and `30,000 being the wages
paid for the strike period under an award.
The production and sales data for the year 2013-14 is as under:
Production:
Finished goods 20,000 units
Work-in-progress (50% complete in all respects) 8,000 units
Sales:
Finished goods 18,000 units
The actual machine hours worked during the period were 48,000. It has been found that one- third of the
under – absorption of production overheads was due to lack of production planning and the rest was
attributable to normal increase in costs.
You are required to:
i. Calculate the amount of under - absorption of production overheads during the year 2013-14; and
ii. Show the accounting treatment of under - absorption of production overheads.
Answer
(i) Amount of under-absorption of production overheads during the year 2013-14
(`)
Total production overheads actually incurred during the year 2013-14 6,00,000
Less: ‘Written off’ obsolete stores ` 45,000
Wages paid for strike period ` 30,000 75,000
Net production overheads actually incurred: (A) 5,25,000
Production overheads absorbed by 48,000 machines hours @ `10 4,80,000
per
hour: (B)
Amount of under-absorption of production overheads: [(A)–(B)] 45,000
(ii) Accounting treatment of under absorption of production overheads: It is given in the
statement of the question that 20,000 units were completely finished and 8,000 units were
50% complete, one third of the under-absorbed overheads were due to lack of production
Chapter 4 : Overhead - Absorption Costing Method 4.13

planning and the rest were attributable to normal increase in costs.

(`)
1. (33-1/3% of `45,000) i.e. `15,000 of under – absorbed overheads 15,000
were due to lack of production planning. This being abnormal,
should be debited to the profit and Loss A/c
2. Balance (66-2/3% of `45,000) i.e. `30,000 of under – absorbed 30,000
overheads should be distributed over work-in-under – absorbed
overheads and cost of sales by using supplementary rate
Total under-absorbed overheads 45,000
Apportionment of unabsorbed overheads of `30,000 over, work-in-progress, finished goods and cost of
sales.
Equivalent Completed (`)
units
Work-in-progress (4,000 units × `1.25) 4,000 5,000
(Refer to Working Note)
Finished goods (2,000 units × `1.25) 2,000 2,500
Cost of sales (18,000 units × `1.25) 18,000 22,500
24,000 30,000
Accounting treatment:
Work-in-progress control A/c Dr. ` 5,000
Finished goods control A/c Dr. ` 2,500
Cost of Sales A/c Dr. `22,500
Profit & Loss A/c Dr. `15,000
To Overhead control A/c `
45,000
Working Note:
`30,000
Supplementary overhead absorption rate   `1.25 per units
24,000 units
Question-7
X Ltd. recovers overheads at a. pre-determined rate of ` 50 per man-day. The total factory overheads
incurred and the man-days actually worked were ` 79 lakhs and 1.5 lakhs days respectively. During the
period 30,000 units were sold. At the end of the period 5,000 completed units were held in stock but
there was no opening stock of finished goods. Similarly, there was no stock of uncompleted units at the
beginning of the period but at the end of the period there were 10,000 uncompleted units which may be
treated as 50% complete.
On analyzing the reasons, it was found that 60% of the unabsorbed overheads were due to defective
planning and the balance were attributable to increase in overhead cost.
How would unabsorbed overheads be treated in cost accounts?
Answer
Absorbed overheads = Actual Man- days x Rate per day
= 1,50,000 days × `50
= ` 75,00,000
 Chapter 4 : Overhead - Absorption Costing Method 4.14

Under absorption of overheads = Actual overheads - Absorbed overheads

= ` 79,00,000 - ` 75,00,000
= ` 4,00,000
Reasons for under – absorption:
1. Defective Planning ` 4,00,000 × 60% = `2,40,000
2. Increase in overhead cost ` 4,00,000 × 40% = ``1,60,000
Treatment in Cost Accounts:
(i) The unabsorbed overheads of ` 2,40,000 on account of defective planning to be treated as
abnormal and thus be charged to Costing profit & loss account.
(ii) The balance of unabsorbed overheads i.e. `1,60,000 be charged as below on the basis of
supplementary overhead absorption rate
Supplementary Rate = `1,60,000 ÷ {30,000 units + 5,000 units +(50% of 10,000 units)= ` 4
To Cost of sales Account = 30,000 units × ` 4 =` 1,20,000
To Finished stock account = 5,000 units × ` 4 =` 20,000
To WIP Account = 50% of 10,000 units × `4 =` 20,000
` 1,60,000
Question 8
PQR manufacturers – a small scale enterprise produces a single product and has adopted a policy to
recover the production overheads of the factory by adopting a single blanket rate based on machine hours.
The budgeted production overheads of the factory are `10,08,000 and budgeted machine hours are
96,000.
For a period of first six months of the financial year 2013–2014, following information were extracted
from the books:
Actual production overheads ` 6,79,000
Amount included in the production overheads:
Paid as per court’s order ` 45,000
Expenses of previous year booked in current year ` 10,000
Paid to workers for strike period under an award ` 42,000
Obsolete stores written off ` 18,000
Production and sales data of the concern for the first six months are as under:
Production:
Finished goods 22,000 units
Works-in-progress
(50% complete in every respect) 16,000 units
Sale:
Finished goods 18,000 units
The actual machine hours worked during the period were 48,000 hours. It is revealed from the analysis of
information that ¼ of the under-absorption was due to defective production policies and the balance was
attributable to increase in costs.
You are required:
(i) to determine the amount of under absorption of production overheads for the period,
 Chapter 4 : Overhead - Absorption Costing Method 4.15

(ii) to show the accounting treatment of under-absorption of production overheads, and

(iii) to apportion the unabsorbed overheads over the items.
Answer
Amount of under absorption of production overheads during the period of first six months of the year
2013-2014:

Amount Amount
(`) (`)
Total production overheads actually incurred during the 6,79,000
period
Less: Amount paid to worker as per court order 45,000
Expenses of previous year booked in the current year
10,000
Wages paid for the strike period under an award
Obsolete stores written off 42,000

18,000 1,15,000
Less: Production overheads absorbed as per machine
hour rate (48,000 hours × `10.50*) 5,64,000

Amount of under absorbed production overheads

5,04,000
60,000

`10,08,000
Budgeted Machine hour rate (Blanket rate)   `10.50 per hour
96,000 hours
Accounting treatment of under absorbed production overheads: As, one fourth of the under absorbed
overheads were due to defective production policies, this being abnormal, hence should be debited to
Costing Profit and Loss Account.
Amount to be debited to Costing Profit and Loss Account = (60,000 * ¼) ` 15,000.
Balance of under absorbed production overheads should be distributed over Works in progress, Finished
goods and Cost of sales by applying supplementary rate*.
Amount to be distributed = (60,000 * ¾) `45,000.
` 45,000
Supplementary rate   `1.50 per unit
30,000 units
Apportionment of under absorbed production overheads over WIP, Finished goods and Cost of sales:
Equivalent Amount (`)
completed units
Work-in-Progress (16,000 units × 50% ×1.50) 8,000 12,000
Finished goods (4,000 units × 1.50) 4,000 6,000
Cost of sales (18,000 units × 1.50) 18,000 27,000
Total 30,000 45,000
Chapter 4 : Overhead - Absorption Costing Method 4.16

Question 9
Your company uses a historical cost system and applies overheads on the basis of "pre- determined" rates.
The following are the figure from the Trial Balance as at 30th September, 2013:-
Manufacturing overheads ` 4,26,544 Dr.
Manufacturing overheads applied ` 3,65,904 Cr.
Work-in-progress ` 1,41,480 Dr.
Finished goods stocks ` 2,30,732 Dr.
Cost of goods sold ` 8,40,588 Dr.
Give two methods for the disposal of the unabsorbed overheads and show the profit implications of each
method.
Answer
Calculation of manufacturing overhead under absorbed (`)
Actual overheads 4,26,544
Overhead recovered (applied) 3,65,904
Under absorption (recovery) of overhead 60,640
The two methods for the disposal of the under-absorbed overheads in this problem may be:–
i. Write off the under - absorbed overhead to Costing Profit & Loss Account.
ii. Use supplementary rate, to recover the under-absorbed overhead.
According to first method, the total unabsorbed overhead amount of `60,640 will be written off to
Costing Profit & Loss Account. The use of this method will reduce the profits of the concern by ` 60,640
for the period.
According to second method, a supplementary rate may be used to adjust the overhead cost of each cost
unit. The under-absorbed amount in total may, at the end of the accounting period, be apportioned on ratio
basis to the three control accounts, viz, Work-in-progress, Finished goods stock and Cost of goods sold
account. Apportioning of under-absorbed overhead can be carried out by using direct labour hours/
machine hours/ the value of the balances in each of these accounts, as the basis. Prorated figures of
under-absorbed overhead over Work-in-progress, Finished goods stock and Cost of goods sold in this
question on the basis of values, of the balances in each of these accounts are as follows:-

Additional Overhead (Under-absorbed) Total

(`) (`) (`)
Work-in-progress 1,41,480 7,074* 1,48,554
Finished Goods 2,30,732 11,537@ 2,42,269
Stock 8,40,588 8,82,617
42,029#
Cost of Goods Sold
12,12,800 60,640 12,73,440
By using this method, the profit for the period will be reduced by `42,029 and the value of stock will
increase by `18,611. The latter will affect the profit of the subsequent period.
Working Notes
The apportionment of under-absorbed overhead over Work-in-progress, Finished goods stock and Cost of
goods sold on the basis of their value in the respective account is as follows:–
` 60,640
*Overhead to be absorbed by work-in-progress  1,41,480  ` 7,074
`12,12,800
` 60,640
@Overhead to be absorbed by finished goods   2,30,732 `11,537
`12,12,800
Chapter 4 : Overhead - Absorption Costing Method 4.17

` 60,640
#Overhead to be absorbed by cost of goods sold   8,40,588 ` 42,029
`12,12,800

Question 10
A machine costing ` 10 lakhs, was purchased on 1-4-2014. The expected life of the machine is 10
years. At the end of this period its scrap value is likely to be `10,000. The total cost of all the machines
including new one was ` 90 lakhs.
The other information is given as follows:
i. Working hours of the machine for the year was 4,200 including 200 non-productive hours.
ii. Repairs and maintenance for the new machine during the year was ` 5,000.
iii. Insurance Premium was paid for all the machine ` 9,000.
iv. New machine consumes 8 units of electricity per hour, the rate per unit being ` 3.75
v. The new machine occupies 1/10th area of the department. Rent of the department is ` 2,400 per
month.
vi. Depreciation is charged on straight line basis.
Compute machine hour rate for the new machine.
Answer
Computation of machine hour rate of new Machine

Total (`) Per hour (`)

A. Standing Charges
1 1,000
I. Insurance Premium ` 9,000 
9

1 2,880
II. Rent  ` 2,400  12 months
10

3,880 0.97*
B. Machine Expenses
I. Repairs and Maintenance (`5,000÷4,000 hours) 1.25

 `10,00,000 – `10,000  24.75

II. Depreciation  
10 years  4,000 hours 

III. Electricity (8 units × `3.75) 30.00

Machine hour Rate 56.97
1. Calculation of productive Machine hour rate
Total hours 4,200
Less: Non-Productive hours 200
Effective machine hours 4,000
* ` 3,880 ÷ 4,000 hours = ` 0.97
Chapter 4 : Overhead - Absorption Costing Method 4.18

Question 11
From the details furnished below you are required to compute a comprehensive machine-hour rate:
Original purchase price of the machine `3,24,000
(subject to depreciation at 10% per annum on original cost)
Normal working hours for the month 200 hours
(The machine works for only 75% of normal capacity)
Wages to Machine-man ` 125 per day (of 8 hours)
Wages to Helper (machine attendant) ` 75 per day (of 8 hours)
Power cost for the month for the time worked ` 15,000
Supervision charges apportioned for the machine centre
for the month ` 3,000
Electricity & Lighting for the month ` 7,500
Repairs & maintenance (machine) including Consumable stores per month ` 17,500

Insurance of Plant & Building (apportioned) for the year ` 16,250

Other general expense per annum ` 27,500
The workers are paid a fixed Dearness allowance of `1,575 per month. Production bonus payable to
workers in terms of an award is equal to 33.33% of basic wages and dearness allowance. Add 10% of the
basic wage and dearness allowance against leave wages and holidays with pay to arrive at a
comprehensive labour-wage for debit to production.
Solution:
Effective machine hours = 200 hours × 75% = 150 hours
Computation of Comprehensive Machine Hour Rate
Per month(`) Per hour (` )
Fixed cost
3,000.00
Supervision charges
7,500.00
Electricity and
1,354.17
lighting
2,291.67
Insurance of Plant and building (`16,250 ÷12)
2,700.00
Other General Expenses (`27,500÷12)
16,845.84 112.31
Depreciation (`32,400÷12)
Direct Cost
Repairs and maintenance 17,500.00 116.67
Power 15,000.00 100.00
Wages of machine man 44.91
Wages of Helper 32.97
Machine Hour rate (Comprehensive) 406.86
Chapter 4 : Overhead - Absorption Costing Method 4.19

Wages per machine hour

Machine Helper
man
Wages for 200 hours
Machine – man (`125 ×25) `3,125.00 –
Helper (`75×25) – `1,875
Dearness Allowance (DA) `1575 `1,575
4,700 `3450
Production bonus (1/3 of Basic and DA) 1,567.00 1,150
Leave Wages (10% of Basic and DA) 470.00 345.00
6,737.00 4,945.00
Effective wage rate per machine hour `44.91 `32.97
Question 12
A machine shop cost centre contains three machines of equal capacities. To operate these three machines
nine operators are required i.e. three operators on each machine. Operators are paid `20 per hour. The
factory works for fourtyeight hours in a week which includes 4 hours set up time. The work is jointly
done by operators. The operators are paid fully for the forty eight hours. In additions they are paid a
bonus of 10 per cent of productive time. Costs are reported for this company on the basis of thirteen
four-weekly period.
The company for the purpose of computing machine hour rate includes the direct wages of the operator
and also recoups the factory overheads allocated to the machines. The following details of factory
overheads applicable to the cost centre are available:
 Depreciation 10% per annum on original cost of the machine. Original cost of the each machine
is `52,000.
 Maintenance and repairs per week per machine is `60.
 Consumable stores per week per machine are `75.
 Power : 20 units per hour per machine at the rate of 80 paise per unit.
 Apportionment to the cost centre : Rent per annum `5,400, Heat and Light per annum
 `9,720, foreman's salary per annum `12,960 and other miscellaneous expenditure per annum `
18,000.
Required:
(i) Calculate the cost of running one machine for a four week period.
(ii) Calculate machine hour rate.

Answer:
Effective Machine hour for four-week period
= Total working hours - unproductive set-up time
= {(48 hours × 4 weeks) – {(4 hours × 4 weeks)}
= (192 – 16) hours ) =176 hours.
Chapter 4 : Overhead - Absorption Costing Method 4.20

(i) Computation of cost of running one machine for a four week period
(`) (`)
(A) Standing Charges (per annum)
Rent 5,400.00
Heat and Light 9,720.00
Forman's salary 12,960.00
Other miscellaneous Expenditure 18,000.00
Standing Charges (per annum) 46,080.00
Total Expenses for one machine for four week period 1,181.54
 ` 46,080 
 
 3 machines 13 four – week period 
Wages (48 hours ×4 weeks ×`20 × 3 operators 11,520.00
Bonus {(176 hours ×`20 ×3operators)×10%} 1,056.00
Total Standing Charges 13,757.54
(B) Machine Expenses
 1  400.00
Depreciation   ` 52,000  10 
 13four – week period 

Repairs and maintenance (`60× 4 weeks) 240.00
Consumable stores (`75 × 4 weeks) 300.00
Power (176 hours × 20 units ×`0.80) 2,816.00
Total machine expenses 3,756.00
(C) Total Expenses (A) + (B) 17,513.54
`17,513.54
(ii) Machine hour rate   `99.51
176 hours
Question 13
In a factory, a machine is considered to work for 208 hours in a month. It includes maintenance time of
8 hours and set up time of 20 hours.
The expense data relating to the machine are as under:
 Cost of the machine is ` 5,00,000. Life 10 years. Estimated scrap value at the end of life is `
20,000.
(`)
– Repairs and maintenance per annum 60,480
– Consumable stores per annum 47,520
– Rent of building per annum (The machine under reference 72,000
occupies 1/6 of the area)
– Supervisor's salary per month (Common to three machines) 6,000
– Wages of operator per month per machine 2,500
– General lighting charges per month allocated to the machine 1,000
– Power 25 units per hour at ` 2 per unit
Chapter 4 : Overhead - Absorption Costing Method 4.21

Power is required for productive purposes only. Set up time, though productive, does not require power.
The Supervisor and Operator are permanent. Repairs and maintenance and consumable stores vary with
the running of the machine.
Required
Calculate a two-tier machine hour rate for (a) set up time, and (b) running time
Answer
Working Notes:
(1) (i) Effective hours for standing charges (208 hours - 8 hours) = 200 hours
(ii) Effective hours for variable costs (208 hours - 28 hours) = 180 hours
(2) Standing Charges per hour
Cost per month (`) Cost per hour (`)
(Cost per month ÷
200 hours)
 ` 6,000  2,000 10.00
Supervisor's Salary  
 3 machines 
 1 `72,000  1,000 5.00
Rent of building   
 6 12 months 
General Lighting 1,000 5.00
Total Standing Charges 4,000 20.00
(3) Machine Running Expenses Per Hour
Cost per month (`) Cost per hour
(`)
Depreciation 4,000 20.00
 ` (5,00,000 – 20,000) 1   ` 4,000 
    
 10 years 12 months   200 hours 
Wages 2,500 12.50
 ` 2,500 
 
 200 hours 
Repairs & Maintenance 5,040 28.00
 ` 60,480   `50,40 
   
 12 months   180 hours 
Consumable 3,960 22.00
 ` 47,520 
 
 12 months 
Power (25 units ×`2×180 hours) 9,000 50.00
Total Machine Expenses 24,500 132.50
Chapter 4 : Overhead - Absorption Costing Method 4.22

Computation of Two – tier machine hour rate

Set up time Running time
rate per rate per
machine hour machine hour
(`) (`)
Standing Charges 20.00 20.00
Machine expenses :
Depreciation 20.00 20.00
Repair and maintenance – 28.00
Consumable stores – 22.00
Power – 50.00
Machine hour rate of overheads 40.00 140.00
Wages 12.50 12.50
Comprehensive machine hour rate 52.50 152.50

Question 14
A manufacturing unit has purchased and installed a new machine of ` 12,70,000 to its fleet of 7
existing machines. The new machine has an estimated life of 12 years and is expected to realise `
70,000 as scrap at the end of its working life. Other relevant data are as follows:
(i) Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This includes 300 hours
for plant maintenance and 92 hours for setting up of plant.
(ii) Estimated cost of maintenance of the machine is `25,000 p.a.
(iii) The machine requires a special chemical solution, which is replaced at the end of each week
(6 days in a week) at a cost of `400 each time.
(iv) Four operators control operation of 8 machines and the average wages per person amounts to `420
per week plus 15% fringe benefits.
(v) Electricity used by the machine during the production is 16 units per hour at a cost of ` 3 per unit.
No electricity is consumed during unproductive maintenance and setting up time.
(vi) Departmental and general works overhead allocated to the operation during last year was
` 50,000. During the current year it is estimated to increase by 10% of this amount.
Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is productive.
Answer
Working Note
1. Effective machine hour when set-up time is unproductive:
= Budgeted working hours - (Maintenance time + Setting-up time)
= [2,592 - (300 + 92)] hours. = 2,200 hours.
2. Effective machine hour when set-up time is productive:
= Budgeted working hours - maintenance time
= (2,592 - 300) hours. = 2,292 hours.
3. Operators' wages per annum
Basic wages (4 operators × `420 × 54 weeks) = ` 90,720
Chapter 4 : Overhead - Absorption Costing Method 4.23

Add: Fringe benefits (15% of `90,720) = ` 13,608

`1,04,328
4. Depreciation per annum
`12,70,000 – ` 70,000
= `1,00,000
12 years
5. Cost of Special chemical solution
324 days ÷ 6 days × `400 = `21,600
Computation of Machine hour Rate
Amount Amount per Amount per
p.a. (`) hour (`) hour (`)
(when set-up (when set-
time is up time is
unproductive) productive)
Standing Charges
Operators Wages 1,04,328

 `1,04,328 1  5.93
  ;
 8 machines 2, 200 hours 

 `1,04,328 1  5.69
  
 8 machines 2,292 hours 
Departmental and General overhead 55,000
(50,000 × 110%)
 `55,000 1  3.13
  ;
 8 machines 2,200 hours 
 `55,000 1  3.00
  
 8 machines 2,292 hours 
(A) 1,59,328 9.06 8.69
Machine Expenses
Depreciation 1,00,000
 `1,00,000   `1,00,000  45.45 46.63
 ;  
 2,200 hours   2,292 hours 
Electricity (16 units × `3) 48.00 48.00
Special Chemical Solution 21,600
 ` 21,600   ` 21,600  9.82 9.42
 ;  
 2, 200 hours  2, 292 hours 
Maintenance
 ` 25,000   ` 25,000  25,000 11.36 10.91
 ;  
 2,200 hours   2,292 hours 
(B) 114.63 111.96
Machine Hour Rate (A+B) 123.69 120.65
Chapter 4 : Overhead - Absorption Costing Method 4.24

Question 15.
You are given the following information of the three machines of a manufacturing department of X Ltd.:
Preliminary estimates of expenses (per
annum)
Machin
Total (`) es
A (`) B (`) C (`)
Depreciation 20,000 7,500 7,500 5,000
Spare parts 10,000 4,000 4,000 2,000
Power 40,000
Consumable stores 8,000 3,000 2,500 2,500
Insurance of machinery 8,000
Indirect labour 20,000
Building maintenance expenses 20,000
Annual interest on capital outlay 50,000 20,000 20,000 10,000
Monthly charge for rent and rates 10,000
Salary of foreman (per month) 20,000
Salary of Attendant (per month) 5,000
(The foreman and the attendant control all the three machines and spend equal time on them.) The
following additional information is also available:
Machines
A B C
Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000
Ratio of K.W. Rating 3 2 3
Floor space (sq. ft.) 40,000 40,000 20,000
There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The manufacturing
department works 8 hours in a day but Saturdays are half days. All machines work at 90% capacity
throughout the year and 2% is reasonable for breakdown.
You are required to :
Calculate predetermined machine hour rates for the above machines after taking into consideration the
following factors:
An increase of 15% in the price of spare parts.
An increase of 25% in the consumption of spare parts for machine 'B' & 'C' only.
20% general increase in wages rates.
Chapter 4 : Overhead - Absorption Costing Method 4.25

Answer
Computation of Machine Hour Rate
Basis of Machines
apportionment Total A (`) B (`) C (`)
(`)
(A) Standing Charges
Depreciation 8,000 3,000 3,000 2,000
Insurance
Basis (3:3:2)
Indirect Labour Direct Labour 24,000 6,000 9,000 9,000
(2:3:3)
Building Floor Space 20,000 8,000 8,000 4,000
maintenance (2:2:1)
expenses
Rent and Rates Floor Space 1,20,000 48,000 48,000 24,000
(2:2:1)
Salary of foreman Equal 2,40,000 80,000 80,000 80,000
Salary of attendant Equal 60,000 20,000 20,000 20,000
Total standing charges 4,72,000 1,65,000 1,68,000 1,39,000
Hourly rate for standing charges 84.70 86.24 71.36
(B) Machine
Expenses:
Depreciation Direct 20,000 7,500 7,500 5,000
Spare parts Final estimates 13,225 4,600 5,750 2,875
Power K.W. 40,000 15,000 10,000 15,000
rating
(3:2:3)
Consumable Stores Direct 8,000 3,000 2,500 2,500
Total Machine expenses 81,225 30,100 25,750 25,375
Hourly Rate for Machine expenses 15.45 13.22 13.03
Total (A + B) 553,225 1,95,100 1,93,750 1,64,375
Machine Hour rate 100.15 99.46 84.38
Working Notes:
Calculation of effective working hours:
No. of full off-days = No. of Sunday + No. of holidays
= 52 + 12 = 64 days
No. of half working days = 52 days – 2 holidays = 50 days
No. of full working days = 365 days – 64 days – 50 days = 251 days
Total working Hours = {(251 days × 8 hours) + (50 days × 4 hours)}
= 2,008 hours + 200 = 2,208 hours.
Total effective hours = Total working hours × 90% – 2% for break-down
= 2,208 hours × 90% - 2% (2,208 hours × 90%)
= 1,987.2 hours – 39.74 hours
= 1947.46 or Rounded up to 1948 hours.
Chapter 4 : Overhead - Absorption Costing Method 4.26

(ii) Amount of spare parts is calculated as under:

A (`) B (`) C (`)
Preliminary estimates 4,000 4,000 2,000
Add: Increase in price @ 15% 600 600 300
4,600 4,600 2,300
Add: Increase in consumption @ 25% – 1,150 575
Estimated cost 4,600 5,750 2,875

(iii) Amount of Indirect Labour is calculated as under:

(`)
Preliminary estimates 20,000
Add: Increase in wages @ 20% 4,000
24,000
(iv) Interest on capital outlay is a finance cost, therefore it has been excluded from the cost
accounts.

Question 16.
M.L. Auto Ltd. is a manufacturer of auto components and the details of its expenses for the year 2014
are given below:
(`)
(i) Opening Stock of Material 1,50,000
(ii) Closing Stock of Material 2,00,000
(iii) Purchase of Material 18,50,000
(iv) Direct Labour 9,50,000
(v) Factory Overhead 3,80,000
(vi) Administrative Overhead 2,50,400
During 2015, the company has received an order from a car manufacturer where it estimates that the cost
of material and labour will be ` 8,00,000 and ` 4,50,000 respectively. M.L. Auto Ltd. charges factory
overhead as a percentage of direct labour and administrative overhead as a percentage of factory cost
based on previous year's cost.
Cost of delivery of the components at customer's premises is estimated at ` 45,000.
You are required to:
(i) Calculate the overhead recovery rates based on actual costs for 2014.
(ii) Prepare a detailed cost statement for the order received in 2015 and the price to be quoted if the
company wants to earn a profit of 10% on sales.
Answer:
(i) Calculation of Overhead Recovery Rate:
Factory Overhead in 2014
Factory Overhead Recovery Rate   100
Direct Labour Costs in 2014
`3,80,000
 100  40% of Direct Labour
`9,50,000
Chapter 4 : Overhead - Absorption Costing Method 4.27

Administra tive Overhead in 2014

Administrative Overhead Recovery Rate  100
Factory Costs in 2014 (W.N.)
` 2,50,400
 100  8% of Factory Cost
`31,30,000
Working Note : Calculation of Factory Cost in 2014
Particulars Amount (`)
Opening Stock of Material 1,50,000
Add: Purchase of Material 18,50,000
Less: Closing Stock of Material (2,00,000)
Material Consumed 18,00,000
Direct Labour 9,50,000
Prime Cost 27,50,000
Factory Overhead 3,80,000
Factory Cost 31,30,000

Detailed Cost Statement for the Order received from M.L. Auto Ltd. during 2015

Particulars Amount (`)

Material 8,00,000
Labour 4,50,000
Factory Overhead (40% of ` 4,50,000) 1,80,000
Factory Cost 14,30,000
Administrative Overhead (8% of ` 14,30,000) 1,14,400
Cost of delivery 45,000
Total Cost 15,89,400
Add: Profit @ 10% of Sales or 11.11% of cost or 1/9 of 15,89,400 1,76,600
Sales value (Price to be quoted for the order) (` 15,89,400 /0.9) 17,66,000

Hence the price to be quoted is `17,66,000 if the company wants to earn a profit of 10% on sales.
Question 17
In a manufacturing company factory overheads are charged as fixed percentage basis on direct labour
and office overheads are charged on the basis of percentage of factory cost. The following information
are available related to the year ending 31st March, 2014:
Product A Product B
Direct Materials ` 19,000 ` 15,000

Direct Labour ` 15,000 ` 25,000

Sales ` 60,000 ` 80,000

Profit 25% on cost 25% on sales price

Chapter 4 : Overhead - Absorption Costing Method 4.28

You are required to find out:

i. The percentage of factory overheads on direct labour.
ii. The percentage of office overheads on factory cost.
Answer:
Let, the percentage of factory overheads on direct labour is ‘x’ and the percentage of office overheads on
factory cost is ‘y’, then the total cost of product A and product B will be as follows:
Product A (`) Product B (`)
Direct Materials 19,000 15,000

Direct labour 15,000 25,000

Prime Cost 34,000 40,000

Factory overheads (Direct labour × x) 150 x 250 x

Factory cost (i) 34,000 + 150 x 40,000 + 250 x

Office overheads (Factory cost × y) (ii) 340 y + 1.5 x y 400 y + 2.5 x y

Total Cost [(i) + (ii)] 34,000 + 150 x 40,000 + 250 x

+ 340 y + 1.5 x y + 400 y + 2.5 x y
Total cost on the basis of sales is:
Product A Product B
(`) (`)
Sales 60,000 80,000
Less: Profit
12,000
Product A – 25% on cost or 20% on Sales
20,000
Product B – 25% on sales
Total Cost 48,000 60,000
Thus,
Total Cost of A is 34,000 + 150x + 340y + 1.5 xy = 48,000
Or, 150x + 340y + 1.5 xy = 14,000……............………….(i)
Total Cost of B is 40,000 + 250x + 400y + 2.5 xy = 60,000
Or, 250x + 400y + 2.5 xy = 20,000………...........……….(ii)
Equation (ii) multiplied by 0.6 and after deducting from equation (i), we get
150x + 340y + 1.5xy = 14,000………….…..……….(i)
_150x  240y  1.5xy = _ 12,000…………...…...……(ii)
100y = 2,000
Or, y = 20
Putting value of y in equation (i), we get
150x + 340 × 20 + 1.5x ×20 = 14,000
Or, 150x + 30x = 14,000 – 6,800
Or, 180x = 7,200
Or, x = 40
Hence, (i) the factory overheads on direct labour = 40% and
(ii) the office overheads on factory cost = 20%.
Chapter 4 : Overhead - Absorption Costing Method 4.29

Question 18.
Maximum production capacity of JK Ltd. is 5,20,000 units per annum. Details of estimated cost of
production are as follows:
Direct material ` 15 per unit.
Direct wages ` 9 per unit (subject to a minimum of ` 2,50,000 per month).
Fixed overheads ` 9,60,000 per annum.
Variable overheads ` 8 per unit.
Semi-variable overheads are ` 5,60,000 per annum up to 50 per cent capacity and additional `1,50,000
per annum for every 25 per cent increase in capacity or a part of it.
JK Ltd. worked at 60 per cent capacity for the first three months during the year 2013-14, but it is
expected to work at 90 per cent capacity for the remaining nine months.
The selling price per unit was ` 44 during the first three months.
You are required, what selling price per unit should be fixed for the remaining nine months to yield a
total profit of `15,62,500 for the whole year.
Answer:
Statement of Cost and Sales for the year 2013-14
(Maximum production capacity = 5,20,000 units per annum)
Particulars First 3 months Next 9 months Total
Capacity utilized 60% 90%
Production 5,20,000  3  60% 5,20,000  9  90% 4,29,000 units
12 12
= 78,000 units = 3,51,000 units
(`) (`) (`)
Direct materials @ 15 per unit 11,70,000 52,65,000 64,35,000
Direct wages @ 9 per unit or 7,50,000 31,59,000 39,09,000
`2,50,000 per month whichever is
higher
Prime Cost (A) 19,20,000 84,20,000 1,03,44,000
Overheads
Fixed 2,40,000 7,20,000 9,60,000
Variable @ `8 per unit 6,24,000 28,08,000 34,32,000
Semi Variable (Refer to working 1,77,500 6,45,000 8,22,500
Note-1)
Total overheads (B) 10,41,500 41,73,000 52,14,500
Total Cost (C) [(A+B)] 29,61,500 1,25,97,000 1,55,58,500
Profit during first 3 months (Bal. 4,70,500
Figure)
Sales @ `44 per unit (78,000 ×`44) 34,32,000
Desired profit during next 9 months 10,92,000
(`15,62,500 – `4,70,500) (D)
Sales required for next 9 months 1,36,89,000
---------------- (E) [(C+D)]
Total Profit 15,62,500
Total Sales 1,71,21,000
Chapter 4 : Overhead - Absorption Costing Method 4.30

Total sales required for last 9 months

Required selling price per unit for last 9 months 
Units produced during last 9 months
`1,36,89,000
  `39per unit
3,51,000 units
Workings:
(1) Semi-variable Overheads:
(a) For first 3 months at 60% capacity = `(5,60,000 + `1,50,000) = 3/12
= `7,10,000 × 3/12
= `1,77,500.
(b) For remaining 9 months at 90% capacity = `(5,60,000 + `3,00,000) × 9/12
= `8,60,000 × 9/12
= `6,45,000
Question 19
PQR Ltd has its own power plant, which has two users, Cutting Department and Welding Department.
When the plans were prepared for the power plant, top management decided that its practical capacity
should be 1,50,000 machine hours. Annual budgeted practical capacity fixed costs are ` 9,00,000 and
budgeted variable costs are ` 4 per machine-hour. The following data are available:

Cutting Welding Total

Department Department
Actual Usage in 2012-13 (Machine hours) 60,000 40,000 1,00,000

Practical capacity for each department 90,000 60,000 1,50,000

(Machine hours)

Required
(i) Allocate the power plant's cost to the cutting and the welding department using a single rate method
in which the budgeted rate is calculated using practical capacity and costs are allocated based on
actual usage.
(ii) Allocate the power plant's cost to the cutting and welding departments, using the dual - rate method
in which fixed costs are allocated based on practical capacity and variable costs are allocated based
on actual usage.
(iii) Allocate the power plant's cost to the cutting and welding departments using the dual- rate method
in which the fixed-cost rate is calculated using practical capacity, but fixed costs are allocated to
the cutting and welding department based on actual usage. Variable costs are allocated based on
actual usage.
(iv) Comment on your results in requirements (i), (ii) and (iii).
Answer
Working Notes:
Fixed practical capacity cost per machine hour:
Practical capacity (machine hours) 1,50,000
Practical capacity fixed costs (`) 9,00,000
Fixed practical capacity cost per machine hour `6
(`9,00,000 ÷ 1,50,000 hours)
Budgeted rate per machine hour (using practical capacity):
= Fixed practical capacity cost per machine hour + Budgeted variable cost per machine hour
= ` 6 + ` 4 = `10
Chapter 4 : Overhead - Absorption Costing Method 4.31

(i) Statement showing Power Plant's cost allocation to the Cutting & Welding departments by
using single rate method on actual usage of machine hours.

Cutting Welding Total

Department Department
(`) (`) (`)
Power plants cost allocation by 6,00,000 4,00,000 10,00,000
using actual usage (machine (60,000 hours (40,000 hours
hours) (Refer to Working Note 2) × `10) × `10)

(ii) Statement showing Power Plant's cost allocation to the Cutting & Welding departments by
using dual rate method.
Cutting Welding Total
Department Department
(`) (`) (`)
Fixed Cost 5,40,000 3,40,000 9,00,000
(Allocated on practical
 `9,00,000  3   `9,00,000  2 
capacity for each department    
i.e.):  5   5 

Variable Cost 2,40,000 1,60,000 4,00,000

(Based on actual usage of (60,000 × `4) (40,000 hours × `4)
machine hours)
Total cost 7,80,000 5,20,000 13,00,000
(iii) Statement showing Power Plant's cost allocation to the Cutting & Welding Departments
using dual rate method
Cutting Department Welding Total
(`) Department
(`) (`)
Fixed Cost 3,60,000 2,40,000 6,00,000
Allocation of fixed cost on (60,000 hours × ` 6) (40,000 hours × ` 6)
actual usage basis
(Refer to Working Note 1)
Variable cost 2,40,000 1,60,000 4,00,000
(Based on actual usage) (60,000 hours × ` 4) (40,000 hours × ` 4)
Total cost 6,00,000 4,00,000 10,00,000
Comments:
Under dual rate method, under (iii) and single rate method under (i), the allocation of fixed cost of
practical capacity of plant over each department are based on single rate. The major advantage of this
approach is that the user departments are allocated fixed capacity costs only for the capacity used.
The unused capacity cost ` 3,00,000 (` 9,00,000 – ` 6,00,000) will not be allocated to the user
departments. This highlights the cost of unused capacity.
Under (ii) fixed cost of capacity are allocated to operating departments on the basis of practical
capacity, so all fixed costs are allocated and there is no unused capacity identified with the power
plant.
Chapter 4 : Overhead - Absorption Costing Method 4.32

Question 20
In the current quarter, a company has undertaken two jobs. The data relating to these jobs are as under:

Job 1102 Job 1108

Selling price ` 1,07,325 ` 1,57,920

Profit as percentage on cost 8% 12%

Direct Materials `37,500 ` 54,000

Direct Wages ` 30,000 ` 42,000

It is the policy of the company to charge Factory overheads as percentage on direct wages and Selling
and Administration overheads as percentage on Factory cost.
The company has received a new order for manufacturing of a similar job. The estimate of direct
materials and direct wages relating to the new order are ` 64,000 and ` 50,000 respectively. A profit of
20% on sales is required.
You are required to compute
i. The rates of Factory overheads and Selling and Administration overheads to be charged.
ii. The Selling price of the new order
Answer
Working notes
1. Computation of total cost of jobs
`1,07,325
Total cost of Job 1102 when 8% is the profit on Cost   100
108
`1,57,920
Total cost of job 1108 when 12% is the profit on cost   100
112
= `1,41,000
2. Factory Overheads = F% of direct wages
Selling & Administrative Overheads = A% of factory cost
(i) Computation of rates of factory overheads and selling and administration overheads to
be charged.
Jobs Cost Sheet
Job 1102 (`) Job 1108 (`)
Direct materials 37,500 54,000

Direct wages 30,000 42,000

Prime cost 67,500 96,000

Add: Factory overheads 30,000F 42,000F

Factory cost (67,500 + 30,000 F) (96,000 + 42,000 F)

(Refer to Working Note 2)

Add: Selling and (67,500 + 30,000 F) A (96,000 + 42,000 F) A

Administration Overheads
(Refer to Working Note 2)
Total Cost (67,500 + 30,000 F)(1 + A) (96,000 + 42,000 F)(1 + A)
Chapter 4 : Overhead - Absorption Costing Method 4.33

Since the total cost of jobs 1102 and 1108 are equal to `99,375 and `1,41,000 respectively, therefore we
have the following equations (Refer to Working Note 1)
(67,500 + 30,000 F) (1 + A) = 99,375…………………….….(i)
(96,000 + 42,000 F) (1 + A) = 1,41,000…………………..…(ii)
Or 67,500 + 30,000 F + 67,500 A + 30,000 FA = 99,375
Or 96,000 + 42,000 F + 96,000 A + 42,000 FA = 1,41,000
Or 30,000 F + 67,500 A + 30,000 FA = 31,875 .....................................(iii)
42,000 F + 96,000 A + 42,000 FA = 45,000 ...................................... (iv)
On solving (iii) and (iv) we get : A
On solving (iii) and (iv) we get : A = 0.25 and F = 0.40
Hence, A = 25% and F = 40%
(ii) Selling price of the new order:
(`)
Direct materials 64,000
Direct wages 50,000
Prime cost 1,14,000
Factory overheads (40% × `50,000) 20,000
Factory cost 1,34,000
Selling & Administration overheads (25% × `1,34,000) 33,500
Total cost 1,67,500
If selling price of new order is `100 then Profit is `20 and Cost is `80

`1,67,500
Hence selling price of the new order   100  ` 2,09,375
80
************************
 Chapter 7 : Cost Accounting System 7.1
A. Problems On Non-Integrated Accounting System
Question 1—
Pass journal entries in the cost books, maintained on non-integrated system, for the following:

(i) Issue of materials: Direct 5,50,000; Indirect 1,50,000

(ii) Allocation of wages: Direct 2,00,000; Indirect 40,000
(iii) Under/Over absorbed overheads: Factory (over) 20,000;
Admini stration (under) 10,000

Answer—
Journal Entries in Cost Books
Maintained on Non-integrated System
Dr.( ) Cr.( )
(i) Work-in-Progress Ledger control A/c Dr. 5,50,000
Factory Overhead Control A/c Dr. 1,50,000
To Stores Ledger Control A/c 7,00,000
(Being issue of materials)
(ii) Work-in Progress Ledger Control A/c Dr. 2,00,000
Factory Overhead Control A/c Dr. 40,000
To Wages Control A/c 2,40,000
(Being Allocation of Wages and Salaries)
(i) Factory Overhead Control A/c Dr. 20,000
To Costing Profit & Loss A/c 20,000
(Being Transfer of over absorpiton of Overhead)
Costing Profit & Loss A/c Dr. 10,000
To Administration Overhead Control A/c 10,000
Question 2—
A Company operates separate cost accounting and financial accounting systems. The following is the list of
opening balances as on 1.04.2013 in the Cost Ledger.

