Cost & Management

Accounting

Mock Test Papers Compilation

Intermediate
3 Attempts

3rd Edition
• Questions from May’22 to May ‘23
• For November ‘23 Attempt
• All Questions in Chapter wise format

Vishesh Khatwani | 8555070670

 Table of Contents
Sr. No Particulars Page Number

1 Introduction to Cost & Management Accounting M 1.1- M 1.3

2 Material Cost M 2.1 – M 2.6
3 Employee Cost M 3.1 - M 3.5
4 Overheads, Absorption Costing Method M 4.1- M 4.7
5 Activity Based Costing M 5.1- M 5.11
6 Cost Sheet M 6.1 - M 6.10
7 Cost Accounting System M 7.1- M 7.4
8 Unit & Batch Costing M 8.1- M 8.5
9 Job Costing and Contract Costing M 9.1- M 9.7
10 Process & Operating Costing M 10.1- M 10.8
11 Joint Products By Products M 11.1- M 11.6
12 Service Costing M 12.1- M 12.7
13 Standard Costing M 13.1- M 13.8
14 Marginal Costing M 14.1- M 14.7
15 Budget & Budgetary Costing M 15.1- M 15.9
Costing MTP NEW Course Compilation includes:
6 MTPS: March ’22, April ’22, Sep’22, Oct’22, March ’23 & April
‘23

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Vishesh Khatwani | 8555070670

 M 1.1

Chapter 1
Introduction to Cost and Management Accounting
Question 1
Explain the difference between controllable & uncontrollable costs? ( March ’19 & April ‘23, 5
Marks)
Answer 1
Controllable costs and Uncontrollable costs : Cost that can be controlled, typically by a cost, profit or
investment center manager is called controllable cost. Controllable costs incurred in a particular
responsibility center can be influenced by the action of the executive heading that responsibility center.
Costs which cannot be influenced by the action of a specified member of an undertaking are known
as uncontrollable costs.

Question 2
Discuss the impact of Information Technology in Cost Accounting. (MTP March ’19 & April ’23 , 5
Marks)
Answer 2
The impact of IT in cost accounting may include the followings:
(i) After the introduction of ERPs, different functional activities get integrated and as a consequence
a single entry into the accounting system provides custom made reports for every purpose and
saves an organization from preparing different sets of documents. Reconciliation process of results
of both cost and financial accounting systems become simpler and less sophisticated.
(ii) A move towards paperless environment can be seen where documents like Bill of Material, Material
Requisition Note, Goods Received Note, labour utilization report etc. are no longer required to be
prepared in multiple copies, the related department can get e -copy from the system.
(iii) Information Technology with the help of internet (including intranet and extranet) helps in resource
procurement and mobilization. For example, production department can get materials from the stores
without issuing material requisition note physically. Similarly, purchase orders can be initiated to the
suppliers with the help of extranet. This enables an entity to shift towards Just-in-Time (JIT) approach
of inventory management and production.
(iv) Cost information for a cost center or cost object is ascertained with accuracy in timely manner. Each
cost center and cost object is codified and all related costs are assigned to the cost object or cost
center. This process automates the cost accumulation and ascertainment process. The cost
information can be customized as per the requirement. For example, when an entity manufacture or
provide services, it can know information job -wise, batch-wise, process-wise, cost center wise etc.
(v) Uniformity in preparation of report, budgets and standards can be achieved with the help of IT . ERP
software plays an important role in bringing uniformity irrespective of location, currency, language
and regulations.
(vi) Cost and revenue variance reports are generated in real time basis which enables the management to
take control measures immediately.
(vii) IT enables an entity to monitor and analyse each process of manufacturing or service activity closely
to eliminate non value added activities.
The above are examples of few areas where Cost Accounting is done with the help of IT .

Question 3
EXPLAIN the difference between Cost Accounting and Management Accounting (5 Marks, Oct ’21 &
March ‘23)
Answer 3
Difference between Cost Accounting and Management Accounting
Basis Cost Accounting Management Accounting
(i) Nature
Vishesh Khatwani | 8555070670 It records the quantitative It records both qualitative and
Chapter 1 Introduction to Cost and Management Accounting
 M 1.2

aspect only. quantitative aspect.

(ii) Objective It records the cost of It Provides information to
producing a product and management for planning and
providing a service. co-ordination.
(iii) Area It only deals with cost It is wider in scope as it includes
Ascertainment. financial accounting, budgeting,
taxation, planning etc.
(iv) Recording of data It uses both past and It is focused with the projection of
present figures. figures for future.
(v) Development Its development is related It develops in accordance to the
to industrial revolution. need of modern business world.
(vi) Rules and It follows certain principles It does not follow any specific
Regulation and procedures for recording rules and regulations.
costs of different products.

Question 4
DISTINGUISH clearly between Bin cards and Stores Ledger. (4 Marks March ’22 & March ‘23)
Answer 4
Bin Card Stores Ledger
It is maintained by the storekeeper in the It is maintained in cost accounting
store. department.
It contains only quantitative details of It contains information both in quantity and value.
material received, issued and returned to
stores.
Entries are made when transaction takes It is always posted after the transaction.
place.
Each transaction is individually posted. Transactions may be summarized and then posted.
Inter-department transfers do not appear Material transfers from one job to another job are
in Bin Card. recorded for costing purposes.

Question 5
Some of the items of PR Company, a manufacturer of corporate office furniture, are provided
below. As the company is in the process of developing a formal cost accounting system, you are
required to CLASSIFY the items into three categories namely: (i) Cost tracing (ii) Cost allocation (iii)
Non- manufacturing item. Carpenter wages, Depreciation - office building, Glue for assembly, Lathe
department supervisor, Metal brackets for drawers, Factory washroom supplies, Lumber, Samples
for trade shows, Lathe depreciation, Lathe operator wages. (4 Marks March ‘22)
Answer 5
Item Cost Tracing Cost Allocation Non-manufacturing
Carpenter wages √
Depreciation - office building √
Glue for assembly √
Lathe department supervisor √
Metal brackets for drawers √
Factory washroom supplies √
Lumber √
Samples for trade shows √
Lathe depreciation √
Lathe operator wages √

Question 6
STATE the method of costing for the following industries:
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Chapter 1 Introduction to Cost and Management Accounting
 M 1.3

(i) Sugar manufacturing

(ii) Bridge Construction
(iii) Advertising
(iv) Car Assembly (4 Marks April ’22)
Answer 6
S. No. Industry Method of costing
(i) Sugar manufacturing Process costing
(ii) Bridge Construction Contract Costing
(iii) Advertising Job costing
(iv) Car Assembly Multiple Costing (Combination of any method)

Question 7
EXPLAIN the difference between product cost and period cost. (5Marks) (Oct’22)
Answer 7
Product costs are those costs that are identified with the goods purchased or produced for resale. In a
manufacturing organisation they are attached to the product and that are included in the inventory
valuation for finished goods, or for incomplete goods. Product cost is also known as inventoriable cost.
Under absorption costing method it includes direct material, direct labour, direct expenses, directly
attributable costs (variable and non-variable) and other production (manufacturing) overheads. Under
marginal costing method Product Costs includes all variable production costs and the all fixed costs are
deducted from the contribution.
Periods costs are the costs, which are not assigned to the products but are charged as expense against
revenue of the period in which they are incurred. General Administration, marketing, sales and distributor
overheads are recognized as period costs.

