Cost & Management Accounting

Dec 23

Q.1 The following details have been extracted from Sam Ltd.’s books of accounts for the year
ending March 31, 2023. The manager of the company is shared and divides his time between the
factory and the office in the ratio of 20:80. You are required to compute: (a) prime cost, (b)
factory overhead, (c) factory cost, (d) over head and (e) cost of sale.

Stock of Materials : Opening 2,82,000

Stock of Materials : Closing 3,00,000
Materials Purchased during the year 12,48,000
Direct Wages 3,57,600
Indirect Wages 24,000
Salaries for Administrative Staff 60,000
Freights Inwards 48,000
Freights Outwards 30,000
Cash Discount Allowed 21,000
Bad Debts w/off 28,200
Repairs to Plant and Machinery 63,600
Rent, Rates and Taxes of Factory 18,000
Rent, Rates and Taxes of Office 9,600
Travelling Expenses 18,600
Salesman’s salaries and commission 50,400
Depreciation w/Off : Plant and Machinery 42,600
Depreciation w/Off : Furniture 3,600
Director’s fees 36,000
Electricity charges: Factory 72,000
Fuel charges: Boiler 96,000
General charges 37,200
Manager’s Salary 72,000

Ans
To compute the various cost components, we will follow the steps required in cost accounting. We
will start by calculating the prime cost, then move on to factory overhead, factory cost, overhead, and
cost of sale.
1. Prime Cost:
Prime Cost includes the costs directly attributable to the production of goods.
Prime Cost = Direct Materials + Direct Wages
Prime Cost = (Materials Purchased + Opening Stock - Closing Stock) + Direct Wages
= (12,48,000 + 2,82,000 - 3,00,000) + 3,57,600
= 12,30,000 + 3,57,600
Prime Cost = 15,87,600

2. Factory Overhead:

Factory Overhead includes indirect costs related to the factory but not directly traceable to a specific
product.
Factory Overhead = Indirect Wages + Rent, Rates, and Taxes of Factory + Depreciation on
Plant and Machinery + Electricity Charges: Factory + Fuel Charges: Boiler

= 24,000 + 18,000 + 42,600 + 72,000 + 96,000

Factory Overhead = 2,52,600

3. Factory Cost:

Factory Cost is the sum of Prime Cost and Factory Overhead.

Factory Cost = Prime Cost + Factory Overhead

= 15,87,600 + 2,52,600

Factory Cost = 18,40,200

4. Overhead:

Overhead includes administrative and selling expenses.

Overhead = Salaries for Administrative Staff + Freights: Inwards + Freights: Outwards + Cash
Discount Allowed + Bad Debts Written Off + Rent, Rates, and Taxes of Office + Travelling
Expenses + Salesmen's Salaries and Commission + Director's Fees + Depreciation Written Off:
Furniture + General Charges

Overhead = 60,000 + 48,000 + 30,000 + 21,000 + 28,200 + 9,600 + 18,600 + 50,400 + 36,000 + 3,600
+ 37,200

Overhead = 3,92,000

5. Cost of Sale:

Cost of Sale is the total cost of production and overhead.

Cost of Sale = Factory Cost + Overhead

= 18,40,200 + 3,92,000

Cost of Sale = 22,32,200

So, the various cost components are as follows:

(a) Prime Cost: ₹15,87,600

(b) Factory Overhead: ₹2,52,600

(c) Factory Cost: ₹18,40,200

(d) Overhead: ₹3,92,000

(e) Cost of Sale: ₹22,32,200

Q2. You are required to compute the labor turnover using different methods of labor turnover
measurement from the following information provided for Manas Ltd. for the month of
December 2022.

Total workers in the beginning of the month were 3800, whereas at the end of the month were
4200. During the month, 50 workers left the firm on account of their own problems while 80
workers were discharged. 560 workers were engaged during the month in various departments.
But out of them, only 60 were appointed.