Debit( ) Credit( )
Stores Ledger Control Account 53,375 –

WIP Control Account 1,04,595 –

Finished Goods Control Account 30,780 –

General Ledger Adjustment Account – 1,88,750

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 Chapter 7 : Cost Accounting System 7.2
Transactions for the quarter ended 30.06.2013 are as under:
( )
Materials Purchased 26,700
Material issued to Production 40,000
Materials issued to factory for repairs 900
Factory wages paid (including indirect wages 23,000) 77,500
Production overheads incurred 95,200
Production overheads under-absorbed and written-off 3,200
Sales 2,56,000
The Company's gross profit is 25% on Cost of Sales. At the end of the quarter, WIP stocks increased by
7,500.
Prepare the relevant Control Accounts, Costing Profit & Loss Account and General Ledger Adjustment
Account to record the above transactions for the quarter ended 30.06.2013.
Answer—
General Ledger Adj. A/c
Particulars Dr. ( ) Particulars Cr. ( )
To Sales 2,56,000 By Balance b/d 1,88,750
To Balance c/d 1,80,150 By Stores ledger control A/c 26,700
(Materials purchased)
By Wages control A/c 77,500
(Factory wages paid)
By Factory Overheads control 95,200
A/c
(Production overhead incurred)
By Costing Profit & Loss A/c 48,000
4,36,150 4,36,150
Stores Ledger Control A/c

Particulars Dr.( ) Particulars Cr. ( )

To Balance b/d 53,375 By WIP control A/c 40,000
(Materials issued to production)
To General ledger adj. A/c 26,700 By Factory overhead control 900
(Materials purchased) A/c
(Materials issued for repairing)
By Balance c/d 39,175
80,075 80,075

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 Chapter 7 : Cost Accounting System 7.3
WIP Control A/c
Particulars Dr. ( ) Particulars Cr. ( )
To Balance b/d 1,04,595 By Finished goods control A/c 2,02,900
(Balancing figure)
To Stores ledger control A/c 40,000 By Balance c/d 1,12,095
To Wages control A/c 54,500
To Factory Overhead control A/c 1,15,900
3,14,995 3,14,995

Finished Goods Control A/c

Particula rs () Particulars ()
To Balance b/d 30,780 By Cost of sales A/c 2,04,800
(Refer to note)
To WIP control A/c 2,02,900 By Balance c/d 28,880
2,33,680 2,33,680
Note: Gross profit is 25% of Cost of Sales or 20% on sales.
Hence cost of sales = 2,56,000 – 20% of 2,56,000 = 2,04,800
Factory Overhead Control A/c
Particulars Dr. ( ) Particulars Cr. ( )
To Stores ledger control A/c 900 By Costing Profit & Loss A/c 3,200
(Under-absorption of overhead)
To Wages control A/c 23,000 By WIP control A/c 1,15,900
To General ledger adj. A/c 95,200
1,19,100 1,19,100
Cost of Sales A/c
Particulars Dr. ( ) Particulars Cr. ( )
To Finished goods control A/c 2,04,800 By Costing Profit & Loss A/c 2,04,800
Sales A/c
Particulars Dr. ( ) Particulars Cr. ( )
To Costing Profit & Loss A/c 2,56,000 By GLA A/c 2,56,000
Wages Control A/c
Particulars ( ) Particulars ()
To General ledger adj. A/c 77,500 By Factory overhead control A/c 23,000
(Wages paid for direct labour)
By WIP control A/c 54,500
(Wages paid for indirect labour)
77,500 77,500

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 Chapter 7 : Cost Accounting System 7.4
Costing Profit & Loss A/c
Particulars Dr. ( ) Particulars Cr. ( )
To Factory O/H Control A/c 3,200 By Sales A/c 2,56,000
To Cost of sales A/c 2,04,800
To General ledger adj. A/c 48,000
(Profit)

2,56,000 2,56,000
Trial Balance (As on 30.06.2013)
Dr. ( ) Cr. ( )
Stores ledger control A/c 39,175
WIP control A/c 1,12,095
Finished goods control A/c 28,880
To General ledger adjustment A/c 1,80,150
1,80,150 1,80,150
Question 3—
As of 31st March, 2014, the following balances existed in a firm's cost ledger, which is maintained separately
on a double entry basis:
Debit( ) Credit( )
Stores Ledger Control A/c 3,00,000 –
Work-in-progress Control A/c 1,50,000 –
Finished Goods Control A/c 2,50,000 –
Manufacturing Overhead Control A/c – 15,000
Cost Ledger Control A/c – 6,85,000
7,00,000 7,00,000
During the next quarter, the following items arose:
( )
Finished Product (at cost) 2,25,000
Manufacturing overhead incurred 85,000
Raw material purchased 1,25,000
Factory wages 40,000
Indirect labour 20,000
Cost of sales 1,75,000
Materials issued to production 1,35,000
Sales returned (at cost) 9,000
Materials returned to suppliers 13,000
Manufacturing overhead charged to production 85,000
You are required to prepare the Cost Ledger Control A/c, Stores Ledger Control A/c, Work-in- progress
Control A/c, Finished Stock Ledger Control A/c, Manufacturing Overhead Control A/c, Wages Control A/

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 Chapter 7 : Cost Accounting System 7.5
c, Cost of Sales A/c and the Trial Balance at the end of the quarter.
Answer—
Cost Ledger Control Account
Dr. ( ) Cr. ( )
To Store Ledger Cont rol 13,000 By Opening Balance 6,85,000
To A/c Balance c/d 9,42,000 By Store ledger control A/c 1,25,000
By Manufacturing
Overhead Control A/c 85,000
By Wages Control A/c 60,000
9,55,000 9,55,000
Stores Ledger Control Account
Dr. ( ) Cr. ( )
To Opening Balance 3,00,000 By WIP Control A/c 1,35,000
To Cost Ledger Control A/c 1,25,000 By Balance c/d 2,77,000
4,25,000 4,25,000
WIP Control Account
Dr. ( ) Cr. ( )
To Opening Balance 1,50,000 By Finished Stock Ledger
Control A/c 2,25,000
To Wages Control A/c 40,000 By Balance C/d 1,85,000
To Stores Ledger Control A/c 1,35,000
To Manufacturing Overhead
Control A/c 85,000 .
4,10,000 4,10,000
Finished Stock Ledger Control Account
Dr. ( ) Cr. ( )
To Opening Balance 2,50,000 By Cost of Sales 1,75,000
To WIP control A/c 2,25,000 By Balance c/d 3,09,000
To Cost of Sales A/c (Sales Return) 9,000 .
4,84,000 4,84,000
Manufacturing Overhead Control A/c
Dr. ( ) Cr. ( )
To Cost Ledger Control A/c 85,000 By Opening Balance 15,000
To Wages Control A/c 20,000 By WIP Control A/c 85,000
. By Under Recovery c/d 5,000
1,05,000 1,05,000

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 Chapter 7 : Cost Accounting System 7.6

Wages Control Account

Dr. ( ) Cr. ( )
To Transfer to Cost Ledger By WIP Control A/c 40,000
Conrtrol A/c 60,000 By Manufacturing Overhead
. Control A/c 20,000
60,000 60,000
Cost of Sales Account
Dr. Cr.
( ) ( )
To Finished Stock Ledger Control A/c 1,75,000 By Finished Stock Ledger Control A/c 9,000
(Sales Return)
. By Balance c/d 1,66,000
1,75,000 1,75,000
Trial Balance
() ()
Stores Ledger Control A/c 2,77,000
WIP Control A/c 1,85,000
Finished Stock Ledger Control A/c 3,09,000
Manufacturing Overhead Control A/c 5,000
Cost of Sales A/c 1,66,000
Cost ledger control A/c – 9,42,000
9,42,000 9,42,000
Question 4—
Following information have been extracted from the cost records of XYZ Pvt. Ltd
Stores ( )
Opening Balance 54,000
Purchases 2,88,000
Transfer from WIP 1,44,000
Issued to WIP 2,88,000
Issue for repairs 36,000
Deficiency found in stock 10,800
Work in Progress: ( )
Opening Balance 1,08,000
Direct Wages applied 1,08,000
Overhead Charged 4,32,000

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 Chapter 7 : Cost Accounting System 7.7
Closing Balance 72,000
Finished Production ( )
Entire Production is sold at a profit of 15% on cost of WIP
Wages Paid 1,26,000
Overheads incurred 4,50,000
Draw the Stores Ledger Control Account, Work-in-Progress Control Account, Overheads Control Account
and Costing Profit and Loss Account.
Answer—
Stores Ledger Control A/c
Particulars ( ) Particulars ( )
To Balance b/d 54,000 By Work in Process A/c 2,88,000
To General Ledger Adjustment A/c 2,88,000 By Overhead Control A/c 36,000
To Work in Process A/c 1,44,000 By Overhead Control A/c 10,800
(Deficiency)
. By Balance c/d 1,51,200
4,86,000 4,86,000
*Deficiency assumed as normal (alternatively can be treated as abnormal loss)
Work in Progress Control A/c
Particulars ( ) Particulars ( )
To Balance b/ d 1,08,000 By Stores Ledger Control a/c 1,44,000
To Stores Ledger Control A/c 2,88,000 By Costing P/L A/c 7,20,000
(Balancing figures being Cost of
finished goods)

To Wages Control A/c 1,08,000 By Balance c/d 72,000

To Overheads Control a/c 4,32,000
9,36,000 9,36,000
Overheads Control A/c
Particulars ( ) Particulars ()
To Stores Ledger Control A/c 36,000 By Work in Process A/c 4,32,000
To Stores Ledger Control A/c 10,800 By Balance c/d 82,800
(Under absorption)
To Wages Control A/c 18,000
( 1,26,000– 1,08,000)
To Gen. Ledger Adjust. A/c 4,50,000
5,14,800 5,14,800

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 Chapter 7 : Cost Accounting System 7.8
Costing Profit & Loss A/c
Particulars ( ) Particulars ( )
To Work in progress 7,20,000 By Gen. Ledger Adjust. A/c 8,28,000
To Gen. Ledger Adjust. A/c (Profit) 1,08,000 (Sales) ( 7,20,000 ×115%) .
8,28,000 8,28,000
Question 5—
The following information have been extracted from the cost records of a manufacturing company:
( )
Stores
* Opening balance 9,000
* Purchases 48,000
* Transfer from WIP 24,000
* Issue to work-in-progress 48,000
* Issue for repairs 6,000
* Deficiency found in stock 1,800
Work-in-Progress:
* Opening balance 18,000
* Direct Wages applied 18,000
* Overhead charged 72,000
* Closing balance 12,000
Finished Production :
* Entire Production is sold at a profit of 10% on cost from work-in-
progress
* Wages Paid 21,000
* Overhead incurred 75,000
Draw the Stores Leger Control A/c, Work-in-Progress Control A/c, Overheads Control A/c and Costing
Profit and Loss A/c.
Answer—
Stores Ledger Control A/c
Particulars ( ) Particulars ( )
To Balance b/d 9,000 By Work-in-Process 48,000
To General Ledger Adjustment A/c 48,000 By Overhead Contorl A/c 6,000
To Work-in-Process A/c 24,000 By Overhead Control A/c (Deficiency) 1,800*
. By Balance c/d 25,200
81,000 81,000
* Deficiency assumed as normal (alterntively can be treated as abnormal loss)

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 Chapter 7 : Cost Accounting System 7.9
Work in Process Control A/c
Particulars ( ) Particulars ( )
To Balance b/d 18,000 By Stores Ledger Control A/c 24,000
To Stores Ledger Control A/c 48,000 By Costing P/L A/c
To Wages Control A/c 18,000 (Balancing figue being Cost of finished 1,20,000
To Overheaeds Control 72,000 goods)
. By Balance c/d 12,000
1,56,000 1,56,000
Overhead Control A/c
Particulars ( ) Particulars ( )
To Stores Ledger Control A/c 6,000 By Work in Process A/c 72,000
To Stores Ledger Control A/c 1,800 By Balance c/d (under absorption) 13,800
To Wages Control A/c 3,000
( 21,000 – 18,000)
To Gen. Ledger Adjust. A/c 75,000 .
85,800 85,800
Costing Profit & Loss A/c
Particulars ( ) Particulars ( )
To Work in Progress 1,20,000 By Gen. Ledger Adjust. A/c 1,32,000
To Gen. Ledger. Adjust. A/c (Profit) 12,000 (Sales) (1,20,000 + 12,000) .
1,32,000 1,32,000
Section – B Problem of Integrated Accounts
Questoion 6—
Journalise the following transactions assuming cost and financial accounts are integrated :
( )
(i) Materials issued :
Direct 3,25,000
Indirect 1,15,000
(ii) Allocation of wages (25% indirect) 6,50,000
(iii) Under/Over absorbed overheads:
Factory (Over) 2,50,000
Administration (Under) 1,75,000
(iv) Payment to Sundry Creditors 1,50,000
(v) Collection from Sundry Debtors 2,00,000

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 Chapter 7 : Cost Accounting System 7.10
Answer—
Journal Entries under Integrated system of accounting
( ) ( )
(i) Work-in-Progress Ledger Control A/c Dr. 3,25,000
Factory Overhead Control A/c Dr. 1,15,000
To Stores Ledger Control A/c 4,40,000
(Being Issue of Direct and Indirect materials)
(ii) Work-in-Progess Ledger Control A/c Dr. 4,87,500
Factory Overhead Control A/c Dr. 1,62,500
To Wages Control A/c 6,50,000
(Being allocation of Direct and Indirect Wages)
(iii) Factory Overhead Control A/c Dr. 2,50,000
To Costing Profit & Loss A/c 2,50,000
(Being transfer of over absorption of Factory overhead)
Costing Profit & Loss A/c Dr. 1,75,000
To Administration Overhead Control A/c 1,75,000
(Being transfer of under absorption of Administration overhead)
(iv) Sundry Creditors A/c Dr. 1,50,000
To Cash/Bank A/c 1,50,000
(Being Payment made to Creditors)
(v) Cash/Bank A/c Dr. 2,00,000
To Sundry Debtors A/c 2,00,000
(Being Payment received from Debtors)
Question 7—
BPR Limited keeps books on integrated accounting system. The following balances appear in the books as
on April 1, 2013.
Dr. ( ) Cr.( )
Stores Control A/c 40,950 –
Work-in-Progress A/c 38,675 –
Finished Goods A/c 52,325
Bank A/c – 22,750
Trade payable A/c – 18,200
Non-Current Assets A/c 1,47,875 –
Trade Receivables A/c 27,300 –
Share Capital A/c – 1,82,000
Provision for Deprecitaon A/c – 11,375
Provision for Doubtful Debts A/c – 3,725
Factory Overheads Outstanding A/c – 6,250

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Pre-Paid Administration Overheads A/c 9,975 –
Profit & Loss A/c – 72,800
*(Reserve & Surplus) 3,17,100 3,17,100
The transactions for the year ended March 31, 2014, were as given below:
( ) ( )
Direct Wages 1,97,925
Indirct Wages 11,375 2,09,300
Purchase of Materials (on Credit) 2,27,500
Material issued to production 2,50,250
Material issued for repairs 4,550
Goods finished during the year (at cost) 4,89,125
Credit Sales 6,82,500
Cost of Goods Sold 5,00,500
Production overheads absorbed 1,09,200
Production overheads paid during the year 91,000
Production overheads outstanding at the end of year 7,775
Administration overheads paid during ther year 27,300
Selling overheads incurred 31,850
Payment to Trade Payables 2,29,775
Payment Received from Trade Receivables 6,59,750
Depreciation of Machinery 14,789
Administration overheads outstanding at the end of year 2,225
Provision for doubtful debts at the end of the year 4,590
Required :
Write up accounts in the integrated ledger of BPR Limited and prepare a Trial Balance.
Answer—
Stores Control A/c
( ) ( )
To Balance b/d 40,950 By WIP A/c 2,50,250
To Trade Payables A/c 2,27,500 By Production overheads A/c 4,550
By Balance c/d 13,650
2,68,450 2,68,450
Wages Control A/c
( ) ()
To Bank (Direct wages) 1,97,925 By Work-in-Progress A/c 1,97,925
To Bank (Indirect wages) 11,375 By Production overheads A/c 11,375
2,09,300 2,09,300

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 Chapter 7 : Cost Accounting System 7.12
Work-in-Progress A/c
Dr. ( ) Cr. ( )
To Balance b/d 38,675 By Finished Goods A/c 4,89,125
To Wages Control A/c 1,97,925 By Balance c/d 1,06,925
To Stores Conrtrol A/c 2,50,250
To Production Overheads A/c 1,09,200 .
5,96,050 5,96,050
Production Overheads A/c
( ) ( )
To Wages control A/c 11,375 By WIP A/c 1,09,200
To Stores control A/c 4,550 By Profit & Loss A/c 14,039
To Bank ( 91,000 – 6,250) 84,750 (Under-absorbed
overheads Written off)
To Production overheads 7,775
outstanding
14,789
To Provision for depreciation
1,23,239 1,23,239

Production overhead incurred = Payment made + Closing Outstanding + Prov. for Depreciation – Open-
ing Outstanding
Finished Goods A/c
( ) ( )
To Balance b/d 52,325 By Cost of sales A/c 5,00,500
To Work-in-progress A/c 4,89,125 By Balance c/d 80,450
To Admin. overheads A/c 39,500
5,80,950 5,80,950
Administration Overheads A/c

( ) ( )
To Pre-paid admin. overheads A/c 9,975 By Finished goods A/c 39,500
To Bank 27,300
To Admin. overheads outstanding 2,225
39,500 39,500
Cost of Sales A/c
( ) ( )
To Finished Goods A/c 5,00,500 By Sales A/c 5,32,350
To Selling Overheads 31,850 .
5,32,350 5,32,350

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 Chapter 7 : Cost Accounting System 7.13
Sales A/c
( ) ( )
To Cost of sales A/c 5,32,350 By Trade Receivables A/c 6,82,500
To Profit & Loss A/c 1,50,150
6,82,500 6,82,500
Factory Overheads / Production Overheads Outstanding A/c
( ) ( )
To Bank 6,250 By Balance b/d 6,250
To Balance c/d 7,775 By Production overheads 7,775
14,025 14,025
Prepaid Administration Overheads A/c
Dr. ( ) Cr. ( )
To Balance c/d 9,975 By Admin. Overheads A/c 9,975
9,975 9,975
Provision for Depreciation A/c
Dr. ( ) Cr. ( )
To Balance c/d 26,164 By Balance b/d 11,375
. By Production Overheads A/c 14789
26,164 26164
Provision for Doubtful Debts A/c
Dr. ( ) Cr. ( )
To Balance C/d 4,590 By Balance B/d 3,725
. By Profit & Loss A/c 865
4,590 4,590
Profit & Loss A/c
Dr. Cr.
( ) ()
To Provision for doubtful debts 865 By Balance b/d 72,800
To Production overheads 14,039 By Sales A/c 1,50,150
To Balance c/d* 2,08,046
2,22,950 2,22,950
* Profit is transferred to Reserve & Surplus.
Trade Receivables A/c
Dr. Cr.
() ()
To Balance b/d 27,300 By Bank A/c 6,59,750
To Sales A/c 6,82,500 By Balance c/d 50,050
7,09,800 7,09,800

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 Chapter 7 : Cost Accounting System 7.14
Trade Payable A/c
Dr. Cr.
( ) ( )
To Bank 2,29,775 By Balance b/d 18,200
To Balance c/d 15,925 By Stores control/Ac 2,27,500
2,45,700 2,45,700
Non Current Assets A/c
Dr. Cr.
( ) ( )
To Balance b/d 1,47,875 By Balance c/d 1,47,875
Bank A/c
Dr. Cr.
( ) ( )
To Trade Receivables 6,59,750 By Balance b/d 22,750
By Direct Wages 1,97,925
By Indirect Wages 11,375
By Production Overheads (`84,750+ 6,250) 91,000
By Admn. Overherads A/c 27,300
By Selling Overheads A/c 31,850
By Trade Payables A/c 2,29,775
. By Balance c/d 47,775
6,59,750 6,59,750
Trial Balance As on March, 31, 2014
Dr. Cr.
( ) ( )
Stores Control A/c 13,650
Work in Progress A/c 1,06,925
Finished Goods A/c 80,450
Bank A/c 47,775
Trade Payables A/c 15,925
Non-Current Assets A/c 1,47,875
Trade Receivabls A/c 50,050
Share capital A/c 1,82,000
Provision for depreciation A/c 26,164
Reserve & Surplus (Profit & Loss A/c) 2,08,046
Production Overheads Outstanding A/c 7,775
Outstanding administrative Overheads A/c 2,225
Provision for Doubtful Debt . 4,590
4,46,725 4,46,725

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 Chapter 7 : Cost Accounting System 7.15
C. Reconciliation Statement
Question 8—
R Limited showed a net loss of 35,400 as per their cost accounts for the year ended 31st March, 2014.
However, the financial accounts disclosed a net profit of 67,800 for the same period. The following infor-
mation were revealed as a result of scrutiny of the figures of cost accounts and financial accounts:
( )
(i) Administrative overhead under recovered 25,500
(ii) Factory overhead over recovered 1,35,000
(iii) Depreciation under charged in Cost Accounts 26,000
(iv) Dividend received 20,000
(v) Loss due to obsolescence charged in Financial Accounts 16,800
(vi) Income tax provided 43,600
(vii) Bank interest credited in Financial Accounts 13,600
(viii) Value of opening stock:
In Cost Accounts 1,65,000
In Financial Accounts 1,45,000
(ix) Value of closing stock:
In Cost Accounts 1,25,500
In Financial Accounts 1,32,000
(x) Goodwill written-off in Financial Accounts 25,000
(xi) Notional rent of own premises charged in Cost Accounts 60,000
(xii) Provision for doubtful debts in Financial Accounts 15,000
Prepare a reconciliation statement by taking costing net loss as base.
Answer—
Statement of Reconciliation
S.No. Particulars Amount( ) Amount ( )
Net loss as per Cost Accounts (35,400)
Additions
1. Factory O/H over recovered 1,35,000
2. Dividend Received 20,000
3. Bank Interest Received 13,600
4. Difference in Value of Opening Stock 20,000
(1,65,000 – 1,45,000)
5. Difference in Value of Closing Stock 6,500
6. Notional Rent of own Premises 60,000 2,55,100

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 Chapter 7 : Cost Accounting System 7.16
Deductions
1. Administration O/H under recovered 25,500
2. Depreciation under Charged 26,000
3. Loss due to obsolescence 16,800
4. Income tax Provided 43,600
5. Goodwill written-off 25,000
6. Provision for doubtful Debts 15,000 (1,51,900)
Net Profit as per Fininacial A/c 67,800
Question 9—
A manufacturing company has disclosed net loss of 48,700 as per their cost accounting records for the year
ended 31st March, 2014. However their financial accounting records disclosed net profit of 35,400 for the
same period. A scrutiny of data of both the sets of books of accounts revealed the following information:
( )
(i) Factory overheads under absorbed 30,500
(ii) Administrative overheads over absorbed 65,000
(iii) Depreciation charged in financial accounts 2,25,000
(iv) Depreciation charged in cost accounts 2,70,000
(v) Income-tax provision 52,400
(vi) Transfer fee (credited in financial accounts) 10,200
(vii) Obsolescence loss charged in financial accounts 20,700
(viii) Notional rent of own premises charged in cost accounts 54,000
(ix) Value of opening stock:
(a) in cost accounts 1,38,000
(b) in financial accounts 1,15,000
(x) Value of closing stock:
(a) in cost accounts 1,22,000
(b) in financial accounts 1,12,500
Prepare a Memorandum Reconciliation Account by taking costing loss as base.
Answer—
Memorandum Reconciliation Accounts
Dr. Cr.
Particulars Amount ( ) Particulars Amount ( )
To Net Loss as per Cost Accounts 48,700 By Administration overheads over 65,000
recovered in Cost Accounts
To Factory Overheads under absorbed 30,500 By Depreciation Overcharged in Cost 45,000
in Cost Accounts Accounts ( 2,70,000 – 2,25,000)
To Provision for Income Tax 52,400 By Transfer fees in Financial Account 10,200
To Obsolescence loss 20,700 By Notional Rent of own Premises 54,000

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 Chapter 7 : Cost Accounting System 7.17
To Overvaluation of closing Stock in 9,500 By Overvaluation of Opening Stock in 23,000
Cost Accounts** Cost Accounts*
To Net Profit (as per Financial Accounts) 35,400 .
1,97,200 1,97,200
* Overvaluation of Opening Stock as per Cost Accounts
= Value in Cost Accounts - Value in Financial Accounts
= 1,38,000 – 1,15,000 = 23,000.
** Overvaluation of Closing Stock as per Cost Accounts
= Value in Cost Accounts – Value in Financial Accounts
= 1,22,000 – 1,12,500 = 9,500.
Question 10—
A manufacturing company has disclosed a net loss of 2,13,000 as per their cost accounting records for the
year ended March 31, 2014. However, their financial accounting records disclosed a net loss of 2,58,000
for the same period. A scrutiny of data of both the sets of books of accounts revealed the following informa-
tion:
()
(i) Factory overheads under-absorbed 5,000
(ii) Administration overheads over-absorbed 3,000
(iii) Depreciat ion charged in financial accounts 70,000
(iv) Depreciation charged in cost accounts 80,000
(v) Interest on investments not included in cost accounts 20,000
(vi) Income-tax provided in financial accounts 65,000
(vii) Transfer fees (credit in financial accounts) 2,000
(viii) Preliminary expenses written off 3,000
(ix) Over-valuation of closing stock of finished goods in cost accounts 7,000
Prepare a Memorandum Reconciliation Account.

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 Chapter 7 : Cost Accounting System 7.18
Answser—
Memorandum Reconciliation Account
Particulars Amount ( ) Particulars Amount ( )
To Net loss as per Costing 2,13,000 By Administrative Overhead 3,000
books over absorbed in costs
To Factory overheads under 5,000 By Depreciation over charged 10,000
absorbed in Cost books ( 80,000 –
70,000)
To Income tax not provided 65,000 By Interest on investment not 20,000
in Cost books included in cost books
To Preliminary expenses 3,000 By Transfer fees not considered 2,000
written off in Financial in cost books
books
To Over-valued of closing 7,000 By Net loss as per Financial 2,58,000
stock of finished goods in books
cost books
2,93,000 2,93,000
Question 11—
A manufacturing company disclosed a net loss of 3,47,000 as per their cost accounts for the year ended
March 31,2014. The financial accounts however disclosed a net loss of 5,10,000 for the same period. The
following information was revealed as a result of scrutiny of the figures of both the sets of accounts.
( )
(i) Factory Overheads under-absorbed 40,000
(ii) Administration Overheads over-absorbed 60,000
(iii) Depreciation charged in Financial Accounts 3,25,000
(iv) Depreciation charged in Cost Accounts 2,75,000
(v) Interest on investments not included in Cost Accounts 96,000
(vi) Income-tax provided 54,000
(vii) Interest on loan funds in Financial Accounts 2,45,000
(viii) Transfer fees (credit in financial books) 24,000
(ix) Stores adjustment (credit in financial books) 14,000
(x) Dividend received 32,000
Prepare a memorandum Reconciliation Account

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 Chapter 7 : Cost Accounting System 7.19
Answer—
Memorandum Reconciliation Accounts
Amount( ) Amount ( )
To Net Loss as per Costing 3,47,000 By Administration overheads 60,000
Books over recovered in cost
accounts
To Factory overheads under 40,000 By Internal on investment not 96,000
absorbed in Cost Accounts included in cost Accounts
To Depreciation under charged 50,000 By Transfer fees in Financial 24,000
in cost Accounts Books
To Income-tax not provided in 54,000 By Stores adjustment 14,000
cost Accounts (Credit in financial books)
To Interest on Loan Funds in 2,45,000 By Dividend Received in 32,000
Financial Accounts financial books
By Net loss as per Financial 5,10,000
Books
7,36,000 7,36,000
Question 12—
The following figures have been extracted from the cost records of a manufacturing unit:
( )
Stores : Opening Balance 32,000
Purchases of Material 1,58,000
Transfer from work-in-progress 80,000
Issues to work-in-progress 1,60,000
Issues to repair and maintenance 20,000
Deficiences found in stock taking 6,000
Work-in-progress : Opening balance 60,000
Direct wages applied 65,000
Overheads applied 2,40,000
Closing balance of W.I.P. 45,000
Finished products: Entire output is sold at a profit of 10% on actual cost from work-in- progress. Wages
incurred 70,000, overhead incurred 2,50,000.
Items not included in cost records: Income from investment 10,000, Loss on sale of capital assets 20,000.
Draw up Store Control account, Work-in-progress Control account, Costing Profit and Loss account, Profit
and Loss account and Reconciliation statement.

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 Chapter 7 : Cost Accounting System 7.20
Answer—
(A) Costing books
Stores Control Account

Particulars ( ) Particulars ( )
To Balance b/d 32,000 By W.I.P. Control A/c 1,60,000
To General ledger adjustment A/c 1,58,000 By Work overhead control A/c 20,000
To Work in progress control A/c 80,000 By Costing Profit and Loss A/c 6,000
By Balance c/d 84,000
2,70,000 2,70,000
W.I.P. Control Account
Particulars ( ) Particulars ( )
To Balance b/d 60,000 By Stores Control A/c 80,000
To Stores control A/c 1,60,000 By Costing Profit and Loss A/c 4,00,000
(cost of sales)
To Direct wages control A/c 65,000 By Balance c/d 45,000
To Works overhead control A/c 2,40,000 .
5,25,000 5,25,000
Works Overhead Control Account
Particulars ( ) Particulars ( )
To General Ledger Adjustment A/c 2,50,000 By W.I.P. Control A/c 2,40,000
To Store Ledger Control A/c 20,000 By Costing P & L A/c (Under recocvery) 30,000
2,70,000 2,70,000
Costing Profit & Loss Account
Particulars ( ) Partiuclars ( )
To W.I.P. Control A/c (Cost of Sales) 4,00,000 By General ledger adj. A/c
To Works overhead control A/c 30,000 Cost of Sales 4,00,000
To Stores control A/c (shortage) 6,000 10% Profit 40,000 4,40,000
To Profit 4,000 .
4,40,000 4,40,000
(B) Financial Books
Profit & Loss Account
Particulars ( ) Particualrs ( )
To Opening Stock By Sales 4,40,000
Stores 32,000 By Closing Stock:
W.I.P. 60,000 92,000 Stores 84,000
To Purchases 1,58,000 W.I.P. 45,000 1,29,000
To Wages incurred 70,000 By Income from investment 10,000
To Overheads incurred 2,50,000 By Loss 11,000

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 Chapter 7 : Cost Accounting System 7.21
To Loss on sale of capital Assets 20,000 .
5,90,000 5,90,000
Reconciliation Statement
( ) ( )
Profit as per Cost Accounts 4,000
Add: Income from investment recorded in Financial accounts 10,000
14,000
Less: Under absorption of wages in Cost accounts 5,000
Loss on sales of capital asset only included in Financial accounts 20,000 25,000
Loss as per Financial accounts 11,000
Question 13—
The following is the trading and Profit & Loss Account of Omega Limited
Dr. Cr.
Particulars ( ) Particulars ( )
To Materials Consumed 23,01,000 By Sales (30,000 units) 48,75,000
To Direct Wages 12,05,750 By Finished goods stock (1,000 units) 1,30,000
To Production Overheads 6,92,250 By Work-in-progress:
To Administration Overheads 3,10,375 Materials 55,250
To Selling and Distribution Overheads 3,68,875 Wages 26,000
To Preliminary Exp. Written off 22,750 Production Overheads 16,250 97,500
To Goodwill written off 45,500 By Dividends received 3,90,000
To Fines 3,250 By Interest on bank Deposits 65,000
To Interest on Mortgage 13,000
To Loss on Sale of Machine 16,250
To Taxtation 1,95,000
To Net Profit for the year 3,83,500 .
55,57,500 55,57,500
Omega Limited manufactures a standard unit.
The Cost Accounting records of Omega Ltd. show the following:
(i) Production overheads have been charged to work-in-progress at 20% on Prime cost.
(ii) Administration Overheads have been recovered at 9.75 per finished Unit.
(iii) Selling & distribution Overheads have been recovered at 13 per Unit sold.
(iv) The Under- or Over-absorption of Overheads has not been transferred to costing P/L A/c.
Required:
(i) Prepare a proforma Costing Profit & Loss account, indicating net profit.
(ii) Prepare Control accounts for Production overheads, Administration Overheads and Selling & Dis-
tribution Overheads.

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 Chapter 7 : Cost Accounting System 7.22
(iii) Prepare a statement reconciling the profit disclosed by the Cost records with that shown in Finan-
cial accounts.
Answer—
(i) Costing Profit & Loss A/c
( )
Materials 23,01,000
Wages 12,05,750
Prime Cost 35,06,750
Production overheads (20% of Prime Cost) 7,01,350
42,08,100
Less: Work in Progress 97,500
Manufacturing cost incurred during the period 41,10,600
Add: Administration Overheads ( 9.75 × 31,000 units) 3,02,250
Cost of Production 44,12,850

 1,000 
Less: Closing Finished goods stock ( 44,12,850  ) 1,42,350
 31,000 
Cost of Goods sold 42,70,500
Add: Selling & Distribution Overheads ( 13 × 30,000units) 3,90,000
Cost of Sales 46,60,500
Profit (Balancing Figure) 2,14,500
Sales 48,75,000
(ii) Production OH A/c
( ) ( )
To Gen. Ledger Adj. A/c 6,92,250 By WIP A/c 7,01,350
To Overhead Adj. A/c (Over-absorption) 9,100 .
7,01,350 7,01,350
Administration Overheads A/c
( ) ( )
To General Ledger Adj. A/c 3,10,375 By Finished Goods A/c 3,02,250
By Overheads Adj. A/c 8,125
. (under-absorption) .
3,10,375 3,10,375

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 Chapter 7 : Cost Accounting System 7.23
Selling & Distribution Overheads A/c
( ) ( )
To Gen. Ledger Adj. A/c 3,68,875 By Cost of Sales A/c 3,90,000
To Overhead Adj. A/c 21,125
( Over-absorption) . .
3,90,000 3,90,000

(iii) Reconlcilioation Statement

Profits as per cost accounts 2,14,500
Add: Production Overheads– Over absorbed 9,100
Selling & Distribution Overheads- over absorbed 21,125
Dividend Received 3,90,000
Interest on Bank Deposits 65,000 4,85,225
6,99,725
Less: Administration Overheads– Under-absorbed 8,125
Preliminary Exp. Written off 22,750
Goodwill written off 45,500
Fines 3,250
Interest on Mortage 13,000
Loss on sale of machinery 16,250
Taxation 1,95,000
Write-down of Finished Stock ( 1,42,350 – 1,30,000) 12,350 (3,16,225)
Profit as per Finiancial Accouts 3,83,500
Question 14—
ABC Ltd. has furnished the following information from the financial books for the year ended 31st March,
2014:
Profit & Loss Account
( ) ( )
To Opening Stock (500 units at 140 each) 70,000 By Sales (10,250) 28,70,000
To Material Consumed 10,40,000 By Closing Stock (250 units at 200 each) 50,000
To Wages 6,00,000
To Gross Profit c/d 12,10,000 .
29,20,000 29,20,000
To Factory Overheads 3,79,000 By Gross Profit b/d 12,10,000
To Administration Overhead 4,24,000 By Interest 1,000
To Selling Expenses 2,20,000 By Rent Received 40,000
To Bad debts 16,000
To Preliminary Expenses 20,000

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 Chapter 7 : Cost Accounting System 7.24
To Net Profit 1,92,000 .
12,51,000 12,51,000
The cost sheet shows the cost of materials at 104 per unit and the labour cost at 60 per unit. The factory
overheads are absorbed at 60% of labour cost and administration overheads at 20% of factory cost. Selling
expenses are charged at 24 per unit. The opening stock of finished goods is valued at 180 per unit.
You are required to prepare:
(i) A statement showing profit as per Cost accounts for the year ended 31st March, 2014; and
(ii) A statement showing the reconciliation of profit as disclosed in Cost accounts with the profit shown
in Financial accounts.
Answer—
(i) Statement of Profit as per Cost Accounts
Units ( )
Opening stock @ 180 per unit 500 90,000
Cost of production @ 240 per unit
(Refer Working Note 1) 10,000 24,00,000
Total 10,500 24,90,000
Less: Closing stock @ 240 per unit (250) (60,000)
10,250 24,30,000
Selling expenses @ 24 per unit 2,46,000
Cost of sales 26,76,000
Profit (Balancing figure) 1,94,000
Sales 10,250 28,70,000
Working Notes:
(i) Statement of Cost (10,000 units)
Total Cost ( ) Cost per unit( )
Materials 10,40,000 104.00
Wages 6,00,000 60.00
Factory Overheads 60% of Wages 3,60,000 36.00
Factory Cost 20,00,000 200.00
Administrative overhead 20% of factory cost 4,00,000 40.00
Total Cost 24,00,000 240.00

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 Chapter 7 : Cost Accounting System 7.25
(ii) Statement of Difference between the two set of accounts:

Financial A/c ( ) Cost A/c ( ) Difference ( ) Remarks ( )

Factory overhead 3,79,000 3,60,000 19,000 Under recovery

Administrative 4,24,000 4,00,000 24,000 Under recovery

overhead

Selling expenses 2,20,000 2,46,000 26,000 Over recovery

Opening stock 70,000 90,000 20,000 Over recovery

Closing stock 50,000 60,000 10,000 Over recovery

(ii) Reconciliation Statement
( )
Profit as per cost account 1,94,000
Add: Over-recovery of Selling overhead in Cost A/c 26,000
Add: Over-valuation of opening stock in Cost A/c 20,000
Add: Income cxcluded from Cost A/c
Interest 1,000
Rent 40,000 41,000
Less: Under recovery of Overhead in Cost A/c
Factory Overhead 19,000
Administrative Overhead 24,000 (43,000)
Less: Over-valuation of closing stock in Cost A/c (10,000)
Less: Expenses excluded from Cost A/c
Bad Debts 16,000
Preliminary Expenses 20,000 (36,000)
Profit as per finincial Account 1,92,000
Question 15—
The following figures have been extracted from the cost records of a manufacturing company:
( )
Stores:
Opening Balance 63,000
Purchases 3,36,000
Transfer from Work-in-progress 1,68,000
Issues to Work-in-progress 3,36,000
Issues to Repairs and Maintenance 42,000
Derficincies found in Stock taking 12,600
Work-in-progress:

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 Chapter 7 : Cost Accounting System 7.26
Opening Balance 1,26,000
Direct Wages applied 1,26,000
Overhead Applied 5,04,000
Closing Balance 84,000
Finished Products:
Entire output is sold at a Profit of 10% on actual cost from work-in-progress. Others: Wages incurred 1,47,000;
Overhead incurred 5,25,000.
Income from investment 21,000; Loss on sale of Fixed Assets 42,000.
Draw the stores control account, work-in-progress control account, costing profit and loss account, profit
and loss account and reconciliation statement
Answer—
Stores Ledger Control Account
( ) ( )
To Balance c/d 63,000 By Work-in-progress 3,36,000
To General Ledger Adjustment A/c 3,36,000 By Overhead A/c 42,000
To Work-in-progress A/c 1,68,000 By Overhead A/c
(Deficiency Assumed as Normal) 12,600
. By Balance c/d 1,76,400
5,67,000 5,67,000
Work-in-Progress Control Account
( ) ( )
To Balance b/d 1,26,000 By Stores Ledger Control A/c 1,68,000
To Stores Ledger Control A/c 3,36,000 By Costing Profits & Loss A/c 8,40,000
(Finished goods at cost Bal. Figure)
To Wages Control A/c 1,26,000 By Balance c/d 84,000
To Overhead A/c (applied) 5,04,000 .
10,92,000 10,92,000
Costing Profit and Loss A/c
( ) ( )
To Work-in-progress A/c 8,40,000 By General Ledger Adj. A/c Sales
To General Ledger Adj. A/c (Profit) 84,000 ( 8,40,000+ 84,000) 9,24,000
9,24,000 9,24,000

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 Chapter 7 : Cost Accounting System 7.27
Financial Profit And Loss Account
( ) ( )
To Opening Stock By Sales 9,24,000
Stores 63,000 By Income from investment 21,000
WIP 1,26,000 1,89,000 By Closing Stock
To Purchases 3,36,000 Stores 1,76,400
To Wages 1,47,000 WIP 84,000 2,60,400
To Overhead 5,25,000 By Loss 33,600
To Loss on sale of fixed Assets 42,000 .
12,39,000 12,39,000
Reconciliation Statement
( )
Profit as per Cost Account 84,000
Add: Income from investment 21,000
1,05,000
Less: Under absorption of overhead 96,600
Loss on sale of fixed assets 42,000 1,38,600
Loss as per financial Account 33,600
Note: Deficiency in stock taking may be treated as abnormal loss and it can be transferred from stores ledger
Control Account to Costing Profit and Loss Account. Then consequential changes in accounting entries in
overheads Control Account has to be done.
Working Notes:
Overheads Control Account
( ) ( )
To Stores Ledger Control A/c 42,000 By Work-in-progress 5,04,000
To Stores Ledger Control A/c 12,600 By Balance c/d 96,600
To Wages Control A/c
Indirect Wages
( 1,47,000 – 1,26,000) 21,000
To General Ledger Adjustment 5,25,000 .
6,00,600 6,00,600
**********************

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 Chapter 09 : CONTRACT COSTING 9.1
LEARNING OUTCOMES CHAPTER - 9
After studying this chapter, you will be CONTRACT
able to: COSTING
A. SIMPLE
UnderstandCONTRACE
the concepts of ACCOUNT:
audit documentation, nature and purpose of audit documentation,
Question
Form, content1—and extent of audit documentation, audit documentation summary, audit fi le, assembly of
the fi nalAaudit
construction
fi le, company undertook a contract at an estimated price of 108 lakhs, which includes a
budgeted profit of 18 lakhs.
ownership of audit documentation, The of
nature relevant
relateddata forrelationships
party the year ended 31.03.2014 are as under:
and transactions. ( ‘000)
Materials
Gain issued to of
the knowledge sitewritten representations and the objectives of the auditor regarding
5,000
written representation.
Direct wages paid 3,800
Identify Audit
Plant hired Evidence-Specifi c Considerations For Selected Items, External confi rmation.
700
Learn objective of Auditor with respect to Opening balances - in conducting an initial audit
Site office costs 270
engagement.
Materials
Explain auditreturned fromsuffi
evidence, siteciency and appropriateness of audit evidence, types of100 audit
Direct expenses
evidence, relevance and reliability of audit evidence, and also methods to obtain audit evidence. 500
Understand
Work certifiedmateriality, its defi nition and judge the materiality of the item in different circum-
10,000
stances. Progress payment received 7,200
Explain concepts of true and fair and disclosure of accounting policies.
A special plant was purchased specifically for this contract at 8,00,000 and after use on this
Understand
contract theend
till the Fundamental Accounting
of 31.02.2014, Assumptions.
it was valued at 5,00,000. This cost of materials at site at the end
of the year was estimated at 18,00,000. Direct wages accrued as on 31.03.2014 was 1,10,000.
Required
Prepare the Contract Account for the year ended 31st March, 2014 and compute the profit to be
taken to the Costing Profit and Loss account.
Answer—
Contract Account for the year ended 31st March, 2014
© The Institute of Chartered Accountants of India ( ’ 000)
( 000)
To Material issued to site 5,000 By Material at site 1,800
By Material returned 100
To Direct wages 3,800 By Cost of contract 8,780
Add: Outstanding wages 110 3,910
To Plant hire 700
To Site office cost 270
To Direct expenses 500
To Depreciation (special plant) 300

10,680 10,680
To Cost of Contract 8,780 By Work certified 10,000
To Costing Profit & Loss A/c 1,220
(Notional Profit)

10,000 10,000

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 Chapter 09 : CONTRACT COSTING 9.2
LEARNING
Question 2—OUTCOMES
After studying
Z Limitedthisobtained
chapter, ayou will beNo.
contract able to:for 50 lacs. The following details are available in respect of
999
Understand
this contract thefor concepts of audit
the year ended documentation,
March 31, 2014: nature and purpose of audit documentation,
Form, content and extent of audit documentation, audit documentation summary, audit ( ) fi le, assembly of
the fi nal audit fiMaterials
le, purchased 1,60,000
ownership of audit documentation, nature of related party relationships
Materials issued from stores 5,00,000
and transactions.
Gain theWages and salaries
knowledge paidrepresentations and the objectives of the
of written 7,00,000
auditor regarding
Drawing
written representation. and maps 60,000
IdentifySundry
Audit Evidence-Specifi
expenses c Considerations For Selected Items, External
15,000 confi rmation.
Learn objective
Electricityofcharges
Auditor with respect to Opening balances - in conducting 25,000an initial audit
engagement. Plant hire expenses 60,000
Explain audit evidence, suffi ciency and appropriateness of audit evidence, types of audit
Sub-contract cost 20,000
evidence, relevance and reliability of audit evidence, and also methods to obtain audit evidence.
UnderstandMaterials returned
materiality, its to stores
defi nition and judge the materiality of the item30,000
in different circum-
stances. Materials returned to suppliers 20,000
Explain
The concepts
following of truerelating
balances and fairtoand
thedisclosure of accounting
contract No. 999 for the policies.
year ended on March 31, 2013 and
Understand
March the Fundamental
31, 2014 are available:Accounting Assumptions.
as on 31st March, 2013 as on 31st March, 2014
Work certified 12,00,000 35,00,000

Work uncertified 20,000 40,000

Materials at site 15,000 30,000

© The Institute of Chartered Accountants of India
Wages outstanding 10,000 20,000
The contractor receives 75% of work certified in cash.
Prepare Contract Account and Contractee's Account.
Answer—
Contract No. 999 Account for the year ended 31st March, 2014
Dr. Cr.
Particulars Amount ( ) Particulars Amount ( )
To Work in progress b/d: By Material returned to store 30,000
– Work certified 12,00,000 By Material returned to Suppliers 20,000
– Work uncertified 20,000 By Stock (Material) c/d 30,000
To Stock (Materials) b/d 15,000 By Work in progress c/d:
To Material purchased 1,60,000 – Work certified 35,00,000
To Material issued 5,00,000 – Work uncertified 40,000
To Wages paid 7,00,000
Less: Opening O/s (10,000)
Add: Closing O/s 20,000 7,10,000

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 Chapter 09 : CONTRACT COSTING 9.3
LEARNING
To Drawing and OUTCOMES
maps* 60,000
After studying this chapter, you will be able to:
To Sundry expenses 15,000
Understand the concepts of audit documentation, nature and purpose of audit documentation,
To Electricity
Form, contentcharges 25,000 audit documentation summary, audit fi le, assembly of
and extent of audit documentation,
To
thePlant hire expenses
fi nal audit fi le, 60,000
ownership
To of audit
Sub-contract costdocumentation, nature20,000of related party relationships
andCosting
To transactions.
P & L A/c 8,35,000
Gain the knowledge
(National Profit) of written representations
. and the objectives of the auditor regarding .
written representation.
36,20,000 36,20,000
Identify Audit Evidence-Specifi c Considerations For Selected Items, External confi rmation.
*Assumed thatobjective
Learn expensesof incurred
Auditorfor drawing
with respectand
tomaps are used
Opening exclusively
balances for this contract
- in conducting an initialonly.
audit
engagement.
Explain audit evidence, suffi ciency and appropriateness of audit evidence, types of audit
evidence, relevance and reliability of audit evidence, and
Contractee's also methods to obtain audit evidence.
Account
Dr. Understand materiality, its defi nition and judge the materiality of the item in different
Cr. circum-
stances.
Particulars Amount ( ) Particulars Amount ( )
Explain concepts of true and fair and disclosure of accounting policies.
To Balance c/d 26,25,000 By Balance b/d 9,00,000
Understand the Fundamental Accounting Assumptions.
( 35,00,000 × 75%) (75% of 12,00,000)
By Bank A/c 17,25,000
26,25,000 26,25,000
Question 3—
A contractor commenced a contract on 01-07-2013. The costing records concerning the said con-
tract reveal the following information as on 31-03-2014.
© The Institute of Chartered Accountants of India Amount ( )
Material sent to site 7,74,300
Labour paid 10,79,000
Labour outstanding as on 31-03-2014 1,02,500
Salary to Engineer 20,500 per month
Cost of plant sent to site (01-07-2013) 7,71,000
Salary to Supervisor (3/4 time devoted to contract) 9,000 per month
Administration & other expenses 4,60,600
Prepaid Administration expenses 10,000
Material in hand at site as on 31-03-2014 75,800
Plant used for the contract has an estimated life of 7 years with residual value at the end of life
50,000. Some of material costing 13,500 was found unsuitable and sold for 10,000. Contract price
was 45,00,000. On 31-03-2014 two third of the contract was completed. The architect issued
certificate covering 50% of the contract price and contractor has been paid 20,00,000 on account.
Depreciation on plant is charged on straight line basis. Prepare Contract Account.