Question 8
DEFINE cost units? WRITE the cost unit basis against each of the following Industry/Product-
Automobile, Steel, Cement, Chemicals, Power and Transport. (5 Marks March ’23)
Answer 8
Cost units are usually the units of physical measurement like number, weight, area, volume, length,
time and value.

Industry or Product Cost Unit Basis

Automobile Number
Steel Ton
Cement Ton/ per bag etc.
Chemicals Litre, gallon, kilogram, ton etc.
Power Kilo-watt hour (kWh)
Transport Passenger- kilometer

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Chapter 1 Introduction to Cost and Management Accounting
 M 2.1

Chapter 2
Material Cost
Question 1
Joy Toy Limited deals in trading of ‘superhero’ toy figure. The annual demand for the toy car is 14,400
units. The company incurs fixed order placement and transportation cost of ₹212 each time an order
is placed. Each toy costs ₹ 450 and the trader has a carrying cost of 25 percent p.a. The company has
been offered a quantity discount of 8% on the purchase of ‘superhero’ toy figure provided the order
size is 5,000 units at a time.

Required:

(i) COMPUTE the economic order quantity

(ii) STATE whether the quantity discount offer can be accepted. (5 Marks March ’23 & Oct 20)
Answer 1
i.Calculation of Economic Order Quantity (EOQ) =
, .
= . %
= 233 units

ii.Evaluation of Profitability of Different Options of Order Quantity

(A) When EOQ is ordered (₹)
Purchase Cost (14,400 units x Rs. 450) 64,80,000
Ordering Cost [(14,400 units/233 units) x Rs. 13,102
212]
Carrying Cost (233 units x 1/2 x 450 x 25%) 13,106
Total Cost 65,06,208

(B) When Quantity Discount of 8% is accepted

(₹)
Purchase Cost (14,400 units x Rs. 414) 59,61,600
Ordering Cost [(14,400 units/5,000 units) x Rs212] 611
Carrying Cost (5,000 units x 1/2 x Rs.414 x 25%) 2,58,750
Total Cost 62,20,961

Advise – The total cost of inventory is lower if quantity discount is accepted. The
company would save Rs. 2,85,247 (Rs. 65,06,208 - Rs. 62,20,961).
Note: Figures may change slightly because of approximation and decimals)

Question 2
A company manufactures 10,000 units of a product per month. The cost of placing an order is
₹200. The purchase price of the raw material is ₹20 per kg. The re-order period is 4 to 8 weeks. The
consumption of raw materials varies from 200 kg to 900 kg per week, the average consumption being
550 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 (5 Marks April 23 & March ‘21)
Answer 2
(i) Reorder Quantity (ROQ) = 1,691 kg. (Refer to working note)
(ii) Reorder level (ROL) = Maximum usage × Maximum re-order period
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Chapter 2 Material Cost
 M 2.2

= 900 kg. × 8 weeks = 7,200 kg.

(iii) Maximum level = ROL + ROQ – (Min. usage × Min. re-order period)
= 7,200 kg. + 1,691 kg. – (200 kg.× 4 weeks)
= 8,091 kg.
(iv) Minimum level = ROL – (Normal usage × Normal re-order period)
= 7,200 kg. – (550 kg. × 6 weeks)
= 3,900 kg.
(v) Average stock level = 1/2 (Maximum level + Minimum level)
= ½ (8,091 kg. + 3,900 kg.) = 5,995.5 kg.
OR
= Minimum Level + ½ ROQ
= 3,900 kg. + ½ X 1,691 kg. = 4,745.5 kg.
Working Note
Annual consumption of raw material (A) = (550 kg. × 52 weeks) = 28,600 kg.
Cost of placing an order (O) = ₹ 200
Carrying cost per kg. Per annum (c × i) = ₹ 20 × 20% = ₹4
Economic order quantity (EOQ) =
, . .
= = 1,691 kg. (Approx)
.

Question 3
SKY Company Ltd., not registered under GST, purchased material ‘RPP’ from a company, registered
under GST. The following information is available for one lot of 5,000 units of material purchased:
Listed price of one lot ₹ 7,50,000
Trade discount @ 10% on Listed price.
CGST and SGST (Credit Not available) 12% (6% CGST + 6% SGST)
Road Tax paid ₹ 15,000
Freight and Insurance ₹ 51,000
Detention Charges ₹ 15,000
Commission and brokerage on purchases ₹ 30,000
Amount deposited for returnable containers ₹ 90,000
Amount of refund on returning the container ₹ 60,000
Other Expenses @ 2% of total cost
20% of material shortage is due to normal reasons. You are required to CALCULATE cost per
unit of material purchased to SKY Company Ltd.(5 Marks March ’22)
Answer 3
Computation of Total cost of material purchased of SKY Manufacturing Company
Particulars Units (Amount in ₹)
Listed Price of Materials 5,000 7,50,000
Less: Trade discount @ 10% on invoice price (75,000)
6,75,000
Add: CGST @ 6% of ₹ 6,75,000 40,500
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Chapter 2 Material Cost
 M 2.3

SGST @ 6% of ₹ 6,75,000 40,500

7,56,000
Add: Road Tax paid 15,000
Freight and Insurance 51,000
Commission and Brokerage Paid 30,000
Add: Cost of returnable containers:
Amount deposited ₹ 90,000
Less: Amount refunded ₹ 60,000 30,000
8,82,000
Add: Other Expenses @ 2% of Total Cost 18,000
8,82,000 / 98 ×2)

Total cost of material 9,00,000

Less: Shortage due to Normal Loss @ 20% 1,000 -
Total cost of material of good units 4,000 9,00,000
Cost per unit (₹ 9,00,000/4,000 units) 225
Notes:
1. GST is payable on net price i.e., listed price less discount.
2. Detention charges/ fines imposed for non-compliance of rule or law by any statutory
authority. It is an abnormal cost and not included with cost of purchase.
3. Shortage due to normal reasons should not be deducted from cost to ascertain total cost
of good units.