Ans

To compute the labor turnover using different methods of labor turnover measurement, we can use the
following formulas:

1. Separation Rate Method:

Separation Rate = (Number of Workers Who Left / Average Number of Workers) * 100

2. Replacement Method:

Replacement Rate = (Number of Workers Replaced / Average Number of Workers) * 100

3. Flux Method:

Flux Rate = (Number of Workers Replaced / Average Number of Workers) * 100

Now let's calculate each method's labor turnover for Manas Ltd for the month of December 2022.

Number of Workers Who Left = 50 + 80 = 130

Number of Workers Replaced = 60

Average Number of Workers = (Total workers in the beginning + Total workers at the end) / 2

= (3800 + 4200) / 2

= 4000

1. Separation Rate Method:

Separation Rate = (130 / 4000) * 100

= 3.25%

2. Replacement Method:

Replacement Rate = (60 / 4000) * 100

= 1.5%
3. Flux method:

Labor Turnover (Flux method) = (130 + 60) / 4000) x 100

= 4.75%

Therefore, the labor turnover for Manas Ltd. in December 2022 using different methods are as
follows:

- Separation method: 3.25%

- Replacement method: 1.5%

- Flux method: 4.75%

Q3. A product sells at Rs. 3 per unit. The company uses a first-in-out actual costing system. A
new fixed manufacturing overhead allocation rate is computed each year by dividing the actual
fixed manufacturing overhead cost by the actual production. The following data is available for
the first two years:

Year 1 Year 2
Sales (Units) 1500 1800
Production (Units) 2100 1500
Cost: (Rs.) (Rs.)
Variable Manufacturing 1050 750
Fixed Manufacturing 1050 1050
Variable Marketing and Administration 1500 1800
Fixed Marketing and Administration 600 600

Prepare Income Statement for each year based on:

a. Absorption Costing
b. Variable Costing
Ans
a. Absorption Costing
Income Statement for Year 1

Sales Rs. 4500

Cost of Goods Sold

- Variable Manufacturing Cost Rs. 1050

- Fixed Manufacturing Overhead Rs. 1050

 - Variable Marketing and Administration
Rs. 1500
Cost

- Fixed Marketing and Administration Cost Rs. 600

Total Cost of Goods Sold Rs. 4200

Gross Profit Rs. 300

Operating Expenses

- Variable Marketing and Administration

Rs. 0
Cost

- Fixed Marketing and Administration Cost Rs. 0

Total Operating Expenses Rs. 0

Net Income Rs. 300

Income Statement for Year 2

Sales Rs. 5400

Cost of Goods Sold

- Variable Manufacturing Cost Rs. 750

- Fixed Manufacturing Overhead Rs. 1050

- Variable Marketing and Administration

Rs. 1800
Cost

- Fixed Marketing and Administration Cost Rs. 600

Total Cost of Goods Sold Rs. 4200

Gross Profit Rs. 1200

Operating Expenses
 - Variable Marketing and Administration
Rs. 0
Cost

- Fixed Marketing and Administration Cost Rs. 0

Total Operating Expenses Rs. 0

Net Income Rs. 1200

b. Variable Costing
Income Statement for Year 1

Sales Rs. 4500

Variable Manufacturing Cost Rs. 1050

Variable Marketing and Administration Cost Rs. 1500

Total Variable Costs Rs. 2550

Contribution Margin Rs. 1950

Fixed Manufacturing Overhead Rs. 1050

Fixed Marketing and Administration Cost Rs. 600

Total Fixed Costs Rs. 1650

Net Income Rs. 300

Income Statement for Year 2

Sales Rs. 5400

Variable Manufacturing Cost Rs. 750

Variable Marketing and Administration Cost Rs. 1800

Total Variable Costs Rs. 2550

Contribution Margin Rs. 2850

Fixed Manufacturing Overhead Rs. 1050

Fixed Marketing and Administration Cost Rs. 600

Total Fixed Costs Rs. 1650

Net Income Rs. 1200