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 Chapter 09 : CONTRACT COSTING 9.4
LEARNING OUTCOMES
Answer
After studying this chapter, you will be ableContract
to: Account
Understand the concepts(For of audit
the period 01.07.13nature
documentation, and purpose of audit documentation,
to 31.03.14)
Form, content and extent of audit documentation, audit documentation summary, audit fi le, assembly of
Particulars Amount ( ) Particulars Amount ( )
the fi nal audit fi le,
To MaterialofIssued
ownership audit documentation, nature 7,74,300
of related partyBy Material (Sold)
relationships 10,000
To
andLabour
transactions. 10,79,000 By Costing P & L A/c(Loss) 3,500
Gain the knowledge of written representations and ( the objectives
13,500 of the auditor regarding
– 10,000)
written
Add: representation.
Outstanding 1,02,500 11,81,500 By Material in hand 75,800
Identify Audit
To Salary to engineer Evidence-Specifi c Considerations
1,84,500 For Selected Items,
By Cost of Contract c/dExternal confi rmation.
26,39,600
Learn objective of Auditor with respect to Opening balances - in conducting an initial audit
( 20,500 × 9 months)
engagement.
To Salary to Supervisor
Explain audit evidence, suffi ciency and appropriateness of audit evidence, types of audit
evidence, relevance
3 and reliability of audit evidence, and also methods to obtain audit evidence.
( 9,000Understand
  9months )
materiality, 60,750
its defi nition and judge the materiality of the item in different circum-
4
stances.
To Administration & other of true and fair and disclosure of accounting policies.
Explain concepts
expensesUnderstand 4,60,600
the Fundamental Accounting Assumptions.
Less: Prepaid 10,000 4,50,600
To Depreciation on Plant
(Working Note 1) 77,250 .
27,28,900 27,28,900
To Cost of Contract b/d 26,39,600 By Work-in Progress:
To National
© The Profit
Institute of c/d 2,70,300
Chartered Accountants of India – Work certified
(50% of 45,00,000) 22,50,000
– Work uncertified 6,59,900
(Working Note 2)
29,09,900 29,09,900
Working Note:
1. Calculation of depreciation on Plant

Cost of the plant - Residual value 9months


7 Years 12months

7,71,000 – 50,000 9months

 77,250
7 Years 12months
2. Cost of the Work uncertified = (Cost incurred to date) – (50% of the total cost of contract)

 3 1
 26,39,600 –  26,39,600     6,59,900
 2 2

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 Chapter 09 : CONTRACT COSTING 9.5
LEARNING
Question 4—OUTCOMES
After studying
Dream this
house chapter,
(P) Ltd.youis will be able
engaged to:
in building two residential housing projects in the city. Particulars
Understand
related to twothe concepts
housing of audit
projects aredocumentation,
as below: nature and purpose of audit documentation,
Form, content and extent of audit documentation, audit documentation summary, audit fi le, assembly of
the fi nal audit fi le, HP-1 ( ) HP-2 ( )
ownership of audit documentation,
Work in Progress on 1st April 2013 nature of related party relationships
7,80,000 2,80,000
and transactions.
Materials Purchased 6,20,000 8,10,000
Gain the knowledge of written representations and the objectives of the auditor regarding
Land
writtenpurchased near to the site to open an office
representation. – 12,00,000
Brokerage and registration
Identify fee paid on thec Considerations
Audit Evidence-Specifi above purchase For Selected–Items, External confi rmation. 60,000
Wages paidLearn objective of Auditor with respect to Opening balances - in conducting an initial audit
85,000 62,000
engagement.
Wages outstanding as on 31st March, 2014 12,000 8,400
Explain audit
Donation paid to local clubsevidence, suffi ciency and appropriateness of audit
5,000 evidence, types of audit 2,500
evidence, relevance and reliability of audit evidence, and also methods to obtain audit evidence.
Plant hire charges paid for three years effecting from 1st April 72,000 57,000
Understand materiality, its defi nition and judge the materiality of the item in different circum-
2013
stances.
Value ofExplain
materials at site asofon
concepts 31st
true andMarch, 2014
fair and 47,000
disclosure of accounting policies. 52,000
ContractUnderstand
price of thethe Fundamental Accounting Assumptions.48,00,000
projects 36,00,000
Value of work certified 20,50,000 16,10,000
Work not certified 1,90,000 1,40,000
A concrete mixture machine was bought on 1st April 2013 for 8,20,000 and used for 180 days in
HP-1 and for 100 days in HP-2. Depreciation is provided @ 15% p.a.( this machine can be used
for any other projects)
As per the contract agreement contractee shall retain 20% of work certified as retention money.
© The Institute of Chartered Accountants of India
Prepare contract account for the two housing projects showing the profit or loss on each project for
the year ended 31st March, 2014.

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 Chapter 09 : CONTRACT COSTING 9.6
LEARNING OUTCOMES
Answer:
After studying this chapter, you will be ableContract
to: Account
Understand the concepts of audit documentation, nature and purpose of audit documentation,
Form, content Particulars HP -1( ) HPaudit
and extent of audit documentation, -2 ( )documentation
Particularssummary, HPaudit
- 1 (fi)le, assembly
HP - 2 ( of
)
the fi nal audit fi le,
To Balance b/d: W-I-P 7,80,000 2,80,000 By Closing 47,000, 52,000
ownership of audit documentation, nature of related party relationships
and transactions. Material at site
Gain the knowledge of written representations and the objectives of the auditor regarding
To Material
written Purchased
representation. 6,20,000 8,10,000 By W-I-P:
Identify Audit Evidence-Specifi c Considerations For Selected Items, External confi rmation.
To Wages: Value of work 20,50,000 16,10,000
Learn objective of Auditor with respect to Opening balances - in conducting an initial audit
engagement.
( 85,000+ 12,000) 97,000 certified
Explain audit evidence, suffi ciency and appropriateness of audit evidence, types of audit
evidence,( 62,000+
relevance8,400) 70,400
and reliability of audit evidence, Costmethods
and also of work not
to obtain audit evidence.
Understand materiality, its defi nition and judge the materiality of the item in different circum-
certified 1,90,000 1,40,000
stances.
Explain
To Donation concepts
to local club* of true and fair and disclosure
5,000 2,500 of accounting policies.
Understand the Fundamental Accounting Assumptions.
To Plant hire charges:

( 72,000×1/3) 24,000

( 57,000×1/3) 19,000

To Depreciation on
© The Institute of Chartered Accountants of India
concrete mixture**.

( 8,20,000×15%×180/365) 60,658

( 8,20,000×15%×180/365) 33,699

To National profit 7,00,342 5,86,401

(balance c/d)

22,87,000 18,02,000 22,87,000 18,02,000

* Assuming donation paid to local club was exclusively for the above projects, hence included in the
contract account.
** Depreciation on concrete mixture machine is charged on the basis of number of days used for the
projects, as it is clearly mentioned in the question that this machine can be used for other projects
also.

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 Chapter 09 : CONTRACT COSTING 9.7
LEARNING
Question 5—OUTCOMES
After studying this chapter, you will be able to:
Modern Construction Ltd. obtained a contract No. B-37 for 40 lakhs. The following balances
Understand
and informationthe concepts
relate toofthe
audit documentation,
contract for the yearnature
endedand purpose
31st March, of2014:
audit documentation,
Form, content and extent of audit documentation, audit documentation summary, audit fi le, assembly of
1.4.2013( ) 31.3.2014 ( )
the fi nal audit fi le,
Work-in-progress:
ownership of audit documentation, nature of related party relationships
Work certified
and transactions. 9,40,000 30,00,000
Gain the knowledge of written representations and11,200
Work uncertified the objectives of the auditor regarding32,000
written representation.
Materials at site 8,000 20,000
Identify
Accrued wages Audit Evidence-Specifi c Considerations For Selected
5,000 Items, External confi rmation.
3,000
Learn objective of Auditor with respect to Opening balances - in conducting an initial audit
engagement.
Additional
Explain audit information
evidence,relating to theand
suffi ciency yearappropriateness
2013-2014 are: of audit evidence, types of audit
evidence, relevance and reliability of audit evidence, and also methods to obtain audit evidence. ( )
Understand materiality, its defi
Materials issued from store nition and judge the materiality of the item in4,00,000 circum-
different
stances. Materials directly purchased 1,50,000
Explain concepts of true and fair and disclosure of accounting policies.
Wages paid 6,00,000
Understand the Fundamental Accounting Assumptions.
Architect’s fees 51,000
Plant hire charges 50,000
Indirect expenses 10,000
Share of general overheads for B-37 18,000
Materials returned to store 25,000
Materials
© The Institute returned
of Chartered to supplierof India
Accountants 15,000
Fines and penalties paid 12,000
The contractee pays 80% of work certified in cash. You are required to prepare:
(i) Contract Account.
(ii) Contractee's Account.
(iii) Balance Sheet

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 Chapter 09 : CONTRACT COSTING 9.8
LEARNING OUTCOMES Books of Modern Constructions Ltd.
After studying this chapter, you No.
Contract will be able
B-37 to:
Account for the year ended 31st March, 2014
Understand the concepts of audit documentation, nature and purpose of audit documentation,
Form,Particulars
content and extent of audit documentation, )audit documentation summary, audit fi le, assembly
Particulars ( ) of
the fi nal audit fi le,
To WIP b/d: By Materials returned to Store 25,000
ownership of audit documentation, nature of related party relationships
and transactions.
–Work certified 9,40,000 By Materials returned to suppliers 15,000
Gain the knowledge of written representations and the objectives of the auditor regarding
–Work uncertified 11,200 By WIP c/d:
written representation.
To Identify Audit Evidence-Specifi
Stock (Materials) b/d c Considerations
8,000 WorkForCertified
Selected Items, External confi rmation.
30,00,000
Learn objective of Auditor with respect to Opening balances - in conducting an initial audit
To
engagement.Materials issued 4,00,000 Uncertified work 32,000 30,32,000
ToExplain
Materialsaudit evidence, suffi ciency
Purchased and appropriateness
1,50,000 By Materialsofstock
auditc/d
evidence, types of audit
20,000
evidence, relevance and reliability of audit evidence, and also methods to obtain audit evidence.
ToUnderstand
Wages paidmateriality,
6,00,000its defi nition and judge the materiality of the item in different circum-
stances.
Less: Opening O/s (5,000)
Explain concepts of true and fair and disclosure of accounting policies.
Understand
Add: Closing O/sthe Fundamental
3,000 Accounting
5,98,000Assumptions.
To Architece's fees 51,000
To Plant Hire charges 50,000
To Indirece expenses 10,000
To General overheads 18,000
© The Institute of Chartered Accountants of India
To National profit c/d 8,55,800
30,92,000 30,92,000
Note:Fines and penalties are not shown in contract accounts.
Contractee's Account
( ) ( )
To Balance c/d 24,00,000 By Balance b/d 7,52,000
(80% of 9 ,40,00 0)
By Bank 16,48,000
24,00,000 24,00,000

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 Chapter 09 : CONTRACT COSTING 9.9
LEARNING OUTCOMES
After studying this chapter, youBalance Sheet
will be able to: (Extract) as on 31.3.2014
Understand the concepts of audit documentation, nature and purpose of audit documentation,
Form,
P & content
L A/c and extent of audit8,55,800
documentation, audit Material
documentation summary, audit fi le, assembly20,000of
theLess:
fi nalFines
audit fi le, 12,000 8,43,800 Material stock in 25,000
site
ownership of audit documentation, nature of related party relationships
Outstanding Wages 3,000 WIP:
and transactions.
Work Certified 30,00,000
Gain the knowledge of written representations and Work theuncertified
objectives of the auditor
32,000regarding
written representation. 30,32,000
Identify Audit Evidence-Specifi c Considerations ForAdvance
Less: Selected Items, External
24,00,000confi rmation.
6,32,000
Learn objective of Auditor with respect to Opening balances - in conducting an initial audit
engagement.
Question 6—
M/s ABID
Explain Constructions
audit undertook
evidence, suffi ciencyaand
contract at a price ofof audit
appropriateness 171.00 lacs. Thetypes
evidence, relevant data for the
of audit
year ended 31st March, 2014 are as under:
evidence, relevance and reliability of audit evidence, and also methods to obtain audit evidence.
Understand materiality, its defi nition andBalance
judge the materiality of the item in different circum-
stances.
Explain concepts of true and fair and disclosure of accounting policies. ( ’000)
Understand the Fundamental
Material i ssued at siteAccounting Assumptions. 7700
Direct Wages paid 3300
Site office cost 550
Material return to store 175
Work certified 12650
Work uncertified 225
© The Institute of Chartered
Progress Accountants
Payment Receivedof India 10120
Prepaid site office cost as on 31-03-2014 50
Direct wages outstanding as on 31-03-2014 100
Material at site as on 31-03-2014 110
Additional Information:
(a) A plant was purchased for the contract at 8,00,000 on 01-12-2013.
(b) Depreciation @ 15% per annum is to be charged.
(c) Material which cost 1,30,000 was destroyed by fire.
Prepare:
(i) Contract Account for the year ended 31st March, 2014.
(ii) Account of Contractee.
(iii) Profit & Loss Account showing the relevant items.
(iv) Balance Sheet showing the relevant items.

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 Chapter 09 : CONTRACT COSTING 9.10
LEARNING
Answer OUTCOMES
(i)
After studying this chapter, you will be able to:
Contract Account
Understand the concepts of audit documentation, nature and purpose of audit documentation,
Form, content and extent of audit documentation,
Particulars Amountaudit documentation
Particularssummary, audit fi le, assembly
Amount of
the fi nal audit fi le, ( in '000) ( in '000)
To Material
ownership issued
of audit documentation, nature of7,700 By Material
related party returned
relationships 175
To Direct Wages
and transactions. 3,300 By Profit & Loss A/c 130
Add: Outstanding 100 3,400 (Material Destroyed by
Gain the knowledge of written representations and the objectives of the auditor regarding
fire)
written representation.
To Site Office Cost 550 By WIP:
Less: Identify
Prepaid Audit Evidence-Specifi
50 c Considerations
500 – Work ForUncertified
Selected Items, External confi rmation.
225
Learn objective of Auditor with respect to Opening
– Workbalances
certified - in conducting an initial audit
12,650 12,875
To Depreciation*
engagement. 40 By Material at site 110
To Notional Profit 1,650
Explain audit evidence, suffi ciency and appropriateness of audit evidence, types of audit
13,290 and also methods to obtain audit evidence.
evidence, relevance and reliability of audit evidence, 13,290
Understand materiality, its defi nition and judge4months
the materiality of the item in different circum-
stances. * Depreciation on plant  8, 00, 000  15 %   40,000
12 months
(ii) Explain concepts
Contractee's of true and fair and disclosure of accounting policies.
Account
Understand the Fundamental Accounting Assumptions.
Particulars Amount Particulars Amount
( in ‘000) ( in ‘000)
To Balance c/d 10,120 By Bank A/c 10,120
10,120 10,120
(iii) Relevant items of Profit & Loss Account
Particulars Amount Particulars Amount
© The Institute of Chartered Accountants(ofin
India
‘000) ( in ‘000)
To Contract A/c 130 By Contract A/c 16,50
(loss of material due to fire) (Profit on contract)
1,520
To Net Profit
1650 1,650
(iv) Balance Sheet (Extracts) as on 31st March, 2014 (Amount in '000)

Liabilities Amount Assest Amount

( ) ( )
Profit 1520 Plant at cost 800
Less: Dep. 40 760
Outstanding Wages 100 Contract W.I.P.
Uncertified 225
Certified 12,650
Less: Advances (10,120) 2,755
Material at site 110
Prepaid Exp. 50

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 Chapter 09 : CONTRACT COSTING 9.11
LEARNING
B. OUTCOMESFOR ESTIMATED PROFIT
CALCULATION
Question 7—
After studying this chapter, you will be able to:
Compute
Understand estimated of profit
the concepts on contract
of audit (which hasnature
documentation, been 90% complete)
and purpose of from
audit the
documentation,
following particulars:
Form, content and extent of audit documentation, audit documentation summary, audit fi le, assembly of
the fi nal audit fi le, ( )
Total expenditure to date
ownership of audit documentation, nature of related party relationships 22,50,000
and transactions.
Estimated further expenditure to complete the contract (including contingencies) 2,50,000
Gain the
Contract knowledge of written representations and the objectives of the auditor regarding
Price 32,50,000
written representation.
Work certified 27,50,000
WorkIdentify Audit Evidence-Specifi c Considerations For Selected Items, External confi rmation.
uncertified 1,75,000
CashLearn objective of Auditor with respect to Opening balances - in conducting an initial audit
received
engagement. 21,25,000
AnswerExplain audit evidence, suffi ciency and appropriateness of audit evidence, types of audit
evidence,Estimated
relevanceprofit
and on completed
reliability contract
of audit basis and also methods to obtain audit evidence.
evidence,
= Contract Price – (Total expenditure to date + Estimated further expenditure to complete contract)
Understand materiality, its defi nition and judge the materiality of the item in different circum-
= 32,50,000 – ( 22,50,000 + 2,50,000)
stances.= 7,50,000.
Question Explain
8— concepts of true and fair and disclosure of accounting policies.
Understand the Fundamental
From the following Accounting
particulars compute Assumptions.
estimated of profit on a contract which has 80 percent
complete:
( )
Total expenditure to date 8,50,000
Estimate further expenditure to complete the contract 1,70,000
Contract Price 15,30,000
Work Certified 10,00,000
Work not certified
© The Institute of Chartered Accountants of India 85,000
Cash received 8,16,000
Answer
(i) Calculation of Notional Profit
= (Work certified + work not certified) - Total expenditure to date
= ( 10,00,000 + 85,000) - 8,50,000 = 2,35,000
(ii) Calculation of Estimated Profit
Contract Price - (Expenditure to date + Further expenditure to be incurred)
= 15,30,000 - (8,50,000 + 1,70,000) = 5,10,000
Question 9—
Arnav Construction Ltd. commenced a contract on November 1, 2012. The total contract was for
39,37,500. It was decided to estimate the total profit on the contract and to take to the credit of
Costing Profit & Loss A/c that proportion of estimated profit on cash basis, which work completed
bore to the total contract. Actual expenditure for the period November 1, 2012 to October 31, 2013
and estimated expenditure for November 1, 2013 to March 31, 2014 are given below:
November 1,2012 to November 1,2013 to
October 31, 2013 March 31, 2014
(Actual) (Estimated)
( ) ( )
Material issued 6,75,000 12,37,500
Labour Paid 4,50,000 5,62,500

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 Chapter 09 : CONTRACT COSTING 9.12
LEARNING PrepaidOUTCOMES 25,000 -----
After studying this chapter, you will be able to: ------
Outstanding 2,500
Understand the concepts of audit documentation,
Plant purchased 3,75,000 nature and purpose of audit documentation,------
Form, content
Expenses Paid and extent of audit documentation,2,00,000audit documentation summary, audit fi le, 3,50,000
assembly of
the fi nalOutstanding
audit fi le, 50,000 25,000
Plant returned
ownership to store(Historical
of audit documentation, cost) 75,000
nature of related party relationships 3,00,000
and transactions. (On March 31,2013) (on March 31,2014)
Work certified
Gain the knowledge of written representations 20,00,000
and the objectives of the auditor regarding Full
Work uncertified
written representation. 75,000 ----
Cash received 17,50,000 ----
Identify Audit Evidence-Specifi c Considerations For Selected Items, External confi rmation.
Material at site 75,000 37,500
Learn
The objective
plant of Auditor
is subject to annualwith respect to@Opening
depreciation 33.33%balances
on written- in conducting
down an initial
value method. Theaudit
contract is
engagement.
likely to be completed on March 31, 2014.
RequiredExplain audit evidence, suffi ciency and appropriateness of audit evidence, types of audit
evidence, relevance
Prepare and reliability
the Contract A/c. of audit evidence, and also methods to obtain audit evidence.
Answer Understand materiality, its defi nition and judge the materiality of the item in different circum-
stances. Arnav Construction Ltd.
Contract A/c
Explain concepts of true and fair and disclosure of accounting policies.
(November
Understand the Fundamental Accounting 1, 2012 to Oct. 31, 2013)
Assumptions.
Particulars Amount Amount Particulars Amount Amount

( ) ( ) ( ) ( )

To Materials issued 6,75,000 By Plant returned to store

on 31/03/13 at cost 75,000

© The Institute of Chartered Accountants of India
To Labour paid 4,50,000 Less: Depreciation for 5

months @ 33.33% (10,417) 64,583

Less: Prepaid wages (25,000) 4,25,000 By W-I-P:

To Plant purchased & 3,75,000 Work certified 20,00,000

issued

To Expenses paid 2,00,000 Work un-certified 75,000 20,75,000

Add: Outstanding exp. By Plant at site 3,00,000

50,000 2,50,000 ( 3,75,000 – 75,000)

Less: Depreciation @ 33.33% 1,00,000 2,00,000

To National profit c/d 6,89,583 By Material at site 75,000

24,14,583 24,14,583

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Arnav Construction Ltd. Contract A/c

 Chapter 09 : CONTRACT COSTING 9.13
LEARNING(November OUTCOMES 1, 2012 to March 31, 2014) (For computing estimated profit)
After studying
Particularsthis chapter, you will Amount
be able to:( ) Dr. Particulars Amount( )
Understand the concepts of audit documentation, nature and purpose of audit documentation, Cr.
Form, Tocontent andIssued
Material extent of audit documentation,
19,12,500 audit
Bydocumentation
Material at site summary, audit fi le, 37,500
assembly of
( 6,75,000
the fi nal + 12,37,500)
audit fi le,
To Labour (Paid & nature10,15,000
ownership of audit documentation, By Plant
of related party returned to stores on
relationships
Outstanding) 31/03/13 64,583
and transactions.
To Plant Purchased 3,75,000 By Plant returned to stores on
Gain the knowledge of written representations and the objectives of the auditor regarding
31/03/14
writtenTorepresentation.
Expenses (2,50,000 + 5,75,000 WDV on 31/10/2013
Identify Audit Evidence-Specifi c Considerations For Selected Items,2,00,000
3,25,000) External confi rmation.
ToLearn objective
Estimated Profitof Auditor with respect to Opening
3,34,305 balances - inforconducting
Less: Depreciation 5 months an initial audit
engagement. @ 33.33% (27,778) 1,72,222
By Contractee A/c
Explain audit evidence, suffi ciency and appropriateness of audit evidence, types of audit 39, 37,500
42,11,805
evidence, relevance and reliability of audit evidence, and also methods to obtain audit evidence. 42,11,805
Question Understand
10— materiality, its defi nition and judge the materiality of the item in different circum-
stances.PQR Construction Ltd. commenced a contract on April 1, 2013. The total contract was for 27,12,500.
It was decided
Explain to estimate
concepts the total
of true and profit
fair and and to take
disclosure to the credit policies.
of accounting of Costing P & L A/c the proportion
of estimatedthe
Understand profit on cash basis
Fundamental which work
Accounting completed bear to the total contract. Actual expendi-
Assumptions.
ture in 2013-14 and estimated expenditure in 2014-15 are given below:
2013-14 2014-15
Actual ( ) Estimated ( )
Material issued 4,56,000 8,14,000

Labour : Paid 3,05,000 3,80,000

© The Institute of: Outstanding at end
Chartered Accountants of India 24,000 37,500

Plant purchased 2,25,000 -

Expenses : Paid 1,00,000 1,75,000
: Outstanding at the end - 25,000
: Prepaid at the end 22,500 -

Plant returned to stores (a historical stores) 75,000 1,50,000

(on Dec. 31 2014)

Material at site 30,000 75,000

Work-in progress certified 12,75,000 Full

Work-in-progress uncertified 40,000 ----

Cash received 10,00,000 Full

The plant is subject to annual depreciation @ 20% of WDV cost. The contract is likely to be com-
pleted on December 31, 2014.
Required:

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 Chapter 09 : CONTRACT COSTING 9.14
LEARNING
(i) OUTCOMES
Prepare the Contract A/c for the year 2013-14.
(ii) Also prepare contract
After studying this chapter, A/c
you forbe
will theable
period
to: 01/04/2013 to 31/12/2014 showing Estimated profit.
AnswerUnderstand the concepts of audit documentation, nature and purpose of audit documentation,
Form, content and extent of audit documentation, audit documentation summary, audit fi le, assembly of
the fi nal audit fi le, PQR Construction Ltd.
Contract A/c
ownership of audit documentation, nature of related party relationships
(April 1, 2013 to March 31, 2014)
and transactions.
Particulars Amount Particulars
Gain the knowledge of written representations Amount
and the objectives of the auditor regarding
To Materials Issued 4,56,000 By Plant returned to Stores 60,000
written representation. (Working Note No. 1)
Identify Audit Evidence-Specifi
To Labour 3,05,000 c Considerations For Selected
By Material at Site Items, External confi rmation.
30,000
Learn objective of Auditor with respect to Opening balances - in conducting an initial audit
engagement.
Add: Outstanding 24,000 3,29,000 By W.I.P.
Certified
Explain audit evidence, suffi ciency and appropriateness 12,75,000
of audit evidence, types of audit
To Plant Purchased 2,25,000 Uncertified 40,000
evidence, relevance and reliability of audit evidence, and also methods to obtain audit evidence. 13,15,000
To Expenses 1,00,000 By Plant at Site 1,20,000
Understand materiality, its defi nition and judge the materiality of the item in different circum-
(Working Note 2)
stances.
Less: Prepaid 22,500 77,500
ExplainProfit
To Notional concepts
c/d of true and fair4,37,500
and disclosure of accounting policies.
Understand the Fundamental Accounting
15,25,000 Assumptions. 15,25,000
PQR Construction Ltd.Contract A/c
(April 1, 2013 to December 31,2014) (For Computing estimated profit)

Particulars Amount ( ) Particulars Amount ( )

To Materials Issued 12,70,000 By Material at Site 75,000
© The Institute of Chartered
( 4,56,000 Accountants of India
+ 8,14,000)
By Plant returned to
To Labour Cost 7,22,500 60,000
Store on 31.3.2014.
tion ( 3,05,000 + 24,000 +
3,56,000* + 37,000))
By Plant returned to
To Plant purchased 2,25,000 1,02,000
Stores on 31.12.2014
(Working Note 3)
To Expenses 3,00,000 By Contractee A/c 27,12,500
77,500 + 1,97,500
+ 25,000)
To Estimated profit 4,32,000
29,49,500 29,49,500

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 Chapter 09 : CONTRACT COSTING 9.15
LEARNING OUTCOMES
* Labour paid in 2014-15: 3,80,000 – 24,000 = 3,56,000
After studying thisNotes:
Working chapter, you will be able to:
Understand the concepts of audit documentation, nature and purpose of audit documentation,
1. Value and
Form, content of the Plant
extent returned
of audit to Stores on
documentation, 31.03.2014
audit documentation summary, audit fi le, assembly of
Historical Cost
the fi nal audit fi le, of the Plant returned 75,000
Less: Depreciation @ 20% of WDV for one year (15,000)
ownership of audit documentation, nature of related party relationships
60,000
and transactions.
2. Value of Plant at Site 31.03.2014
Gain the knowledge
Histrical Cost of Plantofatwritten
Site ( representations and the objectives of the auditor regarding
2,25,000 – 75,000) 1,50,000
written representation.
Less: Depreciation @ 20% on WDV for one year (30,000)
Identify Audit Evidence-Specifi c Considerations For Selected Items, External confi rmation.
1,20,000
3. Learn objective
Value of Plant of Auditorto
returned with respect
Stores on to Opening balances - in conducting an initial audit
31.12.2014
engagement.
Value of Plant (WDV) on 31.3.2014 1,20,000
Less:
ExplainDepreciation @ 20%
audit evidence, ofciency
suffi WDV andfor aappropriateness
period of 9 months
of audit evidence, types(18,000)
of audit
evidence, relevance and reliability of audit evidence, and also methods to obtain audit evidence. 1,02,000
4. Expenses
UnderstandPaid for theits
materiality, year
defi 2013-14
nition and judge the materiality of the item in different circum-
stances. Total expenses paid 1,00,000
Less: Pre-paid at the end (22,500)
Explain concepts of true and fair and disclosure of accounting policies.
77,500
Understand
Question 11–
the Fundamental Accounting Assumptions.
PVK Constructions commenced a contract on 1st April, 2014. Total contract value was 100 lakhs.
The contract is expected to be completed by 31st December, 2016. Actual expenditure during the
period 1st April, 2014 to 31st March, 2015 and estimated expenditure for the period 1st April, 2015 to
31st December, 2016 are as follows:
Actual ( ) Estimated ( )
1st April, 2014 to 31st 1st April, 2015 to 31st
© The Institute of Chartered Accountants of India
March, 2015 Dec. 2016
Material issued 15,30,000 21,00,000

Direct Wages paid 10,12,500 12,25,000

Direct Wages outstanding 80,000 1,15,000

Plant purchased 7,50,000 -

Expenses paid 3,25,000 5,40,000

Prepaid Expenses 68,000 -

Site office expenses 3,00,000 -

Part of the material procured for the contract was unsuitable and was sold for 2,40,000 (cost being
2,55,000) and a part of plant was scrapped and disposed of for 80,000. The value of plant at site
on 31st March, 2015 was 2,50,000 and the value of material at site was 73,000. Cash received
on account to date was 36,00,000, representing 80% of the work certified. The cost of work
uncertified was valued at 5,40,000.
Estimated further expenditure for completion of contract is as follows:

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 Chapter 09 : CONTRACT COSTING 9.16
LEARNING
 OUTCOMES
An additional amount of 4,62,500 would have to be spent on the plant and the residual value of the
After studying this chapter, you of
plant on the completion will
thebecontract
able to:would be 67,500.
 Understand
Site the concepts
office expenses wouldofbe
audit
the documentation,
same amount pernature
monthand purposein
as charged ofthe
audit documentation,
previous year.

Form, content and extent
An amount of auditwould
of 1,57,500 documentation,
have to beaudit documentation
incurred summary,charges.
towards consultancy audit fi Required:
le, assembly of
Required :—Prepare
the fi nal audit fi le, Contract Account and calculate estimated total profit on this contract.
Answer
ownership of audit documentation, nature of related party relationships
and transactions. PVK Constructions Contract Account for the year 2014-15
Gain the knowledge of written representations
Particulars and the objectives of the auditor regarding
Amount ( ) Particulars Amount ( )
written representation.
To Materials
IdentifyIssued
Audit Evidence-Specifi c15,30,000 By Material
Considerations sold Items, External confi rmation.
For Selected 2,40,000
Learn
To Direct objective10,12,500
wages of Auditor with respect to Opening balances
By Costing P &- in
L conducting
Account an initial audit 15,000
engagement.
Explain audit evidence, suffi ciency and appropriateness
(loss on saleofof
audit evidence, types of audit
material)
evidence, relevance and reliability of audit evidence, and also methods to obtain audit evidence.
Add: Outstanding
Understand materiality,80,000 10,92,500
its defi nition Bythe
and judge Plant sold of the item in different circum-
materiality 80,000
stances.
To Plant purchased 7,50,000 By Plant at site 2,50,000
Explain concepts of true and fair and disclosure of accounting policies.
To Expenses 3,25,000 Accounting Assumptions.
Understand the Fundamental By Material at site 73,000
Less: Prepaid (68,000) 2,57,000 By Work-in-progress:
To Site office expenses 3,00,000 - Work certified 45,00,000
To National profit c/d 17,68,500 - Work uncertified 5,40,000 50,40,000
56,98,000 56,98,000
© The Institute of Chartered Accountants of India
To Costing P & L A/c (transfer) 4,11,967* By National profit b/d 17,68,500
(Refer Working note)
To Work-in-progress (reserve) 13,56,533*
17,68,500 17,68,500

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 Chapter 09 : CONTRACT COSTING 9.17
LEARNING OUTCOMES Calculation of Estimated Profit (April 2014 to December 2016)
After studying this chapter, you will be able to:
Particulars the concepts of audit documentation,Amount
Understand nature and( )purpose
Amount ( ) documentation,
of audit Amount ( )
Form, content and extent
Total Value of the of audit documentation,
contract (A) audit documentation summary, audit fi le, assembly
1,00,000 of
the fi nal audit fi le,
(i) Material
ownership of auditCost:
documentation, nature of related party relationships
and transactions.
Material Consumed in 2014–15:
Gain the knowledge of written representations and the objectives of the auditor regarding
written representation.
Material Issued in 2014–2015 15,30,000
Identify Audit Evidence-Specifi c Considerations For Selected Items, External confi rmation.
Less: Unsuitable Material sold (73,000)
Learn objective of Auditor with respect to Opening balances - in conducting an initial audit
engagement.
Less: Unsuitable Material Sold (2,55,000) 12,02,000
Explain audit evidence, suffi ciency and appropriateness of audit evidence, types of audit
evidence,Add: Material to be consumed
relevance and reliability of audit evidence, and also methods to obtain audit evidence.
Understand
Material to be issued its defi nition and judge the materiality
materiality, 21,00,000 of the item in different circum-
stances.
Add: Opening
Explain conceptsMaterial
of trueatand
site fair and disclosure of accounting
73,000 policies.
21,73,000 33,75,000

(ii) Understand
Direct Wages theCost
Fundamental
: Accounting Assumptions.

Direct Wages for 2014–15

Wages Paid 10,12,500

Add: Outstanding at closing 80,000 10,92,500

Direct Wages to be incurred :

© The Institute of Chartered Accountants of India
Wages tobe paid 12,25,000

Less: Outstanding at opening (80,000)

Add: Outstanding at closing 1,15,000 12,60,000 23,52,500

(iii) Plant Cost

Plant Used during 2014–15:

Plant Purchased 7,50,000

Less: Plant Disposed (80,000)

Less: Closing Plant at site (2,50,000) 4,20,000

Plant to be Used

– Additional Amount tobe spent 4,62,500

Add: Opening Plant at site 2,50,000

Less: Residual Value of Plant (67,500) 6,45,000 10,65,000

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 Chapter 09 : CONTRACT COSTING 9.18
LEARNING
(iv) Expenses OUTCOMES
After studying this chapter, you will be able to:
Expenses
Understand incurred during of
the concepts 2014-15:
audit documentation, nature and purpose of audit documentation,
Form, content and extent of audit documentation, audit documentation summary, audit fi le, assembly of
- Expenses paid 3,25,000
the fi nal audit fi le,
ownership of audit
- documentation,
Less: Prepaid at nature of related party relationships
closing (68,000) 2,57,000
and transactions.
Expenses to be incurred
Gain the knowledge of written representations and the objectives of the auditor regarding
written representation.
- Expenses to be paid 5,40,000
Identify Audit Evidence-Specifi c Considerations For Selected Items, External confi rmation.
- Add: Prepaid at opening 68,000 6,08,000
Learn objective of Auditor with respect to Opening balances - in conducting an initial audit
engagement.
(v) Site office expenses paid in 2014-15 3,00,000
Explain audit evidence, suffi ciency and appropriateness of audit evidence, types of audit
- relevance
evidence, Add: Toand be reliability
paid (3,00,000 ÷ evidence,
of audit 12) × 21 and also methods to obtain audit evidence.
5,25,500 8,25,000
months)
Understand materiality, its defi nition and judge the materiality of the item in different circum-
stances.
(vi) Consulatancy charges to be paid 1,57,500
Explain concepts of true and fair and disclosure of accounting policies.
Total Estimated
UnderstandCost of the Contract
the Fundamental Accounting Assumptions. 86,40,000
Estimated Profit (A – B) 13,60,000

Question 12—
Paramount Engineers are engaged in construction and erection of a bridge under a long-term con-
tract. The cost incurred upto 31.03.2014 was as under:
Amount ( ) in lakhs
Fabrication
© The Institute Costs: Accountants of India
of Chartered
Direct Materials 280
Direct Labour 100
Overheads 60
440
Erection Cost of date 110
550
The contract price is 11 crores and the cash received on account till 31.03.2014 was 6 crores.
The technical estimate of the contract indicates the following degree of completion of work. Fabrica-
tion - Direct Material - 70%, Director Labour and Overheads 60% Erection - 40%.
You are required to estimate the profit that could be taken to Costing Profit and Loss Account against
this partly completed contract as at 31.03.2014.
Answer
Working Notes :
1. Statement showing estimated profit to date and future profit on the completion of contract

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 Chapter 09 : CONTRACT COSTING 9.19
LEARNING OUTCOMES
Particulars
After studying this chapter, you will be ableCostto:
of Date Further Costs Total Cost
(%) Amount (%) Amount
Understand the concepts of audit documentation, nature and purpose of audit documentation, ( )
Completion audit( documentation
) Completion (a) + (b)
Form, content and extent of audit documentation, summary,(audit
) fi le, assembly of
of Date (a) to be done (b)
the fi nal audit fi le,
ownership
FabricateofCosts:
audit documentation, nature of related party relationships
andDirect
transactions.
Material 70 280.00 30 120.00 400.00
Gain the knowledge of written representations and the objectives of the auditor regarding
written
Directrepresentation.
Labour 60 100.00 40 66.67 166.67
Identify
Overheads Audit Evidence-Specifi c Considerations
60 For
60.00 Selected Items,
40 External
40.00 confi rmation.
100.00
Learn objective
Total Fabrication cost (A)of Auditor with respect to Opening balances
440 - in conducting an
226.67 initial audit
666.67
engagement.
Erection Cost :(B) 40 110.00 60 165.00 275.00
Total Explain
Estimated audit evidence,
costs (A+ B) suffi ciency and appropriateness
550.00 of audit evidence, types of audit941.67
391.67
evidence,
Profit relevance and reliability of audit evidence, and also methods to obtain audit
92.48 65.85evidence.158.33
Understand materiality, its defi nition and judge642.48
the materiality of the item457.52 1,100.00
in different circum-
stances.Work Certified = Cost of the contract date + Profit to date
= 550 +concepts
Explain 92.48 = of 642.48 cacks
true and fair and disclosure of accounting policies.
Question 13—
Understand the Fundamental Accounting Assumptions.
SB Constructions Limited has entered into a big contract at an agreed price of 1,50,00,000 subject
to an escalation clause for material and labour as spent out on the contract and corresponding actual
are as follows:

Material: Standard Actual

Quantity Rate per Ton Quantity Rate per Ton

© The Institute of Chartered Accountants of India
(Tons) ( ) (Tons) ( )

A 3,000 1,000 3,400 1,100

B 2,400 800 2,300 700

C 500 4,000 600 3,900

D 100 30,000 90 31,500

Hours Hourly Rate Hours Hourly Rate

Labour:
( ) ( )
L1 60,000 15 56,000 18
L2 40,000 30 38,000 35

You are required to:

(i) Give your analysis of admissible escalation claim and determine the final contract price payable.
(ii) Prepare the contract account, if the all expenses other than material and labour related to the
contract are 13,45,000.

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 Chapter 09 : CONTRACT COSTING 9.20
LEARNING
Answer OUTCOMES
After studying
In casethis
of chapter, youclause
escalation will be
inable to:
a contract, a contractor is paid for the any increase in price of
Understand
materials and rate of labours which are beyond thenature
the concepts of audit documentation, controland
of purpose of auditAny
the contractor. documentation,
increase in the
Form, content andtoextent
cost due of audit documentation,
inefficiencies in usage of theaudit documentation
materials and labourssummary,
are notaudit fi le, assembly
admissible. of
Thus any
the fi nalincrease
audit fi le,
in cost due to usage in excess of standard quantity or hours are not paid.
(i)
ownership Statement showing Additional
of audit documentation, natureclaim due party
of related to Escalation clause.
relationships
and transactions. Standard Std. Actual Variation Escalation
Qty / Hours Rate Rate in Rate
Gain the knowledge of written representations and the objectives of the auditor claimregarding
( )
written representation. ( ) ( ) ( )
(a) (b) (c)
Identify Audit Evidence-Specifi c Considerations For Selected Items, (d) = (c-b)External
(e) = (a × d)rmation.
confi
Material:
Learn objective of Auditor with respect to Opening balances - in conducting an initial audit
engagement. A 3,000 1,000 1,100 +100 +3,00,000
B 2,400 800 700 -100
Explain audit evidence, suffi ciency and appropriateness of audit evidence, types -2,40,000
of audit
C 500 4,000 3,900 -100
evidence, relevance and reliability of audit evidence, and also methods to obtain audit -50,000 evidence.
D materiality, its
Understand 100defi nition
30,000
and judge31,500
the materiality+1,500
of the item in+1,50,000
different circum-
stances. Material escalation claim 1,60,000
Explain concepts of true and fair and disclosure of accounting policies.
Labour:
Understand
L 1 the Fundamental
60,000 Accounting 15 Assumptions.
18 +3 +1,80,000
L2 40,000 30 35 +5 +2,00,000
Labour escalation claim 3,80,000
(ii)
Statement showing Final Contract Price
( ) ( )
Agreed contract price 1,50,00,000
© The Institute of Chartered
Add: Agreed Accountants
escalation claim: of India
Material Cost 1,60,000
Labour Cost 3,80,000 5,40,000
Final Contract Price 1,55,40,000
(iii)
Contract Account
Dr. Cr.
Particulars ( ) Particulars ( )
To Material: By Contractee’s A/c 1,55,40,000
A – (3,400 × 37,40,000
1,100)
B – (2,300 × 700) 16,10,000
C – (600 × 3,900) 23,40,000
D – (90 × 31,500) 28,35,000 1,05,25,000
To Labour:
L1 – (56,000 × 18) 10,08,000
L2 – (38,000 × 35) 13,30,000 23,38,000
To Other expenses 13,45,000
To Estimated Profit 13,32,000
1,55,40,000 1,55,40,000
***************************
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 Chapter 10 : Process and Operation Costing 10.1
LEARNING
Question 1—OUTCOMES
After studying this chapter, you will be able to:
A product passes from Process I and Process II. Materials issued to Process I amounted to 40,000,
Labour Understand
30,000 andthe concepts of audit
manufacturing documentation,
overheads were 27,000. nature and purpose
Normal loss wasof3%
audit
of documentation,
input as estimated.
Form,
But 500content and extent
more units of audit
of output documentation,
of Process I were lostaudit
due todocumentation
the carelessnesssummary, auditOnly
of workers. fi le,4,350
assembly
unitsof
of
the fi nal audit fi le,
output were transferred to Process II. There were no opening stocks. Input raw material issued to Process
Iownership
were 5,000 ofunits.
audit documentation, nature of related party relationships
and transactions.
You are required to show Process I account.
Gain the knowledge of written representations and the objectives of the auditor regarding
Answer—
written representation.
Identify Audit Evidence-Specifi c Process- I Account
Considerations For Selected Items, External confi rmation.
Learn objective of AuditorUnits
Particulars with respect to Opening balances - in conductingUnits
( ) Particulars an initial audit ( )
engagement.
To Material 5,000 40,000 By Noraml Loss* 150 –
Explain audit evidence, suffi ciency and appropriateness of audit evidence, types of audit
To Labourrelevance and reliability of audit evidence,
evidence, 30,000andBy Abnormal
also methodsLoss**
to obtain audit500
evidence. 10,000
Understand materiality, its defi nition and judge the materiality
(500 of the item in different circum-
units × 20)
stances.
To Overhead 27,000 By Process II 4,350 87,000
Explain concepts of true and fair and disclosure of accounting policies.
. . (4,350 units × 20) . .
Understand the Fundamental Accounting Assumptions.
5,000 97,000 5,000 97,000
* 3% of input = 3% × 5000 = 150 units

97,000 97,000
**   20 per unit.
(5,000 – 150) 4,850
Question 2—
© The Institute of Chartered Accountants of India
JK Ltd. produces a product "AZE", which passes through two processes, viz., process I and process II. The
output of each process is treated as the raw material of the next process to which it is transferred and output
of the second process is transferred to finished stock. The following data related to December, 2013:
Process I Process II
25,000 units introduced at a cost of 2,00,000 –
Material Consumed 1,92,000 96,020
Direct Labour 2,24,000 1,28,000
Manufacturing Expenses 1,40,000 60,000
Normal wastage of input 10% 10%
Scrap value of normal wastage (per unit) 9.90 8.60
Output in Units 22,000 20,000
Required:
(i) Prepare Process I and Process II account
(ii) Prepare Abnormal Gain/Loss Account as the case may be for each process.
 Chapter 10 : Process and Operation Costing 10.2
LEARNING OUTCOMES
Answer—
After studying this chapter, you will be ableProcess
to: I Account
Understand the concepts of audit documentation, nature and purpose of audit documentation,
Particulasrs Units Amount particulars Units Amount
Form, content and extent of audit documentation, audit documentation summary, audit fi le, assembly of
theInput
To fi nal audit fi le, 25,000 2,00,000 By Normal wastage 2,500 24,750
ownership of audit documentation, nature of related party(2,500 relationships
units × 9.90)
and transactions.
To Material 1,92,000 By Abnoraml loss A/c 500
Gain the knowledge of written representations and the objectives of the auditor regarding16,250
written representation. (500 units × 32.50)
Identify
To Direct Labour Audit Evidence-Specifi c Considerations
2,24,000 By For Selected
Process Items, External
– II confi rmation.
22,000 7,15,000
Learn objective of Auditor with respect to Opening balances - in conducting an initial audit
(22,000 units × 32.50)
engagement.
To Manufacturing Exp. . 1,40,000 . .
Explain audit evidence, suffi ciency and appropriateness of audit evidence, types of audit
evidence, relevance and reliability 25,000 7,56,000and also methods to obtain audit
of audit evidence, 25,000
evidence. 7,56,000
Understand materiality, its defi nition and judge the materiality of the item in different circum-
stances. 7,56,000 – 24,750
Cost per unit   32.50 per unit
25 , 000 units – 2,500 units
Explain concepts of true and fair and disclosure of accounting policies.
Understand the Fundamental Accounting Assumptions.
Process – II Account
Particulars Units Amount Particulars Units Amount
( ) ( )
To Process – I 22,000 7,15,000 By Normal wastage 2,200 18,920
(2,200 units × 8.60)
© The
To Institute of Chartered Accountants of India
Material 96,020 By Finished stock 20,000 9,90,000
(20,000 units × 49.50)
To Direct Labour 1,28,000
To Manufacturing Exp. 60,000
To Abnormal Gain A/c 200 9,900
(200 units × 49.50) . . . .
22.200 10,08,920 22,200 10,08,920