Question 4
M/s SE Traders is a distributor of an electronic items. A periodic inventory of electronic items on
hand is taken when books are closed at the end of each quarter. The following information is
available for the quarter ended on 30th September, 2021:
Sales ₹ 2,19,30,000
Opening Stock 12,500 units @ ₹ 600 per unit
Administrative Expenses ₹ 5,62,500
Purchases (including freight inward):
- July 1, 2021 25,000 units @ ₹ 573 per unit
- September 30, 2021 12,500 units @ ₹ 630 per unit
Closing stock- September 30, 2021 16,000 units
You are required to COMPUTE the following by WAM (Weighted Average Method), FIFO method
and LIFO method assuming issue/ consumption pattern was even throughout the quarter:
(i) Value of Inventory on 30th September, 2021.
(ii) Profit or loss for the quarter ended 30th September, 2021. (10 Marks April ’22)
Answer 4
(i) Computation of Value of Inventory as on 30th September 2021:
Date Particulars Units WAM (₹) FIFO (₹) LIFO (₹)
01-07-21 Opening Stock 12,500 75,00,000 75,00,000 75,00,000
(₹600×12,500) (₹600×12,500) (₹600×12,500)
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Chapter 2 Material Cost
 M 2.4

01-07-21 Purchases 25,000 1,43,25,000 1,43,25,000 1,43,25,000

(₹573×25,000) (₹573×25,000) (₹573×25,000)
30-09-21 Purchases 12,500 78,75,000 78,75,000 78,75,000
(₹630×12,500) (₹630×12,500) (₹630×12,500)
01-07-21 Issues/ 34,000 2,01,96,000* 1,98,19,500** 2,01,94,500***
to Consumption
30-09-21 (Balancing
figure)
30-09-21 Closing Stock 16,000 95,04,000 98,80,500 95,05,500

. , , . , , , . , ,
Weighted average rate = , , ,
= Rs. 594

* ₹ 594 x 34,000 = ₹ 2,01,96,000

** ₹ 600 × 12,500 + ₹ 573 × 21,500 = ₹ 1,98,19,500
*** ₹ 630 × 12,500 + ₹ 573 × 21,500 = ₹ 2,01,94,500

(ii) Computation of Profit or Loss for the Quarter ended 30th September 2021
Particulars WAM (₹) FIFO (₹) LIFO (₹)
Sales 2,19,30,000 2,19,30,000 2,19,30,000
Less: Consumption 2,01,96,000 1,98,19,500 2,01,94,500
Less: Administrative Exp. 5,62,500 5,62,500 5,62,500
Profit or Loss 11,71,500 15,48,000 11,73,000

Question 5
A company produces a product 'AB' by using two raw materials - 'Material Ae' and 'Material Be' in the
ratio of 5:3.
A sales volume of 50,000 kgs is estimated for the month of December by the managers expecting the
trend will continue for entire year. The ratio of input and output is 8:5.
Other Information about Raw Material Ae is as follows:
Purchase Price ₹ 150 per kg
Re-order period 2 to 3 days
Carrying Cost 12%
Note: Material Ae is perishable in nature and if not used within 3.5 days of purchase it becomes obsolete.
To place an order for material 'Ae’, the company has to incur an administrative cost of ₹ 375 per order.
At present, material ‘Ae’ is purchased in a lot of 7,500 kgs. to avail the discount on purchase. Company
works for 25 days in a month and production is carried out evenly.
You are required to CALCULATE:
(i) Economic Order Quantity (EOQ) for Material Ae;
(ii) Maximum stock level for Material Ae. (4 × 5 Marks = 20 Marks) (Sep’22)
Answer 5
(i) Monthly production of AB = 50,000 kgs
Raw material required = 50,000/5 x 8 = 80,000 kgs Material Ae and Material Be ratio = 5:3
Therefore, material Ae = 80,000/8 x 5 =50,000 kgs
!"# $%&" $ '()* +%, (,$%,
Calculation of EOQ= !"# -(#$. / '()* +%, ! .*

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Chapter 2 Material Cost
 M 2.5

, 0/)
EOQ= % (1 ₹
= 5,000 kgs

(ii) Calculation of maximum stock level of Material Ae which is perishable in nature and is required to be
used within 3.5 days.
(a) Stock equals to 3.5 days consumption = 50,000 kgs/ 25 days x 3.5 days = 7,000 kgs
(b) Maximum stock level for Material Ae
Maximum stock = Reorder quantity + reorder level – (minimum consumption x minimum lead time)
Where, reorder quantity = 7,500 kgs
Reorder level = maximum consumption* x maximum lead time
= 50,000/ 25 x 3 days = 6,000 kgs
Now, Maximum stock level = 7,500 kgs + 6,000 kgs – (50,000 /25 days x 2 days) = 9,500 kgs

Stock required for 3.5 days consumption is lower than the maximum stock level calculated above.
Therefore, maximum stock level will be 7,000 kgs.

(*since production is processed evenly throughout the month hence material consumption will also be
even.)

Question 6
BRIEF the treatment of following while calculating purchase cost of material: Trade Discount, Cash
Discount, Penalty, Insurance charges, Commission paid.(5 Marks) (Sep’22)
Answer 6
Trade Discount Trade discount is deducted from the purchase price if it is not shown as
deduction in the invoice.
Cash Discount Cash discount is not deducted from the purchase price. It is treated as
interest and finance charges. It is ignored.
Penalty Penalty of any type is not included with the cost of purchase
Insurance charges Insurance charges are paid for protecting goods during transit. It is
added with the cost of purchase.
Commission paid Commission or brokerage paid is added with the cost of purchase.

Question 7
The following are the details of receipts and issues of a material of stores in a manufacturing company
for the period of three months ending 30th June, 2022:
Receipts:
Date Quantity (kg.) Rate per kg. (₹)
April 10 1,600 50.00
April 20 2,400 49.00
May 5 1,000 51.00
May 17 1,100 52.00
May 25 800 52.50
June 11 900 54.00
June 24 1,400 55.00
There was 1,500 kg. in stock at April 1, 2022 which was valued at ₹ 48.00 per kg.
Issues:
Date Quantity (kg.)

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Chapter 2 Material Cost
 M 2.6

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, 2022 and 60 kgs. on 30th
June, 2022.
You are required to PREPARE a Stores Ledger Account. (10 Marks) (Oct’22)
Answer 7
Stores Ledger Account for the three months ending 30th June, 2022 (Weighted Average Method)
Receipts Issues Balance
Date Rates Rates Amount Amount Rate for further
GRN Qty. (Kg.) Amounts MR No. Qty. (Kg.) Qty. Issue (Rs.)
(Rs.) (Rs.) (Rs.) (Rs.)
No. (Kg.)