9,99,020 – 18,920
Cost per unit   49.50 per unit
22,000 units – 2,200 units
 Chapter 10 : Process and Operation Costing 10.3
LEARNING OUTCOMES Abnormal Loss Account
After studying this chapter, you will
Particulars be able to:Amount Particulars
Units Units Amount
Understand the concepts of audit documentation, nature and purpose of audit documentation,
Form, content and extent of audit documentation, audit ( ) documentation summary, audit fi le, assembly( of)
the fi
To nal auditA/c
Process-I fi le, 500 16,250 By Cash (Sales) 500 4,950
ownership of audit documentation, nature of related party(500 relationships
units × 9.90)
and transactions.
Gain the knowledge of written .representations . and
Bythe
Costing P & LofA/c
objectives .
the auditor regarding 11,300
written representation. 500 16,250 500 16,250
Identify Audit Evidence-Specifi c Considerations For Selected Items, External confi rmation.
Learn objective of Auditor withAbnormal
respect to Opening balances - in conducting an initial audit
Gain Account
engagement.
Particualrs Units Amount Particulars Units Amount
Explain audit evidence, suffi ciency and appropriateness of audit evidence, types of audit
evidence, relevance and reliability of audit evidence, ( )and also methods to obtain audit evidence. ( )
To NormalUnderstand
wastage materiality, its defi
200nition and1,720
judge the
Bymateriality
Process IIof the item in different
A/c 200 circum-
9,900
stances.
(200 units × 8.60)
Explain concepts of true and fair and disclosure of accounting policies.
To Costing Profit andthe
Understand Loss .
Fundamental Accounting 8,180
Assumptions. . .
200 9,900 200 9,900
Question 3—
M J Pvt. Ltd. produces a product “SKY” which passes through two processes, viz. Process-A and Process-
B. The details for the year ending 31st March, 2014 are as follows:
Process – A Process – B
40,000 Units introduced at a cost of 3,60,000 –
© The Institute
Material Consumedof Chartered Accountants of India 2,42,000 2,25,000
Direct Wages 2,58,000 1,90,000
Manufacturing Expenses 1,96,000 1,23,720
Output in units 37,000 27,000
Normal Wastage of Inuput 5% 10%
Scrap Value (per unit) 15 20
Selling Price (per unit) 37 61
Additional Information:
(a) 80% of the output of Process-A, was passed on to the next process and the balance was sold. The
entire output of Process- B was sold.
(b) Indirect expenses for the year was 4,48,080.
(c) It is assumed that Process-A and Process-B are not responsibility centre.
Required:
(i) Prepare Process –A and Process – B Account
(ii) Prepare Profit and Loss Account showing the net profit / net Loss for the year.
 Chapter 10 : Process and Operation Costing 10.4
LEARNING OUTCOMES
Answer—
After
(i) studying this chapter, you will be able to: A Account
Proecss–
Understand the concepts of audit documentation, nature and purpose of audit documentation,
Particulars Units
Form, content and extent of audit documentation, Amount Particulars summary, audit
audit documentation Units Amount
fi le, assembly of
the fi nal audit fi le, ( ) ( )
ownership
To Input of audit documentation, nature of related
40,000 partyBy
3,60,000 relationships
Normal Wastage 2,000 30,000
and transactions.
Gain the knowledge of written representations and (2,000 units × 15)of the auditor regarding
the objectives
written
To representation.
Material – 2,42,000 By Abnormal Loss A/c 1,000 27,000
Identify Audit Evidence-Specifi c Considerations(1,000 For Selected Items,
units × 27) External confi rmation.
Learn objective of Auditor with respect to Opening balances - in conducting an initial audit
To Direct Wages
engagement. – 2,58,000 By Process – B 29,600 7,99,200
Explain audit evidence, suffi ciency and appropriateness of audit
(29,600 units evidence, types of audit
× 27)
evidence,
To relevance
Manufacturing and reliability of audit
Exp. – evidence,
1,96,000andByalso methods
Profit to obtain
& Loss A/c audit evidence.1,99,800
7,400
Understand materiality, its defi nition and judge the materiality of the item in different circum-
stances. . . (7,400 units × 27) . .
Explain concepts of true40,000
and fair and disclosure of accounting policies. 40,000
10,56,000 10,56,000
Understand the Fundamental Accounting Assumptions.
10,56,000 – 30,000
Cost per Unit   27 per unit
40,000 units – 2,000 units
Normal wastage = 40,000 units × 5% = 2,000 units
Abnormal loss = 40,000 units - (37,000 units + 2,000 units) = 1,000 units
Transfer to Process- B = 37,000 units × 80% = 29,600 units
© The Institute of Chartered Accountants of India
Sale = 37,000 units × 20% = 7,400 units
Process – B Account
Proecss– B Account
Particulars Units Amount Particulars Units Amount
( ) ( )
To Process -A A/c 29,600 7,99,200 By Normal wastage 2,960 59,200
(2,960 units × 20)
To Material – 2,25,000 By Profit & Loss A/c 27,000 12,96,000
(27,000 units × 48)
To Direct Wages – 1,90,000
To Manufacturing Exp. – 1,23,720
To Abnormal Gain sA/c 360 17,280
(360 units × 48) . . . .
29,960 13,55,200 29,960 13,55,200
 Chapter 10 : Process and Operation Costing 10.5
LEARNING
aaa OUTCOMES 13,37,920 – 59,200
Afterper
Cost studying  to:
unit this chapter, you will be able  48 per units
29,600units – 2,960 units
Understand the concepts of audit documentation, nature and purpose of audit documentation,
Form,
Normalcontent
wastageand extent of audit documentation, audit×documentation
= 29,600 units summary, audit fi le, assembly of
10% = 2,960 units
the fi nal audit fi le,
Abnormal gain = (27,000 units + 2,960 units) – 29,600 units = 360 units
ownership of audit documentation, nature of related party relationships
and transactions.
(ii) Gain the knowledge of written representations and the
Profit and Loss objectives of the auditor regarding
Acccount
written representation.
Particulars Amount Particulars Amount
Identify Audit Evidence-Specifi c Considerations For Selected Items, External confi rmation.
Learn objective of Auditor with respect( )to Opening balances - in conducting an initial audit ( )
engagement.
To Process – A A/c 1,99,800 By Sales:
Explain audit evidence, suffi ciency and appropriateness of audit evidence, types of audit
To Process – B A/C 12,96,000 – Process – A 2,73,800
evidence, relevance and reliability of audit evidence, and also methods to obtain audit evidence.
(7,400
Understand materiality, its defi nition and judge theunits × 37) of the item in different circum-
materiality
stances.
To Abnormal Loss A/c 12,000 – Process – B 16,47,000
Explain concepts of true and fair and disclosure of accounting policies.
(27,000 units × 61)
Understand the Fundamental Accounting Assumptions.
To Indirect Expenses 4,48,080 By Abnormal Gain 10,080
. By Net Loss 25,000
19,55,880 19,55,880
Working Notes:
Normal Wastage (Loss) Account
© The Institute of Chartered Accountants
Particulars Units of India
Amount Particulars Units Amount
( ) ( )
To Process –A A/c 2,000 30,000 By Abnormal Gain A/c 360 7,200
To Process – B A/c 2,960 59,200 By Bank (Sales) 4,600 82,000
4,960 89,200 4,960 89,200

Abnormal Loss Account

Particulars Units Amount Particulars Units Amount
( ) ( )
To Process - A A/c 1,000 27,000 By Bank A/c 1,000 15,000
(1,000 units × 15)
. . By Profit and Loss A/c – 12,000
1,000 27,000 1,000 27,000
 Chapter 10 : Process and Operation Costing 10.6
LEARNING OUTCOMES Abnormal Gain Account
After studying this chapter, you will
Particulars
be able to:Amount Particulars
Units Units Amount
Understand the concepts of audit documentation, nature and purpose of audit documentation,
Form, content and extent of audit documentation, audit ( ) documentation summary, audit( fi) le, assembly of
To Normal Loss A/c
the fi nal audit fi le, 360 7,200 By Process – B A/c 360 17,280
(360 units
ownership of audit 20)
× documentation, nature of related party relationships
To Profit & Loss
and transactions. A/c . 10,080 . .
360 17,280 360
Gain the knowledge of written representations and the objectives of the auditor regarding 17,280
written representation.
Question 4— Audit Evidence-Specifi c Considerations For Selected Items, External confi rmation.
Identify
A productLearnpasses through
objective two processes
of Auditor A and
with respect B. During
to Opening the year
balances - in2013, the input
conducting to process
an initial audit A of
basic raw material was 8,000 units @ 9 per unit. Other information for the year is as follows:
engagement.
Explain audit evidence, suffi ciency and appropriateness of audit Process A types of audit
evidence, Process B
Output
evidence, Units and reliability of audit evidence, and also methods to obtain
relevance 7,500 audit evidence. 4,800
Normal Loss (% to input) 5% in different circum-
Understand materiality, its defi nition and judge the materiality of the item 10%
Scrap value per unit ( )
stances. 2 10
Direct Wages
Explain ( ) of true and fair and disclosure of accounting policies.
concepts 12,000 24,000
Drict Expenses ( )
Understand the Fundamental Accounting Assumptions. 6,000 5,000
Selling Price Per unit ( ) 15 25
Total overheads 17,400 were recovered as percentage of direct wages. Selling expenses were 5,000.
These are not allocated to the processes. 2/3rd of the output of Process A was passed on to the next
process and the balance was sold. The entire output of Process B was sold.
Prepare Process A and B Accounts.
Answer—
© The Institute of Chartered AccountantsProcess- of India A Account
Particulars Units Amount Particulars Units Amount
( ) ( )
To Input 8,000 72,000 By Normal Loss 400 800
(5% of 8,000 units × 2)
To Direcet Wages – 12,000 By Abnormal Loss 100 1,250
To Direct Expenses – 6,000 (100 units × 12.50)
To Overheads – 5,800 By Process – B A/c 5,000 62,500
 1  2 
 17,400    7,500units  12.50
 3  3 
By Profit and Loss A/c 2,500 31,1250
 1 
. .  7,500 units   12.50  . .
 3 
8,000 95,800 8,000 95,800
95,800 – 800 95,000
Cost per unit    12.50
8,000 units – 400 units 7,600 units
 Chapter 10 : Process and Operation Costing 10.7
LEARNING OUTCOMES Process – B Account
After studying this chapter, you will
Particulars
be able to:Amount Particulars
Units Units Amount
Understand the concepts of audit documentation, nature and purpose of audit documentation,
Form, content and extent of audit documentation, audit ( ) documentation summary, audit fi le, assembly( of)
To
the Process – AfiA/c
fi nal audit le, 5,000 62,500 By Normal Loss 500 5,000
(10% of 5,000
ownership of audit documentation, nature of related party relationships Units × 10)
To
andDirect Wages
transactions. – 24,000 By Finished Stock A/c 4,800 1,04,640
or Profit & Loss A/c
Gain the knowledge of written representations and the objectives of the auditor regarding
written representation. (4,800 units × 21.80)
To Direct Expenses
Identify Audit Evidence-Specifi – c Considerations
5,000 For Selected Items, External confi rmation.
To Overheads – 11,600
Learn objective of Auditor with respect to Opening balances - in conducting an initial audit
engagement.
 2
 17,400   audit evidence, suffi ciency and appropriateness of audit evidence, types of audit
Explain
 3
evidence, relevance and reliability of audit evidence, and also methods to obtain audit evidence.
To Abnormal Gain materiality, its defi
Understand 300nition and6,540 . circum- .
judge the materiality of the item in different
stances. 5,300 1,09,640 5,300 1,09,640
1,03of,100
Explain concepts true–and
5,000 98,100of accounting policies.
fair and disclosure
Cost per unit =    21.80
Understand5the Fundamental
,000 units – 500Accounting
units 4,50 Assumptions.
0 units
Working Notes:
Profit And Loss A/c
Particulars Amount Amount Particulars Amount Amount
To Cost of Sales: By Sales:
Process A 31,250 Process A
(2,500 units × 12.50) (2,500 units × 15) 37,500
© The Institute of Chartered Accountants of India
Process B Process B
(4,800 units× 21.80) 1,04,640 1,35,890 (4,800 units × 25) 1,20,000 1,57,500
To Abnormal Loss: ByAbnormal Gain:
Process A 1,050 Process B 3,540
[(100 units × (12.50 –2)] [(300 units × 21.80 –10]
To Selling Expenses 5,000
To Net Profit 19,100 .
1,61,040 1,61,040
Note:
1. As mentioned selling expenses are not allocable to process which is debited directly to the P/L A/c.
2. It is assumed that Process A and Process B are not responsibility centres and hence, Process A and
Process B have not been credited to direct sales. P/L A/c is prepared to arriving at profit/loss.
******************
 Chapter 10 : Process and Operating Costing 10.8
Question 5—
A product passes through three processes 'X', 'Y' and 'Z'. The output of process 'X' and 'Y' is transferred to
next process at cost plus 20 per cent each on transfer price and the output of process 'Z' is transferred to
finished stock at a profit of 25 per cent on transfer price. The following information are available in respect
of the year ending 31st March, 2014:
Process –X Process–Y Process – Z Finished Stock
( ) ( ) ( ) ( )
Opening Stock 15,000 27,000 40,000 45,000
Material 80,000 65,000 50,000 –
Wages 1,25,000 1,08,000 92,000 –
Manufacturing Overheads 96,000 72,000 66,500 –
Closing Stock 20,000 32,000 39,000 50,000
Inter Process Profit included in
Opening Stock NIL 4,000 10,000 20,000
Stock in processes is valued at prime cost. The finished stock is valued at the price at which it is received
from process 'Z'. Sales of the finished stock during the period was 14,00,000.
You are required to prepare:
(i) Process accounts and finished stock account showing profit element at each stage.
(ii) Costing Profit and Loss account.
(iii) Show the relevant items in the Balance Sheet.
Answer—
Process 'X' Account
Dr. Cr.
Particulars Cost Profit Total Particulars Cost Profit Total
( ) ( ) ( ) ( ) ( ) ( )
To Opening Stock 15,000 – 15,000 By Process 'Y' A/c 2,96,000 74,000 3,70,000
(Transfer)
To Material 80,000 – 80,000
To Wages 1,25,000 – 1,25,000
Total 2,20,000 – 2,20,000
Less:Closing Stock 20,000 – 20,000
Prime Cost 2,00,000 2,00,000
To Manuf. Overheads 96,000 – 96,000
Total Cost 2,96,000 – 2,96,000
 Chapter 10 : Process and Operating Costing 10.9
To Costing P & L A/c 74,000 74,000
(20% on transfer Price
or 25% on cost) . . . . . .
2,96,000 74,000 3,70,000 2,96,000 74,000 3,70,000
Process 'Y' Account
Dr. Cr.
Particulars Cost Profit Total Particulars Cost Profit Total
( ) ( ) ( ) ( ) ( ) ( )
To Opening Stock 23,000 4,000 27,000 By Process 'Z' A/c 5,36,379 2,26,121 7,62,500
(Transfer)
To Process 'X' A/c 2,96,000 74,000 3,70,000
To Material 65,000 – 65,000
To Wages 1,08,000 – 1,08,000
Total 4,92,000 78,000 5,70,000
Less: Closing Stock 27,621 4,379 32,000
Prime Cost 4,64,379 73,621 5,38,000
To Manufacturing
Cost 72,000 – 72,000
Total Cost 5,36,379 73,621 6,10,000
To Costing Profit
& Loss A/c(20% on
transfer price or 25%
on cost) – 1,52,500 1,52,500 . . .
5,36,379 2,26,121 7,62,500 5,36,379 2,26,121 7,62,500
Process 'Z' Account
Dr. Cr.
Particulars Cost Profit Total Particulars Cost Profit Total
( ) ( ) ( ) ( ) ( ) ( )
To Opening Stock 30,000 10,000 40,000 By Finished Stock 7,45,629 5,50,371 12,96,000
To Process 'Y' A/c 5,36,379 2,26,121 7,62,500 (A/c) (Transfer)
To Material 50,000 – 50,000
To Wages 92,000 – 92,000
Total 7,08,379 2,36,121 9,44,500
Less: Closing Stock 29,250 9,750 39,000
 Chapter 10 : Process and Operating Costing 10.10
Prime Cost 6,79,129 2,26,371 9,05,500
To Manuf. Overheads 66,500 – 66,500
Total Cost 7,45,629 2,26,371 9,72,000
To Costing P & L
A/c (25% on transfer

Price or 33 13 % on cost)

– 3,24,000 3,24,000 . . .
7,45,629 5,50,371 12,96,000 7,45,629 5,50,371 12,96,000
Finished Stock Account
Dr. Cr.
Particulars Cost Profit Total Particulars Cost Profit Total
( ) ( ) ( ) ( ) ( ) ( )
To Opening Stock 25,000 20,000 45,000 By Closing P & L A/c 7,41,862 6,58,138 14,00,000
To Process 'Z' A/c 7,45,629 5,50,371 12,96,000
Total 7,70,629 5,70,371 13,41,000
Less: Closing Stock 28,767 21,233 50,000
To Costing P& L A/c 7,41,862 5,49,138 12,91,000
. 1,09,000 1,09,000
7,41,862 6,58,138 14,00,000 7,41,862 6,58,138 14,00,000
Costing Profit and Loss Account
For the year ending 31st March, 2014
Particulars Amount Particulars Amount
( ) ( )
To Provision for unlrealized Profit on closing By Provision for unrealized profit on
Stock ( 4,379 + 9,750 + 21,233) 35,362 Opeining Stock
( 4,000 + 10,000 + 20,000) 34,000
To Net Profit 6,58,138 By Process X A/c 74,000
By Process Y A/c 1,52,500
By Process Z A/c 3,24,000
. By Finished Stock A/c 1,09,000
6,93,500 6,93,500
Working Notes:
Calculaltion of amount of unrealized profit on closing Stock:
 Chapter 10 : Process and Operating Costing 10.11
Process 'X' = Nil

78,000
Process 'Y' =  32,000  4,379
5,70,000

2,36,121
Process 'Y' =  39,000  9750
9,44,500

5,50,371
Process 'Z' =  50,000  21,233.
12,96,000
Balance Sheet on 31st March, 2014, (Extract)
Liablilities Amount ( ) Assets Amount ( )
Net Profit 6,58,138 Closing Stock
Process – X 20,000
Process – Y 32,000
Process – Z 39,000
Fininshed Stock 50,000
1,41,000
Less: Provision for unrealized profit 35,362
1,05,638
Question 6—
Pharma Limited produces product 'Gluco-G' which passes through two processes before it is completed and
transferred to finished stock. The following data relates to March, 2014:

Process-I Process-II Finished

( ) (`) Stock
(`)
Opening Stock 1,50,000 1,80,000 4,50,000

Direct materials 3,00,000 3,15,000 –

Direct Wages 2,24,000 2,25,000 –

Factory Overheads 2,10,000 90,000 –

Closing Stock 74,000 90,000 2,25,000

Inter process profit included in Opening NIL 30,000 1,65,000

stock
Output of process I is transferred to process II at 25 percent profit on the transfer price, whereas output of
 Chapter 10 : Process and Operating Costing 10.12
process II is transferred to finished stock at 20 percent on transfer price. Stock in processes are valued at
prime cost. Finished stock is valued at the price at which it is received from process II. Sales for the month
is 28,00,000.
You are required to prepare Process-I A/c, Process-II A/c, and Finished Stock A/c showing the profit
element at each stage.
Answer—
Process- I A/c
Particulars Total Cost Profit Particulars Total Cost Profit
( ) ( ) ( ) ( ) ( ) ( )
To Opening Balance 1,50,000 1,50,000 – By Transfer to 10,80,000 8,10,000 2,70,000
Process II A/c
To Direct Material 3,00,000 3,00,000 –
To Wages 2,24,000 2,24,000 .
6,74,000 6,74,000 –
Less: Closing Stock 74,000 74,000 –
Prime Cost 6,00,000 6,00,000 –
To Factory Overhead 2,10,000 2,10,000 .
Total Cost 8,10,000 8,10,000 –
Profit 25% on transfer

1
price i.e. 33 on total cost 2,70,000 – 2,70,000
3
10,80,000 8,10,000 2,70,000 10,80,000 8,10,000 2,70,000
Process II A/c
Particulars Total Cost Profit Particulars Total Cost Profit
( ) ( ) ( ) ( ) ( ) ( )
To Opening Stock 1,80,000 1,50,000 30,000 By Transfer to 22,50,000 15,15,000 7,35,000
To Direct Material 3,15,000 3,15,000 – Process II A/c
To Direct Wages 2,25,000 2,25,000 –
To Transfer from
Process I A/c 10,80,000 8,10,000 2,70,000
Prime Cost 18,00,000 15,00,000 3,00,000
Less: Closing Stock 90,000 75,000 15,000
17,10,000 14,25,000 2,85,000
To Factory Overhead 90,000 90,000 –
 Chapter 10 : Process and Operating Costing 10.13
Total Cost: 18,00,000 15,15,000 2,85,000
Profit 20% on Transfer
price i.e. 25% on cost 4,50,000 – 4,50,000
22,50,000 15,15,000 7,35,000 22,50,000 15,15,000 7,35,000

3,00,000
Profit element in closing stock   90,000  15,000
18,00,000
Finished Stock A/c

Particulars Total ( ) Cost ( ) Profit ( ) Particulars Total ( ) Cost ( ) Profit ( )

To Opening 4,50,000 2,85,000 1,65,000 By Sales 28,00,000 16,48,500 11,51,500

Stock
To Transfer 22,50,000 15,15,000 7,35,000
from Process-II
27,00,000 18,00,000 9,00,000
Less: Closing 2,25,000 1,51,500 73,500
Stock
Total Cost 24,75,000 16,48,500 8,26,500
Profit 3,25,000 – 3,25,000
(Balancing
Figure)
28,00,000 16,48,500 11,51,500 28,00,000 16,48,500 11,51,500

7,35,000
Profit element in closing Finished Stock =   2,25,000  73,500
22,50,000
Calculation of Profit on Sale

Process Apparent Profit Add: Unrealised Less: Actual Profit

Profit in Unrealised
Opening Stock Profit in Closing
Stock
( ) ( ) ( ) ( )
Process – I 2,70,000 – – 2,70,000
Process – II 4,50,000 30,000 15,000 4,65,000
Finished 3,25,000 1,65,000 73,500 4,16,500
Stock 10,45,000 1,95,000 88,500 11,51,500

*********************
 Chapter 10 : Process and Operating Costing 10.14
Question 7—
XP Ltd. furnishes you the following information relating to process II.
(i) Opening work-in-progress - NIL
(ii) Units introduced 42,000 units @ 12
(iii) Expenses debited to the process: ( )
Direct material = 61,530
Labour = 88,820
Overhead = 1,76,400
(iv) Normal loss in the process = 2 % of input.
(v) Closing work-in-progress – 1,200 units
Degree of completion - Materials 100%
Labour 50%
Overhead 40%
(vi) (vi)Finished output - 39,500 units
(vii) Degree of completion of abnormal loss:
Material 100%
Labour 80%
Overhead 60%
(viii) Units scraped as normal loss were sold at 4.50 per unit.
(ix) All the units of abnormal loss were sold at 9 per unit.
Prepare:
(a) Statement of equivalent production;
(b) Statement showing the cost of finished goods, abnormal loss and closing work-in- progress;
(c) Process II account and abnormal loss account.
Answer—
(a) Statement of Equivalent Production

Material Labour Overhead

Particulars Output
Units (%) Units (%) Units (%)
Finished Output 39,500 39,500 100 39,500 100 39,500 100
Normal Loss (2% of 42,000 units) 840 – – – – – –
Abnormal Loss (42,000 – 39,500 – 460 460 100 368 80 276 60
840 – 1,200)
Closing W.I.P. 1,200 1,200 100 600 50 480 40
42,000 41,160 40,468 40,256
 Chapter 10 : Process and Operating Costing 10.15
(b) Staetment of Cost ( )
Units Introduced 42,000 units @ 12 per unit 5,04,000
Add: Material 61,530
5,65,530
Less: Value of Normal Loss (840 units × 4.50) 3,780
5,61,750

Cost per Unit ( )

Material 5,61,750
13.648
41,160units
Labour 88,820
2.195
40,468units
Overhead 1,76,400
4.382
40,256units
20.225

Amount ( )
Abnormal Loss:
Material (460 units × 13.648) 6,278.08
Labour (368 units × 2.195) 807.76
Overheads (276 units × 4.382) 1,209.42
8,295.26
Closing W.I.P:
Material (1,200 units × 13.648) 16,377.60
Labour (600 units × 2.195) 1,317.00
Overheads (480 units × 4.382) 2,103.36
19,797.96
Finished Goods
(39,500 units × 20.225) 7,98,887.50

(C) Process II Account

Particulars Units Amount Particulars Units Amount
( ) ( )
To Opening WIP – Ni l By Normal Loss 840 3,780
“ Input 42,000 5,04,000 “ Abnormal Loss 460 8,295
“ Direct Material – 61,530 “ Finished Goods 39,500 7,98,877
“ Labour – 88,820
“ Overhead – 1,76,400 “ Closing WIP 1,200 19,798
42,000 8,30,750 42,000 8,30,750
 Chapter 10 : Process and Operating Costing 10.16
Abnormal Loss Account

Particulars Units Amount Particulars Units Amount

( ) ( )
To Process II 460 8,295 By Cash 460 4,140
(460 units × 9)
– 4,155
“ Costing P & L
460 8,295 460 8,295

Question 8—
ABX Company Ltd. provides the following information relating to Process-B:
(i) Opening Work-in-progress - NIL
(ii) Units Introduced - 45,000 units @ 10 per unit
(iii) Expenses debited to the process:
Direct material 65,500
Labour 90,800
Overhead 1,80,700
(iv) Normal loss in the process - 2% of Input
(v) Work-in progress - 1800 units
Degree of completion
Materials - 100%
Labour - 50%
Overhead - 40%
(vi) Finished output - 42,000 units
(vii) Degree of completion of abnormal loss:
Materials - 100%
Labour - 80%
Overhead - 60%
(viii) Units scrapped as normal loss were sold at 5 per unit.
(ix) All the units of abnormal loss were sold at 2 per unit.
You are required to prepare:
(a) Statement of equivalent production.
(b) Statement showing the cost of finished goods, abnormal loss and closing balance of work-in-progress.
(c) Process-B Account and Abnormal Loss account.
 Chapter 10 : Process and Operating Costing 10.17
Answer—
(a) Statement of Equivalent Production

Equivalent Production
Output
Input Deatails Units Particul- Units
Material Labour Overhead
ars
% Units % Units % Units

Finished
Unit Introduced 45,000 42,000 100 42,000 100 42,000 100 42,000
Output

Normal
loss (2%
900 – – – – – –
of
45,000)

Abnormal
300 100 300 80 240 60 180
loss

Closing
1,800 100 1,800 50 900 40 720
W-I-P

45,000 45,000 44,100 43,140 42,900

(b) Statement of Cost

Particulars Units Rate ( ) Amount ( ) Amount ( )

(i) Finished goods 42,000 17.9042 7,51,976.40
(ii ) Abnormal Loss

Material 30 0 11.5873 3,476.19

Labour 24 0 2.1048 505.15

Overhead 18 0 4.2121 758.18 4,739.52

(iii) Closing W-I-P:

Material 1,800 11.5873 20,857.14

Labour 90 0 2.1048 1,894.32

Overhead 72 0 4.2121 3,032.71 25,784.17

 Chapter 10 : Process and Operating Costing 10.18
Cost of Unit
Particul ars Amount ( ) Units Per unit ( )
(i) Direct Material
Unit Introduced 4,50,000
Add: Material 65,500
5,15,500
Less: Value of normal loss
(900 units × 5) (4,500)
5,11,000 44,100 11.5873
(ii) Labour 90,800 43,140 2.1048
(iii) Overhead 1,80,700 42,900 4.2121
17.9042

Process – B A/c

Particulars Units Amount Particulars Units Amount

( ) ( )
To Input 45,000 4,50,000 By Normal loss 900 4,500
To Direct Material – 65,500 By Abnormal loss 300 4,740
To Labour – 90,800 By Finished goods 42,000 7,51,976
To Overhead 1,80,700 By Closing W-I-P 1,800 25,784
45,000 7,87,000 45,000 7,87,000

Abnormal Loss A/c

Particulars Units Amount Particulars Units Amount

( ) ( )
To Process-B A/c 300 4,740 By Cost ledger control A/c 300 600
or Bank A/c
By Costing Profit & loss A/c – 4,140
300 4,740 300 4,740
Question 9—
Following information is available regarding Process A for the month of October 2013:
Production Record:
(i) Opening work-in progress 40,000 Units
(Material: 100% complete, 25% complete for labour & overheads)
(ii) Units Introduced 1,80,000 Units
(iii) Units Completed 1,50,000 Units
 Chapter 10 : Process and Operating Costing 10.19
(iv) Units in-process on 31.10.2013 70,000 Units
(Material: 100% complete, 50% complete for labour & overheads)
Cost Record: ( )
Opening Work-in-progress:
Material 1,00,000
Labour 25,000
Overheads 45,000
Cost incurred during the month:
Material 6,60,000
Labour 5,55,000
Overheads 9,25,000
Assure that FIFO method is used for W.I.P. inventory valuation. Required:
(i) Statement of Equivalent Production
(ii) Statement showing Cost for each element
(iii) Statement of apportionment of Cost
(iv) Process- A Account
Answer—
Statement of Equivalent Production (FIFO Method)
Input Output Equivalent Production
Particulars Units Particulars Units Material Labo ur & Overheads
(%) Units (%) Units
Opening 40,000 Transfer to Process II:
WIP Opening WIP completed 40,000 -- -- 75 30,000
100 1,10,000 10 0 1 ,10,000
Introduced 1,80,000 Introduced & co mpleted 1,10,000
100 70,000
Closing WIP 70,000 50 35,000
2,20,000 2,20,000 1,80,000 1 ,75,000

Statement showing Cost for each element

Item of Cost Equivalent Cost Incurred Cost per Unit
Production ( ) ( )
Material 1,80,000 6,60,000 3.66667
Labour & Overheads 1,75,000 14,80,000 8.45714
12.12381
 Chapter 10 : Process and Operating Costing 10.20
Statement of Apportionment of Cost
Transfer to Process II
Opening WIP Completed
Cost already Incurred (1,00,000 + 25,000 + 45,000) 1,70,000
Cost Incurred during the Month
Labour & Overheads (30,000 units × 8 .45714) 2,53,714 4,23,714
Introduced & Completed (1,10,000 units × 12.12381) 13,33,619
17,57,333
Closing WIP
Material (70,000 units × 3.66667) 2,56,667
Labour and Overheads (35,000 units × 8.45714) 2,96,000 5,52,667
Process –A A/c
Particulars Units Amount ( ) Particulars Units Amount ( )
To Opening WIP 40,000 1,70,000 By Process II A/c 1,50,000 17,57,333
To Materials 1,80,000 6,60,000 By Closing WIP 7,000 5,52,667
To Labour 5,55,000
To Overheads 9,25,000
2,20,000 23,10,000 2,20,000 23,10,000

Question 10—
The following information relate to Process A:
(i) Opening Work-in-Progress 8,000 units at 75,000
Degree of Completion: Material 100%
Labour and Overhead 60%
(ii) Input 1,82,000 units at 7,37,500
(iii) Wages paid 3,40,600
(iv) Overheads paid 1,70,300
(v) Units scrapped 14,000
Degree of Completion: Material 100 %
Wages and Overheads 80%
(vi) Closing Work - in- Progress 18,000 units
Degree of Completion: Material 100%
Wages and Overheads 70%
(vii) Units completed and 1,58,000 to next process
(viii) Normal loss 5% of total input including opening WIP
(ix) Scrap value is 5 per unit to be adjusted out of direct material cost
 Chapter 10 : Process and Operating Costing 10.21
You are required to compute on the basis of FIFO
(i) Equivalent Production
(ii) Cost Per Unit
(iii) Value of Units transferred to next process.
Answer—
(i) Statement of Equivalent Production (FIFO Method)

Input Output Equivalent Production

Particula rs Units Particulars Units Material Labour & Overheads
(%) Units (%) Units
Opening WIP 8,000 Transfer to next
Introduced Process :
1,82,000 Opening WIP 8,000 -- -- 40 3,200
completed
Introduced & 1 ,50,000 100 1,50,000 100 1,50,000
completed
Normal loss 9,500 -- -- -- --
5% (8,000 +
182,000)
Abnormal loss 4,500 100 4,500 80 3,600
Closing WIP 18,000 100 18,000 70 12,600
1,90,000 1,90,000 1,72,500 1,69,400
(ii) Computation of Cost per unit
Particulars Materials Labour Overhead
( ) ( ) ( )
Input of Materials 7,37,500 – –
Expenses – 3,40,600 1,70,300
Total 7,37,500 3,40,600 1,70,300
Less : Sale of Scrap (9,500 units × 5 ) (47,500) – –
Net cost 6,90,000 3,40,600 1,70,300
Equivalent Units 1,72,500 1,69,400 1,69,400
Cost Per Unit 4.0000 2.0106 1.0053
Total cost per unit = (4.0000 + 2.0106 + 1.0053) = 7.0159
(iii) Value of units transferred to next process:
Amount ( ) Amount ( )
Opening W-I-P 75,000
Add: Lobour (3,200 units × 2.0106) 6,434
Overhead (3,200 units × 1.0053) 3,217 84,651
New Introduced (1,50,000 units × 7.0159) 10,52,385
11,37,036
 Chapter 10 : Process and Operating Costing 10.22
Question 11—
From the following Information for the month ending October, 2013, prepare Process Cost accounts for
Process III. Use First-in-fist-out (FIFO) method to value equivalent production.
Direct Materials Added in Process III (Opening WIP) 2,000 units at 25,750
Transfer from Process II 53,000 units at 4,11,500
Transferred to Process IV 48,000 units
Closing Stock of Process III 5,000 Units
Units scrapped 2,000 units
Direct material added in Process III 1,97,600
Direct Wages 97,600
Production Overheads 48,000
Degree of Completion:
Opening Stock Closing Stock Scrap
Material 80% 70% 100%
Labour 60% 50% 70%
Overheads 60% 50% 70%
The normal loss in the process was 5% of production and scrap was sold at 3 per unit.
Answer—
 Chapter 10 : Process and Operating Costing 10.23
Process III Process Cost Sheet (FIFO Method)
Opening Stock : 2,000 units; Introduced : 53,000 units
Statement of Equivalent Production
Input Output Equivalent Production

Labour
Intem Units Item Units Mat-A (%) Mat-B (%) & (%)
OHs.

Openi- 2,000 Work on 2,000 – – 400 20 800 40

ng opening WIP
Stock

Proce- 53,000 Introduced & 46,000 46,000 100 46,000 100 46,000 100
ss II completed
transf- during the
er period
(48,000
–2000)

Normal Loss 2,500 – – – – – –

(2,000 +
53,000
–5,000)×5%

Closing WIP 5,000 5,000 100 3,500 70 2,500 50

55,500 51,000 49,900 49,300 50

Abnormal 500 500 100 500 100 500 100
Gain
55,000 55,000 50,500 49,400 48,800
Statement of Cost for each Element
Element of Cost Cost ( ) Equivalent Cost per Unit
Production ( )
Material A:
Transfer from Process – II 4,11,500
Less: Scrap value of Normal Loss (2,500 × 3) 7,500
4,04,000 50,500 8

Material B 1,97,600 49,400 4

Wages 97,600 48,800 2
 Chapter 10 : Process and Operating Costing 10.24

Overheads 48,800 48,800 1

7,48,000 15
Process Cost Sheet
( )
Opening WIP (For Completion):
Material - B (400 units × 4) 1,600
Wages (800 units × 2) 1,600
Overheads (800 units × 1) 800
4,000
Introduced and completely processed during the period
(46,000 units × 15) 6,90,000
Closing WIP:
Material – A (5,000 Units × 8) 40,000
Material – B (3,500 units × 4) 14,000
Wages (2,500 units × 2) 5,000
Overheads (2,500 units × 1) 2,500
61,500
Abnormal Gain (500 units × 15) 7,500
Process III A/c

Particulars Units Amount Particulars Units Amount

To Balance b/d 2,000 25,750 By Normal Loss 2,500 7,500
To Process II A/c 53,000 4,11,500 By Process IV A/c
( 6,90,000 + 4000 +
To Direct Material 1,97,600 25,750) 48,000 7,19,750
To Direct Wages 97,600 5,000 61,500
By Balance c/d
To Production OH 48,800
To Abnormal Gain 500 7,500

55,500 7,88,750 55,500 7,88,750

Question 12—
The following information is furnished by ABC Company for Process - II of its manufacturing activity for
the month of April 2015:
(i) Opening Work-in-Progress – Nil
(ii) Units transferred from Process I – 55,000 units at 3,27,800
(iii) Expenditure debited to Process - II:
Consumables 1,57,200
 Chapter 10 : Process and Operating Costing 10.25
Labour 1,04,000
Overhead 52,000
(iv) Units transferred to Process III - 51,000 units
(v) Closing WIP – 2,000 units (Degree of completion):
Consumables 80%
Labour 60%
Overhead 60%
(vi) Units scrapped - 2,000 units, scrapped units were sold at 5 per unit
(vii) Normal loss - 4% of units introduced
You are required to:
(i) Prepare a Statement of Equivalent Production.
(ii) Determine the cost per unit
(iii) Determine the value of Work-in-Process and units transferred to Process - III
Answer—
(i) Statement of Equivalent Production
Equivalent Production
Input Output Material- A* Consumables Labour &
Units Units
Details Particulars Overheads
% Units % Units % Units
Units 55,000 Units 51,000 100 51,000 100 51,000 100 51,000
transferre transferred to
d from Process- III
Process-I
Normal loss 2,200 – – – – – –
(4% of
55,000)
Closing W-I-P 2,000 100 2,000 80 1,600 60 1,200

Abnormal (200) 100 (200) 100 (200) 100 (200)

Gain
55,000 55,000 52,800 52,400 52,000

*Material A represent transferred -in units from process– I

(ii) Determination of Cost per unit
Particulars Amount ( ) Units Per Unit ( )
(i) Direct Materia l (Consumables) :
Value of units transferred from Process-I 3,27,800
Less: Value of norma l loss
(2,200 units × 5) (11, 000)
3,16,800 52,800 6.00
(ii) Consumables added in Process-II 1,57,200 52,400 3.00
(iii) Labour 1,04,000 52,000 2.00
(iii) Overhead 52,000 52,000 1.00
Total Cost per equivalent unit 12.00
 Chapter 10 : Process and Operating Costing 10.26
(iii) Determination of value of Work-in-process and units transferred to Process - III
Particulars Units Rate ( ) Amount ( )
Va lue of Closing W-I-P:
Mater ia l from Process-I 2,000 6.00 12,000
Consumables 1,600 3.00 4, 800
Labour 1,200 2.00 2,400
Overhead 1,200 1.00 1,200
20,400
Value of units transferred to Process-III 51,000 12.00 6,12,000
Question 13—
Star Ltd. manufactures chemical solutions for the food processing industry. The manufacturing takes place
in a number of processes and the company uses a FIFO process costing system to value work-in-process
and finished goods. At the end of the last month, a fire occurred in the factory and destroyed some of the
paper files containing records of the process operations for the month.
Star Ltd. needs your help to prepare the process accounts for the month during which the fire occurred. You
have been able to gather some information about the month's operating activities but some of the informa-
tion could not be retrieved due to the damage. The following information was salvaged:
• Opening work-in-process at the beginning of the month was 800 litres, 70% complete for labour and
60% complete for overheads. Opening work-in-process was valued at 26,640.
• Closing work-in-process at the end of the month was 160 litres, 30% complete for labour and 20%
complete for overheads.
• Normal loss is 10% of input and total losses during the month were 1,800 litres partly due to the fire
damage.
• Output sent to finished goods warehouse was 4,200 litres.
• Losses have a scrap value of 15 per litre.
• All raw materials are added at the commencement of the process.
• The cost per equivalent unit (litre) is 39 for the month made up as follows:

( )
Raw Material 23
Labour 7
Overheads 9
39

Required:
(a) Calculate the quantity (in litres) of raw material inputs during the month.
(b) Calculate the quantity (in litres) of normal loss expected from the process and the quantity (in
litres) of abnormal loss / gain experienced in the month.
(c) Calculate the values of raw material, labour and overheads added to the process during the month.
(d) Prepare the process account for the month.
 Chapter 10 : Process and Operating Costing 10.27
Answer—
(a) Calculation of Raw Material inputs during the month:

Quantities Entering Process Litres Quantities Leaving Litre

Process s
Opening WIP 800 Transfer to Finished 4,200
Ra w material input (balancing 5,360 Goods Process Losses 1,800
figure) Closing WIP 160
6,160 6,160

(b) Calculation of Normal Loss and Abnormal Loss/Gain

Litres
Total process losses for month 1,800
Normal Loss (10% input) 536
Abnormal Loss (balancing figure) 1,264

(c) Calculation of values of Raw Material, Labour and Overheads added to the process:

Material Labour Overheads

Cost per Equivalent Unit 23.00 7.00 9.00
Equivalent Units (Litre) 4,824 4,952 5,016
(refer the working note)
Cost of equivalent units 1,10,952 34,664 45,144
Add: Scrap value of normal 8,040 –
loss (536 units × 15)
Total Value added 1,18,992 34,664 45,144

Workings:
Statement of Equivalent Units (Litre):
Equivalent Production
Input Details
Units Output details Units Material Labour Overheads
Units (%) Units (%) Units (%)
Opening 800 Units completed:
WIP
Units 5,360 - Opening WIP 800 -- -- 240 30 320 40
introduced
- Fresh inputs 3,400 3,400 100 3,400 100 3,400 100
Normal loss 536 -- -- -- -- -- --
Abnormal loss 1,264 1,264 100 1,264 100 1,264 100
Closing WIP 160 160 100 48 30 32 20
6,160 6,160 4,824 4,952 5,016
 Chapter 10 : Process and Operating Costing 10.28
(d) Process Account for Month

Litres Amount ( ) Litres Amount

( )
To Opening WIP 800 26,640 By Finished goods 4,200 1,63,800
To Raw Materials 5,360 1,18,992 By Normal loss 536 8,040
To Wages -- 34,664 By Abnormal loss 1,264 49,296
To Overheads -- 45,144 By Closing WIP 160 4,304
6,160 2,25,440 6,160 2,25,440

***************
 Chapter 10 : Process and Operating Costing 10.29
Question 14—
The following details are available of Process X for August 2013:
(1) Opening Work-in-Process 8,000 units
Degree of completion and cost:
Material (100%) 63,900
Labour (60%) 10,800
Overheads (60%) 5,400
(2) Input 1,82,000 units at 7,56,900
(3) Labour paid 3,28,000
(4) Over heads incurred 1,64,000
(5) Units scrapped 14,000
Degree of completion :
Material 100%
Labour and overhead 80%
(6) Closing work-in-process 18,000 units
Degree of completion :
Material 100%
Labour and overhead 70%
(7) 1,58,000 units were completed and transferred to next process.
(8) Normal loss is 8% of total input including opening work-in-process
(9) Scrap value is 8 per unit to be adjusted in direct material cost
You are required to compute, assuming that average method of inventory is used:
(i) Equivalent production, and
(ii) Cost per unit
Answer—
(i) Statement of Equivalent Production

Material Labour and Overhead

Particulars Units
(%) Units (%) Units
Production units 1,58,000 100 1,58,000 100 1,58,000
completed Normal Loss 15,200 – – -- --
8% of (1,82,000 + 8,000)
Closing WIP 18,000 100 18,000 70 12,600
1,91,200 1,76,000 -- 1,70,600
Less : Abnormal Gain 1,200 – 100 1,200 100 1,200
Total 1,90,000 1,74,800 1,69,400

(ii) Statement of Cost

Materials Labour Overhead
( ) ( ) ( )
Opening WIP 63,900 10,800 5,400
Input of Materials 7,56,900 – –
Expenses – 3,28,000 1,64,000
Total 8,20,800 3,38,800 1,69,400
Less: Sale of Scrap (15,200 × 8) 1,21,600 – –
 Chapter 10 : Process and Operating Costing 10.30
Net Cost 6,99,200 3,38,800 1,69,400
Equivalent Units 1,74,800 1,69,400 1,69,400
Cost Per Unit 4.00 2.00 1.00
Total Cost per unit = 4+2+1 = 7.00
Question 15—
Following details are related to the work done in Process 'A' of XYZ Company during the month of March,
2014:
( )
Opening work-in-progress (2,000 units):
Materials 80,000
Labour 15,000
Overheads 45,000
Materials introduced in Process ‘A’ (38,000 units) 14,80,000
Direct labour 3,59,000
Overheads 10,77,000
Units scrapped: 3,000 units,
Degree of completion:
Materials 100%
Labour and overheads 80%
Closing work-in-progress : 2,000 units,
Degree of Completion:
Materials 100%
Labour and overheads 80%
Units finished and transferred to Process ‘B’ : 35,000 units
Normal Loss:
5% of total input including opening work-in-progress
Scrapped units fetch 20 per piece.
You are required to prepare:
(i) Statement of equivalent production;
(ii) Statement of cost;
(iii) Statement of distribution cost; and
(iv) Process 'A' Account, Normal and Abnormal Loss Accounts.
 Chapter 10 : Process and Operating Costing 10.31

Answer—
(i) Statement of Equivalent Production
Equivalent production

Input Units Output Units Materia l Labour &

Overheads
(%) Units (%) Units
Opening WIP 2,000 Completed and 35,000 100 35,000 100 35,000
transferred to
Process ‘B’
Units introduced 38,000 Normal l oss 2,000 -- -- -- --
(5% of 40,000 units)
Abnormal loss 1,000 100 1,000 80 800
Closing WIP 2,000 100 2,000 80 1,600
40,000 40,000 38,000 37,400
(ii) Statement of Cost
Details Cost at the Cost added Total Cost Equivalent Cost per
beginning of Units unit
Process
( ) ( ) ( ) ( ) ( )
Material 80,000 14,80,000 15,60,000
Less: Value of (40,000)
normal loss
(2,000 units × 20)
15,20,000 38,000 40
Labour 15,000 3,59,000 3,74,000 37,400 10
Overheads 45,000 10,77,000 11,22,000 37,400 30
Total 1,40,000 29,16,000 30,16,000 80
(iii) Statement of Distribution of Cost
( )
Completed and Transferred to Process–B (35,000 units × 80) 28,00,000
Abnormal Loss:
Materials (1,000 units × 40) 40,000
Wages (800 units × 10) 8,000
Overheads (800 units × 30) 24,000
72,000
Closing WIP:
Materials (2,000 units × 40) 80,000
Wages (1,600 units × 10) 16,000
Overheads (1,600 units × 30) 48,000
1,44,000
 Chapter 10 : Process and Operating Costing 10.32
(iv) Process 'A' Account
Particulars Units Amount Particulars Units Amount
(Dr.) (Cr.)
To Opening WIP 2,000 1,40,000 By Normal Loss 2,000 40,000
To Material Introduced 38,000 14,80,000 By Abnormal Loss 1,000 72,000
To Direct Labour 3,59,000 By Process 'B' A/c 35,000 28,00,000
transfer to next
process
To Overheads 10,77,000 By Closing WIP 2,000 1,44,000
40,000 30,56,000 40,000 30,56,000
Normal Loss Account

Particul ars Units Amount Particulars Units Amount

To Process–A A/c 2,000 40,000 By Cost Ledger 2,000 40,000
Control A/c
2,000 40,000 2,000 40,000
Abnormal Loss Account

Particulars Units Amount Particulars Units Amount

To Process–A A/c 1,000 72,000 By Cost Ledger 1,000 20,000
Control A/c
By Costing Profit & 52,000
Loss A/c
1,000 72,000 1,000 72,000
Question 16—
ABC Limited manufactures a product 'ZX' by using the process namely RT. For the month of May, 2014, the
following data are available:
Process RT
Material introduced (units) 16,000
Transfer to next process (units) 14,400
Work in process:
At the beginning of the month (units) 4,000
(4/5 completed)
At the end of the month (units) 3,000
(2/3 completed)
Cost records:
Work in process at the beginning of the month
Material 30,000
Conversion cost 29,200
Cost during the month : materials 1,20,000
Conversion cost 1,60,800
 Chapter 10 : Process and Operating Costing 10.33
Normal spoiled units are 10% of good finished output transferred to next process.
Defects in these units are identified in their finished state. Material for the product is put in the process at the
beginning of the cycle of operation, whereas labour and other indirect cost flow evenly over the year. It has
no realizable value for spoiled units.
Required:
(i) Statement of equivalent production (Average cost method);
(ii) Statement of cost and distribution of cost;
(iii) Process accounts.