April 1 1,500 72,000 48.00

April 4 1,100 48.00 52,800 400 19,200 48.00
April 10 1,600 50.00 80,000 2,000 99,200
99,200
6 49.60
2,000
April 20 2,400 49.00 1,17,600 4,400 216,800 2,16,800
6 49.30
4,400
April 24 1,600 49.30 78,880 2,800 137,920 1,37,920
6 49.30
2,800
May 5 1,000 51.00 51,000 3,800 188,920 1,88,920
6 49.70
3,800
May 10 1,500 49.70 74,550 2,300 114,370 1,14,370
6 49.70
2,300
May 17 1,100 52.00 57,200 3,400 171,570 1,71,570
6 50.50
3,400
May 25 800 52.50 42,000 4,200 213,570 2,13,570
6 50.90
4,200
May 26 1,700 50.90 86,530 2,500 127,040 1,27,040
6 50.90
2,500
May 31 Shortage 80 2,420 127,040 1,27,040
6 52.50
2,420
June 11 900 54.00 48,600 3,320 175,640 1,75,640
6 49.60
3,320
June 15 1,500 52.90 79,350 1,820 96,290 99,200
6 52.90
2,000
June 21 1,200 52.90 63,480 620 32,810 32,810
6 52.90
620
June 24 1,400 55.00 77,000 2,020 109,810 1,09,810
6 54.40
2,020
June 30 Shortage 60 1,960 109,810 1,09,810
6 56.00
1,960

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Chapter 2 Material Cost
 M 3.1

Chapter 3
Employee Cost and Direct Expenses
Question 1
The standard time allowed for a certain piece of work is 240 hours. Normal wage rate is ₹ 75
per hour.
The bonus system applicable to the work is as follows:
Percentage of time saved to time allowed (slab Bonus
rate)
(i) Up to the first 20% of time allowed 25% of the corresponding saving in time.
(ii) For and within the next 30% of time allowed 40% of the corresponding saving in time.
(iii) For and within the next 30% of time allowed 30% of the corresponding saving in time.
(iv) For and within the next 20% of time allowed 10% of the corresponding saving in time.
CALCULATE the total earnings of a worker over the piece of work and his earnings per hour
when he takes-
(a) 256 hours,
(b) 120 hours, and
(c) 24 hours respectively. (10 Marks March ‘22)
Answer 1
Calculation of total earnings and earnings per hour:
Particulars (a) Time taken is (b) Time taken is (c) Time taken is
256 hours 120 hours 24 hours
A. Time Allowed 240 hours 240 hours 240 hours
B. Time taken 256 hours 120 hours 24 hours
C. Time Saved (A-B) Nil 120 hours 216 hours
D. Bonus hours (Refer Nil 40.80 hours 64.80 hours
workings)
E. Hours to be paid (B+D) 256 hours 160.80 hours 88.80 hours
F. Wages rate per hour ₹ 75 ₹ 75 ₹ 75
G. Total earnings (E×F) ₹ 19,200 ₹ 12,060 ₹ 6,660
H. Earnings per hour (G÷B) ₹ 75 ₹ 100.50 ₹ 277.50
Working Notes:
Calculation of bonus hours:
Time saved 120 Time saved 216 hours
hours
For first 20% of time allowed i.e. 48 hours 12 12
(25% of 48 hours) (25% of 48 hours)
For next 30% of time allowed i..e. 72 hours 28.80 28.80
(40% of 72 hours) (40% of 72 hours)
For next 30% of time allowed i..e. 72 hours - 21.60
(30% of 72 hours)
For next 20% of time allowed i..e. 48 hours - 2.40
(10% of 24 hours)
Bonus hours 40.80 64.80

Question 2
R Ltd. is facing increasing employee turnover in the factory and before analyzing the causes and
taking remedial steps; the management wants to have an idea of the profit foregone as a result of
employee turnover in the last year. Last year sales amounted to ₹ 99,63,960 and P/V ratio was
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Chapter 3 Employee Cost and Direct Expenses
 M 3.2

20%.
The total number of actual hours worked by the direct employee force was 5.34 lakhs. The actual
direct employee hours included 36,000 hours attributable to training new recruits, out of which
half of the hours were unproductive. As a result of the delays by the Personnel Department in
filling vacancies due to employee turnover, 1,20,000 potentially productive hours (excluding
unproductive training hours) were lost. The costs incurred consequent on employee turnover
revealed, on analysis, the following: Settlement cost due to leaving ₹ 52,584
Recruitment costs ₹ 32,088
Selection costs ₹ 15,300
Training costs ₹ 36,588
Assuming that the potential production lost as a consequence of employee turnover could have
been sold at prevailing prices, FIND the profit foregone last year on account of employee turnover.
(5 Marks April ’22)
Answer 2
Workings:
(i) Computation of productive hours
Actual hours worked 5,34,000
Less: Unproductive training hours 18,000
Actual productive hours 5,16,000
(ii) Productive hours lost:
Loss of potential productive hours + Unproductive training hours
= 1,20,000 + 18,000 = 1,38,000 hours
(iii) Loss of contribution due to unproductive hours:
Sales value / Actual productive hours ×Total unproductive hours =
₹ 99,63,960 / 5,16,000 hrs × 1,38,000 hours = ₹ 26,64,780
Contribution lost for 1,38,000 hours = Rs. 26,64,780/100 × 20= ₹ 5,32,956
Computation of profit forgone on account of employee turnover
(₹)
Contribution foregone (as calculated above) 5,32,956
Settlement cost due to leaving 52,584
Recruitment cost 32,088
Selection cost 15,300
Training costs 36,588
Profit foregone 6,69,516

Question 3
BRIEF OUT advantages and disadvantages of Halsey Premium Plan. (4 Marks April ’22)
Answer 3
Advantages Disadvantages
1. Time rate is guaranteed while there is 1. Incentive is not so strong as with piece rate
opportunity for increasing earnings by system. In fact the harder the worker works,
increasing production. the lesser he gets per piece.

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Chapter 3 Employee Cost and Direct Expenses
 M 3.3

2. The system is equitable in as much as the 2. The sharing principle may not be liked by
employer gets a direct return for his employees.
efforts in improving production methods
and providing better equipment.