Answer—
Statement of Equivalent production of Process RT

Input Details Output Equivalent Production

units units Material Conversion cost
units (%) units (%)
4,000 Opening WIP
16,000 Introduced completed 14,400 14,400 100 14,400 100
and transfer to next
Normal spoilage 1,440 – – – --
Abnormal Spoilage 1,160 1,160 100 1,160 100
Closing WIP 3,000 3,000 100 2,000 66.67

20,000 20,000 18,560 17,560

Statement showing Cost of Each Elemment

Opening Cost in Total ( ) Equivalent Cost per
( ) Process Units unit
( ) ( )
Materials 30,000 1,20,000 1,50,000 18,560 8.0819

Conversion cost 29,200 1,60,800 1,90,000 17,560 10.8200

Statement of Apportionment of Cost
Material 14,400 8.0819 1,16,380
Completed Units Conversion cost 14,400 10.8200 1,55,808
2,72,188
Material 3,000 8.0819 24,246
Closing stock Conversion 2,000 10.8200 21,640
cost 45,886
Material 1,160 8.0819 9,375
Abnormal Loss Conversion cost 1,160 10.8200 12,551
21,926
 Chapter 10 : Process and Operating Costing 10.34
Process - RT Account

Particulars Units Amount Particulars Units Amount

To Opening WIP 4,000 59,200 By Normal Loss 1,440 –
To Material introduced 16,000 1,20,000 By Abnormal loss 1,160 21,926
To Conversion cost 1,60,800 By Transfer to 14,400 2,72,188
next process
By Closing WIP 3,000 45,886
20,000 3, 40,000 20,000 3, 40,000
Question 17—
A Chemical Company carries on production operation in two processes. The material first pass
through Process I, where Product 'A' is produced.
Following data are given for the month just ended:
Material input quantity 2,00,000 Kg.
Opening work-in-progress quantity
(Material 100% and conversion 50% complete) 40,000 kg.
Work completed quantity 1,60,000 kg.
Closing work-in-progress quantity
(Material 100% and conversion two-third complete) 30,000 kg.
Material input cost 75,000
Processing cost 1,02,000
Opening work-in-progress cost
Material cost 20,000
Processing cost 12,000
Normal process loss in quantity may be assumed to be 20% of material input. It has no realisable value.
Any quantity of Product 'A' can be sold for 1.60 per kg.
Alternatively, it can be transferred to Process II for further processing and then sold as Product 'AX' for
2 per kg. Further materials are added in Process II, which yield two kg. of product 'AX' for every kg. of
Product 'A' of Process I.
Of the 1,60,000 kg. per month of work completed in Process I, 40,000 kg. are sold as Product 'A' and
1,20,000 kg. are passed through Process II for sale as Product 'AX'. Process II has facilities to handle upto
1,60,000 kg. of Product 'A' per month, if required.
The monthly costs incurred in Process II (other than the cost of Product 'A') are:

1,20,000 kg. of Product ‘A’ input 1,60,000 kg. of Product ‘A’ input
( ) ( )
Materials Cost 1,32,000 1,76,000
Processing Costs 1,20,000 1,40,000

Required:
(i) Determine, using the weighted average cost method, the cost per kg. of Product 'A' in Process I and
value of both work completed and closing work-in-progress for the month just ended.
(ii) Is it worthwhile processing 1,20,000 kg. of Product 'A' further?
(iii) Calculate the minimum acceptable selling price per kg., if a potential buyer could be found for
 Chapter 10 : Process and Operating Costing 10.35
additional output of Product 'AX' that could be produced with the remaining Product 'A' quantity.
Answer—
(i) Process –I
Statement of Equivalent Production
Inputs Output Equivalent output
Material Conversion
Particulars Kg. Particulars Kg.
(%) kg. (%) kg.
Opening W.I.P. 40,0 00 Normal loss 40,000 – – -- --
New material Units
introduced 2,00,000 introduced &
completed 1,60,000 100 1,60,000 100 1,60,000
Abnormal loss 10,000 100 10,000 100 10,000
Closing WIP 30,000 100 30,000 2/3r d 20,000
2,40,000 2,40,000 2,00,000 1,90,000
Process- I
Statement of Cost for each element
Elements of cost Costs of Costs in Total cost Equiv alent Cost per
opening WIP process units Kg.
( ) ( ) ( ) Kg . ( )
Material 20,000 75 ,000 95,000 2,0 0,0 00 0.475
Conversion cost 12,000 1 ,02 ,000 1 ,14,000 1,9 0,0 00 0.600
32,000 1,77,000 2,09,000 1.075
Statement of Apportionment of Cost
Units Elements Equivalent units
Cost/un Cost Total cost
completed (Kg.) it
( ) ( ) ( )
Work completed Material 1,60,000 0.475 76,000
Conversion 1,60,000 0.600 96,000 1,72,000
Closing WIP Material 30,000 0.475 14,250
Conversion 20,000 0.600 12,000 26,250
(ii) Statement showing comparative data to decide whether 1,20,000 kg. of product 'A' should
be processed further into 'AX'.
Alternative I - To sell product 'A' after Process - I ( )
Sales 1,20,000 kg. × 1.60 1,92,000
Less: cost form process – I 1,20,000 kg. × 1.075 1,29,000
Profit 63,000
Alternative II - Process further into 'AX'
Sales 2,40,000 kg. 2.00 4,80,000
Less: Cost from Process- I 1,20,000 kg. × 1.075 = 1,29,000
Material in Process- II = 1,32,000
Processing cost in Process- II = 1,20,000 3,81,000
Profit 99,000
Hence company should process further
It will increase profit by 99,000 - 63,000 = 36,000
 Chapter 10 : Process and Operating Costing 10.36
(iii) Calculation of minimum selling price per kg.:
Cost of processing remaining 40,000 kg. further ( )
Material 1,76,000 1,32,000 44,000
Processing cost 1,40,000 - 1,20,000 20,000
Cost from process- I relating to 40,000 kg. 'A' (40,000 kg. × 1.075) 43,000
Benefit foregone if 40,000 kg. 'A' are further processed
40,000 kg. ( 1.60 - 1.075) 21,000
Total cost 1,28,000
Additional quantity of product 'AX' (40,000 kg. × 2) 80,000
 1,28,000 
 Minimum selling price  80,000kg.   1.60
 
************
 Chapter : 11 Joint Product and By Product 11.1

A. Joint Product
Question 1.
The Sunshine Oil Company purchases crude vegetables oil. It does refining of the same. The refining
process results in four products at the split off point: M, N, O and P.
Product O is fully processed at the split off point. Product M, N and P can be individually further refined
into ‘Super M’, ‘Super N’ and ‘Super P’. In the most recent month (March, 2014), the output at split off
point was:

Product M 3,00,000 gallons

Product N 1,00,000 gallons
Product O 50,000 gallons
Product P 50,000 gallons
The joint cost of purchasing the crude vegetables oil and processing it were ` 40,00,000. Sunshine had no
beginning or ending inventories. Sales of Product O in March, 2014 were ` 20,00,000. Total output of
products M, N and P was further refined and then sold. Data related to March, 2014 are as follows:

Further Processing Sales

Costs to Make Super
Products
Super M’ ` 80,00,000 ` 1,20,00,000
Super N’ ` 32,00,000 ` 40,00,000
Super P’ ` 36,00,000 ` 48,00,000
Sunshine had the option of selling products M, N and P at the split off point. This alternative would have
yielded the following sales for the March, 2014 production:

Product M ` 20,00,000
Product N ` 12,00,000
Product P ` 28,00,000
You are required to answer:
How the joint cost of ` 40,00,000 would be allocated between each product under each of the following
methods (a) sales value at split off; (b) physical output (gallons); and (c) estimated net realizable value?
Could Sunshine have increased its March, 2014 operating profits by making different decisions about the
further refining of product M, N or P? Show the effect of any change you recommend on operating profits.
Answer
(i) Allocation of Joint Cost by the following methods:
(a) Sales Value at split – off Method
Chapter : 11 Joint Product and By Product 11.2

Products Sales value of the point Joint cost allocated (`)

of split off (`)
M 20,00,000 10,00,000
 ` 20,00,000 
  ` 40,00,000
 `80,00,000 
N 12,00,000 6,00,000
 `12,00,000 
  ` 40,00,000
 `80,00,000 
O 20,00,000 10,00,000
 ` 20,00,000 
  ` 40,00,000
 `80,00,000 
P 28,00,000 14,00,000
 ` 28,00,000 
  ` 40,00,000
 `80,00,000 
Total 80,00,000 40,00,000
(b) Physical output (Gallon) Method

Products Physical Output (in Joint cost allocated (`)

gallon)
M 3,00,000 24,00,000
 3,00,000 gallon 
  ` 40,00,000
 5,00,000 gallon 
N 1,00,000 8,00,000
 1,00,000 gallon 
  ` 40,00,000
 5,00,000 gallon 
O 50,000 4,00,000
 50,000 gallon 
  ` 40,00,000
 5,00,000 gallon 
P 50,000 4,00,000
 50,000 gallon 
  ` 40,00,000
 5,00,000 gallon 
Total 5,00,000 40,00,000
Chapter : 11 Joint Product and By Product 11.3

(c) Estimated Net Realizable value Method

Products Sales Sales Further Net Joint cost allocated

revenue revenue processing realizable
after at the costs value
further point of
processing split off
(`) (`) (`) (`) (`)
(a) (b) (c) (d) (e)=[(b) –
(d)] or (c)
'Super M' 1,20,00,000 – 80,00,000 40,00,000 20,00,000
 ` 40,00,000 
  ` 40,00,000
 `80,00,000 
'Super N' 40,00,000 – 32,00,000 8,00,000 4,00,000
 `8,00,000 
  ` 40,00,000
 `80,00,000 
'O' – 20,00,000 – 20,00,000 10,00,000
 ` 20,00,000 
  ` 40,00,000
 `80,00,000 
'Super P' 48,00,000 – 36,00,000 12,00,000 6,00,000
 `12,00,000 
  ` 40,00,000
 `80,00,000 
Total 1,48,00,000 80,00,000 40,00,000

(ii) Decision about the future refining of Product M, N or P.

Products M (`) N (`) P (`)

Sales revenue after further processing: (A) 1,20,00,000 40,00,000 48,00,000
Sales revenue at the point of split off: (B) 20,00,000 12,00,000 28,00,000
Incremental sales revenue: (C)={(A)-(B)} 1,00,00,000 28,00,000 20,00,000
Further processing cost: (D) 80,00,000 32,00,000 36,00,000
Profit (Loss) arising due to further processing: 20,00,000 (4,00,000) (16,00,000)
{(C) – (D)}
It is apparent from above that further processing of products N and P results in the decrease of the
operating profit by `20,00,000. Hence M/s. Sunshine Oil Company should not resort to further
processing of its N and P products. This decision on adoption would increase the operating profits of
the company for the month of March, 2014 by ``20,00,000.
Question 2.
In a chemical manufacturing company, three products A, B and C emerge at a single split off stage in
department P. Product A is further processed in department Q, product B in department R and product C
Chapter : 11 Joint Product and By Product 11.4

in department S. There is no loss in further Processing of any of the three products. The cost data for a
month are as under:
Cost of raw materials introduced in department P `12,68,800
Direct Wages Department
(`)
P 3,84,000
Q 96,000
R 64,000
S 36,000
Factory overheads of `4,64,000 are to be apportioned to the departments on direct wage basis.
During the month under reference, the company sold all three products after processing them further as
under:
Products A B C
Output sold (kg.) 44,000 40,000 20,000
Selling Price per kg. (`) 32 24 16
There is no opening or closing stocks. If these products were sold at the split off stage, that is, without
further processing, the selling prices would have been ` 20, ` 22 and ` 10 each per kg respectively for A,
B and C.
Required:
(i) Prepare a statement showing the apportionment of joint costs to joint products.
(ii) Present a statement showing product-wise and total profit for the month under reference as per the
company's current processing policy.
(iii) What processing decision should have been taken to improve the profitability of the company?
(iv) Calculate the product-wise and total profit arising from your recommendation in (iii) above.
Answer
(i) Statement showing the apportionment of joint costs to joint products
Products
A B C Total
Output sold Kg.: (I) 44,000 40,000 20,000
Selling price per kg. at split off (`): (II) 20 22 10
Sales value at split off (`): (I) x (II) 8,80,000 8,80,000 2,00,000 19,60,000
Joint costs (costs incurred in 8,80,000 8,80,000 2,00,000 19,60,000
department P (`)
(apportioned on the basis of sales value at
the point of split off) i.e. (22:22:5)
(Working Note 1)
Chapter : 11 Joint Product and By Product 11.5

(ii) Statement showing product-wise and total profit for the month under reference
(as per the company’s current processing policy)
Products
A B C Total
Output (kg.) : (a) 44,000 40,000 20,000
Selling price per kg. after further 32 24 16
processing (`): (b)
Sales value after further 14,08,000 9,60,000 3,20,000 26,88,000
processing (`).:(c) = {(a) x (b)}
Joint costs (`): (d) 8,80,000 8,80,000 2,00,000 19,60,000
Further processing costs (`): (e)
(Working Note 2) 1,72,800 1,15,200 64,800 3,52,800
Total costs (`): (f) = [(d) + (e)} 10,52,800 9,95,200 2,64,800 23,12,800
Profit/ (Loss) (`): [(c))– (f)} 3,55,200 (35,200) 55,200 3,75,200

Alternatively:

Incremental sales revenue (`) 5,28,000 80,000 1,20,000

(44,000 units (40,000 units × ` 2) (20,000
× ` 12) units × ` 6)
Less: Further processing costs
(`) 1,72,800 1,15,200 64,800
[Refer to Working Note 2 (ii)]
Incremental net profit / (loss) 3,55,200 (35,200) 55,200
(iii) Processing decision to improve the profitability of the company.
44,000 units of product A and 20,000 units of product C should be further processed because the
incremental sales revenue generated after further processing is more than the further processing
costs incurred. 40,000 units of product B should be sold at the point of-split off because the
incremental revenue generated after further processing is less than the further processing costs.
(iv) The product wise and total profit arising from the recommendation in (iii) above is as
follows:
Product A B C Total
Profit (`) 3,55,200 – 55,200 4,10,400

Working Notes:
1. Statement of department-wise costs
P Q R S
(`) (`) (`) (`)
Raw materials 12,68,800
Wages 3,84,000 96,000 64,000 36,000
Overheads 3,07,200 76,800 51,200 28,800
(Apportioned on the basis of
Chapter : 11 Joint Product and By Product 11.6

department direct wages i.e.

96:24:16:9)
Total Cost 19,60,000 1,72,800 1,15,200 64,800
2. Joint Costs and further processing Costs
(i) Costs incurred Costs incurred in the department P are joint costs of products A, B and C
and are equal to ` 19,60,000.
(ii) Costs incurred in the departments Q, R and S are further processing costs of products A, B
and C respectively. Further processing costs of products A, B and C thus are ` 1,72,800;
` 1,15,200 and ` 64,800 respectively.
Question 3.
A company’s plant processes 1,50,000 kg. of raw material in a month to produce two products, viz, ‘P’ and
‘Q’. The cost of raw material is ` 12 per kg. The processing costs per month are:

(`)
Direct Materials 90,000
Direct Wages 1,20,000
Variable Overheads 1,00,000
Fixed Overheads 1,00,000
The loss in process is 5% of input and the output ratio of P and Q which emerge simultaneously is 1:2.
The selling prices of the two products at the point of split off are: P ` 12 per kg. and Q ` 20 per kg. A
proposal is available to process P further by mixing it with other purchased materials. The entire current
output of the plant can be so processed further to obtain a new product ‘S’. The price per kg. of S is ` 15
and each kg of output of S will require one kilogram of input P. The cost of processing of P into S
(including other materials) is `1,85,000 per month.
You are required to prepare a statement showing the monthly profitability based both on the existing
manufacturing operations and on further processing.
Will you recommend further processing?
Answer
Working
Notes
1.
(Kg.)
Material input 1,50,000
Less: Loss of Material in process (5% of 1,50,000 kg.) 7,500
Total output 1,42,500
2. Output of P and Q are in the ratio of 1 : 2 of the total output:
1,42,500 kg.  1
P  47,500 kg.
3
1,42,500 kg.  2
Q  95,000 kg.
3
Chapter : 11 Joint Product and By Product 11.7

3. Joint Costs:
(`)
Material (input) (1,50,000 kg. × ` 12) 18,00,000
Direct Material 90,000
Direct Wages 1,20,000
Variable Overheads 1,00,000
Fixed overheads 1,00,000
22,10,000
4. Sales Revenue of P, Q and S
P = 47,500 Kg. × ` 12 = ` 5,70,000 Q = 95,000 Kg. × ` 20 = ` 19,00,000 S = 47,500 Kg. × `
15 = ` 7,12,500.
5. Apportionment of joint costs viz. ` 22,10,000 over P and Q in proportion of their sales value i.e.
` 5,70,000 and ` 19,00,000, i.e., 3 : 10 is:
Total P Q
(`) (`) (`)
Joint cost apportionment 22,10,000 5,10,000 17,00,000
in the ratio of 3 : 10
 ` 22,10,000  3   ` 22,10,000 10 
   
 13   13 
6. Total Cost of 47,500 kg. of S = Joint Cost of P + Cost of Processing P into S.
= ` 5,10,000 + ` 1,85,000 = ` 6,95,000.
Statement showing the Monthly Profitability
Based on existing Based on further processing of
manufacturing operations P into S
Products Products
P Q Total S Q Total
Sales quantity (kg.) 47,500 95,000 1,42,500 47,500 95,000 1,42,500
(`) (`) (`) (`) (`) (`)
Sales Revenue 5,70,000 19,00,000 24,70,000 7,12,500 19,00,000 26,12,500
(Working Note 4)
Less: Joint Costs 5,10,000 17,00,000 22,10,000 6,95,000 17,00,000 23,95,000
(Working Note 5) *
Profit 60,000 2,00,000 2,60,000 17,500 2,00,000 2,17,500
*Working Note 6
Recommendation: Further processing of P is not recommended as it results in a lower profit of P.
Question 4.
A company produces two joint product X and Y, from the same basic materials. The processing
is completed in three departments.
Materials are mixed in Department I. At the end of this process X and Y get separated. After separation X
Chapter : 11 Joint Product and By Product 11.8

is completed in the Department II and Y is finished in Department III. During a period 2,00,000 kg. of raw
material were processed in Department I, at a total cost of ` 8,75,000, and the resultant 60% becomes X
and 30% becomes Y and 10% normally lost in processing.
In Department II 1/6th of the quantity received from Department I is lost in processing. X is further
processed in Department II at a cost of ` 1,80,000.
In Department III further new material added to the material received from Department I and weight
mixture is doubled, there is no quantity loss in the department. Further processing cost (with material cost)
in Department III is ` 1,50,000.
The details of sales during the year are:
Product X Product Y
Quantity sold (kg.) 90,000 1,15,000
Sales price per kg (`) 10 4
There were no opening stocks. If these products sold at split-off-point, the selling price of X and Y would
be ` 8 and ` 4 per kg respectively.
Required:
(i) Prepare a statement showing the apportionment of joint cost to X and Y in proportion of sales value at
split off point.
(ii) Prepare a statement showing the cost per kg of each product indicating joint cost, processing cost and
total cost separately.
(iii) Prepare a statement showing the product wise profit for the year.
On the basis of profits before and after further processing of product X and Y, give your comment that
products should be further processed or not.
Answer
Calculation of quantity produced
Dept I (kg) Dept II (kg) Dept III (kg)
Input 2,00,000 1,20,000 60,000
(60% of 2,00,000 kg.) (30% of 2,00,000
kg.)
Weight lost or added (20,000) (20,000) 60,000
(10% of 2,00,000 (1/6 th of 2,00,000 kg.)
kg.)
1,80,000 1,00,000 1,20,000
Production of X 1,20,000 1,00,000 –
Production of Y 60,000 – 1,20,000
(i) Statement of apportionment of joint cost
Product X Product Y
Output (kg) 1,20,000 60,000
Selling price per kg (`) 8 4
Sales value (`) 9,60,000 2,40,000
Share in Joint cost (4:1) 7,00,000 1,75,000
(` 8,75,000 × 4 ÷ (` 8,75,000 × 1 ÷ 5)
Chapter : 11 Joint Product and By Product 11.9

5)

(ii) Statement of cost per kg

Product X Product Y
Output (kg) 1,00,000 1,20,000
Share in joint cost (`) 7,00,000 1,75,000
Cost per kg (`) (Joint cost) 7.00 1.458
Further processing cost (`) 1,80,000 1,50,000
Further processing cost per kg (`) 1.80 1.250
Total cost per kg (`) 8.80 2.708

(iii) Statement of Profit

Product X Product Y
Output (kg) 1,00,000 1,20,000
Sales (kg) 90,000 1,15,000
Closing stock 10,000 5,000
(`) (`)
Sales @ `10 and `4 for product X and Y respectively 9,00,000 4,60,000
Add: closing stock (kg) (at full cost) 88,000 13,540
Value of production 9,88,000 4,73,540
Less: Share in joint cost 7,00,000 1,75,000
Further processing 1,80,000 1,50,000
Profit 1,08,000 1,48,540

(iv) Profitability statement, before and after processing

Product X Product X Product Y Product Y
Before (`) After Befor After
(`) e (`)
(`)
Sales Value 9,60,000 1,08,000 2,40,000 1,48,540
Share in joint 7,00,000 (as per iii above) 1,75,000 (as per iii above)
costs
Profit 2,60,000 65,000
Product X should be sold at split off point and product Y after processing because of higher profitability.
Question 5.
ABC Ltd. operates a simple chemical process to convert a single material into three separate items,
referred to here as X, Y and Z. All three end products are separated simultaneously at a single split-off
point.
Product X and Y are ready for sale immediately upon split off without further processing or any other
additional costs. Product Z, however, is processed further before being sold. There is no available market
Chapter : 11 Joint Product and By Product 11.10

price for Z at the split-off point.

The selling prices quoted here are expected to remain the same in the coming year. During 2013-14, the
selling prices of the items and the total amounts sold were:
X - 186 tons sold for ` 1,500 per ton, Y - 527 tons sold for ` 1,125 per ton, Z - 736 tons sold for ` 750
per ton
The total joint manufacturing costs for the year were ` 6,25,000. An additional ` 3,10,000 was spent to
finish product Z.
There were no opening inventories of X, Y or Z at the end of the year. The following inventories of
complete units were on hand:
180 tons
60 Tons
25 tons
There was no opening or closing work-in-progress.
Required:
(i) Compute the cost of inventories of X, Y and Z for Balance Sheet purposes and cost of goods
sold for income statement purpose as of March 31, 2014, using:
(a) Net realizable value (NRV) method of joint cost allocation
(b) Constant gross-margin percentage NRV method of joint-cost allocation.
(ii) Compare the gross-margin percentages for X, Y and Z using two methods given in
requirement (i)
Answer
(i) (a) Statement of Joint Cost allocation of inventories of X, Y and Z for Balance Sheet
purposes
(By using Net Realizable Value Method)
Products
X Y Z Total
(`) (`) (`) (`)
Final sales value of total 5,49,000 6,60,375 5,70,750 17,80,125
production (Working Note 1) (366 × ` 1,500) (587 × ` (761 × ` 750)
1,125)
Less: Additional cost – – 3,10,000 3,10,000
Net realisable value 5,49,000 6,60,375 2,60,750 14,70,125
(at split-off point)
Joint cost allocated 2,33,398 2,80,748 1,10,854 6,25,000
(Working Note 2)
Cost of goods sold for income statement purpose as of March 31, 2014 (By using Net Realisable
Value Method)
Products
X Y Z Total
(`) (`) (`) (`)
Allocated joint cost 2,33,398 2,80,748 1,10,854 6,25,000
Chapter : 11 Joint Product and By Product 11.11

Additional costs – – 3,10,000 3,10,000

Cost of goods 2,33,398 2,80,748 4,20,854 9,35,000
available for sale
(CGAS)
Less: Cost of ending 1,14,785 28,692 13,846 1,57,323
inventory (CGAS× (CGAS × (CGAS ×
(Working Note 1) 49.18%) 10.22%) 3.29%)
Cost of goods sold 1,18,613 2,52,056 4,07008 7,77,677
Income Statement (Showing gross margin and gross margin percentage)
(By using net realisable value method)
Products
X Y Z Total
Sales revenue (`) 2,79,000 5,92,875 5,52,000 14,23,875
(186 × ` (527× ` (736 × `
1,500) 1,125) 750)
Less: Cost of goods 1,18,613 2,52,056 4,07,008 7,77,677
sold (`)
Gross margin (`) 1,60,387 3,40,819 1,44,992 6,46,198

Gross margin (%) 57.49% 57.49% 26.27% 45.38%

(b) Statement of joint cost allocation of inventories of X, Y and Z for Balance sheet purposes
(By using Constant Gross Margin Percentage Net Realisable Value Method)
Product
Total
X Y Z
(`) (`) (`) (`)
Final sales value of 5,49,000 6,60,375 5,70,750 17,80,125
total production
Less: Gross margin 2,60,641 3,13,517 2,70,967 8,45,125
(Working Note 3)
2,88,359 3,46,858 2,99,783 9,35,000
Less: Additional -- -- 3,10,000 3,10,000
Cost
Joint cost allocated 2,88,359 3,46,858 (10,217) 6,25,000
Note: The negative joint cost allocation to product Z illustrates one ‘unusual’ feature of the constant
gross margin NRV method.
Cost of Goods Sold for Income Statement purpose
(By using Constant Gross Margin Percentage Net Realizable Value Method)
Products
Total
X Y Z
(`) (`) (`) (`)
Chapter : 11 Joint Product and By Product 11.12

Allocated joint cost 2,88,359 3,46,858 (10,217) 6,25,000

Additional costs – – 3,10,000 3,10,000
Cost of goods 2,88,359 3,46,858 2,99,783 9,35,000
available for sale
(CGAS)
Less: Cost of ending 1,41,815 35,449 9,863 1,87,127
inventory (CGAS × (CGAS × (CGAS ×
(Working Note 1) 49.18%) 10.22%) 3.29%)
Cost of Goods sold 1,46,544 3,11,409 2,89,920 7,47,873
Income Statement (Showing gross margin and gross margin percentage)
(By using Constant Gross Margin Percentage NRV Method)
Products
Total
X Y Z
Sales revenue (`) 2,79,000 5,92,875 5,52,000 14,23,875
(186 × `1,500) (527 × ` 1,125) (736 × ` 750)
Less: Cost of Goods sold 1,46,544 3,11,409 2,89,920 7,47,873
(`)
Gross margin (`) 1,32,456 2,81,466 2,62,080 6,76,002
Gross margin (%) 47.48% 47.48% 47.48% 47.48%

Comparative statement of gross percentage for X, Y and Z

(Using Net Realisable Value and Constant Gross Margin Percentage NRV Methods)
Product gross margin percentage
Method
X Y Z
Net Realisable Method 57.49 57.49 26.26
Constant gross margin percentage NRV 47.48 47.48 47.48
Working Notes
1. Total production of three products for the year 2013-2014
Products Quantity Quantity of Total Ending
sold in ending inventory production inventory
tones in tons percentage
(%)
(1) (2) (3) (4) = [(2) + (5) = (3)/
(3)} (4)
X 186 180 366 49.18
Y 527 60 587 10.22
Z 736 25 761 3.29

2. Joint cost apportioned to each product:

Total Joint cost
 Net Realisable Value of each product
Total Net Realisable Value
` 6,25,000
 Total cost of Product X  `5,49,000 ` 2,33,398
`14,70,125
 Chapter : 11 Joint Product and By Product 11.13

Similarly, the joint cost of inventories of products Y and Z comes to ` 2,80,748 and ` 1,10,854
respectively.
3. Gross margin percentage
(`)
Final sales value production 17,80,125
Less: Joint cost and additional costs (` 6,25,000 + ` 3,10,000) 9,35,000
Gross margin 8,45,125
Gross margin percentage (` 8,45,125 ÷ ` 17,80,125) × 100 47.4756%

Question 6.
SV chemicals Limited processes 9,00,000 kgs. of raw material in a month purchased at ` 95 per kg in
department X. The input output ratio of department X is 100 : 90. Processing of the material results in two
joint products being produced ‘P1’ and ‘P2’ in the ratio of 60 : 40. Product ‘P1’ can be sold at split off
stage or can be further processed in department Y and sold as a new product ‘YP1’. The input output
ratio of department Y is 100 : 95. Department Y is utilized only for further processing of product ‘P1’ to
product ‘YP1’. Individual departmental expenses are as follows:

Dept. X (` lakhs) Dept. Y (` lakhs)

Direct Materials 95.00 14.00
Direct Wages 80.00 27.00
Variable Overheads 100.00 35.00
Fixed Overheads 75.00 52.00
Total 350.00 128.00
Further, selling expenses to be incurred on three products are:
Particulars Amount (` in lakhs)
Product ‘P1’ 28.38
Product ‘P2’ 25.00
Product ‘YP1’ 19.00
Selling price of the products 'P1' and 'P2' at split off point is `110 per kg and `325 per kg respectively.
Selling price of new product 'YP1' is `150 per kg.
You are required to:
i. Prepare a statement showing apportionment of joint costs, in the ratio of value of sales, net of selling
expenses.
ii. Statement showing profitability at split off point.
iii. Statement of profitability of 'YP1'.
iv. Would you recommend further processing of P1?
 Chapter : 11 Joint Product and By Product 11.14

Answer
Working Notes:
Input output ratio of material processed in Department X = 100 : 90

Particulars Quantity (Kg)

Material input 9,00,000
Less: Loss of material in process @ 10% of 9,00,000 kgs 90,000
Output 8,10,000
Output of department X is product 'P1' and 'P2' in the ratio of 60:40
60  8,10,000
output 'P1'   4,86,000 kgs
100
40  8,10,000
Output 'P2'   3,24,000 kgs
100
Statement showing ratio of net sales
Product P1 P2 Total
Quantity (kgs) 4,86,000 3,24,000 8,10,000
Selling price per kg (`) 110.00 325.00
Sales Value (` Lakhs) 534.60 1,053.00 1,587.60
Less: Selling Expenses 28.38 25.00 53.38
Net Sales 506.22 1,028.00 1,534.22
Ratio 33% 67% 100.00
Computation of Joint Costs
Particulars Amount (`Lakhs)
Raw Material input 9,00,000 kgs @ ` 95 per 855.00
kg Direct Materials 95.00
Direct Wages 80.00
Variable Overheads 100.00
Fixed Overheads 75.00
Total 1,205.00

(i) Statement showing apportionment of joint costs in the ratio of net sales
Particulars Amount (` In lakhs)
Joint cost of P1 – 33% of ` 1,205 lakhs 397.65
Joint cost of P2 – 67% of `1,205 lakhs 807.35
Total 1,205.00
Chapter : 11 Joint Product and By Product 11.15

(ii) Statement showing profitability at split off point

Product P1 P2 Total
Net Sales Value (` in lakhs) – [A] 506.22 1028.00 1534.22
Less: Joint costs (` in lakhs) 397.65 807.35 1205.00
Profit (` in lakhs) [A] – [B] 108.57 220.65 329.22
(iii) Statement of profitability of product 'YP1'
Particulars YP1
Sales Value (` in lakhs) [A] 629.55
Less: Cost of P1 397.65 807.35
Cost of Department Y 128.00
Selling Expenses of Product ‘YP1’ 19.00
Total Costs [B] 544.65
Profit (` in lakhs) [A] – [B] 147.90

Working Note: Computation of product ‘YP1’

Quantity of product P1 input used =– 4,86,000 kgs
Input output ratio of material processed in Department Y = 100 : 95

Particulars Quantity (Kg)

Material input 4,86,000
Less: Loss of material in process @ 5% of 24,300
4,86,000 Output 4,61,700

Sales Value of YP1 = 4,61,700 kgs @ `150 per kg = `692.55 lakhs

(iv) Further processing of product P1 and converting to product YP1 is beneficial as the profit
of the company increases by `39.33 lakhs.
Working Note:
Profit of Product ‘YP1’ `147.90
Profit of Product ‘P1 L
Increase in profit after further processing `108.57
L
Question 7
Pokemon Chocolates manufactures and distributes chocolate products. It purchases Cocoa beans and
processes them into two intermediate products:
Chocolate powder liquor base Milk-chocolate liquor base
These two intermediate products become separately identifiable at a single split off point.
Every 500 pounds of cocoa beans yields 20 gallons of chocolate – powder liquor base and 30 gallons of
milk-chocolate liquor base.
The chocolate powder liquor base is further processed into chocolate powder. Every 20 gallons of
chocolate-powder liquor base yields 200 pounds of chocolate powder. The milk- chocolate liquor base is
further processed into milk-chocolate. Every 30 gallons of milk- chocolate liquor base yields 340 pounds
of milk chocolate.
Chapter : 11 Joint Product and By Product 11.16

Production and sales data for October, 2013 are:

Cocoa beans processed 7,500 pounds
Costs of processing Cocoa beans to split off point `7,12,500
(including purchase of bean)

Production Sales Selling Price

Chocolates Power 3000 Pounds 3000 Pounds Rs. 190 per Pound
Milk Chocolate 5100 Pounds 5100 Pounds Rs. 237.50 per Pound
The October, 2013 separable costs of processing chocolate-powder liquor into chocolate powder are `
3,02,812.50. The October 2013 separable costs of processing milk-chocolate liquor base into milk-
chocolate are ` 6,23,437.50.
Pokemon full processes both of its intermediate products into chocolate powder or milk- chocolate. There
is an active market for these intermediate products. In October, 2013, Pokemon could have sold the
chocolate powder liquor base for ` 997.50 a gallon and the milk-chocolate liquor base for `1,235 a
gallon.
Required:
(i) Calculate how the joint cost of ` 7,12,500 would be allocated between the chocolate powder and
milk-chocolate liquor bases under the following methods:
Sales value at split off point
Physical measure (gallons)
Estimated net realisable value, (NRV) and
Constant gross-margin percentage NRV.
(ii) What is the gross-margin percentage of the chocolate powder and milk-chocolate liquor bases under
each of the methods in requirements (i) above?
(iii) Could Pokemon have increased its operating income by a change in its decision to fully process both
of its intermediate products? Show your computations.
Answer
(i) Comparison of alternative Joint-Cost Allocation Methods:
(a) Sales Value at Split-off Point Method
Chocolate Milk chocolate Total
powder liquor base
liquor base
Sales value of products at split ` 2,99,250* ` 5,55,750** ` 8,55,000
off
Weights 0.35 0.65 1.00
Joint cost allocated ` 2,49,375 ` 4,63,125 ` 7,12,500
(`7,12,500 × (`7,12,500 ×
0.35) 0.65)
*(3,000 lbs ÷ 200 lbs) × 20 gallon × ` 997.50 = ` 2,99,250
** (5,100 lbs ÷ 340 lbs) × 30 gallon × `1,235 = ` 5,55,750
Chapter : 11 Joint Product and By Product 11.17

(b) Physical Measure Method

Chocolate Milk Total
powder chocolate
liquor base liquor base
Output 300 gallon* 450 gallon** 750
gallons
Weight 300/750 = 0.40 450/750 = 0.60 1.00
Joint cost allocated ` 2,85,000 ` 4,27,500 `
(` 7,12,500 × (` 7,12,500 × 7,12,500
0.40) 0.60)
*(3,000 lbs ÷ 200 lbs) × 20 gallon = 300 gallon
** (5,100 lbs ÷ 340 lbs) × 30 gallon = 450 gallon
(c) Net Realizable Value (NRV) Method
Chocolate Milk Total
powder liquor chocolate
base liquor base
Final sales value ` 5,70,000 ` 12,11,250 ` 17,81,250
of production (3,000 lbs × (5,100 lbs × `
`190) 237.50)
Less: Separable costs ` 3,02,812.50 ` 6,23,437.50 ` 9,26,250
Net realisable value at ` 2,67,187.50 ` 5,87,812.50 ` 8,55,000
split off point
Weight 0.3125 0.6875 1.00
(2,67,187.50 ÷ (5,87,812.5 ÷
8,55,000) 8,55,000)
Joint cost allocated ` 2,22,656.25 ` 4,89,843.75 ` 7,12,500
(` 7,12,500 × (` 7,12,500 ×
0.3125) 0.6875)
(d) Constant Gross Margin( %) NRV method
Chocolate Milk chocolate Total
powder liquor Base
Liquor base
Final sales value of production ` 5,70,000 ` 12,11,250 ` 17,81,250
Less: Gross margin* 8% ` 45,600 ` 96,900 `1,42,500
Cost of goods available for sale ` 5,24,400 ` 11,14,350 `16,38,750
Less: Separable costs ` 3,02,812.50 ` 6,23,437.50 ` 9,26,250
Joint cost allocated ` 2,21,587.50 ` 4,90,912.50 ` 7,12,500
*Final sales value of total production = `17,81,250
Less: Joint and separable cost = ` 16,38,750 (` 7,12,500 + ` 9,26,250)
Gross Margin = ` 1,42,500
Chapter : 11 Joint Product and By Product 11.18

`142,500
Gross margin (%)  100  8%
`17,81,250
(ii) Chocolate powder liquor base (Amount in `)
Sales value Physical Estimated Constant
at Split off Measure net Gross
Realisable Margin
Value NRV
Final sale value of 5,70,000 5,70,000 5,70,000 5,70,000
chocolate powder
Less : Separable Costs 3,02, 812.50 3,02,812.50 3,02,812.50 3,02,812.50
Less: Joint Costs 2,49,375 2,85,000 2,22,656.25 2,21,587.50
Gross Margin 17,812.50 (17,812.50) 44531.25 45,600
Gross Margin (%) 3.125% (3.125%) 7.8125% 8.00%

Milk chocolate liquor base (Amount in `)

Sales value Physical Estimated Constant
at split off measure net Gross
realisable margin
NRV
Final sale value of milk 12,11,250 12,11,250 12,11,250 12,11,250
chocolate
Less: Separable costs 6,23,437.50 6,23,437.5 6,23,437.50 6,23,437.50
0
Less: Joint costs 4,63,125 4,27,500 4,89,843.75 4,90,912
Gross Margin 1,24,687.50 1,60,312.5 97,968.75 96,900.50
0
Gross Margin % 10.29% 13.24% 8.09% 8.00%

(iii) Further processing of Chocolate powder liquor base into Chocolate powder
(Amount in `)
Incremental revenue {` 5,70,000 – (` 997.50 x 300 gallon)} 2,70,750
Less: Incremental costs 3,02,812.50
Incremental operating income (32,062.50)

Further processing of Milk Chocolate liquor base into Milk Chocolate.

(Amount in `)
Incremental revenue {`12,11,250 – (` 1,235 x 450 gallon)} 6,55,500
Less: Incremental cost 6,23,437.50
Incremental operating income 32,062.50
The above computations show that Pokemon Chocolates could increase operating income by ` 32,062.50
if chocolate liquor base is sold at split off point and milk chocolate liquor base is processed further.
Chapter : 11 Joint Product and By Product 11.19

B. By– Product :
Question 8
A company manufactures one main product (M1) and two by-products B1 and B2. For the month of
January 2013, following details are available:
Total Cost upto separation Point ` 2,12,400
M1 B1 B2
Cost after separation – ` 35,000 ` 24,000
No. of units produced 4,000 1,800 3,000
Selling price per unit ` 100 ` 40 ` 30
Estimated net profit as percentage to – 20% 30%
sales value
Estimated selling expenses as 20% 15% 15%
percentage to sales value
There are no beginning or closing inventories. Prepare
statement showing:
(i) Allocation of joint cost; and
(ii) Product-wise and overall profitability of the company for January 2013.
Answer
(i) Statement showing allocation of Joint Cost
Particulars B1 B2
No. of units Produced 1,800 3,000
Selling Price Per unit (`) 40 30
Sales Value (`) 72,000 90,000
Less: Estimated Profit (B1 -20% & B2 -30%) (14,400) (27,000)
Cost of Sales 57,600 63,000
Less: Estimated Selling Expenses (B1 -15% & B2 –15%) (10,800) (13,500)
Cost of Production 46,800 49,500
Less: Cost after separation (35,000) (24,000)
Joint Cost allocated 11,800 25,500
(ii) Statement of Profitability
Particulars M1 (`) B1 (`) B2 (`)
Sales Value (A) 4,00,000 72,000 90,000
(4,000 × `100)
Less: –Joint Cost 1,75,100 11,800 25,500
(2,12,400 –11,800 –
25,500)
– Cost after separation – 35,000 24,000
– Selling Expenses 80,000 10,800 13,500
(M1- 20%, B1-15% & B2-
15%)
(B) 2,55,100 57,600 63,000
Chapter : 11 Joint Product and By Product 11.20

Profit (A –B) 1,44,900 14,400 27,000

Overall Profit = `1,44,900 + `14,400 + ` 27,000 = ` 1,86,300
Question 9.
Three joint products are produced by passing chemicals through two consecutive processes. Output from
process 1 is transferred to process 2 from which the three joint products are produced and immediately
sold. The data regarding the processes for April, 2014 is given below:
Process 1 Process 2
Direct material 2,500 kg. @ ` 4 per kg. ` 10,000 –
Direct labour ` 6,250 ` 6,900
Overheads ` 4,500 ` 6,900
Normal Loss 10% of input –
Scrap value of loss ` 2 per kg. –
Output 2,300 kg. Joint products
A – 900 kg.
B – 800 kg.
C – 600 kg.
here were no opening or closing stocks in either process and the selling prices of the output from process 2
were:
Joint product A ` 24 per kg.
Joint product B ` 18 per kg.
Joint product C ` 12 per kg.
Required:
i. Prepare an account for process 1 together with any Loss or Gain Accounts you consider necessary
to record the month's activities.
ii. Calculate the profit attributable to each of the joint products by apportioning the total costs from
process 2
A. According to weight of output;
B. By the market value of production.
Answer
(a) Process- 1 Account
Qty. Rate Amount Qty. Rate Amount
(kg.) per kg. (kg.) per (`)
(`) (`) kg.
(`)
To Direct 2,500 4 10,000 By Process 2 2,300 9* 20,700
material (Working Note 1)
To Direct labour – – 6,250 By Normal Loss 250 2 500
(10% of input)
To Overhead – – 4,500
To Abnormal 50 9* 450
gain
2,550 21,200 2,550 21,200
Chapter : 11 Joint Product and By Product 11.21

Normal Loss Account

Qty. Rate Amou Qty. Rate Amount
(kg.) per nt (kg.) per kg.
kg. (`) (`)
(`) (`)
To Process- 1 250 2 500 By Sales 200 2 400
By Abnormal 50 2 100
gain
250 500 250 500
Abnormal Gain Account
Qty. Rate Amount Qty. Rate Amount
(kg.) per (kg.) per kg.
kg. (`) (`) (`)
(`)
To Normal Loss A/c 50 2 100 By Process 1 50 9 450
To Costing Profit and
Loss Account 350
50 450 50 450
Statement of Profit
(attributable to each of the Joint Products according to weight of
output and market value of production)
Joint Output S.P. Sales Joint cost apportionment according to
products (p.u.) value Weight Profit/(loss) Market Profit/
of value of (loss)
output production
(kg.) (`) (`) (`) (`) (`) (`)
A 900 24 21,600 13,500* 8,100 17,250** 4,350
B 800 18 14,400 12,000 2,400 11,500 2,900
C 600 12 7,200 9,000 (1,800) 5,750 1,450
2,300 43,200 34,500 8,700 34,500 8,700
*Working Note 3
** Working Note 4
Normal output = 2,500 kg. – 250 kg. (2,500 kg. × 10%) = 2,250 kg.
Total Cost = Direct material cost + Direct labour cost + Overheads – Recovery from scrap sales
= ` 10,000 + ` 6,250 + ` 4,500 – ` 500 (2,500 × 10% × ` 2)
= ` 20,250
` 20,250
Normal Cost (p.u.)   `9
2,250
Chapter : 11 Joint Product and By Product 11.22

2. Joint Cost of three products under Process –2

(`)
Transfer of output from process-1 20,700
Direct Labour 6,900
Overhead 6,900
Total 34,500
3. Apportionment of joint cost on the basis of weight of output

Joint Output (in kg.) Apportionment of joint cost on

Products the basis of weight of output
A 900 ` 34,500  9
  `13,500
23
B 800 ` 34,500  8
  `12,000
23
C 600 ` 34,500  6
  ` 9,000
23
4. Apportionment of Joint Cost on the basis of market value of production
Joint Output Selling Sales Apportionment of Joint Cost
Products Price Revenue on the basis of market value
(p.u.) of production
(In Kg.) (`) (`)
A 900 24 21,600 ` 34,500  3
  `17,250
6
B 800 18 14,400 ` 34,500  2
  `11,500
6

C 600 12 7,200 ` 34,500  1

  ` 5,750
6

43,200 34,500

**************************
 Chapter 12 : Service Costing 12.1
Section – A
(A) Calculation of Absolute Tonne-Km and Commercial Tonne-Km.
Questioin 1—
Calculate total passenger kilometres from the following information:
Number of buses 6, number of days operating in a month 25, trips made by each bus per day 8, distance
covered 20 kilometres (one side), capacity of bus 40 passengers, normally 80% of capacity utilization.
Answer:
Calculation of passenger kilometer:
= 6 buses × 25 days × 8 trips × 2 sides × 20 k.m. × 40 passengers × 80%
= 15,36,000 passenger km.