Question 4
Archika Tyre Manufacturing Private Limited has four workers Ram, Shyam, Mohan & Kundan who
are paid wages on the basis of ₹ 100 per day, ₹ 120 per day, ₹ 130 per day & ₹ 2500 per month
respectively.
Standard working days in a week are six of 8 hours per day. For the month of October 2022, there
was only one holiday other than Sunday for which no payment was made to employees except
Kundan who was paid for full month. Sundays are considered paid holidays i.e. employees are paid
for Sunday also even there is no working on that day. Provident fund contribution is 8% of monthly
wages by employer and employee each. ESI contribution is 5% of monthly wages by employer and
4% of monthly wages by employee.
On the basis of above information, you are required to CALCULATE (regarding the month of October
2022):
(i) Amount of net wages receivable by each employee from the employer.
(ii) What is the total amount of Provident Fund required to be deposited by employer?
(iii) What is the total amount of ESI required to be deposited by employer?
(iv) What is the total labour cost to employer?
(v)If total material cost is ₹ 20,000 for October 2022 and overheads are charged equal to labour
cost, calculate total cost for the month. (10 Marks) (Sep’22)
Answer 4
(i) Calculation of net wages receivable by each employee from the employer (October 2022):
Ram (₹) Shyam Mohan Kundan Total
(₹) (₹) (₹) (₹)
Wages for October 2022 3,000 3,600 3,900 2,500 13,000
(₹ 100 x (₹ 120 x (₹ 130 x
30 days) 30 days) 30 days)

Less: Employee
Contribution to PF @ 8% 240 288 312 200 1,040
Less: Employee
Contribution to ESI @ 4% 120 144 156 100 520
Net Wages Receivable 2,640 3,168 3,432 2,200 11,440

(ii) Calculation of total amount of Provident Fund required to be deposited by employer (October
2022):
(₹)
Total Wages for the month 13,000
Employer’s Contribution to Provident Fund @8% of ₹ 13,000 1,040
Add: Employee’s Contribution to Provident Fund @8% of ₹ 13,000 1,040
Total amount of Provident Fund required to be deposited by 2,080
employer
(iii) Calculation of total amount of ESI required to be deposited by employer (October 2022):
(₹)
Total Wages for the month 13,000
Employer’s Contribution to ESI @5% of ₹ 13,000 650
Add: Employee’s Contribution to ESI @4% of ₹ 13,000 520
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Chapter 3 Employee Cost and Direct Expenses
 M 3.4

Total amount of ESI required to be deposited by employer 1,170

(iv) Total labour cost to employer (October 2022):

(₹)
Total Wages for the month 13,000
Add: Employer’s Contribution to Provident Fund @8% of ₹ 13,000 1,040
Add: Employer’s Contribution to ESI @5% of ₹ 13,000 650
Total labour cost to employer 14,690
(v) Calculation of Total Cost for October 2022
(₹)
Total Material Cost 20,000
Total Labour Cost 14,690
Total Overheads (Equal to Labour Cost) 14,690
Total Cost 49,380

Question 5
R Ltd. has computed labour turnover rates for the quarter ended 31 st March, 2022 as 20%, 10% and
5% under flux method, replacement method and separation method respectively. If the number of
workers replaced during that quarter is 50, FIND OUT (i) Workers recruited and joined
(ii) Workers left and discharged and
(iii) Average number of workers on roll. (5 Marks) (Oct’22)
Answer 5
Labour Turnover Rate (Replacement method
No. of workers replaced
Average no. of workers

Or, . !" # $

Thus, Average No. of workers = 500

Labour Turnover Rate (Separation method=

No. of workers seprated

Average no. of workers

Numberofwor # $$ ) * +
Or, =
Thus, No. of workers separated = 25
Labour Turnover Rate (Flux Method)
No. of Separations . No. of Accession /Joinings1
Average no. of workers

2 3456 .of 77 $$8 /9 8 8 $1

Or, =

Or, 100 (25 + No. of Accessions) = 10,000 Or, 25 +

No. of Accessions =100

Thus, No. of Accessions = 100 - 25 =75

Accordingly,
(i) Workers recruited and joined = 75
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 M 3.5

(ii) Workers left and discharged = 25

Average number of workers on roll

Question 6
STATE various causes of and treatment of Overtime Premium in Cost Accounting. (5Marks) (Oct’22)
Answer 6
Causes and Treatment of Overtime premium in cost accounting
Causes Treatment
(1) The customer may agree to bear the entire (1) If overtime is resorted to at the desire of the
charge of overtime because urgency of customer, then overtime premium may be
work. charged to the job directly.
(2) Overtime may be called for to make up any (2) If overtime is required to cope with general
shortfall in production due to some production programmes or for meeting urgent
unexpected development. orders, the overtime premium should be
treated as overhead cost of the particular
department or cost centre which works
overtime.
(3) Overtime work may be necessary to make (3) If overtime is worked in a department due to the
up a shortfall in production due to some fault of another department, the overtime
fault of management. premium should be
charged to the latter department.
(4) Overtime work may be resorted to, to (4) Overtime worked on account of abnormal
secure an out-turn in excess of the normal conditions such as flood, earthquake etc.,
output to take advantage of an expanding should not be charged to cost, but to Costing
market or of rising demand Profit and Loss Account.

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Chapter 4
Overheads-Absorption Costing Method
Question 1
V Ltd. manufactures luggage trolleys for airports. The factory, in which the company undertakes all
of its production, has two production departments- ‘Fabrication’ and ‘Assembly’, and two service
departments- ‘Stores’ and ‘Maintenance’.
The following information have been extracted from the company’s budget for the financial year
ended 31st March, 2019:
Particulars Rs.
Allocated Overhead Costs
Fabrication Department 15,52,000
Assembly Department 7,44,000
Stores Department 2,36,000
Maintenance Department 1,96,000
Other Overheads
Factory rent 15,28,000
Factory building insurance 1,72,000
Plant & machinery insurance 1,96,000
Plant & Machinery Depreciation 2,65,000
Subsidy for staffs’ canteen 4,48,000
Direct Costs Rs. Rs.
Fabrication Department:
Material 63,26,000
Labour 8,62,000 71,88,000
Assembly Department:
Material 1,42,000
Labour 13,06,000 14,48,000

The following additional information is also provided:

Fabrication Assembly Stores Maintenance
Department Department Department Department
Floor area 24,000 10,000 2,500 3,500
(square meters)
Value of plant & 16,50,000 7,50,000 75,000 1,75,000
machinery (Rs.)
No. of stores 3,600 1,400 - -
requisitions
Maintenance 2,800 2,300 400 -
hours required
No. of employees 120 80 38 12
Machine hours 30,00,000 60,000
Labour hours 70,000 26,00,000
Required:
(i) PREPARE a table showing the distribution of overhead costs of the two service
departments to the two production departments using step method; and
(ii) Calculate the most appropriate overhead recovery rate for each department.
(iii) Using the rates calculated in part (ii) above, CALCULATE the full production costs of the
following job order:
Job number IGI2019
Direct Materials Rs. 2,30,400
Direct Labour:
Fabrication Department 240 hours @ Rs. 50 per hour
Assembly Department 180 hours @ Rs. 50 per hour
Machine hours required:

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 M 4.2

Fabrication Department 210 hours

Assembly Department 180 hours (Oct. ’19 & April ’23 10 Marks)
Answer 1
(i) Table of Primary Distribution of Overheads
Particulars Basis of Total Production Department Service Departments
Apportionment Amount
Fabrication Assembly Stores Maintenance
Overheads 27,28,000 15,52,000 7,44,000 2,36,000 1,96,000
Allocated
Direct Costs Actual 86,36,000 71,88,000 14,48,000 — —
Other
Overheads:
Factory rent Floor Area 15,28,000 9,16,800 3,82,000 95,500 1,33,700
(48:20:5:7)
Factory Floor Area 1,72,000 1,03,200 43,000 10,750 15,050
building (48:20:5:7)
insurance
Plant & Value of
Machinery Plant & 1,96,000 1,22,038 55,472 5,547 12,943
insurance Machinery
(66:30:3:7)
Plant & Value of Plant & 75,000 7,500 17,500
Machinery Machinery
Depreciation (66:30:3:7) 2,65,000 1,65,000
Canteen No. of 68,096 21,504
Subsidy Employees 4,48,000 2,15,040 1,43,360
(60:40:19:6)
1,39,73,000 1,02,62,078 28,90,832 4,23,393 3,96,697
Re-distribution of Service Departments’ Expenses:
Particulars Basis of Production Service
Apportionment Department Departments
Fabrication Assembly Stores Maintenance
Overheads As per Primary 1,02,62,078 28,90,832 4,23,393 3,96,697
as per Primary distribution
distribution
Maintenance Maintenance 2,01,955 1,65,891 28,851 (3,96,697)
Department Hours
Cost (28:23:4:-)
1,04,64,033 30,56,723 4,52,244 —
Stores No. of Stores 3,25,616 1,26,628 (4,52,244)
Department Requisition
(18:7:-:-)
1,07,89,649 31,83,351 — —
(ii) Overhead Recovery Rate
Department Apportioned Basis of Overhead Overhead Recovery Rate (Rs.)
Overhead (Rs.) Recovery Rate
(I) (II) [(I) ÷ (II)]
Fabrication 1,07,89,649 30,00,000 Machine Hours 3.60 per Machine Hour
Assembly 31,83,351 26,00,000 Labour Hours 1.22 per Labour Hour
(iii)
Calculation of full production costs of Job no. IGI2019.
Particulars Amount (Rs.)
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 M 4.3

Direct Materials 2,30,400

Direct Labour:
Fabrication Deptt. (240 hours × Rs.50) 12,000
Assembly Deptt. (180 hours × Rs.50) 9,000
Production Overheads:
Fabrication Deptt. (210 hours × Rs. 3.60) 756
Assembly Deptt. (180 hours × Rs. 1.22) 220
Total Production Cost 2,52,376

Question 2
M/s Avyukt Automobile Parts has four identical machines in its factory. Cost of each machine is ₹
5,00,000 with expected scrap value of 10% at the end of its effective life (9 years). The expected
annual running hours of machine is expected to run for 2,200 hours. The other details in respect
of the machine shop are:

(I) Factory Rent ₹ 5,000 per month

(II) Lighting of Factory ₹ 3,000 per month
(III) Operator Wages (Two operators and each operator is in charge of two machines) ₹10,000
per month (per Operator)
(IV) Fixed repairs and maintenance charges per machine 2,000 per quarter
(V) Insurance premium for the machine (Annual) 3% of cost
(VI) Forman’s salary (Devoted 1/6th of his time to this factory)₹ 2,500 per month
(VII) Other factory overhead (Annual) ₹40,000
(VIII) Power Consumption per machine per hour 80 units
(IX) Rate of Power ₹ 150 for 100 units
(X) Unproductive Hours lost during repairs 50 per annum
(XI) Unproductive Hours Lost while Job Setting 650 per annum
You are required to COMPUTE a comprehensive machine hour rate assuming power is used
during operating time only. (10 Marks April ’22)
Answer 2
Computation of Comprehensive Machine Hour Rate per Machine

Particulars Per Annum (₹) Per Hour (₹)

Standing Charges:
Depreciation (Working Note 2) 50,000
Factory Rent (₹ 5,000 x 12 months / 4) 15,000
Lighting of Factory (₹ 3,000 x 12 months / 4) 9,000
Operator Wages (₹ 10,000 x 12 months / 2) 60,000
Repairs and maintenance (₹ 2,000 x 4) 8,000
Insurance premium (₹ 5,00,000 x 3%) 15,000
Forman’s salary (₹ 2,500 x 12 x ⅙ / 4) 1,250
Other factory overhead (₹ 40,000 / 4) 10,000
1,68,250
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 M 4.4

Standing Charges per hour (₹ 1,68,250 / 1,500 hours) 112.17

Running Charges:
Power (80 units x ₹ 150 / 100) 120.00
Comprehensive Machine Hour Rate 232.17
Working Notes:

1. Computation of Total Operative Hours

Total Running Hours: 2,200
Less: Unproductive hours lost during repairs 50
Less: Unproductive hours Lost while Job Setting 650
Total Operative Hours 1,500 per annum
2. Calculation of Annual Depreciation
Annual Depreciation =

. , , . ,
= = Rs. 50,000

Question 3
PM Ltd. has three Production Departments P1, P2, P3 and two Service Departments S1 and S2 details
pertaining to which are as under:
P1 P2 P3 S1 S2

Direct wages (₹) 60,000 40,000 60,000 30,000 3,900

Working hours 3,070 4,475 2,419 - -
Value of machines (₹) 12,00,000 16,00,000 20,00,000 1,00,000 1,00,000
H.P. of machines 60 30 50 10 -
Light points 10 15 20 10 5
Floor space (sq. ft.) 2,000 2,500 3,000 2,000 500
The following figures extracted from the accounting records are relevant:
(₹)
Rent and Rates 1,00,000
General Lighting 12,000
Indirect Wages 38,780
Power 30,000
Depreciation on Machines 2,00,000
Sundries 1,93,900
The expenses of the service departments are allocated as under:
P1 P2 P3 S1 S2
S1 20% 30% 40% - 10%
S2 40% 20% 30% 10% -
DETERMINE the total cost of product X which is processed for manufacture in Departments P 1, P2
and P3 for 4, 5 and 3 hours respectively, given that its Direct Material Cost is ₹ 1,000 and Direct
Labour Cost is ₹ 600. (10 Marks March ‘22)
Answer 3
Statement Showing Distribution of Overheads of PM Ltd.
Particulars Basis Total Production Departments Service
Departments
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 M 4.5

P1 P2 P3 S1 S2
(₹) (₹) (₹) (₹) (₹) (₹)
Direct wages Actual 33,900 - - - 30,000 3,900
Rent & rates Area 1,00,000 20,000 25,000 30,000 20,000 5,000
General lighting Light points 12,000 2,000 3,000 4,000 2,000 1,000