Question 2—
A lorry starts with a load of 24 tonnes of goods from station A. It unloads 10 tonnes at station B and rest
of goods at station C. It reaches back directly to station A after getting reloaded with 18 tonnes of goods
at station C. The distance between A to B, B to C and then from C to A are 270 kms, 150 kms and 325
kms respectively. Compute 'Absolute tonnes km.' and 'Commercial tones-km'.
Answer:
Absolute tonnes km.:
= Weight in tonnes × Distance in km.
= From A to B + from B to C + from C to A
= (24 tonnes × 270 km.) + (14 tons × 150 km.) + (18 tonnes × 325 km.)
= 6,480 tonnes-km. + 2,100 tonnes-km. + 5,850 tonnes-km.
= 14,430 tonnes-km.
Commercial Tonnes km.
= Average weight load × Total distance (km.) travelled

 24  14  18 
= 
 3  Tonnes  745 km.
= 13,906.67 Tonnes km

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 Chapter 12 : Service Costing 12.2
Section – B
Question 3—
A transport company has been given a 40 kilometre long route to run 5 buses. The cost of each bus is
6,50,000. The buses will make 3 round trips per day carrying on an average 80 percent passengers of
their seating capacity. The seating capacity of each bus is 40 passengers. The buses will run on an average
25 days in a month. The other information for the year 2013-14 are given below:
Garage rent 4,000 per month
Annual repairs and maintenance 22,500each bus
Salaries of 5 drivers 3,000 each per month
Wages of 5 conductors 1,200 each per month
Manager's salary 7,500 per month
Road tax, permit fee, etc. 5,000 for a quarter
Office expenses 2,000 per month
Cost of diesel per litre 33
Kilometre run per litre for each but 6 kilometres
Annual depreciation 15% of cost
Annual Insurance 3% of cost
You are required to calculate the bus fare to be charged from each passenger per kilometre, if the company
wants to earn profits of 33/3 percent on taking (total receipts from passengers).
Answer— Operating Cost sheet for the year 2013–14
Particulars Total Cost ( )
A. Fixed Charges:
Garage rent ( 4,000 × 12 months) 48,000
Salary of drivers ( 3,000 × 5 drivers ×12 months) 1,80,000
Wages of Conductors ( 1,200 × 5 conductors × 12 months) 72,000
Manager's salary ( 7,500 × 12 months) 90,000
Road Tax, Permit fee, etc. ( 5,000 × 4 quarters) 20,000
Office expenses ( 2,000 × 12 months) 24,000
Insurance ( 6,50,000 × 5 buses × 3%) 97,500
Total (A) 5,31,500
B. Variable Charges:
Repairs and Maintenance ( 22,500 × 5 buses) 1,12,500
Depreciation ( 6,50,000 × 5 buses × 15%) 4,87,500
Diesel {(3,60,000 km. ÷ 6 km.) × 33} 19,80,000
Total (B) 25,80,000
Total Cost (A+B) 31,11,500
Add: 33 1/3 % Profit on takings or 50% on cost 15,55,750

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 Chapter 12 : Service Costing 12.3
Total Takings (Total bus fare collection) 46,67,250
Total Passenger-km. (Working Note 2) 1,15,20,000
Bus fare to be charged from each passenger per km. 0.405
Working Notes:
1. Total Kilometres to be run during the year 2013-14
= 40 km.× 2 sides × 3 trips × 25 days × 12 months × 5 buses = 3, 60,000 Kilometres
2. Total passenger Kilometres
= 3,60,000 km. × 40 passengers × 80% = 1,15,20,000 Passenger- km.
Question 4—
The following information relates to a bus operator:
Cost of the bus 18,00,000
Insurance charges 3% p.a.
Manager-cum accountant's salary 8,000 p.m.
Annual Tax 50,000
Garage Rent 2,500 p.m.
Annual repair & maintenanc 1,50,000
Expected life of the bus 15 years
Scrap value at the end of 15 years 1,20,000
Driver's salary 15,000 p.m.
Conductor's salary 12,000 p.m.
Stationery 500 p.m.
Engine oil, lubricants (for 1200 km.) 2,500
Diesel and oil (for 10 km.) 52
Commission to driver and conductor (shared equally) 10% of collections
Route distance 20 km long
The bus will make 3 round trips for carrying on the average 40 passengers in each trip. Assume 15%
profit on collections. The bus will work on the average 25 days in a month.
Calculate fare for passenger-km
Answer :
Working Notes:
(i) Calculation of Depreciation of Bus (Per month)

Cost of the bus – Scrap value at the end of the 15 years


Expectelife of the bus

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 Chapter 12 : Service Costing 12.4
18,00,000 – 1,20,000

15years
= 1,12,000 p. a.
1,20,000
Depreciation per month   9,333.33
12months
(ii) Calculation of total distance travelled and Passenger-km. per month
Total distance = 3 trips × 2 × 20 k.m. × 25 days = 3,000 k.m.
Total Passenger-km. = 3 trips × 2 × 20 k.m. × 25 days × 40 passengers
= 1,20,000 Passenger-k.m.
(iii) Cost of Engine oil. Lubricants and Diesel & oil (Per month)
Total distance travelled
Engine oil & Lubricants   2,500
1,200K.m.

3,000K.m.
  2,500  6,250
1,200K.m.

Total distance travelled

Diesel and Oil   52
10 K.m.

3,000K.m.
  52  15,600
10K.m.
Statement showing the Operating Cost per Passenger-km.

(i) Standing Charges:

Depreciation {Working Note-(i)} 9,333.33
 18,00,000 
Insurance Charge   3%  4,500
 12 
Manager-cum-accountant's salary 8,000

 50,000 
Annual Tax (p.m.)   4,166.67
 12 
Garage Rent 2,500 28,500
(ii) Maintenance Charges:

 1,50,000 
Repair & Maintance per month   12,500
 12 

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 Chapter 12 : Service Costing 12.5
(iii) Running Cost:
Driver's Salary 15,000
Counductor's Salary 12,000
Stationery 500
Engine oil & Lubricants {Working Note-(iii)} 6,250
Diesel and oil {Working Note-(iii)} 15,600
Total running cost before deducting commission to 49,350 49,350
deiver and conductor
Total cost excluding commission to
driver and conductor 90,350
Driver's commission on collection* 6,023.34
Conductor's commission on collection* 6,023.33
Total Cost (i)+(ii)+(iii) 1,02,396.67
Add : Profit** 18,070
Total Collection 1,20,466.67
Working Note:
Total costs before commission on collection and net profit is 90,350.
Commission on collection to driver and conductor is 10% of collection and Profit is 15% of
collection means
100% - (10% + 15%) i.e. 75% = 90,350
90,350
So, Total collection =  100  1,20,466.67
75
*Total Commission on collection = 10% × 1,20,466.67 = 12,046.67
Driver's share = 50% × 12,046.67 = 6,023.34
Conductor's share = 50% × 12,046.67 = 6,023.33
**Profit on collection = 1,20,466.67 × 15% = 18,070
Total Collection
Fare per Passenger-km. 
Total Passenger - km. {Working Note (ii)}

1,20,466.67

1,20,000
= 1.004 (appx.)

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 Chapter 12 : Service Costing 12.6
Question 5—
Voyager Cabs Pvt. Ltd. is a New Delhi based cab renting company, provides cab facility on rent for cities
Delhi, Agra and Jaipur to the tourists. To attract more tourists it has launched a new three days tour
package for Delhi-Jaipur-Agra-Delhi. Following are the relevant information regarding the package:
Distance between Delhi to Jaipur (Km.) 274
Distance between Delhi to Agra (Km.) 242
Distance between Agra to Jaipur (Km.) 238
Price of diesel in Delhi 54 per litre
Price of diesel in Jaipur 56 per litre
Price of diesel in Agra 58 per litre
Mileage of cab per litre of diesel (Km.) 16
Chauffeur's salary 12,000 per month
Cost of the cab 12,00,000
Expected life of the cab 24,00,000 kms.
Servicing cost 30,000 after every 50,000 kilometres run.
Chauffeur's meal allowance 50 for every 200 kilometres of completed journey
Other set up and office cost 2,400 per month.
Voyager Cabs has made tie-up with fuel service centres at Agra, Jaipur and Delhi to fill diesel to its cabs on
production of fuel passbook to the fuel centre. Company has a policy to get fuel filled up sufficient to reach
next destination only.
You are required to calculate the price inclusive of service tax @ 12.36% to be quoted for the package if
company wants to earn profit of 25% on its net takings i.e. excluding service tax.
Answer :
Calculation of Price of the Delhi-Jaipur-Agra-Delhi tour package
Particulars Amount ( ) Amount ( )
Diesel Cost (Working Note-2) 2,635.00

 30,000 
Servicing Cost   754kms. 452.40
 50,000kms 
Chauffeur's meal cost (three 200 km. completed journey × 50 150.00
Other Allocable costs:

 12,00,000 
Depreciation   754kms. 377.00
 24,00,000kms 

 2,400 
Other set-up and office cost   3days  240.00
 30 days 

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 12,000 
Chauffeur's salary   3days  1,200.00 1,817.00
 30 days 
Total Cost 5,054.40
Add: Profit (25% of net taking or 1/3rd of total cost) 1,684.80
6,739.20
Add: Service Tax @ 12.36% 832.97
Price of the package (inclusive of service tax) 7,572.17
Working Notes
(1) Total distance of journey
From To Distance (in Km.)
Delhi Jaipur 274
Jaipur Agra 238
Agra Delhi 242
Total Distance 754

(2) Cost of Diesel

From To Distance (in km.) price of diesel litre ( ) Total diesel Cost ( )
I II III IV V=(III÷16km)×IV
Delhi Jaipur 274 54 924.75
Jaipur Agra 238 56 833.00
Agra Delhi 242 58 877.25
Total cost 2,635.00
Question 6—
A mini-bus, having a capacity of 32 passengers, operates between two places - 'A' and 'B'. The distance
between the place 'A' and place 'B' is 30 km. The bus makes 10 round trips in a day for 25 days in a
month. On an average, the occupancy ratio is 70% and is expected throughout the year.
The details of other expenses are as under:
Amount ( )
Insurance 15,600 Per annum
Garage Rent 2,400 Per quarter
Road Tax 5,000 Per annum
Repairs 4,800 Per quarter
Salary of operating staff 7,200 Per month
Tyres and Tubes 3,600 Per quarter
Diesel: (one litre is consumed for every 5 km) 13 Per litre

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 Chapter 12 : Service Costing 12.8
Oil and Sundries 22 Per 100 km run
Depreciation 68,000 Per annum
Passenger tax @ 22% on total taking is to be levied and bus operator requires a profit of 25% on total
taking.
Prepare operating cost statement on the annual basis and find out the cost per passenger kilometer and one
way fare per passenger.
Answer:
Operating Cost Statement
Particulars Total Cost Per annum
( )
A. Fixed Charges:
15,600
Insurance
9,600
Garage rent ( 2,400 × 4 quarters)
5,000
Road Tax
86,400
Salary of operating staff ( 7,200 × 12 months)
68,000
Depreciation
Total (A) 1,84,600
B. Variable Charges:
Repairs ( 4,800 × 4 quarters) 19,200
Tyres and Tubes ( 3,600 × 4 quarters) 14,400
Diesel {(1,80,000 km. ÷ 5 km.) × 13} 4,68,000
Oil and Sundries {(1,80,000 km. ÷ 100 km.) × 22} 39,600

Total (B) 5,41,200

Total Operating Cost (A+B) 7,25,800
Add: Passenger tax (Refer to WN-1) 3,01,275
Add: Profit (Refer to WN-1) 3,42,359
Total takings 13,69,434
Calculation of Cost per passenger kilometre and one way fare per passenger:
Total Operating Cost
Cost per Passenger-Km. 
Total Passenger – Km.

7,25,800
  0.18
40,32,000Passenger – Km.

Total Takings
One way fare per passenger   30Km.
Total Passenger – Km.

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 Chapter 12 : Service Costing 12.9
13,69,434
  30Km.  10.20
40,32,000 Passenger – Km.
Working Notes:
1. Let total taking be X then Passenger tax and profit will be as follows:
X = 7,25,800 + 0.22 X + 0.25X
X - 0.47 X = 7,25,800
7,25,800
X  13,69,434
0.53
Passenger tax = 13,69,434 × 0.22 = 3,01,275
Profit = 13,69,434 × 0.25 = 3,42,359
2. Total Kilometres to be run during the year
= 30 km.× 2 sides × 10 trips × 25 days × 12 months = 1,80,000 Kilometres
3. Total passenger Kilometres
= 1,80,000 km. × 32 passengers × 70% = 40,32,000 Passenger- km.
Question 7—
A Mineral is transported from two mines - 'A' and 'B' and unloaded at plots in a Railway Station. Mine A
is at a distance of 10 km., and B is at a distance of 15 km. from railhead plots. A fleet of lorries of 5 tonne
carrying capacity is used for the transport of mineral from the mines. Records reveal that the lorries
average a speed of 30 km. per hour, when running and regularly take 10 minutes to unload at the railhead.
At mine 'A' loading time averages 30 minutes per load while at mine 'B' loading time averages 20 minutes
per load.
Drivers' wages, depreciation, insurance and taxes are found to cost 9 per hour operated. Fuel, oil, tyres,
repairs and maintenance cost 1.20 per km.
Draw up a statement, showing the cost per tonne-kilometer of carrying mineral from each mine.
Answer—
Statement showing the cost per tonne-kilometre of carrying mineral from each mine
Mine A ( ) Mine B ( )
Fixed cost per trio : (Refer to working note 1)
(Driver's wages, depreciation, insurance and taxes)
A. 1 hour 20 minutes @ 9 per hour 12.00
B. 1 hour 30 minutes @ 9 per hour 13.50
Running and maintenance cost:
(Fuel, Oil, Tryies, Repairs and maintenance)
A. 20 km. 1.20 per km. 24.00
B. 30 km.. 1.20 per km. . 36.00
Total Cost per trip 36.00 49.50
Cost per tonne – Km 0.72 0.66
 36   49.50 
(Refer to working note 2)    
 50 tonne – km   75 tonne – km 
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Working Notes:
Mine–A `Mine – B
(1) Total operated time taken per trip Running
time to & fro 40 minues 60 minutes

 60 minutes   60 minutes 
 20km.   30km.  
 30km   30km 
Up-loading time 10 minutes 10 minutes
Loading time 30 minutes 20 minutes
Total operated time 80 minutes or 90 minutes or
1 hour 20 minutes 1 hour 30 minutes
(2) Effective tones – km 50 75
(5 tonnes × 10 km.) (5 tonnes ×15 km.)
Question 8—
A transport company has a fleet of three trucks of 10 tonnes capacity each plying in different directions for
transport of customer's goods. The trucks run loaded with goods and return empty. The distance travelled,
number of trips made and the load carried per day by each truck are as under:
Truck One way No. of trips Load carried
No. Distance Km per day per trip / day
tonnes
1 16 4 6

2 40 2 9

3 30 3 8
The analysis of maintenance cost and the total distance travelled during the last two years is as under
Year Total distance Maintenance
travelled Cost
1 1,60,200 46,050

2 1,56,700 45,175

The following are the details of expenses for the year under review:
Diesel 10 per litre. Each litre gives 4 km per litre of diesel on an
average.
Driver's salary 2,000 per month
Licence and taxes 5,000 per annum per truck
Insurance 5,000 per annum for all the three vehicles

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 Chapter 12 : Service Costing 12.11

Purchase Price per truck 3,00,000, Life 10 years. Scrap value at the end of life is
10,000.
Oil and sundries 25 per 100 km run.
General Overhea d 11,084 per annum

The vehicles operate 24 days per month on an average.

Required
(i) Prepare an Annual Cost Statement covering the fleet of three vehicles.
(ii) Calculate the cost per km. run.
(iii) Determine the freight rate per tonne km. to yield a profit of 10% on freight.
Answer—
(i) Annual Cost Statement of three vehicles
( )
Diesel {(1,34,784 km. ÷ 4 km) × 10) (Refer to Working Note 1) 3,36,960
Oil & sundries {(1,34,784 km. ÷ 100 km.) × 25} 33,696
Maintenance {(1,34,784 km. × 0.25) + 6,000} 39,696
(Refer to Working Note 2)
Drivers' salary {( 2,000 × 12 months) × 3 trucks} 72,000
Licence and taxes ( 5,000 × 3 trucks) 15,000
Insurance 5,000
Depreciation {( 2,90,000 ÷ 10 years) × 3 trucks} 87,000
General overhead 11,084
Total annual cost 6,00,436
(ii) Cost per km. run
Total annual cost of vehicles
Cost per kilometer run = (Refer to Working note 1)
Total kilometre travelled annually

6,00,436
=  4.4548
1,34,784 Kms
(iii) Freight rate per tonne km (to yield a profit of 10% on freight)
Total annual cost of three vehicles
Cost per toone km.  (Refer to Working Note 1)
Total effective tonnes kms. per annum

6,00,436
=  1.143
5,25,312 Kms

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 1.143 
Freight rate per tonne km.    1  1.27
 0.9 
Working Notes :
1. Total kilometre travelled and tonnes kilometre (load carried) by three trucks in one year
Truck One way No. of Total Load Total
number distance trips distance carried effective
in kms covered per trip / tonnes
in km day in km
per day tonnes
1 16 4 128 6 384
2 40 2 160 9 720
3 30 3 180 8 720
Total 468 1,824
Total kilometre travelled by three trucks in one year
(468 km. × 24 days × 12 months) = 1,34,784
Total effective tonnes kilometre of load carried by three trucks during one year
(1,824 tonnes km. × 24 days × 12 months) = 5,25,312
2. Fixed and variable component of maintenance cost:
Difference in maintance cost
Variable maintance cost per km =
Difference in distance travelled

46,050 – 45,175
= 1,60,200 kms – 1,56,700 kms  0.25

Fixed maintenance cost = Total maintenance cost-Variable maintenance cost

= 46,050 - 1,60,200 kms × 0.25 = 6,000
Question 9—
A transport company has 20 vehicles, which capacities are as follows:
No. of Vehicles Capacity Per Vehicle
5 9 tonne
6 12 tonne
7 15 tonne
2 20 tonne
The company provides the goods transport service between stations 'A' to station 'B'. Distance between
these stations is 200 kilometres. Each vehicle makes one round trip per day an average. Vehicles are loaded
with an average of 90 per cent of capacity at the time of departure from station 'A' to station 'B' and at the
time of return back loaded with 70 per cent of capacity. 10 per cent of vehicles are laid up for repairs every
day. The following information are related to the month of October, 2013:

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Salary of Transport Manager 30,000
Salary of 30 drivers 4,000 each driver
Wages of 25 Helpers 2,000 each helper
Wages of 20 Laboures 1,500 each laboures
Consumable stores 45,000
Insurance (Annual) 24,000
Road Licence (Annual) 60,000
Cost of Diesel per litre 35
Kilometres run per litre each vehicle 5 Km.
Lubricant, Oil etc. 23,500
Cost of replacement of Tyres, Tubes, Other parts etc. 1,25,000
Garage rent (Annual) 90,000
Transport Technical Service Charges 10,000
Electricity and Gas charges 5,000
Depreciation of vehicles 2,00,000
There is a workshop attached to transport department which repairs these vehicles and other vehicles also.
40 per cent of transport manager's salary is debited to the workshop. The transport department is charged
28,000 for the service rendered by the workshop during October, 2013. During the month of October,
2013 operation was 25 days.
You are required:
(i) Calculate per ton-km operating cost.
(ii) Find out the freight to be charged per ton-km, if the company earned a profit of 25 per cent on
freight.
Answer :
(i) Operating Cost Sheet for the month of October, 2013
Particulars Amount ( )
A Fixed Charges:
Manager's salary( 30,000×60%) 18,000
Drivers' salary ( 4,000×30 drivers) 1,20,000
Helper's wages ( 2,000×25 helpers) 50,000
Labourer wages ( 1,500×20 labourers) 30,000
Insurance ( 24,000 ÷12 months) 2,000
Road licence ( 60,000÷12 months) 5,000
Garage rent ( 90,000÷ 12 months) 7,500
Transport Technical Service Charges 10,000
Share in workshop expenses 28,000

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Total (A) 2,70,500
B Varible Charges :
Cost of diesel (Working Note 1) 12,60,000
Lubricant, Oil etc. 23,500
Depreciation 2,00,000
Replacement of Tyres, Tubes & other parts 1,25,000
Consumable Stores 45,000
Electricity and Gas charges 5,000
Total (B) 16,58,500
C. Total Cost (A+B) 19,29,000
D. Total Ton-Kms. (Working Note 2) 18,86,400
E. Cost per ton-km. (C÷D) 1.022
(ii) Calcualtion of Chargeable Freight
Cost per ton-km. 1.022
1
Add: Profit @ 25% on freight or 33 % on cost 0.341
3
Chargeabel freight per ton-km. 1.363 or 1.36
Working Notes:
1. Cost of Diesel:–
Distance covered by each vehicle during October, 2013
= 200 k.m. × 2 × 25 days × 90% = 9.000km.
9,000k.m.  20 vehicles
Consumption of diesel =   36,000litres.
5k.m.
Cost of diesel = 36,000 litres × 35=12,60,000.
2. Calculation of total ton-km:
Total Ton-km. = Total Capacity × Distance covered by each vehicle × Average Capacity Utilisation
ratio.
90%  70% 
= [(5×9 ton)+(6×12 ton)+(7×15 ton)+(2×20 ton)]× 9,000k.m.×
2
= (45 + 72 + 105 + 40) × 9,000 k.m. × 80%
= 262 × 9,000 × 80%
= 18,86,400 ton-k.m.

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Question 10—
Gopal Milk Co-Operative Society (GMCS) collects raw milk from the farmers of Ramgarh, Pratapgarh
and Devgarh panchayats and processes these milk to make various dairy products. GMCS has its own
vehicles (tankers) to collect and bring the milk to the processing plant. Vehicles are parked in the GMCS's
garage situated within the plant compound. Following are the some information related with the vehicles:
Ramgarh Pratapgarh Devgarh
No. of vehicles assigned 4 3 5
No. of trips a day 3 2 2
One way distance from the processing plant 24 k.m. 34 k.m. 16 k.m.
Toll tax paid p.m. ( ) 2,850 3,020 ---
All the 5 vehicles assigned to Devgarh panchayat, were purchased five years back at a cost of 9,25,000
each. The 4 vehicles assigned to Ramgarh panchayat, were purchased two years back at a cost of
11,02,000 each and the remaining vehicles assigned to Pratapgarh were purchased last year at a cost of
13,12,000 each. With the purchase of each vehicle a two years free servicing warranty is provided. A
vehicle gives 10 kmpl mileage in the first two year of purchase, 8 kmpl in next two years and 6 kmpl
afterwards. The vehicles are subject to depreciation of 10% p.a. on straight line basis irrespective of
usage. A vehicle has the capacity to carry 25,000 litres of milk but on an average only 70% of the total
capacity is utilized.
The following expenditure is related with the vehicles:
Salary of Driver (a driver for each vehicle) 18,000 p.m.
Salary to Cleaner (a cleaner for each vehicle) 11,000 p.m.
Allocated garage parking fee 1,350 per vehicle per month
Servicing cost 3,000 for every complete 5,000 k.m. run.
Price of diesel per litre 58.00
From the above information you are required to calculate
(i) Total operating cost per month for each vehicle. (Take 30 days for the month)
(ii) Vehicle operating cost per litre of milk.
Answere:
(i) Calculation of Operating Cost per month for each vehicle
Ramgarh Pratapgarh Devgarh Total

A. Running Costs:
- Cost of diesel(Working Note-2) 1,25,280 70,992 92,800 2,89,072

- Servicing cost (Working Note-3) 9,000 – 3,000 12,000

. . . .
1,34,280 70,992 95,800 3,01,072

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B. Fixed Costs :
- Salary to drivers 72,000 54,000 90,000 2,16,000
(4 deivers × (3 drivers × (5 drivers ×
18,000) 18,000) 18,000)
- Salary of cleaners 44,000 33,000 55,000 1,32,000
(4 cleaners × (3 cleaners × (5 cleaners ×
11,000) 11,000) 11,000)
- Allocated garage parking fee 5,400 4,050 6,750 16,200
( 4 vehicles × (3 vehicles × (5 vehicles ×
1,350) 1,350) 1,350)
- Depreciation (Working Note-4) 36,733 32,800 38,542 1,08,075
- Toll tax passes 2,850 3,020 – 5,870
1,60,983 1,26,870 1,90,292 4,78,145
. . . .
Total [A + B] 2,95,263 1,97,862 2,86,092 7,79,217
Operating Cost per vehicle 73,815.75 65,954 52,218.40 64,934.75
( 2,95,263÷ ( 1,97,862÷ ( 2,86,092÷ ( 7,79,217÷
4 vehicles) 3 vehicles) 5 vehicles) 12 vehicles)
(ii) Vehicle operating cost per litre of milk
Total Operating Cost per month 7,79,217
  0.053
Total milk carried a month 1,47 ,00,000 Litres (Working Note – 5)
Working Notes :
1. Distance covered by the vehicles in a month
Route Total Distance (in K.M.)
Ramgarh (4 vehicles × 3 trips × 2 × 24 km. × 30 days) 17,280
Pratapgarh (3 vehicles × 2 trips × 2 × 34 km. × 30 days) 12,240
Devgarh (5 vehicles × 2 trips × 2 × 16 km. × 30 days) 9,600
2. Cost of diesel consumption
Ramgarh Pratapgarh Devgarh
Total distance travelled (K.M.) 17,280 12,240 9,600
Mileage per litre of diesel 8 kmpl 10 kmpl 6 kmpl
Diesel consumption (Litre) 2,160 1,224 1,600
(17,280 ÷ 8) (12,240 ÷ 10) (9,600 ÷ 6)
Cost of diesel consumption @ 58 per litre( ) 1,25,280 70,992 92,800

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 Chapter 12 : Service Costing 12.17
3. Servicing Cost
Ramgarh Pratapgarh Devgar h
Total distance travelled (K.M.) 17,280 12,240 9,600
Covered under free service No Yes No
warranty
No. of services required 3 2 1
(17,280 k.m. ÷ (12,240 k.m. ÷ (9,600 k.m. ÷
5,000 k.m.) 5,000 k.m.) 5,000 k.m.)
Total Service Cost ( ) 9,000 --- 3,000
( 3,000 × 3) ( 3,000 × 1)

4. Calculation of Depreciation
Ramgarh Pratapgarh Devgarh
No. of vehicles 4 3 5
Cost of a vehicles 11,02,000 13,12,000 9,25,000
Total Cost of vehicles 44,08,000 39,36,000 46,25,000
Depreciation per month 36,733 32,800 38,542

 44,08,000  10%   39,36,000  10%   46,25,000  10% 

     
 12months   12months   12months 
5. Total volume of Milk Carried
Route Milk Qty. (Litre)
Ramgarh ( 25,000 ltr. × 0.7 × 4 vehicles × 3 trips × 30 days) 63,00,000
Pratapgarh (25,000 ltr. × 0.7 × 3 vehicles × 2 trips × 30 days) 31,50,000
Devgarh (25,000 ltr. × 0.7 × 5 vehicles × 2 trips × 30 days) 52,50,000
1,47,00,000
Question 11—
EPS 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 up junior students. Similarly, in the afternoon, the first trip takes the junior
students and an hour later the second trip takes the senior students home.
The distance travelled by each bus, one way is 16 km. The school works 24 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 the year 2013-2014 are as under:

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Driver's salary - payable for all the 12 in months. 5,000 per month per driver.
Cleaner's salary payable for all the 12 months 3,000 per month per cleaner
(one cleaner has been employed for every five buses).
Licence Fees, Taxes etc. 2,300 per bus per annum
Insurance Premium 15,600 per bus per annum
Repairs and Maintenance 16,400 per bus per annum
Purchase price of the bus 16,50,000 each
Life of the bus 16 years
Scrap value 1,50,000
Diesel Cost 18.50 per litre
Each bus gives an average of 10 km. per litre of diesel. The seating capacity of each bus is 60 students. The
seating capacity is fully occupied during the whole year.
The school follows differential bus fees based on distance traveled as under:
Students picked up and Bus fee Percentage of students
dropped within the range of availing this facility
distance from the school
4 km. 25% of Full 15%
8 km. 50% of Full 30%
16 km. Full 55%
Ignore interest. Since the bus fees has to be based on average cost, you are required to
(i) Prepare a statement showing the expenses of operating a single bus and the fleet of 25 buses for a
year.
(ii) Work out average cost per student per month in respect of:
(a) Students coming from a distance of upto 4 km. from the school.
(b) Students coming from a distance of upto 8 km. from the school; and
(c) Students coming from a distance of upto 16 km. from the school.
Answer—

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(i) EPS Public School
Statement showing the expenses of operating a single bus
and the fleet of 25 buses for a year

Per Bus Per Fleet of 25 buses

Particulars
Annum per annum
( ) ( )
Running Costs : A
56,832 14,20,800
Diesel (Refer to working note 1)
Repairs & Maintenance costs : (B) 16,400 4,10,000
Fixed Charges:
Driver's Salary ( 5,000×12 months) 60,000 15,00,000
Cleaners Salary ( 3,000 × 1/5th×12 months) 7,200 1,80,000
Licence Fee, Taxes etc. 2,300 57,500
Insurance 15,600 3,90,000
Depreciation 93,750 23,43,750
Total Fixed Charges: (C) 1,78,850 44,71,250
Total expenses :(A+B+C) 2,52,082 63,02,050
(ii) Average cost per student per month in respect of
students coming from a distance of:
(a) 4 km. from the school{ 2,52,082 / (354 students × 12 months)} 59.34
(Refer to Working Note 2)
(b) 8 km. from the school ( 59.34 ×2) 118.68
(c) 16 km. from the school ( 59.34 × 4) 237.36
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 (16 km. × 2 trips) 32 km.
Distance traveled per day by a bus (32 km. × 4 shifts) 128 km.
Distance traveled during a month (128 km. × 24 days) 3,072 km.
Distance traveled per year (3,072 km × 10 months) 30,720 km.
No of litres of diesel required per bus per year 3,072 litres

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 Chapter 12 : Service Costing 12.20
(30,720 km ÷ 10 km.)
Cost of diesel per bus per year (3,072 litres × 18.50) 56,832
2. Calculation of number of students per bus:
Bus capacity of 2 trips (60 students × 2 trips) 120 students
¼th fare students (15% × 120 students) 18 students
½ fare 30% students (equivalent to ¼th fare students) 72 students
Full fare 55% students (equivalent to ¼th fare students) 264 students
Total ¼th fare students 354 students

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Costing for Airlines
Question 12
In order to develop tourism, ABCL airline has been given permit to operate three flights in a week between
X and Y cities (both side). The airline operates a single aircraft of 160 seats capacity. The normal occu-
pancy is estimated at 60% through out the year of 52 weeks. The one-way fare is 7,200. The cost of
operation of flights are:
Fuel cost (variable) 96,000 per flight
Food served on board on non-chargeable basis 125 per passenger
Commission 5% of fare applicable for all booking
Fixed Cost—
Aircraft lease 3,50,000 per flight
Landing Charges 72,000 per flight
Required:
(i) Calculate the net operating income per flight.
(ii) The airline expects that its occupancy will increase to 108 passengers per flight if the fare is
reduced to 6,720. Advise whether this proposal should be implemented or not.
Answer:
(i) No. of passengers 160 seats × 60% = 96
( ) ( )
Fare collection (96 passengers × 7,200) 6,91,200
Variable costs:
Fuel 96,000
Food (96 passengers × 125) 12,000
Commission (5% of 6,91,200) 34,560 1,42,560
Contribution per 5,48,640

flight Fixed costs:

3,50,000
Aircraft Lease
72,000 4,22,000
Landing charges
1,26,640
Net income per flight
(ii) Fare collection (108 passengers × 6,720) 7,25,760
Variable cost:
Fuel 96,000
Food (108 passengers × 125) 13,500
Commission (5% of 7,25,760) 36,288 1,45,788
Contribution 5,79,972
There is an increase in contribution by 31,332. Hence the proposal is acceptable.

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 Chapter 12 : Service Costing 12.22
Costing for Clubs and Liabrary—
Question 13—
A Club runs a library for its members. As part of club policy, an annual subsidy of upto 5 per member
including cost of books may be given from the general funds of the club. The management of the club has
provided the following figures for its library department.
Number of Club members 5,000
Number of Library members 1,000
Library fee per member per month 100
Fine for late return of books 1 per book per day
Average No. of books returned late per month 500
Average No. of days each book is returned late 5 Days
Number of available old books 50,000 books
Cost of new books 300 per book
Number of books purchased per year 1,200 books
Cost of maintance per old book per year 10
Staff details No. Per Employee Salary per ( ) month
Librarian 01 10,000

Assistant Librarian 03 7,000

Clerk 01 4,000
You are required to calculate:
(i) the cost of maintaining the library per year excluding the cost of new books;
(ii) the cost incurred per member per month on the library excluding cost of new books; and
(iii) the net income from the library per year.
If the club follows a policy that all new books must be purchased out of library revenue
(a) What is the maximum number of books that can be purchased per year and
(b) How many excess books are being purchased by the library per year?
Also, comment on the subsidy policy of the club
Answer :
( ) ( )
Total Revenue
Library fees per month (1,000 members × 100) 1,00,000
Late fees per month (500 times × 5 books × 1) 2,500
Total Revenue per month 1,02,500
Total Revenue per annum ( 1,02,500 × 12 months) 12,30,000

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 Chapter 12 : Service Costing 12.23
Total Cost
Staff Costs:
Librarian ( 10,000 × 1 person × 12 months) 1,20,000
Assistant Librarian ( 7,000 × 3 persons × 12 months) 2,52,000
Clerk ( 4,000 × 1 person × 12 months) 48,000 4,20,000
Books maintenance cost (50,000 books × 10) 5,00,000
Total maintenance cost per annum excluding cost of new books 9,20,000
Cost incurred per library member per annum ( 9,20,000 ÷1,000) 920
Cost incurred per library member per month on the library
excluding cost of new books ( 920 ÷12 months) 76 .67
Cost incurred per club member per annum ( 9,20,000 ÷ 5,000) 184
Cost incurred per club member per month ( 184 ÷12 months) 15.33
Net income from the library per annum
( 12,30,000 - 9,20,000) 3,10,000
Cost per new book 300
Maximum number of new books per annum ( 3,10,000 ÷ 300) 1,033.33 nos.
Number of books purchased 1,200 nos.
Excess books purchased (1,200 nos. - 1,033.33 nos.) 166.67
Subsidy being given per annum on excess purchase 50,000
(166.67 books × 300) .
Subsidy per library member per annum ( 50,000 ÷1,000 members) 50
Subsidy per club member per annum ( 50,000 ÷ 5,000 members) 10
Comment: The club is exceeding its subsidy target to members by 45 ( 50 - 5) per library member
and 5 ( 10 - 5) per club member.
**********

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 Chapter 13 : Standard Costing 13.1
Part – A Material Cost Variances
Question 1—
UV Ltd. presents the following information for November, 2013:
Budgeted production of product P = 200 units.
Standard consumption of Raw materials = 2 kg. per unit of P.
Standard price of material A = 6 per kg.
Actually, 250 units of P were produced and material A was purchased at 8 per kg and consumed at 1.8 kg
per unit of P. Calculate the Material Cost Variances.
Answer—
Actual production of P = 250 units
Standard quantity of material A for actual production = 2 kg. × 250 units = 500 kg.
Actual quantity of material A for actual production = 1.8 kg. × 250 units = 450 kg.
Standard price per kg. of material A = 6 (SP)
Actual price per kg. of material A = 8 (AP)
(1) Total Material Cost Variance = (Standard Price × Standard Quantity) – (Actual Price × Actual Quantity)
= ( 6 × 500 kg.) – ( 8 × 450 kg.)
= 3,000 – 3,600 = 600 (A)
(2) Material Price Variance = (Standard Price – Actual Price) ×Actual Quantity
= ( 6 – 8) × 450 kg. = 900 (A)
(3) Material Usage Variance = (Standard Quantity – Actual Quantity) × Standard Price
= (500 kg. – 450 kg.) × 6 = 300 (F)
Question 2—
The following information is available from the cost records of Vatika & Co. For the month of August, 2013:
Material purchased 24,000 kg 1,05,600
Material consumed 22,800 kg
Actual wages paid for 5,940 hours 29,700
Unit produced 2,160 units.
Standard rates and prices are:
Direct material rate is 4.00 per unit
Direct labour rate is 4.00 per hour
Standard input is 10 kg. for one unit
Standard labour requirement is 2.5 hours per unit.
Calculate all material and labour variances for the month of August, 2013.
Answer—
Material Variances:
(i) Material Cost Variance
= (Std. Qty. × Std. Price) – (Actual Qty. × Actual Price)
= (2,160 units × 10 kg. × 4) – (22,800 kg. × 4.40)
= 86,400 – 1,00,320 = 13,920 (A)
(ii) Material Price Variance
= Actual Q (SP – AP)
= 24,000 kg. ( 4 – 4.40) = 9,600 (A)
(Here AQ means actual quantity of material purchased)
(iii) Material Usage Variance
= SP (SQ - AQ)
= 4 (21,600 kg. - 22,800 kg.) = 4,800 (A)
Labour Variances:

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 Chapter 13 : Standard Costing 13.2
(i) Labour Cost Variance
= (SH × SR) - (AH × AR)
= (2,160 units × 2.50 hours × 4) – 29,700
= 21,600 – 29,700 = 8,100 (A)
(ii) Labour Rate Variance
= AH (SR - AR) = 5,940 hours ( 4 – 5) = 5,940 (A)
(iii) Labour Efficiency Variance
= SR (SH – AH)
= 4 (5,400 hours – 5,940 hours) = 2,160 (A)
Question 3—
Following are the details of the product Phomex for the month of April 2013: Standard quantity of material
required per unit 5 kg
Actual output 1000 units
Actual cost of materials used 7,14,000
Material price variance 51,000 (Fav)
Actual price per kg of material is found to be less than standard price per kg of material by 10. You are
required to calculate:
(i) Actual quantity and Actual price of materials used.
(ii) Material Usage Variance
(iii) Material Cost Variance.
Answer—
(i) Actual Quantity and Actual Price of material used
Material Price Variance = Actual Quantity (Std. Price - Actual Price) = 51,000
Or, AQ (SP - AP) = 51,000
Or, 10 AQ = 51,000
Or, AQ = 5,100 kgs
Actual cost of material used is given i.e.
AQ × AP = 7,14,000
Or, 5,100 AP = 7,14,000
AP = 140
 Actual price is less by 10
So, Standard Price = 140 + 10 = 150 per kg
Actual Quantity = 5,100 kgs
Actual Price = 140/kg
(ii) Material Usage Variance
Std. Price (Std. Quantity – Actual Quantity)
Or, SP (SQ - AQ) = 150 (1,000 units × 5 kg – 5,100 kg)
= 15,000 (A)
(iii) Material Cost Variance = Std. Cost – Actual Cost
= (SP x SQ) – (AP x AQ)
= 150 × 5,000 – 140 × 5,100
= 7,50,000 – 7,14,000
= 36,000 (F)
OR
Material Price Variance + Material Usage Variance
51,000 (F) + 15,000 (A)= 36,000 (F)

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 Chapter 13 : Standard Costing 13.3
Question 4—
Jigyasa Pharmaceuticals Ltd. is engaged in producing dietary supplement 'Funkids' for growing children. It
produces 'Funkids' in a batch of 10 kgs. Standard material inputs required for 10 kgs. of 'Funkids' are as
below:
Material Quantity (in kgs.) Rate per kg. (in )
Vita – X 5 110
Proto – D 3 320
Mine – L 3 460
During the month of March, 2014, actual production was 5,000 kgs. of 'Funkids' for which the actual quan-
tities of material used for a batch and the prices paid thereof are as under:
Material Quantity (in kgs.) Rate per kg. (in )
Vita – X 6 115
Proto – D 2.5 330
Mine – L 2 405
You are required to calculate the following variances based on the above given information for the month of
March, 2014 for Jigyasa Pharmaceuticals Ltd.:
(i) Material Cost Variance;
(ii) Material Price Variance;
(iii) Material Usage Variance;
(iv) Material Mix Variance;
(v) Material Yield Variance.
Answer—
Material SQ*× SP AQ**× SP AQ** × AP RSQ***× SP
Vita– X 2,75,000 3,30,000 3,45,000 2,62,400
(2,500 kg. × 110) (3,000 kg. × 110) (3,000 kg. × 115) (2,386 kg. × 110)
Proto– D 4,80,000 4,00,000 4,12,500 4,58,240
(1,500 kg. × 320) (1,250 × 320) (1,250kg. × 330) (1,432 kg. × 320)
Mine – L 6,90,000 4,60,000 4,05,000 6,58,720
(1,500 kg. × 460) (1,000 kg. × 460) (1,000 kg. × 405) (1,432 kg. × 460)
Total 14,45,000 11,90,000 11,62,500 13,79,420
* Standard Quantity of maaterials for actual output:

5 kgs.
Vita–x   5,000kgs.  2,500 kgs.
10 kgs

3 kgs.
Proto–D   5,000kgs.  1,500 kgs.
10 kgs

3 kgs.
Mine–L   5,000kgs.  1,500 kgs.
10 kgs

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 Chapter 13 : Standard Costing 13.4
** Actual Quantity of Material used:

6 kgs.
Vita–X   5,000kgs.  3,000 kgs. = 3,000 kgs.
10 kgs

2.5 kgs.
Proto–D   5,000kgs.  1,250 kgs.
10 kgs

3 kgs.
Mine–L   5,000kgs.  1,000 kgs.
10 kgs
*** Revised Standard Quantity (RSQ):

5 kgs.
Vita–X   5,250kgs.  2,386 kgs.
11 kgs

3 kgs.
Proto–D   5,250kgs.  1,432 kgs.
11 kgs

3 kgs.
Mine–L   5,250kgs.  1,432 kgs.
11 kgs
(i) Material Cost Variance = (Std.Qty. × Std. Price) – (Actual Qty. × Acutal Price)
Or = (SQ × SP) – (AQ × AP)
Vita–X = 2,75,000 – 3,45,000 = 70,000 (A)
Proto–D = 4,80,000 – 4,12,500 = 67,500 (F)
Mine–L = 6,90,000 – 4,05,000 = 2,85,000 (F)
2,82,500 (F)
(ii) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
= (AQ × SP) – (AQ × AP)
Vita-X = 3,30,000 – 3,45,000 = 15,000 (A)
Proto–D = 4,00,000 – 4,12,500 = 12,500 (A)
Mine–L = 4,60,000 – 4,05,000 = 55,000 (F)
27,500 (F)
(iii) Material Usage Variance = Std. Price (Std. Qty. – Actual Qty.)
Or = (SQ × SP) – (AQ × SP)
Vita–X = 2,75,000 – 3,30,000 = 55,000 (A)
Proto-D = 4,80,000 – 4,00,000 = 80,000 (F)
Mine-L = 6,90,000 – 4,60,000 = 2,30,000 (F)
2,55,000 (F)

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 Chapter 13 : Standard Costing 13.5
(iv) Material Mix Variance = Std. Price (Revised Std. Qty. – Actual Qty.)
Or = (RSQ × SP) – (AQ × SP)
Vita-X = 2,62,460 – 3,30,000 = 67,540 (A)
Proto-D = 4,58,240 – 4,00,000 = 58,240 (F)
Mine–L = 6,58,720 – 4,60,000 = 1,98,720 (F)
= 1,89,420
(v) Material Yieled Variance = Std. Price (Std. Qty. – Revised Std. Qty.)
Or = (SQ × SP) – (RSQ × SP)
Vita–X = 2,75,000 – 2,62,460 = 12,540 (F)
Proto-D = 4,80,000 – 4,58,240 = 21,760 (F)
Mine- L = 6,90,000 – 6,58,720 = 31,280 (F)
= 65,580 (F)
(B) Labour Cost Variances
Question 5—
The standard labour employment and the actual labour engaged in a 40 hours week for a job are as under:

Standard Actual
Category of No. of Wage Rate No. of Wage Rate
Workers workers per hour ( ) workers per hour
( )
Skilled 65 45 50 50
Semi-skilled 20 30 30 35
Unskilled 15 15 20 10
Standard output: 2,000 units; Actual output: 1,800 units Abnormal Idle time 2 hours in the week
Calculate:
(i) Labour Cost Variance
(ii) Labour Efficiency Variance
(iii) Labour Idle Time Variance.