Indirect wages Direct wages 38,780 12,000 8,000 12,000 6,000 780
Power H.P. 30,000 12,000 6,000 10,000 2,000 -
Depreciation of Value of 2,00,000 48,000 64,000 80,000 4,000 4,000
machines machines
Sundries Direct wages 1,93,900 60,000 40,000 60,000 30,000 3,900
6,08,580 1,54,000 1,46,000 1,96,000 94,000 18,580
Redistribution of Service Department’s Expenses over Production Departments
P1 P2 P3 S1 S2
(₹) (₹) (₹) (₹) (₹)
Total overhead distributed as above 1,54,000 1,46,000 1,96,000 94,000 18,580
Dept. S1 Overheads apportioned 18,800 28,200 37,600 (94,000) 9,400
(20:30:40:—:10)
Dept. S2 overheads apportioned 11,192 5,596 8,394 2,798 (27,980)
(40:20:30:10:—)
Dept. S1 Overheads apportioned 560 839 1,119 (2,798) 280
(20:30:40:—:10)
Dept. S2 overheads apportioned 124 63 93 - (280)
(40:20:30:10:—)
1,84,676 1,80,698 2,43,206 - -
Working hours 3,070 4,475 2,419
Rate per hour 60.16 40.38 100.54
Determination of total cost of Product ‘X’
(₹)
Direct material cost 1,000.00
Direct labour cost 600.00
Overhead cost (See working note) 744.14
2,344.14
Working Note:
Overhead cost = (₹ 60.16 × 4 hrs.) + (₹ 40.38 × 5 hrs.) + (₹ 100.54 × 3 hrs.) = ₹ 240.62 + ₹ 201.90 +
₹ 301.62 = ₹ 744.14

Question 4
A work-shop has 8 identical machines operated by 6 operators. The machine cannot work without
an operator wholly engaged on it. The original cost of all the 8 machines works out to ₹ 64,00,000.
The following particulars are furnished for a six months’ period:
Normal available hours per operator 1,248
Absenteeism (without pay) hours per operator 18
Leave (with pay) hours per operator 20
Normal unavoidable idle time-hours per operator 10
Production bonus estimated 10% on wages
Power consumed ₹ 80,500
Supervision and Indirect Labour ₹ 33,000
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 M 4.6

Lighting and Electricity ₹ 12,000

Average rate of wages per day of 8 hours per operator ₹ 200
The following particulars are given for a year:
Insurance ₹ 7,20,000
Sundry work Expenses ₹ 1,00,000
Management Expenses allocated ₹ 10,00,000
Depreciation 10% on the original cost
Repairs and Maintenance (including consumables): 5% of the value of all the machines. Prepare a
statement showing the comprehensive machine hour rate for the machine shop.
(10 Marks) (Sep’22)
Answer 4
Workings:
Particulars Six months 6
operators (Hours)
Normal available hours half yearly (1,248 x 6 operators) 7,488
Less: Absenteeism hours (18 x 6 operators) (108)
Paid hours (A) 7,380
Less: Leave hours (20 x 6 operators) (120)
Less: Normal idle time (10 x 6 operators) (60)
Effective working hours 7,200
Computation of Comprehensive Machine Hour Rate

Particulars Amount for six

months (₹)
Operators' wages (7,380/8 x200) 1,84,500
Production bonus (10% on wages) 18,450
Power consumed 80,500
Supervision and indirect labour 33,000
Lighting and Electricity 12,000
Repair and maintenance {(5% × ₹ 64,00,000)/2} 1,60,000
Insurance (₹ 7,20,000/2) 3,60,000
Depreciation {(₹ 64,00,000 × 10%)/2} 3,20,000
Sundry Work expenses (₹ 1,00,000/2) 50,000
Management expenses (₹ 10,00,000/2) 5,00,000
Total Overheads for 6 months 17,18,450
Comprehensive Machine Hour Rate = ₹ 17,18,450/7,200 hours ₹ 238.67

Question 5
Madhu Ltd has calculated a predetermined overhead rate of ₹22 per machine hour for its Quality
Check (QC) department. This rate has been calculated for the budgeted level of activity and is
considered as appropriate for absorbing overheads. The following overhead expenditures at various
activity levels had been estimated.
Total Number of machine
overheads hours
₹3,38,875 14,500
₹3,47,625 15,500
₹3,56,375 16,500

You are required to:

(i) COMPUTE the variable overhead absorption rate per machine hour.
(ii) COMPUTE the estimated total fixed overheads.
(iii) CALCULATE the budgeted level of activity in machine hours.
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 M 4.7

CALCULATE the amount of under/over absorption of overheads if the actual machine hours were
14,970 and actual overheads were ₹3,22,000. (5 Marks) (Oct’22)

Answer 5
(i) Computation of variable overhead absorption rate:
Variable overhead absorption rate =

Difference in Total Overheads

Difference in levels in terms of machine hours

Rs. 3,47,625 < Rs. 3,38,875

4
15,500hours < 14 hours

(ii) Computation of Total fixed overheads

Total overheads at 14,500 hours 3,38,875
Less: Variable overheads (Rs. 8.75 × 14,500) (1,26,875)
Total fixed overheads 2,12,000
(iii) Calculation of Budgeted level of activity in machine hours: Let budgeted level of activity = X
Then,
@ .A.B CD .E,FE, G
C
=Rs.22

8.75X + Rs.2,12,000 = 22X

13.25X = 2,12,000
X =16,000
Thus, budgeted level of activity = 16,000 machine hours.
(iv) Calculation of Under / Over absorption of overheads:
(Rs.)
Actual overheads 3,22,000
Absorbed overheads (14,970 hours × Rs. 22 per 3,29,340
hour)
Over-absorption (3,29,340 – 3,22,000) 7,340

Question 6
STATE Direct Expenses with examples. (5Marks) (Oct’22)
Answer 6
Expenses other than direct material cost and direct employee cost, which are incurred to manufacture
a product or for provision of service and can be directly traced in an economically feasible manner to
a cost object. The following costs are examples for direct expenses:
(a) Royalty paid/ payable for production or provision of service;
(b) Hire charges paid for hiring specific equipment;
(c) Cost for product/ service specific design or drawing;
(d) Cost of product/ service specific software;
(e) Other expenses which are directly related with the production of goods or provision of service.

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 5.1

Chapter 5
Activity Based Costing
Question 1
Equate bank offers 3 products, viz., deposits, Loans and Credit Cards. The bank has selected 4
activities for a detailed budgeting exercise, following activity-based costing methods.
The bank wants to know the product wise total cost per unit for the selected activities, so that prices
may be fixed accordingly.
The following information is made available to formulate the budget:
Activity Present Cost (Rs.) Estimation for the budget period

ATM Services:
(a) Machine 5,20,000 All fixed, no change.
Maintenance
(b) Rents 2,60,000 Fully fixed, no change.
(c) Currency 1,30,000 Expected to double during budget
Replenishment Cost period.

9,10,000
Computer Processing 6,50,000 Half this amount is fixed and no
change is expected. The variable
portion is expected to increase to
three times the current level.
Issuing Statements 23,40,000 Presently, 3 lakh statements are
made. In the budget period, 5 lakh
statements are expected. For every
increase of one lakh statement, one
lakh rupees is the budgeted increase.
Computer Inquiries 2,60,000 Estimated to increase by 80% during
the budget period.