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 Chapter 13 : Standard Costing 13.6
Answer—
Working Note:
Table Showing Standard & Actual Cost
Woker Standard Standard Standard Actual Actual Actual Idle time Actual
Hours Rate per Cost for Hours Rate per Cost (g) hours
(a) Hours Actual Paid hour (f) = (d) × worked
(b) Output (c) (d) (e) (e)
= (a × b)

Skilled 2,340 hrs. 45 1,05,300 2000 hrs. 50 1,00,000 100 hrs. 1,900
[(65 (50 (50 hrs.
workers × workers × Workers (2,000
40 hrs.)/ 40 hrs.) × 2 hrs.) hrs. –
2,000 100 hrs.)
units)]
×1,800
units

Semi-ski- 720 hrs. 30 21,600 1,200 hrs. 35 42,000 60 hrs. 1,140

lled [(20 (30 (30 hrs.
Workers× workers Workers (1,200
40 ×40 hrs.) × 2 hrs.) hrs. – 60
hrs.)/2,000 hrs.)
units]×
1,800 units

Unskilled 540 hrs. 15 8,100 800 hrs. 10 8,000 40 hrs. 760 hrs.
[(15 (20 (20 (800 hrs.
Workers × Workers Workers – 40
40 hrs.) ×40 hrs.) × 2hrs.) hrs.)
/2,000
units] ×
1,800 units

Total 3,600 hrs. 1,35,000 4,00hrs. 1,50,000 200 hrs. 3,800hrs

Calculation of Variances
(i) Labour Cost Variance = Standard Cost for actual output - Actual cost Skilled worker
= 1,05,300 – 1,00,000
= 5,300 (F)
Semi-skilled worker = 21,600 – 42,000
= 20,400 (A)
Unskilled Worker = 8,100 – 8,000
= 100 (F)
Total = 5,300 (F) + 20,400 (A) + 100 (F)
= 15,000 (A)

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 Chapter 13 : Standard Costing 13.7
(ii) Labour Efficiency Variance = Std. Rate × (Standard hours – Actual hours worked)
Skilled worker = 45 × (2,340 hrs. – 1,900 hrs.)
= 19,800 (F)
Semi-skilled worker = 30 × (720 hrs. – 1,140 hrs.)
= 12,600 (A)
Unskilled Worker = 15 × (540 hrs. – 760 hrs.)
= 3,300 (A)
Total = 19,800 (F) + 12,600 (A) + 3,300 (A)
= 3,900 (F)
(iii) Labour Idle Time Variance = Std. Rate × Idle Time (Hrs.)
Skilled worker = 45 × 100 hrs.
= 4,500 (A)
Semi-skilled worker = 30 × 60 hrs.
= 1,800 (A)
Unskilled worker = 15 × 40 hrs.= 600 (A)
Total = 4,500 (A) + 1,800 (A) + 600 (A)
= 6,900 (A)
Question 6—
The following information has been provided by a company:
Number of units produced and sold 6,000
Standard labour rate per hour 8
Standard hours required for 6,000 units -
Actual hours required 17,094 hours
Labour efficiency 105.3%
Labour rate variance 68,376 (A)
You are required to calculate:
(i) Actual labour rate per hour
(ii) Standard hours required for 6,000 units
(iii) Labour Efficiency variance
(iv) Standard labour cost per unit
(v) Actual labour cost per unit.
Answer—
SR – Standard labour Rate per Hour
AR – Actual labour rate per hour
SH – Standard Hours AH - Actual hours
(i) Labour rate Variance = AH(SR – AR)
= 17,094 (8 – AR) = 68,376 (A) = – 68,476
= 8 – AR = – 4
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 Chapter 13 : Standard Costing 13.8
= AR = 12

SH
(ii) Labour Efficiency  100  105.3
AH
AH  105.3 17,094  105.3
 SH  
100 100
= 17,999.982
= SH= 18,000 hours
(iii) Labour Efficiency Variance = SR(SH – AH)
= 8(18,000 – 17,094)
= 8 × 906
= 7,248 (F)

18,000  8
(iv) Standard Labour Cost per unit   24
6,000

17,094  12
(v) Actual Labour Cost Per Unit   34.19
6,000
(C) Overhead Variabnces
Question 7—
SJ Ltd. has furnished the following information:
Standard overhead absorption rate per unit 20
Standard rate per hour 4
Budgeted Production 12,000 units
Actual production 15,560 units
Actual overheads were 2,95,000 out of which 62,500 fixed.
Actual hours 74,000
Overheads are based on the following flexible budget
Production (units) 8,000 10,000 14,000
Total Overheads( ) 1,80,000 2,10,000 2,70,000
You are required to calculate the following overhead variances (on hour's basis) with appropriate workings:
(i) Variable overhead efficiency and expenditure variance
(ii) Fixed overhead efficiency and capacity variance.
Answer—
Workings:
(a) Variable Overhead rate per unit

Difference of Overhead at two level


Difference in Production units

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 Chapter 13 : Standard Costing 13.9

2,10,000 – 1,80,000
  15
10,000 units – 8,000 units
(b) Fixed Overhead = 1,80,000 – (8,000 units × 15) = 60,000

Std. Overhead Absorkption Rate

(c) Standard hours per unit of production 
Std. Rate per hour

20
  5 hours
4

Variable Overhead per unit

(d) Standard Variable Overhead Rate per hourn 
Std. hour per unit

15
  3
5 hours
(e) Standard Fixed Overhead Rate per hour = 4– 3= 1
(f) Actual Variable Overhead = 2,95,000 – 62,500= 2,32,500

2,32,500
(g) Actual Variable Overhead Rate Per Hour   3.1419
74,000 hours
(h) Budgeted hours = 12,000 units × 5 hours = 60,000 hours
(i) Standard Hours for Actual Production = 15,560 units × 5 hours = 77,800 hours
(j) Variable Overhead Efficiency and Expenditure Variance:
Variable Overhead Efficiency Variance = Std. Rate per hour (Std. Hours – Actual Hours)
= 3 (77,800 hours × 74,000 hours)
= 11,400 (F)
Variable Overhead Expenditure Variance = Actual Hours (Std. Rate – Actual Rate)
= 74,000 hours ( 3 – 3.1419)
= 10,500(A)
(ii) Fixed overhead efficiency and capacity variance:
Fixed overhead efficiency variance = std. Rate per hour (std. hours – Actual hours)
= 1 (77,800 hours – 74,000 hours)= 3,800 (F)
Fixed overheads capacity variance = Std. Rate per hour (Actual Hours – budgeted Hours)
= 1 (74,000 hours – 60,000 hours) = 74,000 – 60,000 = 14,000 (f)

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 Chapter 13 : Standard Costing 13.10
Question 8—
XYZ Co. Ltd. provides the following information:
Standard Actual
Production 4,000 units 3,800 units
Working Days 20 21
Fixed Overhead 40,000 39,000
Variable Overhead 12,000 12,000
You are required to calculate following overhead variances:
(a) Variable Overhead Variance
(b) Fixed Overhead Variances
(i) Expenditure Variance
(ii) Volume Variance
Answer—
Workings:

12,000
Standard Variable Overhead rate per unit   3
4,000 units

40,000
Standard Fixed Overhead rate per unit   10
4,000 units
(a) Variable Overhead Variance = Recovered Variable Overhead – Actual Variable overhead
= 3,800 units × 3 – 12,000
= 11,400 – 12,000 = 600 (Adverse)
(b) (i) Fixed Overhead Expenditure Variabnce = Budgeted Overhead – Actual Overhead
= 40,000 – 39,000
= 1,000 (Favourable)
(ii) Fixed Overhead Volume Variable = Recovered Overhead – Budgeted Overhead
= 3,800 units × 10 – 40,000
= 38,000 – 40,000
= 2,000 (Adverse)
(D) Mix
Question 9—
SB Constructions Limited has entered into a big contract at an agreed price of 1,50,00,000 subject to an
escalation clause for material and labour as spent out on the contract and corresponding details are as
follows:

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 Chapter 13 : Standard Costing 13.11

Standard Actual
Material: Quantity Rate per Ton Quantity Rate per Ton
(Tons) ( ) (Tons) ( )
A 3,000 1,000 3,400 1,100
B 2,400 800 2,300 700
C 500 4,000 600 3,900
D 100 30,000 90 31,500
Hours Hourly Rate Hours Hourly Rate
Labour
( ) ( )
L1 60,000 15 56,000 18
L2 40,000 30 38,000 35
You are required to:
Calculate the following variance and verify them:
(a) Material Cost Variance
(b) Material Price Variance
(c) Material Usage Variance
(d) Labour Cost Variance
(e) Labour Rate Variance
(f) Labour Efficiency Variance.
Answer—
Material Variances

(SQ×SP) ( ) (AQ×AP) ( ) (AQ × SP) ( )

A–3,000 ×1000 = 30,00,000 3,400 ×1,100 =37,40,000 3,400 × 1,000 = 34,00,000

B–2,400 ×800 =19,20,000 2,300 ×700 = 16,10,000 2,300 ×800 = 18,40,000

C-500 × 4,000 = 20,00,000 600 ×3,900 = 23,40,000 600 × 4,000 = 24,00,000

D-100 ×30,000 = 30,00,000 90 × 31,500 = 28,35,000 90 × 30,000 = 27,00,000

Total 99,20,000 1,05,25,000 1,03,40,000

(a) Material Cost Variance (MCV) = (SQ ×SP) – (AQ × AP)

= 99, 20,000 – 1,05,25,000 = 6,05,000 (A)
(b) Material Price Variance (MPV) = AQ (SP - AP) or (AQ × SP) - (AQ × AP)
= 1,03,40,000 – 1,05,25,000 = 1,85,000 (A)
(c) Material Usage Variance (MUV) = (SQ × SP) – (AQ × SP)
= 99,20,000 – 1,03,40,000 = 4,20,000 (A)
Verification, MCV = MPV + MUV

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 Chapter 13 : Standard Costing 13.12

Or, 6,05,000 (A) = 1,85,000 (A) + 4,20,000 (A)

Or, 6,05,000 (A) = 6,05,000 (A)
Labour Variances

(SH×SR) ( ) (AH × AR) ( ) (AH × SR) ( )

L1– 60,000 ×15 = 9,00,000 56,000 ×18 =10,08,000 56,000 ×15 = 8,40,000

L2 – 40,000 ×30 = 12,00,000 38,000 ×35 = 13,30,000 38,000 ×30 = 11,40,000

Total 21,00,000 23,38,000 19,80,000

(a) Labour Cost Variance (LCV) = (SH × SR) – (AH × AR)

= 21,00,000 – 23,38,000 = 2,38,000 (A)
(b) Labour Rate Variance (LRV) = (AH × SR) – (AH × AR)
= 19,80,000 – 23,38,000 = 3,58,000 (A)
(c) Labour Efficiency Variance (LEV) = (SH × SR) – (AH × SR)
= 21,00,000 – 19,80,000 = 1,20,000 (F)
Verification, LCV = LRV + LEV
Or, 2,38,000 (A) = 3,58,000 (A) + 1,20,000 (F)
Or, 2,38,000 (A) = 2,38,000 (A)
Question 10—
Compute the sales variances (total, price and volume) from the following figures:

Budgeted Budgeted Price Actual Actual Price

Product
quantity per Unit ( ) Quantity Per unit ( )

P 4,000 25 4,800 30

Q 3000 50 2,800 45

R 2000 75 2,400 70

S 1000 100 800 105

Answer—
Working:

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 Chapter 13 : Standard Costing 13.13

Product Budgete- Actual Budgeted Actual Budgeted Standard Actual

d Price Price ( ) Qty. Qty. Sales ( ) Sales Sales ( )
( ) (Actual
Sales at
Budgeted
Price) ( )

(a) (b) (c) (d) (e) = (a × (f) = (a × (g) = (b ×

c) d) d)

P 25 30 4,000 4,800 1,00,000 1,20,000 1,44,000

Q 50 45 3,000 2,800 1,50,000 1,40,000 1,26,000

R 75 70 2,000 2,400 1,50,000 1,80,000 1,68,000

S 100 105 1,000 800 1,00,000 80,000 84,000

5,00,000 5,20,000 5,22,000

Calculation of Variances:
Sale Price Variance = Actual Quantity (Actual Price – Budgeted Price)
= Acutal Sales – Standard Sales
= 5,22,000 – 5,20,000 = 2,000 (F)
Sales Volume Variance = Budgeted Price (Actual Quantity – Budgeted Quantity)
= Standard Sales – Budgeted Sales
= 5,20,000 – 5,00,000 = 20,000 (F)
Total Sales Variance = Actual Sales – Budgeted Sales
= 5,22,000 – 5,00,000 = 22,000 (F)
Vefification, Total Sales Variance = Sales Price Variance + Sales Volume Variance
22,000 (F) = 2,000 (F) + 20,000 (F)
Question 11—
Gama Ltd. has furnished the following standard cost data per' unit of production:
Material 10 kg @ 10 per kg.
Labour 6 hours @ 5.50 per hour
Variable overhead 6 hours @ 10 per hour.
Fixed overhead 4,50,000 per month (Based on a normal volume of 30,000 labour hours.)
The actual cost data for the month of August 2013 are as follows:
Material used 50,000 kg at a cost of 5,25,000.
Labour paid 1,55,000 for 31,000 hours worked
Variable overheads 2,93,000
Fixed overheads 4,70,000
Actual production 4,800 units.

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 Chapter 13 : Standard Costing 13.14
Calculate:
(i) Material Cost Variance.
(ii) Labour Cost Variance.
(iii) Fixed Overhead Cost Variance.
(iv) Variable Overhead Cost Variance.
Answer—
Budgeted Production 30,000 hours ÷ 6 hours per unit = 5,000 units
Budgeted Fixed Overhead Rate = 4,50,000 ÷ 5,000 units = 90 per unit Or
= 4,50,000 ÷ 30,000 hours = 15 per hour.
(i) Material Cost Variance = (Std. Qty. × Std. Price) – (Actual Qty. × Actual Price)
= (4,800 units × 10 kg. × 10) – 5,25,000
= 4.80,000 – 5,25,000
= 45,000 (A)
(ii) Labour Cost Variance = (Std. Hours × Std. Rate) – (Actual Hours × Actual rate)
= (4,800 units × 6 hours × 5.50) – 1,55,000
= 1,58,400 – 1,55,000
= 3,400 (F)
(iii) Fixed Overhead Cost Variance = (Budgeted Rate × Actual Qty) – Actual Overhead
= ( 90 × 4,800 units) – 4,70,000
= 38,000 (A)
OR = (Budgeted Rate × Std. Hours) – Actual Overhead
= ( 15 × 4,800 units × 6 hours) – 4,70,000
= 38,000 (A)
(iv) Variable Overhead Cost Variance = (Std. Rate × Std. Hours) - Actual Overhead
= (4,800 units × 6 hours × 10) – 2,93,000
= 2,88,00 – 2,93,000
= 5,000 (A)
Question 12—
SP Limited produces a product 'Tempex' which is sold in a 10 Kg. packet. The standard cost card per
packet of 'Tempex' are as follows:
( )
Direct materials 10 kg @ 45 per kg 450
Direct labour 8 hours @ 50 per hour 400
Variable Overhead 8 hours @ 10 per hour 80
Fixed Overhead 200
1,130
Budgeted output for the third quarter of a year was 10,000 Kg. Actual output is 9,000 Kg.
Actual cost for this quarter are as follows :

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 Chapter 13 : Standard Costing 13.15
( )
Direct Materials 8,900 Kg @ 46 per Kg. 4,09,400
Direct Labour 7,000 hours @ 52 per hour 3,64,000
Variable Overhead incurred 72,500
Fixed Overhead incurred 1,92,000
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.
Answer—
(i) Material Usage Variance = Std. Price (Std. Quantity - Actual Quantity)
= 45 (9,000 kg. – 8,900 kg.)
= 4,500 (Favourable)
(ii) Material Price Variance = Actual Quantity (Std. Price - Actual Price)
= 8,900 kg. ( 45 – 46) = 8,900 (Adverse)
(iii) Material Cost Variance = Std. Material Cost – Actual Material Cost
= (SQ × SP) – (AQ × AP)
= (9,000 kg. × 45) – (8,900 kg. × 46)
= 4,05,000 – 4,09,400
= 4,400 (Adverse)
(iv) Labour Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)

9,000
 50(  8 hours – 7,000 hrs.)
10
= 50 (7,200 hrs. - 7,000 hrs.)
= 10,000 (Favourable)
(v) Labour Rate Variance = Actual Hours (Std. Rate - Actual Rate)
= 7,000 hrs. ( 50 – 52)
= 14,000 (Adverse)
(vi) Labour Cost Variance = Std. Labour Cost - Actual Labour Cost
= (SH × SR) – (AH × AR)
= (7,200 hrs. × 50) – (7,000 hrs. × 52)
= 3,60,000 – 3,64,000

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 Chapter 13 : Standard Costing 13.16
= 4,000 (Adverse)
(vii) Variable Cost Variance = Std. Variable Cost – Actual Variable Cost
= (7,200 hrs. × 10) – 72,500
= 500 (Adverse)
(viii) Fixed Overhead Cost Variance = Absorbed Fixed Overhead – Actual Fixed Overhead

200
  9,000 kgs. – 1,92,000
10 kgs.
= 1,80,000 – 1,92,000 = 12,000 (Adverse)
Question 13—
ABC Ltd. had prepared the following estimation for the month of April:
Quantity Rate ( ) Amount ( )
Material 800 kg. 45.00 36,000
Material 600 kg. 30.00 18,000
Skilled Labour 1,000 hours 37.50 37,500
Unskillled Labour 800 hours 22.00 17,600
Normal loss was expected to be 10% of total input materials and an idle labour time of 5% of expected
labour hours was also estimated.
At the end of the month the following information has been collected from the cost accounting depart-
ment:
The company has produced 1,480 kg. finished product by using the followings:
Quantiry Rate ( ) Amount ( )
Material - A 900 kg. 43.00 38,700
Material - B 650 kg. 32.50 21,125
Skilled Labour 1,200 hours 35.50 42,600
Unskilled labour 860 hours 23.00 19,780
You are required to calculate:
(a) Material Cost Variance;
(b) Material Price Variance;
(c) Material Mix Variance;
(d) Material Yield Variance;
(e) Labour Cost Variance;
(f) Labour Efficiency Variance and
(g) Labour Yield Variance.
Answer—
Material Variances:

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 Chapter 13 : Standard Costing 13.17
Material SQ SP SQ× SP RSQ RSQ × SP AQ AQ × SP AP AQ×AP
(WN–1) ( ) (WN–2) ( ) ( ) ( ) ( )

A 940 kg. 45.00 42,300 886 kg. 39,870 900 kg. 40,500 43.00 38,700

B 705 kg. 30.00 21,150 664 kg. 19,920 650 kg. 19,500 32.50 21,125

1645 kg 63,450 1,550kg 59,790 1550kg. 60,000 59,825

WN – 1: Standard Quantity (SQ):

 800kg. 
Material A–   1,480kg.   939.678 or 940kg.
 0.9  1,400 kg. 

 600kg. 
Material B–   1,480kg.   704.76 or705kg.
 0.9  1,400 kg. 
WN –2 Revised Standard Quantity (RSQ):

 800 kg. 
Material A–   1550 kg.   885.71or 886kg.
 1,400 kg. 

 600 kg. 
Material B–   1550 kg.   664.28 or 664kg.
 1,400 kg. 
(a) Material Cost Variance (A+B) = {(SQ × SP) – (AQ ×AP)}
= {63,450 – 59,825} = 3625 (F)
(b) Material Price Variance (A + B) = {(AQ × SP) – (AQ×AP)}
= {60,000 – 59,825} = 175 (F)
(c) Material Mix Variance (A + B) = {(RSQ × SP) – (AQ × SP)}
= {59,790 – 60,000} = 210 (A)
(d) Material Yield Variance (A + B) = {(SQ × SP) – (RSQ × SP)}
= {63,450 –59,790} = 3,660(F)
Labour Variance:
Labour SH SR SH ×SR RSH RSH × SR AH AH × SR AR AH × AR
(WN –3) ( ) ( ) (WN–4) ( ) ( ) ( ) ( )

Skilled 1,116 hrs. 37.50 41,850 1144 42,900 1,200 45,000 35.50 42,600

Unskilled 893 hrs 22.00 19,646 916 20,152 860 18,920 23.00 19,780

2009 hrs. 61,496 2,060 63,052 2,060 63,920 62,380

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 Chapter 13 : Standard Costing 13.18
WN – 3: Standard Hours (SH):

 0.95 1,000 hr. 

Skilled labour–   1,480kg.   1,115.87or 1,116 hrs.
 0.90  1,400 kg. 

 0.95  800 hr. 

Unskilled labour–   1,480kg.   892.69or 893hrs.
 0.90  1,400 kg. 
WN.– 4: Revised Standard Hours (RSH):

 1,000 hr. 
Skilled labour –   2,060hr.   1,144.44 or 1,144hrs.
 1,800hr 

 800 hr. 
Unskilled Labour –   2,060 hr.  915.56 or 916 hrs.
 1,800hr 
(e) Labour Cost Variance (Skilled + Unskilled) = {(SH × SR) - (AH × AR)}
= {61,496 - 62,380} = 884 (A)
(f) Labour Efficiency Variance (Skilled + Unskilled) = {(SH × SR) - (AH × SR)}
= {61,496 - 63,920} = 2,424 (A)
(g) Labour Yield Variance (Skilled + Unskilled) = {(SH × SR) - (RSH × SR)}
= {61,496 - 63,052} = 1,556 (A)
Question 14—
KPR Limited operates a system of standard costing in respect of one of its products which is
manufactured within a single cost centre. The Standard Cost Card of a product is as under:
Standard Unit cost ( )
Direct Material 5kg. @ 4.20 21.00
Direct Labour 3hours @ 3.00 9.00
Factory Overhead 1.20 per labour hour 3.60
Total manufacturing cost 33.60
The production schedule for the month of June, 2013 required completion of 40,000 units. However, 40,960
units were completed during the month without opening and closing work-in- process inventories.
Purchases during the month of June, 2013, 2,25,000 kg. of material at the rate of 4.50 per kg. Production
and Sales records for the month showed the following actual results.
Material used 2,05,600 kg.
Direct labour 1,21,200 hours; cost incurred 3,87,840
Total factory overhead cost incurred 1,00,000
Sales 40,000 units
Selling price to be so fixed as to allow a mark-up of 20 per cent on selling price.
Required:
(i) Calculate material variances based on consumption of material.

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 Chapter 13 : Standard Costing 13.19
(ii) Calculate labour variances and the total variance for factory overhead.
(iii) Prepare Income statement for June, 2013 showing actual gross margin.
(iv) An incentive scheme is in operation in the company whereby employees are paid a bonus of 50% of
direct labour hour saved at standard direct labour hour rate. Calculate the Bonus amount.
Answer—
(i) Material variances:
(a) Direct Material Cost Variance = Standard Cost – Actual Cost
= (40,960 units × 5 kg.× 4.20) – (2,05,600 kg.× 4.50)
= 8,60,160 – 9,25,200 = 65,040 (A)
(b) Material Price Variance = Actual Qty. (Std. Price – Actual Price)
= 2,05,600* kg. ( 4.20 – 4.50) = 61,680 (A)
(*Material variances are calculated on the basis of consumption)
(c) Material Usages Variance = Std. Price (Std. Qty. - Actual Qty.)
= 4.20 (40,960 units 5 kg. - 2,05,600 kg.)
= 3,360 (A)
(ii) Labour Variances and Overhead Variances:
(a) Labour Cost Variance = Standard cost - Actual cost
= (40,960 units × 3 hours × 3) - 3,87,840
= 19,200 (A)
(b) Labour Rate Variance = Actual Hours (Std. Rate - Actual Rate)
= 1,21,200 hours ( 3 – 3.20)
= 24,240 (A)
(c) Labour Efficiency Variance = Std. Rate (Std. Hour – Actual Hour)
= 3(40,960 units × 3 hour – 1,21,200 hour)
= 5,040 (F)
(d) Total Factory Overhead Variance = Factory Overhead Absorbed - Actual Factory Overhead
= (Actual Hours × Std. Rate) - Actual Factory Overhead
= (40,960 units × 3 hours × 1.20) – 1,00,000
= 47,456 (F)
(*Material variances are calculated on the basis of consumption)
(c) Material Usages Variance = Std. Price (Std. Qty. - Actual Qty.)
= 4.20 (40,960 units 5 kg. - 2,05,600 kg.)
= 3,360 (A)
(ii) Labour Variances and Overhead Variances:
(a) Labour Cost Variance = Standard cost - Actual cost
= (40,960 units × 3 hours × 3) - 3,87,840
= 19,200 (A)
(b) Labour Rate Variance = Actual Hours (Std. Rate - Actual Rate)
= 1,21,200 hours ( 3 - 3.20)
= 24,240 (A)

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 Chapter 13 : Standard Costing 13.20
(c) Labour Efficiency Variance = Std. Rate (Std. Hour - Actual Hour)
= 3 (40,960 units × 3 hour - 1,21,200 hour)
= 5,040 (F)
(d) Total Factory Overhead Variance
= Factory Overhead Absorbed - Actual Factory Overhead
= (Actual Hours × Std. Rate) - Actual Factory Overhead
= (40,960 units × 3 hours × 1.20) - 1,00,000
= 47,456 (F)
(iii) Preparation of Income Statement
Calculation of unit selling ( )
Direct Material 21.00
Direct Labour 9.00
Factory Overhead 3.60
Factory Cost 33.60
Margin 25% on factory cost 8.40
Selling Price 42.00
Income Statement
( ) ( )
Sales (40,000 units × 42) 16,80,000
Less: Standard cost of goods sold (40,000 units × 33.60) 13,44,000
3,36,000
Less: Adverse Variances:
Material Price Variance 61,680
Material Usage Variance 3,360
Labour Rate variance 24,240 89,280
2,46,720
Add: Favourable variances:
Labour efficiency variances 5,040
Factory overhead 47,456 52,496
Actual Gross Margin 2,99,216
(iv)
Labour hour saved ( )
Standard labour hours (40,960 units × 3 hours) 1,22,880
Actual labour hour worked 1,21,200
Labour hour saved 1,680
Bonus for saved labour = 50% (1,680 hours × 3) = 2,520.
*****************

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 Chapter 14 : Marginal Costing 14.1
Question 1—
Mega Company has just completed its first year of operations. The unit costs on a normal costing basis
are as under:
( )
Direct material 4 kg @ 4 = 16.00
Direct labour 3 hrs @ 18 = 54.00
Variable overhead 3 hrs @ 4 = 12.00
Fixed overhead 3 hrs @ 6 = 18.00
100.00
Selling and administrative costs:
Variable 20 per unit
Fixed 7,60,000
During the year the company has the following activity:
Units produced = 24,000
Units sold = 21,500
Unit selling price = 168
Direct labour hours worked = 72,000
Actual fixed overhead was 48,000 less than the budgeted fixed overhead. Budgeted variable overhead was
20,000 less than the actual variable overhead. The company used an expected actual activity level of
72,000 direct labour hours to compute the predetermine overhead rates.
Required :
(i) Compute the unit cost and total income under:
(a) Absorption costing
(b) Marginal costing
(ii) Under or over absorption of overhead.
(iii) Reconcile the difference between the total income under absorption and marginal costing.
Answer—
(i) Computation of Unit Cost & Total Income
Unit Cost Absorptio Marginal
n Costing Costing
( ) ( )
Direct Material 16.00 16.00
Direct Labour 54.00 54.00
Variable Overhead ( 12 + 20,000/24,000) 12.83 12.83
Fixed Overhead 18.00 --
Unit Cost 100.83 82.83
Income Statement Absorption Costing ( )
Sales (21,500 units × 168) 36,12,000
Less: Cost of goods sold (Refer the working note) (21,19,917)
14,92,083
Less: Selling & Distribution Expensesx (11,90,000)
Profit 3,02,083

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 Chapter 14 : Marginal Costing 14.2

Marginal Costing ( )
Sales (as above) 36,12,000
Less: Cost of goods sold (Refer the working note) (17,80,917)
18,31,083
Less: Selling & Distribution Expenses (4,30,000)
Contribution 14,01,083
Less: Fixed Factory and Selling & Distribution Overhead
( 3,84,000 + 7,60,000) (11,44,000)
Profit 2,57,083
(ii) Under or over absorption of Overhead:
( )
Fixed Overhead:
Budgeted ( 6 × 72,000 hours) 4,32,000
Actual ( 4,32,000 – 48,000) 3,84,000
Over–absorption 48,000
Variable Overhead:
Budgeted ( 4 × 72,000 hours) 2,88,000
Actual ( 2,88,000 + 20,000) 3,08,000
Under-absorption 20,000
(iii) Reconciliation of Profit:
Difference in Profit: 3,02,083 – 2,57,083 = 45,000
Due to Fixed Factory Overhead being included in Closing Stock in Absorption Costing not in Marginal
Costing.
Therefore, Difference in Profit = Fixed Overhead Rate (Production - Sale)
= 18 (24,000 – 21,500) = 45,000
Working Note:
Calculation of Cost of Goods Sold
Absorption Costing Marginal Costing
Direct Material ( 16×24,000) 3,84,000 3,84,000
Direct Labour ( 54 ×24,000) 12,96,000 12,96,000
Variable OH ( 12×24,000 × 20,000) 3,08,000 3,08,000
( 12×24,000 + 20,000)
Fixed Overhead ( 18 × 24,000) 4,32,000 –
24,20,000 19,88,000
Add: Opening Stock – –
Less: Closing Stock (2,52,083) (2,07,083)

 24,20,000   19,88,000 
(24,000–21,500)   2,500 units    2,500 units 
 24,000 units   24,000 units 

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 Chapter 14 : Marginal Costing 14.3
Cost of Goods Produced 21,67,917 17,80,917
Add: Adjustment for over/ under absorption (48,000) –
Cost of Goods Sold 21,19,917 17,80,917
Question 2—
ABC Ltd. can produce 4,00,000 units of a product per annum at 100% capacity. The variable production
costs are 40 per unit and the variable selling expenses are 12 per sold unit. The budgeted fixed produc-
tion expenses were 24,00,000 per annum and the fixed selling expenses were 16,00,000. During the year
ended 31st March, 2014, the company worked at 80% of its capacity. The operating data for the year are as
follows:
Production 3,20,000 units
Sales @ 80 per unit 3,10,000 units
Opening stock of finished goods 40,000 units
Fixed production expenses are absorbed on the basis of capacity and fixed selling expenses are recovered on
the basis of period.
You are required to prepare Statements of Cost and Profit for the year ending 31st March, 2014:
(i) On the basis of marginal costing
(ii) On the basis of absorption costing
Answer—
(i) Statement of Cost and Profit under Marginal Costing
for the year ending 31st March, 2014
Output = 3,20,000 units
Particulars Amount ( ) Amount ( )
Sales: 3,10,000 units @ 80 2,48,00,000
Marginal Cost/ Variable cost:
Variable cost of production (3,20,000 × 40) 1,28,00,000
Add: Opening Stock 40,000 units @ 40 16,00,000
1,44,00,000

 1,44,00,000 
Less: Closing Stock   50,000 units * (20,00,000)
 3,60,000 units 
Variable cost of production of 3,10,000 units 1,24,00,000
Add: Variable selling expenses @ 12 per unit 37,20,000 1,61,20,000
88,80,000
Less: Fixed production cost 24,00,000
Fixed selling expenses 16,00,000 (40,00,000)
Actual profit under marginal Costing 46,80,000
* Closing stock = 40,000 + 3,20,000 – 3,10,000 = 50,0000 units

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 Chapter 14 : Marginal Costing 14.4
(ii) Statement of Cost and Profit under Absorption Costing
for the year ending 31st March, 2014
Output = 3,20,000 units
Particulars Amount ( ) Amount ( )
Sales : 3,10,000 units @ 80 2,48,00,000
Less: Cost of Goods sold:
Variable cost of production (3,20,000 @ 40) 1,28,00,000
Add: Fixed cost of production absorbed
3,20,000 units @ 6(1) 19,20,000
1,47,20,000

 1,47,20,000 
Add: Opening Stock:   40,000  18,40,000
 3,20,000 units 

 1,65,60,000 
Less: Closing Stock :   50,000  (23,00,000)
 3,60,000 units 
Production cost of 3,10,000 units 1,42,60,000
Adjustment for Over /under-absorption:
Under absorption of fixed production overheads(2) 4,80,000
Cost of Goods Sold 1,47,40,000
Selling Expenses:
Variable : 12 × 3,10,000 units 37,20,000
Fixed 16,00,000 (2,00,60,000)
Actual Profit under absorption costing 47,40,000
Workings:

24,00,000
1. Absorption rate for fixed cost of production =  6 per unit
4,00,000 units
2. Fixed production overhead under absorbed = (24,00,000 – 19,20,000) = 4,80,000
Question 3—
PQ Ltd. reports the following cost structure at two capacity levels:
(100% capacity) (75% capacity)
2,000 units 1,500 units
Production overhead I 3 per unit 4 per unit
Production overhead II 2 per unit 2 per unit
If the selling price, reduced by direct material and labour is 8 per unit, what would be its break-even point?

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 Chapter 14 : Marginal Costing 14.5
Answer—
Computation of Break-even point in units:
2,000 units 1,500 units
Production Overhead I: Fixed Cost ( ) 6,000 6,000
(2,000 unit × 3) (1,500 unit × 4)
Selling price - Material and labour ( ) (A) 8 8
Production Overhead II (Variable Overhead) (B) 2 2
Contribution per unit (A) – (B) 6 6

Fixed Cost 6,000

Break Even Point    1,000 units
Contribution per unit 6
Question 4—
A Company sells two products, J and K. The sales mix is 4 units of J and 3 units of K. The contribution
margins per unit are 40 for J and 20 for K. Fixed costs are 6,16,000 per month. Compute the break-even
point.
Solution:—
Let 4x = No. of units of J
Then 3x = no. of units of K

 Fixed Cost  6,16,000

BEP in x units   
 Contribution  (4 x  40)  3x  20

6,16,000
Or x  2,800 units
220
Break- even point of Product J = 4 × 2,800 = 11,200 units
Break even point of Product K = 3 × 2,800 = 8,400 units
Question 5—
MFN Limited started its operation in 2012 with the total production capacity of 2,00,000 units. The
following data for two years is made available to you:
2012 2013
Sales units 80,000 1,20,000
Total cost ( ) 34,40,000 45,60,000
There has been no change in the cost structure and selling price and it is expected to continue in 2014 as
well. Selling price is 40 per unit.
You are required to calculate:
(i) Break-Even Point (in units)
(ii) Profit at 75% of the total capacity in 2014

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 Chapter 14 : Marginal Costing 14.6
Answer—
2012 2013 Differ ence
Sales Units 80,000 1,20,000 40,000
Sale Value @ 40 32,00,000 48,00,000 16,00,000
Total Cost ( ) 34,40,000 45,60,000 11,20,000

Change in Total Cost

Variable Cost per unit 
Change in slaes volume

11,20,000
  28 per unit
40,000 units
Total Fixed Cost ( ) = 45,60,000 – ( 1,20,000 units × 28) = 12,00,000

Fixed Cost
(i) Break-even point (in units) 
Contribution per unit

12,00,000
  1,00,000 unit
( 40 – 28)
(ii) Profit at 75% Capacity in 2014
= (2,000 units × 75%) × Contribution per unit – Fixed Cost
= 1,50,000 units × 12– 12,00,000 = 6,00,000.
Question 6—
Zed Limited sells its product at 30 per unit. During the quarter ending on 31st March, 2014, it produced
and sold 16,000 units and' suffered a loss of 10 per unit. If the volume of sales is raised to 40,000 units; it
can earn a profit of 8 per unit.
You are required to calculate:
(i) Break Even Point in Rupees.
(ii) Profit if the sale volume is 50,000 units.
(iii) Minimum level of production where the company needs not to close the production if unavoidable
fixed cost is 1,50,000.
Answer—
Units sold Sales value ( ) Profit/ (loss) ( )
16,000 units 4,80,000 (1,60,000)
( 30 × 16000 units) ( 10×16,000 units)
40,000 units 12,00,000 3,20,000
( 30 × 40,000 units) ( 8 × 40,000 units)

Change in profit 3,20,000 – (– 160,000)

P / V Ratio   100   100
Change in sales value 12,00,000 – 4,80,000

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 Chapter 14 : Marginal Costing 14.7
4,80,000
  100  66.67%
7,20,000
= 8,00,000
So, Fixed cost = Contribution – Profit
= 8,00,000 – 3,20,000
= 4,80,000

Fixed Cost
(i) Break-even Point in Rupees 
P/V Ratio
4,80,000
 .  7,20,000
66.67%
(ii) If sales volume is 50,000 units, then profit = Sales Value × P/V Ratio – Fixed Cost
= (50,000 units × 30 × 66.67% – 4,80,000)
= 5,20,000
(iii) Minimum level of production where the company needs not to close the production, if unaboidable
fixed cost is 1,50,000:

Avoidable fixed cost


Contribution per unit

Total fixed cost – Unavoidable fixed cost


Contribution unit
4,80,000 – 1,50,000

30  66.67%
3,30,000
  16,500 units
20
At production level > 16,500 units, company needs not to close the production.
Question 7—
Product Z has a profit-volume ratio of 28%. Fixed operating costs directly attributable to product Z during
the quarter II of the financial year 2013-14 will be 2,80,000.
Calculate the sales revenue required to achieve a quarterly profit of 70,000.
Answer—
P/V ratio = 28%
Quarterly fixed Cost = 2,80,000
Desired Profit = 70,000
Sales revenue required to achieve desired profit. =

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 Chapter 14 : Marginal Costing 14.8

2,80,000  70,000
Fixed Cost  Desired Profit   12,50,000
 28%
P/V Ratio

Question 8—
The P/V Ratio of Delta Ltd. is 50% and margin of safety is 40%. The company sold 500 units for `
5,00,000. You are required to calculate:
(i) Break- even point, and
(ii) Sales in units to earn a profit of 10% on sales
Answer—
(i) P/V Ratio – 50% Margin of Safety – 40%,
Sales 500 Units for 5,00,000 Selling price per Unit – 1,000
Calculation of Break Even Point (BEP)

Sales – BEP
Margin of Safety Ratio   100
Sales

5,00,000 –BEP
40   100
5,00,000
BEP (In sales) = 3,00,000
BEP (in Unit) 3,00,000 ÷ 1,000 = 300 units
(ii) Sales in units to earn a profit of 10% on sales

Fixed Cost  Desired Profit

Sales =
P/V Raito
Let the Sales be x
Profit = 10% of x i.e. 0.1 x
Thus–

 1,50,000  0.1x 
x = 
 50 % 
Or, x = 3,75,000
To find out sales in units amount of slaes 3,75,000 is to be dividend by selling Price per unit
Thus—

3,75,000
Sales (in units)   375 units
1,000
Working Notes:
1. Selling Price = 5,00,000 ÷ 500 = 1,000 per Unit
2. Variable cost per unit = Selling Price – (Selling Price ×PV Ratio)

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 Chapter 14 : Marginal Costing 14.9
= 1,000 – ( 1,000 × 50%) = 500
3. Profit at present level of sales

Profit
Margin of Safety 
P/V Ratio
Margin of Safety = 40% of 5,00,000= 2,00,000

Profit
2,00,000 
50%
Profit = 1,00,000
4. Fixed Cost = (Sales × P/V Ratio) – Profit
= ( 5,00,000 × 50%) – 1,00,000 = 1,50,000
(Note: Alternative ways of calculation of 'Break Even Point' and required sales to earn a profit of 10% of
sales' can be adopted to solve the problem.)
Question 9—
Maxim Ltd. manufactures a product "N-joy". In the month of August 2014, 14,000 units of the product "N-
joy" were sold, the details are as under:
( )
Sale Revenue 2,52,000
Direct Material 1,12,000
Direct Labour 49,000
Variable Overheads 35,000
Fixed Overheads 28,000
A forecast for the month of September 2014 has been carried out by the General manger of Maxim Ltd. As
per the forecast, price of direct material and variable overhead will be increased by 10% and 5% respec-
tively.
Required to calculate:
(i) Number of units to be sold to maintain the same quantum of profit that made in August 2014.
(ii) Margin of safety in the month of August 2014 and September 2014.
Answer—
Calculation of Profit made in the month of August 2014 by selling 14,000 units.
Amount per unit ( ) Amount ( )
Sales Revenue 18.00 2,52,000
Less: Variable Costs:
– Direct Material 8.00 1,12,000
– Direct Labour 3.50 49,000
Variable Overhead 2.50 35,000
Contribution 4.00 56,000
Less: Fixed Overhead 2.00 28,000
Profit 2.00 28,000

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 Chapter 14 : Marginal Costing 14.10
(i) To maintain the same amount of profit i.e. 28,000 in September 2014 also, the company needs
to maintain a contribution of 56,000.
Let, number of units to be sold in September 2014 is 'x', then the contribution will be
18 x – [( 8 × 1.10) + 3.5 + ( 2.5 × 1.05)] x = 56,000
18 x –( 8.8 + 3.5 + 2.625) x = 56,000
56,000
Or, x = 18,211.38 units or 18,212 units
3.075
(ii) Margin of Safety
August 2014 September 2014
Profit 28,000 28,000
4 3 075
P/V Ratio  100 100
18 18
1,26,000 1,63,902.44
 Profit   28,000   28,000 
Margin of Safety     18 100    18 100 
 P/VRatio   400   307.5 

Question 10—
Maximum Production capacity of KM (P) Ltd. is 28000 units per month. Output at different levels along
with cost data is furnished below:
Activity Level
Particulars of Costs 16,000 units 18,000 units 20,000 units
Direct Material 12,80,000 14,40,000 16,00,000

Direct labour 17,60,000 19,80,000 22,00,000

Total factory overheads 22,00,000 23,70,000 25,40,000

You are required to work out the selling price per unit at an activity level of 24,000 units by considering
profit at the rate of 25% on sales.
Answer—
Change in factory overheads
Computation of Overheads:
Change in activity level
23,70,000 – 22,00,000 25,40,000 – 23,70,000
Variable Overhead per unit  or
18,000 – 16,000 20,000 – 18,000
1,70,000
=  85per unit
2,000
Fixed Overhead
Activity level = 16,000 units

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 Chapter 14 : Marginal Costing 14.11
Particulars Amount ( )
Total Factory Overhead 22,00,000
Less: Variable overheads 16,000 units @ 85 per unit 13,60,000
Fixed Overhead 8,40,000
Computation of Costs at Activity Level 24,000 units
Per Unit ( ) Amount ( )
Direct Material (12,80,000/16,000) 80.00 19,20,000
Direct Lavbour (17,60,000/16,000) 110.00 26,40,000
Variable Overhead (As calculated above) 85.00 20,40,000
Fixed Overhead 8,40,000
Total Cost 74,40,000
Computation of Selling Price at activity level 24,000 units Profit required is 25% on selling price, hence
cost will be 75%.
25 74,40,000
Therefore desired Profit  = 24,80,000
75
Cost of 24,000 units 74,40,000
Desired Profit 24,80,000
Total Sales 99,20,000
Total Sales
Selling Price per unit 
No. of units
99,20,000
 = 413.33 or 413
24,000
Question 11—
A company produces single product which sells for 20 per unit. Variable cost is 15 per unit and Fixed
overhead for the year is 6,30,000.
Required:
(a) Calculate sales value needed to earn a profit of 10% on sales.
(b) Calculate sales price per unit to bring BEP down to 1,20,000 units.
(c) Calculate margin of safety sales if profit is 60,000.
Answer—
(a) Suppose Sales units are x then S = V + F + P
(S = Sales ; V = Variable Cost; F = Fixed Cost; P = Profit)
20x = 15x + 6,30,000 + 2x
20x – 17x = 6,30,000

6,30,000
 x  2,10,000 units
3
Sales value= 2,10,000 units × 20 = 42,00,000 to earn of 10% on sales.
(b) Sales price to bring down BEP to 1,20,000 units

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 Chapter 14 : Marginal Costing 14.12
Fixed Cost
B.E.P. (Unit) 
Contribution per unit

6,30,000
Or, Contribution per unit   5.25
1,20,000 units
So, Sales Price = 15 + 5.25 = 20.25

Profit 60,000
(c) Margin of Safety Sales  Or,
P/V Ratio P/V Ratio

Contribution per unit 5

where, P/V Ratio  100 Or, 100  25%
Sales Price 20
60,000
Margin of Safety Sales =   2,40,000
25%
So if profit is 60,000, margin of safety sale will be 2,40,000.
Question 12—
A company has fixed cost of 90,000, Sales 3,00,000 and Profit of 60,000. Required:
(i) Sales volume if in the next period, the company suffered a loss of 30,000.
(ii) What is the margin of safety for a profit of 90,000?
Answer—

Contribution  1,50,000 
P/V Ratio   100  100   50%
Sales  3,00,000 
(i) If in the next period company suffered a loss of 30,000, then
Contribution = Fixed Cost  Profit
= 90,000 – 30,000 (as it is a loss) = 60,000

Contribution 60,000
Then Sales  or  1,20,000
P/V ratio 50%
So, there will be loss of 30,000 at sales of 1,20,000.

Profit 90,000
(ii) Margin of Safety    180 ,000
PV Ratio 50 %
Alternative solution of this part:

Fixed Cost 90,000

Break-even Sales    180,000
PV Ratio 50%
Fixed Cost  Profit
Sales at profit of 90,000 
PV Ratio

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 Chapter 14 : Marginal Costing 14.13
90,000  90,000 180,000
   3,60,000
50% 50%
Margin of Safety = Sales – Break-even Sales
= 3,60,000–1,80,000 = 180,000
Question 13—
Following informations are available for the year 2013 and 2014 of PIX Limited:
Year 2013 2014
Sales 32, 00,000 57, 00,000
Profit/ (Loss) ( 3,00,000) 7, 00,000
Calculate – (a) P/V ratio, (b) Total fixed cost, and (c) Sales required to earn a Profit of 12,00,000.
Answer—

Chagne in profit
(a) P/V Ratio   100
Change in sales

7,00,000  ( 3,00,000) 10,00,000

   100  40%
( 57,00,000 – 32,00,000) 25,00,000
(b) Total Fixed cost = Total Contribution – Profit
= (Sales × P/V Ratio) – Profit

 40 
  57,00,000    7,00,000
 100 
= 22, 80,000 – 7,00,000 = 15,80,000
(c) Contribution required to earn a profit of 12,00,000
= Total fixed cost + Profit required
= 15,80,000 + 12,00,000 = 27,80,000

27,80,000 27,80,000
Required Sales    69,50,000
P/V Ratio 40%
Question 14—
MNP Ltd sold 2,75,000 units of its product at 37.50 per unit. Variable costs are 17.50 per unit (manufac-
turing costs of 14 and selling cost 3.50 per unit). Fixed costs are incurred uniformly throughout the year
and amount to 35,00,000 (including depreciation of 15,00,000). there are no beginning or ending invento-
ries. Required:
(i) Estimate breakeven sales level quantity and cash breakeven sales level quantity.
(ii) Estimate the P/V ratio.
(iii) Estimate the number of units that must be sold to earn an income (EBIT) of 2,50,000.
(iv) Estimate the sales level achieve an after-tax income (PAT) of 2,50,000. Assume 40% corporate
Income Tax rate.

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 Chapter 14 : Marginal Costing 14.14
Answer—
(i) Contribution = 37.50 – 17.50 = 20 per unit.

Fixed Cost 35,00,000

Break even Sales Quantity    1,57,000 units
Contribution margin per unit 20

Cash Fixed Cost 20,00,000

Cash Break even Sales Qty    1,00,000 units
Contribution margin per unit 20

Contribution/unit 20
(ii) P/V ratio   100   100  53.33%
Selling Price / unit 37.50
(iii) No. of units that must be sold to earn an Income (EBIT) of 2,50,000

Fixed cost  Desired EBIT level 35,00,000  2,50,000

   1,87,500 units
Contribution margin per unit 20
(iv) After Tax Income (PAT) = 2,50,000
Tax rate = 40%

2,50,000
Desired level of Profit before tax   100  4,16,667
60
Fixed Cost  Desired Profit
Estimate Sales Level 
P/V ratio

 Fixed Cost  Desired Profit 

Or   Selling Per Unit 
 Contribution per Unit 

35,00,000  4,16,667
  73,43,750
53.33%
Question 15—
The following figures are related to LM Limited for the year ending 31st March, 2014 : Sales – 24,000 units
@ 200 per unit;
P/V Ratio 25% and Break-even Point 50% of sales. You are required to calculate:
(i) Fixed cost for the year
(ii) Profit earned for the year
(iii) Units to be sold to earn a target net profit of 11,00,000 for a year.
(iv) Number of units to be sold to earn a net income of 25% on cost.
(v) Selling price per unit if Break-even Point is to be brought down by 4,000 units.
Answer—
Break- even point (in units) is 50% of sales i.e. 12,000 units.
Hence, Break- even point (in sales value) is 12,000 units × 200 = 24,00,000

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 Chapter 14 : Marginal Costing 14.15
Fixed Cost
(i) We know that Break even sales 
P/V Ratio
Fixed Cost
Or, 24,00,000 
25%
Or, Fixed Cost = 24,00,000 × 25%
= 6,00,000
So Fixed Cost for the year is 6,00,000
(ii) Contribution for the year = (24,000 units × 200) × 25%
= 12,00,000
Profit for the year = Contribution – Fixed Cost
= 12,00,000 – 6,00,000
= 6,00,000
(iii) Target net profit is 11,00,000
Hence, Target contribution = Target Profit + Fixed Cost
= 11,00,000 + 6,00,000
= 17,00,000
Contribution per unit = 25% of 200 = 50 per unit

17,00,000
No. of units   34,000 unit
50per unit
So, 34,000 units to be sold to earn a target net profit of 11,00,000 for a year.
(iv) Net desired total Sales (Number of unit × Selling price) be x then desired profit is 25% on Cost or
20% on Sales i.e. 0.2 x

Fixed Cost  Desired Profit

Desired Sales 
P/V Ratio
6,00,000  0.2 x
x 
25%
Or, 0.25x = 6,00,000 + 0.2x
Or, 0.05x = 6,00,000
or, x = 1,20,00,000

1,20,00,000
No. of units to be sold   60,000 units
200
(v) If Break- even point is to be brought down by 4,000 units then Break-even point will be
12,000 units – 4,000 units = 8,000 units
Let Selling price be x and fixed cost and variable cost per unit remain unchanged i.e.
6,00,000 and 150 respectively.

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 Chapter 14 : Marginal Costing 14.16
Break even point: Sales revenue = Total cost
8,000 x = 8,000 × 150 + 6,00,000
Or, 8,000 x = 12,00,000 + 6,00,000

18,00,000
Or, x   225
8,000
 Selling Price should be 225
Hence, selling price per unit shall be 225 if Break-even point is to be brought down by 4,000 units
Question 16—
Arnav Ltd. manufacture and sales its product R-9. The following figures have been collected from cost
records of last year for the product R-9:
Elements of Cost Variable Cost portion Fixed Cost
Direct Material 30% of Cost of Goods Sold –
Direct Labour 15% of Cost of Goods Sold –
Factory Overhead 10% of Cost of Goods Sold 2,30,000
General & Administration Overhead 2% of Cost of Goods Sold 71,000
Selling & Distribution Overhead 4% of Cost of Sales 68,000
Last Year 5,000 units were sold at 185 per unit. From the given data find the followings:
(a) Break-even Sales (in rupees)
(b) Profit earned during last year
(c) Margin of safety (in %)
(d) Profit if the sales were 10% less than the actual sales.
Answer—
Working Notes:
(i) Calcualtion of Cost of Goods Sold (COGS):
= {(DM- 0.3 COGS) + (DL- 0.15 COGS) + (FOH- 0.10 COGS + 2,30,000)
+ (G&AOH- 0.02 COGS + 71,000)}
Or COGS = 0.57 COGS + 3,01,000

3,01,000
Or COGS   7,00,000
0.43
(ii) Calculaton of Cost of Sales (COS):
COS = COGS + (S &DOH– 0.04 COS + 68,000)
Or COS = 7,00,000 + (0.04 COS + 68,000)

7,68,000
Or COS   8,00,000
0.96

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 Chapter 14 : Marginal Costing 14.17
(iii) Calculation of Variable Costs:
Direct Material- (0.3 × 7,00,000) 2,10,000
Direct Labour- (0.15 × 7,00,000) 1,05,000
Factory Overhead- (0.10 × 7,00,000) 70,000
General & Administration OH- (0.02 × 7,00,000) 14,000
Selling & Distribution OH (0.04 × 8,00,000) 32,000
4,31,000
(iv) Calculation of total Fixed Costs:
Factory Overhead- 2,30,000
General & Administration OH- 71,000
Selling & Distribution OH 68,000
3,69,000
(v) Calculation of P/V

Contribution Sales – Variable Costs

P/V Ratio   100   100
Sales Sales

( 185  5,000 units) – 4,31,000

  100  53.41%
185  5000 units

Fixed Costs 3,69,000

(a) Break-Even Sales =   6,90,882
P/V Ratio 53.41%
(b) Profit earned during the last year
= (Sales – Total Variable Costs) – Total Fixed Costs
= ( 9,25,000 – 4,31,000) – 3,69,000
= 1,25,000

Sales – Break even Sales

(c) Margin of Safety (%)   100
Sales

9,25,000 – 6,90,882
  100  25.31%
9,25,000
(d) Profit if the sales were 10% less than the actual sales:
Profit = 90% ( 9,25,000 – 4,31,000) – 3,69,000
= 4,44,600 – 3,69,000 = 75,600
Question 17—
Maryanne Petrochemicals Ltd. is operating at 80 % capacity and presents the following information:
Break-even Sales 400 crores
P/V Ratio 30 %
Margin of Safety 120 crores

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 Chapter 14 : Marginal Costing 14.18
Maryanne's management has decided to increase production to 95 % capacity level with the following
modifications:
(a) The selling price will be reduced by 10%.
(b) The variable cost will be increased by 2% on sales
(c) The fixed costs will increase by 50 crores, including depreciation on additions, but excluding
interest on additional capital.
Additional capital of 100 crores will be needed for capital expenditure and working capital.
Required:
(i) Indicate the sales figure, with the working, that will be needed to earn ` 20 crores over and above
the present profit and also meet 15% interest on the additional capital.
(ii) What will be the revised
(a) Break-even Sales
(b) P/V Ratio
(c) Margin of Safety
Answer—
Working Notes:
1. Total Sales = Break -even Sales + Margin of Safety
= 400 crores + 120 crores
= 520 crores
2. Variable Cost = Total Sales × (1- P/V Ratio)
= 520 crores × (1 - 0.3)
= 364 crores
3. Fixed Cost = Break-even Sales × P/V Ratio
= 400 crores × 30%
= 120 crores
4. Profit = Total Sales – (Variable Cost + Fixed Cost)
= 520 crores – ( 364 crores + 120 crores)
= 36 crores
(i) Revised Sales figure to earn profit of 56 crores (i.e. 36 crores + 20 crores)

Revised Fixed Cost *  Desired Profit

Revised Sales 
Revised P/V Ratio * *
185crores  56crores

28%
= 860.71 Crores
*Revised Fixed Cost = Present Fixed Cost + Increment in fixed cost + Interest on additional Capital
= 120 crores + 50 crores + 15% of 100 crores
= 185 crores

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 Chapter 14 : Marginal Costing 14.19
**Revised P/V Ratio : Let current selling price per unit be 100.
Therefore, Reduced selling price per unit = 100 × 90% = 90
Revised Variable Cost on Sales = 70%+ 2% = 72%
Variable Cost per unit = 90 × 72% = 64.80
Contribution per unit = 90 – 64.80 = 25.20

Contribution 25.2
Revised P/V Ratio =  100   100  28%
Sales 90
Fixed Cost 185crores
(ii) (a) Revised Break-even Sales  100   660.71 crores
P/V Ratio 28%
(b) Revised P/V Ratio = 28% (as calculated above)
(c) Revised Margin of safety = Total Sales – Break-even Sales
= 860.71 crores – 660.71 crores
= 200 crores.
Question 18—
SHA Limited provides the following trading results:
Year Sale Profit
2012-13 25,00,000 10% of Sale
2013-14 20,00,000 8% of Sale
You are required to calculate:
(i) Fixed Cost
(ii) Break Even Point
(iii) Amount of profit, if sale is 30,00,000
(iv) Sale, when desired profit is 4,75,000
(v) Margin of Safety at a profit of 2,70,000
Answer—
Workings:
Profit in year 2012-13 = 25,00,000 × 10% = 2,50,000
Profit in year 2013-14 = 20,00,000 × 8% = 1,60,000

Change in Profit
So, P/V Ratio   100
Change in Sales

2,50,000 – 1,60,000 90,000

  100   100  18%
25,00,000 – 20,00,000 5,00,000
(i) Fixed Cost = Contribution (in year 2012-13) – Profit (in year 2012-13)
= (Sales × P/V Ratio) – 2,50,000
= ( 25,00,000 × 18%) – 2,50,000

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 Chapter 14 : Marginal Costing 14.20
= 4,50,000 – 2,50,000
= 2,00,000

Fixed Cost
(ii) Break-even Point (in Sales) 
P/V Ratio
2,00,000
  11,11,111( Approx )
18%
(iii) Calculation of profit, if sales is 30,00,000
Profit = Contribution – Fixed Csot = (Sales × P/V Ratio) – Fixed Cost
= ( 30,00,000 × 18%) – 2,00,000
= 5,40,000 – 2,00,000
= 3,40,000
So profit is 3,40,000, if Sale is 30,00,000.
(iv) Calculation of Sale, when desired Profit is 4,75,000
Contribution Required = Desired Profit + Fixed Cost
= 4,75,000 + 2,00,000
= 6,75,000

Contributi on 6,75,000
Sales    37,50,000
P/V Ratio 18%
Sales is 37,50,000 when desired profit is 4,75,000.

Profit
(v) Margin of Safety 
P/V Ratio
2,70,000
  15,00,000
18%
So Margin of Safety is 15,00,000 at a profit of 2,70,000
Question 19 —
ABC Limited started its operation in the year 2013 with a total production capacity of 2,00,000 units. The
following information, for two years, are made available to you:
Year Year
2013 2014
Sales (units) 80,000 1,20,000
Total Cost ( ) 34,40,000 45,60,000
There has been no change in the cost structure and selling price and it is anticipated that it will remain
unchanged in the year 2015 also.
Selling price is 40 per unit. Calculate:
(i) Variable cost per unit.
(ii) Profit Volume Ratio.

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 Chapter 14 : Marginal Costing 14.21
(iii) Break-Even Point (in units)
(iv) Profit if the firm operates at 75% of the capacity.
Answer—

Change in total cost 45,60,000 – 34,40,000

 
Change in sales volume 1,20,000 units – 80,000 units

11,20,000
  28
40,000 units

Contribution Per Unit

(ii) Profit volume Ratio  100
Selling Price Per Unit

40 – 28
 100  30%
40

Fixed Cost
(iii) Break-Even Point (in units) 
Contribution per unit
Fixed Cost = Total Cost in 2013 - Total Variable Cost in 2013
= 34,40,000 – ( 28 × 80,000 units)
= 34,40,000 – 22,40,000
= 12,00,000

12,00,000
Therefore, Break-Even Point   1,00,000 units
12
(iv) Profit if the firm operates at 75% of the capacity:
Number of units to be produced and sold = 2,00,000 units × 75% = 1,50,000 units
Profit = Total contribution – Fixed Cost
Or, = 12 × 1,50,000 units – 12,00,000
Or, = 18,00,000 – 12,00,000
Or, Profit = 6,00,000
Question 20—
SK Lit. is engaged in the manufacture of tyres. Analysis of income statement indicated a profit of 150
lakhs on a sales volume of 50,000 units. The fixed costs are 850 lakhs which appears to be high. Existing
selling price is 3,400 per unit. The company is considering to revise the profit target to ` 350 lakhs. You are
required to compute—
(i) Break- even point at existing levels in units and in rupees.
(ii) The number of units required to be sold to earn the target profit.
(iii) Profit with 15% increase in selling price and drop in sales volume by 10%.
(iv) Volume to be achieved to earn target profit at the revised selling price as calculated in (ii) above, if
a reduction of 8% in the variable costs and 85 lakhs in the fixed cost is envisaged.

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 Chapter 14 : Marginal Costing 14.22
Answer—
Sales Volume 50,000 Units
Computation of existing contribution
Particulars Per unit ( ) Total ( In lakhs)
Sales 3,400 1,700
Fixed Cost 1,700 850
Profit 300 150
Contribution 2,000 1,000
Variable Cost 1,400 700

Fixed Cost 8,50,00,000

Break even sales in units =   42,500 units
Contribution per unit 2,000
Break even sales in rupees = 42,500 units × 3,400 = 1,445 lakhs
Or

2,000
P/V Ratio   100  58.82%
3,400

FC 8,50,00,000
B.EP (Rupees) =    1,445 lakhs(approx)
P/V Ratio 58.82%
(ii) Number of units sold to achieve a target profit of 3,50,lakhs:
Desired Contribution = Fixed Cost + Target Profit
= 850 L + 350 L = 1,200L

DesiredContribution 12,00,00,000
Number of units to be sold    60,000 units
Contribution per unit 2,000
(iii) Profit if selling price is increased by 15% and sales volume drops by 10%: ]
Existing Selling Price per unit = 3,400
Revised selling price per unit = 3,400 × 115% = 3,910
Existing Sales Volume = 50,000 units
Revised sales volume = 50,000 units – 10% of 50,000 = 45,000 units.
Statement of profit at sales volume of 45,000 units @ 3910 per unit
Particulars Per unit ( ) Total ( In lakhs)
Sales 3,910.00 1,759.50
Less: Variable Costs 1,400.00 630.00
Contribution 2,510.00 1,129.50
Less: Fixed Cost 850.00
Profit 279.50

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 Chapter 14 : Marginal Costing 14.23
(iv) Volume to be achieved to earn target profit of 350 lakhs with revised selling price and reduction of
8% in variable costs and 85 lakhs in fixed cost:
Revised selling price per existing unit = 3,910
Variable costs per unit = 1,400
Revised Variable Costs
Reduction of 8% in variable costs = 1,400 – 8% of 1,400
= 1,400 – 112
= 1,288
Total Fixed Cost (existing) = 850 lakhs
Reduction in fixed cost = 85 lakhs
Revised fixed cost = 850 lakhs – 85 lakhs = 765 lakhs
Revised Contribution (unit) = Revised selling price per unit – Revised
Variable Costs per units
Revised Contribution per unit = 3,910 – 1,288 = 2,622
Desired Contribution = Revised Fixed Cost + Target Profit
= 765 lakhs + 350 lakhs = 1,115 lakhs

Desired Contribution 1,115lakh

No. of Units to be sold    42,525 units
Contribution per unit 2,622
Question 21—
A company gives the following information:
Margin of Safety 3,75,000
Total Cost 3,87,500
Margin of Safety (Qty.) 15,000 units
Break Even Sales in Units 5,000 units
You are required to calculate:
(i) Selling price per unit
(ii) Profit
(iii) Profit/ Volume Ratio
(iv) Break Even Sales (in Rupees)
(v) Fixed Cost
Answer—

Margin of Safety in Rupee value

(i) Selling Price per unit 
Margin of Safety in Quantity

3,75,000
  25
15,000 units
(ii) Profit = Sales Value - Total Cost

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 Chapter 14 : Marginal Costing 14.24
= Selling price per unit × (BEP units + MoS units) - Total Cost
= 25 × (5,000 + 15,000) units – 3,87,500
= 5,00,000 – 3,87,500 = 1,12,500

profit
(iii) Profit/Volume (P/v) Ratio   100
Margin of Safety in Rupee value

1,12,500
  100  30%
3,75,000
(iv) Break Even Sales (in Rupees) = BEP units × Selling Price per unit
= 5,000 units × 25 = 1,25,000
(v) Fixed Cost = Contribution - Profit
= Sales Value × P/V Ratio - Profit
= ( 5,00,000 × 30%) – 1,12,500
= 1,50,000 – 1,12,500 = 37,500
************************

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 Chapter 15 : Budget and Budgetory Control 15.1
Question 1—
Pentax Limited has prepared its expense budget for 20,000 units in its factory for the year
2013 as detailed below:
( per unit)
Direct Materials 50
Direct Labour 20
Variable Overhead 15
Direct Expenses 6
Selling Expenses (20% fixed) 15
Factory Expenses (100% fixed) 7
Administration expenses (100% fixed) 4
Distribution expenses (85% variable) 12
Total 129
Prepare an expense budget for the production of 15,000 units and 18,000 units.
Answer—
Expense Budget of M/s Pentax Ltd.

Particulars 20,000 Un its 15,000 Units 18,000 Units

( ) ( ) ( )
Direct Material 10,00,000 7,50,000 9,00,000
(20,000 × 50) (15,000 × (18,000 × 50)
50)
Direct Labour 4,00,000 3,00,000 3,60,000
(20,000 × 20) (15,000 × (18,000 × 20)
20)
Variable Overhead 3,00,000 2,25,000 2,70,000
(20,000 × 15) (15,000 × (18,000 × 15)
15)
Direct Expenses 1,20,000 90,000 1,08,000
(20,000 × 6) (15,000 × (18,000 × 6)
6)
Selling Expenses (Variable)* 2,40,000 1,80,000 2,16,000
(20,000 × 12) (15,000 × (18,000 × 12)
12)
Selling Expenses (Fixed)* 60,000 60,000 60,000
(3 × 20,000)

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 Chapter 15 : Budget and Budgetory Control 15.2
Factory Expenses (Fixed) 1,40,000 1,40,000 1,40,000
(7 × 20,000)
Administration Expenses (Fixed) 80,000 80,000 80,000
(4× 20,000)
Distribution Expenses (Variable)** 2,04,000 1,53,000(10.20 1,83,600
(10.20 × 20,000) × 15,000) (10.20 × 18,000)
Distribution Expenses (Fixed)** 36,000 36,000 36,000
(1.80 × 20,000)
25,80,000 20,14,000 23,53,600
*Selling Expenses: Fixed cost per unit = 15 × 20% = 3
Fixed Cost = 3 × 20,000 units = 60,000
Variable Cost Per unit = 15 – 3 = 12
**Distribution Expenses: Fixed cost per unit = 12 × 15% = 1.80
Fixed Cost = 1.80 × 20,000 units = 36,000
Variable cost per unit = 12 – 1.80 = 10.20
Question 2—
M/s NNSG Ltd, specialized in manufacturing of piston rings for motor vehicle. It has prepared
budget for 8,000 units per annum at budgeted cost of 21,64,400 as detailed below:
( ) ( )
Fixed cost (Manufacturing) 2,28,000
Variable costs:
Power 18,000
Repairs, etc. 16,000
Other variable cost 6,400
Direct material 6,16,000
Direct labour 12,80,000 19,36400
21,64,400
Considering the possible impact on sales turnover by market trends, the company decides to pre-
pare flexible budget with a production target of 4,000 and 6,000 units. On behalf of the company
you are required to prepare a flexible budget for production levels at 50% and 75%.
Assuming the selling price per unit is maintained at 400 as at present, indicate the effect on net
profit. Administration, selling and distribution overheads continue at 72,000.

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 Chapter 15 : Budget and Budgetory Control 15.3
Answer—
Flexible Budget

Activity Level 50% 75% 100%

Production (units) 4,000 6,000 8,000
( ) ( ) ( )
Sales @ 400 per unit 16,00,000 24,00,000 32,00,000
Variable costs :
Direct Materials 3,08,000 4,62,000 6,16,000
Direct Labour 6,40,000 9,60,000 12,80,000
Power 9,000 13,500 18,000
Repairs etc. 8,000 12,000 16,000
3,200 4,800 6,400
Other variable cost
9,68,200 14,52,300 19,36,400
Total Variable Costs:

Fixed costs :
Manufacturing 2,28,000 2,28,000 2,28,000
72,000 72,000 72,000
Administration, Selling and
3,00,000 3,00,000 3,00,000
Distribution Total Fixed Costs:

Total Costs 12,68,200 17,52,300 22,36,400

Profit (Sales – Variable Cost) – Fixed Cost 3,31,800 6,47,700 9,63,600
Question 3—
RST, Limited is presently operating at 50% capacity and producing 30000 units. The entire output
is sold at a price of 200 per unit. The cost structure at the 50% level of activity is as under:
( )
Direct Material 75 per unit
Direct Wages 25 per unit
Variable Overheads 25 per unit
Direct Expenses 15 per unit
Factory Expenses (25% fixed) 20 per unit
Selling and Distribution Exp. (80% variable) 10 per unit
Office and Administrative Exp. (100% fixed) 5 per unit
The company anticipates that the variable costs will go up by 10% and fixed costs will go up by
15%.
You are required to prepare an Expense budget, on the basis of marginal cost for the company at
50% and 60% level of activity and find out the profits at respective levels.
Answer—

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 Chapter 15 : Budget and Budgetory Control 15.4
Expense Budget of RST Ltd. for the period
Per unit 30,000units 36, 000 units
( )
Amount ( ) Amount ( )
Sales (A) 200.00 60,00,000 72,00,000
Less: Variable Costs:
— Direct Material 82.50 24,75,000 29,70,000
— Driect Wages 27.50 8,25,000 9,90,000
— Variable Overheards 27.50 8,25,000 9,90,000
— Direct Expenses 16.50 4,95,000 5,94,000
— Variable factory expenses 16.50 4,95,000 5,94,000
(75% of 20 p.u.)
Variable Selling & Dist. Expenses (80% of 10 p.u.) 8.80 2,64,000 3,16,800
Total Variable Cost (B) 179.30 53,79,000 64,54,800
Contribution C= (A – B) 20.70 6,21,000 7,45,200
Less: Fixed Costs
— Office and Admin. Exp. (100%) – 1,72,500 1,72,500
— Fixed Factory Exp. (25%) – 1,72,500 1,72,500
— Fixed Selling & Dist. Exp. (20%) – 69,000 69,000
Total Fixed Costs (D) – 4,14,000 4,14,000
Profit (C–D) – 2,07,000 3,31,200
Question 4—
S Ltd. has prepared budget for the coming year for its two products A and B.
Product A ( ) Product B ( )
Production & Sales unit 6,000 units 9,000 units
Raw material cost per unit 60.00 42.00
Direct labour cost per unit 30.00 18.00
Variable overhead per unit 12.00 6.00
Fixed overhead per unit 8.00 4.00
Selling price per unit 120.00 78.00
After some marketing efforts, the sales quantity of the Product A & B can be increased by 1,500
units and 500 units respectively but for this purpose the variable overhead and fixed overhead will
be increased by 10% and 5% respectively for the both products.
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 Chapter 15 : Budget and Budgetory Control 15.5
You are required to prepare flexible budget for both the products:
(a) Before marketing efforts
(b) After marketing efforts.
Answer—
(a) Flexible Budget before marketing efforts:

Product A ( ) Product B ( )
6,000 Units 9,000 Units
Per unit Total Per unit Total
Sales 120.00 7,20,000 78.00 7,02,000

Raw material cost 60.00 3,60,000 42.00 3,78,000

Direct labour cost per unit 30.00 1,80,000 18.00 1,62,000
Variable overhead per unit 12.00 72,000 6.00 54,000
Fixed overhead per unit 8.00 48,000 4.00 36,000
Total cost 110.00 6,60,000 70.00 6,30,000
Profit 10.00 60,000 8.00 72,000

Flexible Budget after marketing efforts:

Product A ( ) Product B ( )
7,500 units 9,500 units
Per unit Total Per unit Total
Sales 120.00 9,00,000 78.00 7,41,000

Raw material cost 60.00 4,50,000 42.00 3,99,000

Direct labour cost per unit 30.00 2,25,000 18.00 1,71,000

Variable overhead per unit 13.20 99,000 6.60 62,700

Fixed overhead per unit 6.72 50,400 3.98 37,800

Total cost 109.92 8,24,400 70.58 6,70,500

Profit 10.08 75,600 7.42 70,500

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 Chapter 15 : Budget and Budgetory Control 15.6
Mix
(Production Budget, Consumption Budget, )
Questioin 5—
Following is the sales budget for the first six months of the year 2014 in respect of PQR Ltd.

Month : Jan. Feb. March April May June

Sales (units) : 10,000 12,000 14,000 15,000 15,000 16,000

Finished goods inventory at the end of each month is expected to be 20% of budgeted sales quantity for the
following month. Finished goods inventory was 2,700 units on January 1, 2014. There would be no work-
in-progress at the end of any month.
Each unit of finished product requires two types of materials as detailed below:
Material X : 4 kg. @ 10/kg
Material Y : 6 kg. @ 15/kg
Material on hand on January 1, 2014 was 19,000 kg. of material X and 29,000 kg. of materialY. Monthly
closing stock of material is budgeted to be equal to half of the requirements of next month's production.
Budgeted direct labour hour per unit of finished product is ¾ hour.
Budgeted direct labour cost for the first quarter of the year 2014 is 10,89,000. Actual data for the quarter
one, ended on March 31, 2014 is as under:

Actual production quantity : 40,000 units

Direct material cost
(Purchase cost based on materials actually issued to production)
Material X : 1,65,000 kg. @ 10.20 / kg.
Material Y : 2,38,000 kg. @ 15.10/ kg.
Actual direct labour hours worked 32,000 hours
Actual direct labour : 13,12,000
Required :
(a) Prepare the following budgets:
(i) Monthly production quantity for the quarter one.
(ii) Monthly raw material consumption quantity budget from January, 2014 to April, 2014.
(iii) Materials purchase quantity budget for the quarter one.
(b) Compute the following variances :
(i) Material cost variance
(ii) Material price variance
(iii) Material usage variance
(iv) Direct labour cost variance
(v) Direct labour rate variance
(vi) Direct labour efficiency variance

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 Chapter 15 : Budget and Budgetory Control 15.7
Answer—
(a) (i) Production Budget for January to March 2014
(Quantitative)
Jan Feb Mar. April
Budgeted Sales 10,000 12,000 14,000 15,000
Add: Budgeted Cloasing Stock
(20% of sales of next month) 2,400 2,800 3,000 3,000
12,400 14,800 17,000 18,000
Less: Opening Stock 2,700 2,400 2,800 3,000
Budgeted Output 9,700 12,400 14,200 15,000
Total Budgeted Output for the Quarter ended March 31, 2014
= (9,700 + 12,400 + 14,200)= 36,300 units.
(ii) Raw Material Consumption Budget (in quantity)
Month Budgeted Output Martial 'X' @4kg. Material 'Y' @ 6 kg
Units Per unit (Kg) Per unit (Kg)
January 9,700 38,800 58,200
February 12,400 49,600 74,400
March 14,200 56,800 85,200
April 15,000 60,000 90,000
Total 2,05,200 3,07,800
(iii) Raw Materials Purchase Budget for the Quarter ended March 31, 2014
(in quantity)
Material X (kg) Material Y (kg)
Raw Material Required for production 1,45,200 2,17,800
Add: Closing Stock or raw material 30,000 45,000
1,75,000 2,62,800
Less: Opening Stock of raw material 19,000 29,000
Material to be purchased 1,56,200 2,33,800
(b) Calculation of Material Cost Variance
(a) (b)
Std Price × Std. Mix × Std. Qty for actual Output Std Price × Std. Mix × Actual Qty.
4
X – 10 × 4 × 40,000 = 16,00,000 X – 10   4,03,000  16,12,000
10
6
Y – 15 × 6 × 40,000 = 36,00,000 Y – 15   4,03,000  36,27,000
10
52,00,000 52,39,000

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 Chapter 15 : Budget and Budgetory Control 15.8
(c) (d)
Std Price × Actual Mix × Actual Qty. Actual Price × Actual Mix × Actual Qty.
X – 10 × 1,65,000 = 16,50,000 X – 10.20 × 1,65,000 = 16,83,000
Y – 15 × 2,38,000 = 35,70,000 Y – 15.10 × 2,38,000 = 35,93,800
52,20,000 52,76,800
Direct Material Usage Variance = (a – c)
X– 16,00,000 – 16,50,000 = 50,000 (A)
Y– 36,00,000 – 35,70,000 = 30,000 (F)
52,00,000 – 52,20,000 = 20,000 (A)
Direct Material Price Variance = (c – d)
X– 16,50,000 – 16,83,000 = 33,000 (A)
Y– 35,70,000 – 35,93,800 = 23,800 (A)
52,20,000 – 52,76,800 = 56,800 (A)
Direct Material Cost Variance = (a – d)
X– 16,00,000 – 16,83,000 = 83,000 (A)
Y– 36,00,000 – 35,93,800 = 6,200 (F)
52,00,000 – 52,76,800 = 76,800 (A)
Verification:
Direct Material Cost Variance = Direct Material Usage Variance + Direct
Material Price Variance
= 20,000 (A) + 56,800 (A)
= 76,800 (A)
Alternative Solution (Total basis)
Direct Material Cost Variance = 52, 00,000 – 52, 76,800 =76,800 (A)
Direct Material Price Variance = 52, 20,000 – 52, 76,800 = 56,800 (A)
Direct Material Usage Variance = 52, 20,000 –52, 00,000 = 20,000 (A)
Calculation of Labour Cost Variances:
Budgeted output for the quarter = 36,300 units
Budgeted direct labour hours = 36,300 × ¾ hrs.
= 27,225 hours
hours Standard or Budgeted labour rate per hour
Budgeted direct labour cost

Budgeted direct labour hours

10,89,000
  40
27,225 hours
Standard labour hours for actual output:

40,000 units × 3 4 hour = 30,000 hours

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 Chapter 15 : Budget and Budgetory Control 15.9
13,12,000
Actual labour hour rate   41
32,000 hrs
Direct Labour Efficiency Variance = Standard Rate × (Std. hrs – Actual hrs.)
= 40 × (30,000 – 32,000)
= 80,000 (A)
Direct Labour Rate Varience = Actual hrs. × (Std. Rate – Actual Rate)
= 32,000 ×(40 – 41)
= 32,000 (A)
Direct Labour Cost Variance = (Std. rate × Std. hrs.) – (Actual rate × Actual hrs.)
= (40 × 30,000) - (41 × 32,000)
= 12,00,000 – 13,12,000
= 1,12,000 (A)
Verification:
Direct Labour Cost Variance = Direct Labour Efficiency Variance + Direct Labour Rate Variance
= 80,000 (A) + 32,000 (A)
= 1,12,000 (A)
Question 6—
A Light Motor Vehicle manufacturer has prepared sales budget for the next few months, and the following
draft figures are available:
Month No. of vehicles
October 4,000
November 3,500
December 4,500
January 6,000
February 6,500
To manufacture a vehicle a standard cost of 2,85,700 is incurred and sold through dealers at an uniform
selling price of 3,95,600 to customers. Dealers are paid 12.5% commission on selling price on sale of a
vehicle.
Apart from other materials four units of Part-X are required to manufacture a vehicle. It is a policy of the
company to hold stocks of Part-X at the end of the each month to cover 40% of next month's production.
4,800 units of Part-X are in stock as on 1st October.
There are 950 nos. of completed vehicles are in stock as on 1st October and it is policy to have stocks at the
end of each month to cover 20% of the next month's sales.
You are required to
(a) Prepare Production budget (in nos.) for the month of October, November, December and January.
(b) Prepare a Purchase budget for Part-X (in units) for the months of October, November and Decem-
ber.
(c) Calculate the budgeted gross profit for the quarter October to December.

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 Chapter 15 : Budget and Budgetory Control 15.10
Answer—
(a) Preparation of Production Budget (in nos.)
October November December January
Demand for the month (Nos.) 4,000 3,500 4,500 6,000
Add: 20% of next month's demand 700 900 1,200 1,300
Less: Opening Stock (950) (700) (900) (1200)
Vehicles to be produced 3,750 3,700 4,800 6,100
(b) Preparation of Purchase budget for Part-X
October November December
Production for the month (Nos.) 3,750 3,700 4,800
Add: 40% of next month's production 1,480 1,920 2,440
(40% of 3,700) (40% of 4,800) (40% of 6,100)
5,230 5,620 7,240
No. of units required for production 20,920 22,480 28,960
(5,230 × 4 units) (5,620 × 4 units) (7,240 ×4 units)
Less: Opening Stock (4,800) (5,920) (7,680)
. (1,480 × 4 units) (1,920 × units)
No. of units to be purchased 16,120 16,560 21,280
(c) Budgeted Gross Profit for the Quarter October to December
October Novemvber December Total
Sales in nos. 4,000 3,500 4,500 12,000
Net Selling Price per unit* 3,46,150 3,46,150 3,46,150
Sales Revenue ( in lakh) 13,846 12,115.25 15,576.75 41,538
Less: Cost of Sales ( in lakh) 11428 9,999.50 12,856.50 34,284
(Slaes unit ×Cost per unit) . . . .
Gross Profit ( in lakh) 2,418 2,115.75 2,720.25 7,254
* Net Selling price unit = 3,95,600 – 12.5% commission on 3,95,600 = 3,46,150
Question 7—
G Ltd. manufactures two products called 'M' and 'N'. Both products use a common raw material Z. The raw
material Z is purchased @ 36 per kg from the market. The company has decided to review inventory
management policies for the for the coming year.
The following forecast information has been extracted from departmental estimates for the year ended 31st
March 2016 (the budget period):
Product M Product N
Sales (units) 28,000 13,000
Finished goods stock increase by year-end 320 160
Post-production rejection rate (%) 4 6
Material Z usage (per completed unit, net of wastage) 5 kg 6 kg
Material Z wastage (%) 10 5

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 Chapter 15 : Budget and Budgetory Control 15.11
Additional information:
 Usage of raw material Z is expected to be at a constant rate over the period.
 Annual cost of holding one unit of raw material in stock is 11% of the material cost.
 The cost of placing an orders is ` 320 per order.
 The management of G Ltd. has decided that there should not be more than 40 orders in a year for the
raw material Z.
Required:
(a) Prepare functional budgets for the year ended 31st March 2016 under the following headings:
(i) Production budget for Products M and N (in units).
(ii) Purchases budget for Material Z (in kgs and value).
(b) Calculate the Economic Order Quantity for Material Z (in kgs).
(c) If there is a sole supplier for the raw material Z in the market and the supplier do not sale more than
4,000 kg. of material Z at a time. Keeping the management purchase policy and production quantity
mix into consideration, calculate the maximum number of units of Product M and N that could be
produced.
Answer—
(a) (i) Production Budget (in units) for the year ended 31st March 2016
Product M Product N
Budgeted sales 28,000 13,000
Add: Increase in closing Stock 320 160
No. good units to be produced 28,320 13,160
Post production rejection rate 4% 6%
No. of units to be produced 29,500 14,000

 28,320   13,160 
   
 0.96   0.94 
(ii) Purchase budget (in kgs and value) for Material Z
Product M Product N
No. of units to be produced 29,500 14,000
Usage of Material Z per unit of production 5 kg. 6 kg.
Material needed for production 1,47,500 kg. 84,000 kg.
Materials to be pruchased 1,63,889 kg. 88,421 kg.

 1,47,500   84,000 
   
 0.90   0.95 
Total quantity to be purchased 2,52,310 kg.
Rate per kg. of Material Z 36
Total Puchase price 90,83,160

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 Chapter 15 : Budget and Budgetory Control 15.12
(b) Calculatilon of Economic Order Quantity for Material Z

2  2,52,310 kg  320 16,14,78,400

ECQ    6,385.72kg
36 11% 3.96
(c) Since, the maximum number of order per year can not be more than 40 orders and the maximum
quantity per order that can be purchased is 4,000 kg. Hence, the total quantity of Material Z that can
be available for production:
= 4,000 kg. × 40 orders = 1,60,000 kg.
Product M Product N
Material needed for production to maintain the same
production mix 1,03,929 kg. 56,071 kg.

 1,63,889   88,421 
1,60,000   1,60,000  
 2,52,310   2,52,310 
Less: Process wastage 10,393 kg. 2,804 kg.
Net Material available for production 93,536 kg. 53,267 kg.
Units to be produced 18,707 units 8,878 units

 93,536 kg   53,267 kg 
   
 5 kg.   6 kg. 
Question 8—
Calculate efficiency and activity ratio from the following data:
Capacity ratio = 75%
Budgeted output = 6,000 units
Actual output = 5,000 units
Standard Time per unit = 4 hours
Answer—

Actual Hours
Capacity Ratio   100
Budgeted Hours

AH
75% 
6,000 units  4 hour per unit

AH
0.75% 
24,000 Hours
AH = 18,000 Hours
Actual Output in terms of Standard Hours
Efficiency Ratio  100
Actual Working Hours

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 Chapter 15 : Budget and Budgetory Control 15.13
5,000 units  4 hours per unit
 100
18,000 Hours

20,000Hours
 100  111.11%
18,000 Hours

Actual Output in term of Standard Hours

Activity Ratio   100
Budgeted Output in term of Standard Hours

20,000 Units
  100
6,000 Units  4 hour per unit

20,000 units
  100
24,000 units
= 83.33%
Question 9—
AK Limited produces and sells a single product. Sales budget for calendar year 2013 by a quarters is as
under:
Quarters I II III IV
No. of units to be sold 18,000 22,000 25,000 27,000
The year is expected to open with an inventory of 6,000 units of finished products and close with inventory
of 8,000 units. Production is customarily scheduled to provide for 70% of the current quarter's sales demand
plus 30% of the following quarter demand. The budgeted selling price per unit is ` 40. The standard cost
details for one unit of the product are as follows:
Variable Cost 34.50 per unit
Fixed Overheads 2 hours 30 minutes @ 2 per hour based on a budgeted production volume of 1,10,000
direct labour hours for the year. Fixed overheads are evenly distributed through- out the year.
You are required to:
(i) Prepare Quarterly Production Budget for the year.
(ii) In which quarter of the year, company expected to achieve bread-even point.
Answer—
(i) Production Budget for the year 2013 by Quarters
I II III IV Total
Sales 18,000 22,000 25,000 27,000 92,000
I Opening Stock 6,000 7,200 8,100 8,700 30,000
II 70% of Current Quarter's Demand 12,600 15,400 17,500 18,900 64,400
III 30% of Following Quarter's Demand 6,600 7,500 8,100 7,400* 29,600
IV Total Production (II & III) 19,200 22,900 25,600 26,300 94,000
V Closing Stock (I+IV) 7,200 8,100 8,700 8,000 32,000

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 Chapter 15 : Budget and Budgetory Control 15.14
*Balancing Figure
(ii) Break Even Point = Fixed Cost ÷ PV Ratio
= 2,20,000 ÷ 13.75% = 16,00,000 or 40,000 units.
P/V Ratio= (`40 - `34.50 = ` 5.50) ÷ 40 × 100 =13.75%
(Or, Break Even Point = Fixed Cost ÷ Contribution = 2,20,000 ÷ 5.50 = 40,000 Units)
Total sales in the quarter II is 40,000 equal to BEP means BEP achived in 11 quarter.
Question 10—
XY Co. Ltd manufactures two products viz., X and Y and sells them through two divisions, East and West.
For the purpose of Sales Budget to the Budget Committee, following information has been made available
for the year 2014–15:

Budgeted Sales Actual

Product Sales
East Division West Division East Division West Division
X 400 units at 9 600 units at 9 500 units at 9 700 units at 9
Y 300 units at 21 500 units at 21 200 units at 21 400 units at 21
Adequate market studies reveal that product X is popular but under priced. It is expected that if the price of
X is increased by 1, it will, find a ready market. On the other hand, Y is overpriced and if the price of Y is
reduced by 1 it will have more demand in the market. The company management has agreed for the
aforesaid price changes. On the basis of these price changes and the reports of salesmen, following
estimates have been prepared by the Divisional Managers:
Percentage increase in sales over budgeted sales
Product East Division West Division
X + 10% + 5%
Y + 20% + 10%
With the help of intensive advertisement campaign, following additional sales (over and above the above
mentioned estimated sales by Divisional Mangers) are possible:
Product East Division West Division
X 60 units 70 units
Y 40 units 50 units
You are required to prepare Sales Budget for 2015-16 after incorporating above estimates and also show the
Budgeted Sales and Actual Sales of 2014-15.
Answer—
Statement Showing Sales Budget for 2015-16
Product X Product Y Total
Division
Qty. Rate ( ) Amt. ( ) Qty. Rate ( ) Amt. ( ) Amt. ( )
East 5001 10 5,000 400 3 20 8,000 13,000
West 7002 10 7,000 600 4 20 12,000 19,000
Total 1,200 12,000 1,000 20,000 32,000

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 Chapter 15 : Budget and Budgetory Control 15.15
Workings—
1. 400 × 110% + 60 = 500 units
2. 600 × 105% + 70 = 700 units
3. 300 × 120% + 40 = 400 units
4. 500 × 110% + 50 = 600 units
Statement Showing Sales Budget for 2014-15
D iv isio n Pr o d u c t P ro duct T o ta l
X Y
Q t y. R at e A m t. ( ) Q ty R at e ( ) A m t. ( ) A m t. ( )
( )
E a st 40 0 9 3 , 60 0 30 0 21 6 , 30 0 9 , 90 0
W e st 60 0 9 5 , 40 0 50 0 21 10 ,50 0 15 ,90 0
T ot al 1,0 00 9, 00 0 8 00 16 , 80 0 2 5, 8 00

Statement Showing Actual Sales for 2014-15

Product X Product Total

Division Y
Qty. Rate Amt. ( ) Qty. Rate Amt. Amt. ( )
( ) ( ) ( )
East 500 9 4,500 200 21 4,200 8,700
West 700 9 6,300 400 21 8,400 14,700
Total 1,200 10,800 600 12,600 23,400
*****************

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