The activity drivers and their budgeted quantifies are given below:
Activity Drivers Deposits Loans Credit Cards
No. of ATM Transactions 1,95,000 --- 65,000
No. of Computer Processing 19,50,000 2,60,000 3,90,000
Transactions
No. of Statements to be issued 4,55,000 65,000 1,30,000
Telephone Minutes 4,68,000 2,34,000 2,34,000

The bank budgets a volume of 76,180 deposit accounts, 16,900 loan accounts, and 18,200 Credit Card
Accounts. Required:
(i) CALCULATE the budgeted rate for each activity.
(ii) PREPARE the budgeted cost statement activity wise.
(iii) COMPUTE the budgeted product cost per account for each product using (i) and (ii) above. (10
Marks April ’22) (Similar to Apr’19 but different figures)
Answer 1
Statement Showing “Budgeted Cost per unit of the Product”
Activity Activity Cost Activity No. of Activity Deposits Loans Credit
(Budgeted) Driver Units of Rate (₹) Cards
(₹) Activity
Driver
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Chapter 5 Activity Based Costing
 5.2

ATM 10,40,000 No. of ATM 2,60,000 4.00 7,80,000 --- 2,60,000

Services Transaction

Computer 13,00,000 No. of 26,00,000 0.50 9,75,000 1,30,000 1,95,000

Processing Computer
processing
Transaction
Issuing 26,00,000 No. of 6,50,000 4.00 18,20,000 2,60,000 5,20,000
Statements Statements
Customer 4,68,000 Telephone 9,36,000 0.50 2,34,000 1,17,000 1,17,000
Inquiries Minutes
Budgeted 54,08,000 38,09,000 5,07,000 10,92,000
Cost
Units of Product (as estimated in the budget period) 76,180 16,900 18,200
Budgeted Cost per unit of the product 50 30 60
Working Note:
Activity Budgeted Cost (Rs.) Remark
ATM Services:
(a) Machine Maintenance 5,20,000 − All fixed, no change.
(b) Rents 2,60,000 − Fully fixed, no change.
(c) Currency 2,60,000 − Doubled during budget period.
Replenishment Cost
Total 10,40,000
Computer Processing 3,25,000 ₹ 3,25,000 (half of ₹ 6,50,000) is
fixed and no change is expected.
9,75,000 ₹ 3,25,000 (variable portion) is
Total 13,00,000 expected to increase to three
times the current level.
Issuing Statements 23,40,000 -Existing.
2,60,000 − 2.60 lakh statements are
expected to be increased in
budgeted period. For every single
increase of statement, one rupee
is the budgeted increase.
26,00,000
Total
Computer Inquiries 4,68,000 - Estimated to increase by 80%
during the budget period.
(Rs.2,60,000 x 180%)
Total 4,68,000

Question 2
MG Ltd. manufactures three types of products namely A, B and C. The data relating to a period
are as under:
Particulars A B C
Machine hours per unit 10 18 14
Direct Labour hours per unit 4 12 8
Direct Material per unit (₹) 1,350 1,200 1,800
Production (units) 3,000 5,000 20,000
Currently the company uses traditional costing method and absorbs all production overheads on
the basis of machine hours. The machine hour rate of overheads is ₹ 90 per hour. Direct labour
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Chapter 5 Activity Based Costing
 5.3

hour rate is ₹ 300 per hour.

The company proposes to use activity based costing system and the activity analysis is as under:
Particulars A B C
Batch size (units) 150 500 1,000
Number of purchase orders per batch 3 10 8
Number of inspections per batch 5 4 3
The total production overheads are analysed as under:
Machine set up costs 20%
Machine operation costs 30%
Inspection costs 40%
Material procurement related costs 10%
Required:
CALCULATE the cost per unit of each product using traditional method of absorbing all
production overheads on the basis of machine hours.
CALCULATE the cost per unit of each product using activity based costing principles.
(10 Marks March ‘22)
Answer 2
(i) Statement Showing “Cost per unit - Traditional Method”
Particulars of Costs A B C
(₹) (₹) (₹)
Direct Materials 1,350 1,200 1,800
Direct Labour [(4, 12, 8 hours) X ₹ 300] 1,200 3,600 2,400
Production Overheads [(10, 18, 14 hours) X ₹ 90] 900 1,620 1,260
Cost per unit 3,450 6,420 5,460
(ii) Statement Showing “Cost per unit - Activity Based Costing”
Products A B C
Production (units) 3,000 5,000 20,000
(₹) (₹) (₹)
Direct Materials (1350, 1200, 1800) 40,50,000 60,00,000 3,60,00,000
Direct Labour (1200, 3600, 2400) 36,00,000 1,80,00,000 4,80,00,000
Machine Related Costs @ ₹ 27 per hour 8,10,000 24,30,000 75,60,000
(30,000, 90,000, 2,80,000)
Setup Costs @ ₹ 1,44,000 per 28,80,000 14,40,000 28,80,000
setup (20, 10, 20)
Inspection Costs @ ₹ 72,000 per inspection 72,00,000 28,80,000 43,20,000
(100, 40, 60)
Purchase Related Costs @ ₹ 11,250 per 6,75,000 11,25,000 18,00,000
purchase (60, 100, 160)
Total Costs 1,92,15,000 3,18,75,000 10,05,60,000
Cost per unit (Total Cost X Units) 6,405 6,375 5,028
Working Notes:
Number of Batches, Purchase Orders, and Inspections-
Particulars A B C Total
A. Production (units) 3,000 5,000 20,000
B. Batch Size (units) 150 500 1,000
C. Number of Batches [A. ÷ B.] 20 10 20 50
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D. Number of Purchase Order per 3 10 8

batch
E. Total Purchase Orders [C. X D.] 60 100 160 320
F. Number of Inspections per batch 5 4 3
G. Total Inspections [C. X F.] 100 40 60 200
Total Machine Hours-
Particulars A B C
A. Machine Hours per unit 10 18 14
B. Production (units) 3,000 5,000 20,000
C. Total Machine Hours [A. X B.] 30,000 90,000 2,80,000
Total Machine Hours = 4,00,000 Total Production Overheads-
= 4,00,000 hrs. X ₹ 90 = ₹ 3,60,00,000

Question 3
SMD Limited manufactures four products namely A, B, C and D using the same production and
process facilities. The company has been following conventional method of costing and wishes to
shift to activity-based costing system.
The data pertaining to four products are:
Product Units Material per unit Labour hours per unit Machine hours per
produce (₹) unit
d
A 1,500 140 1 3
B 2,500 90 3 2
C 10,000 180 2 6
D 6,000 150 1.5 4
The following activity volumes are associated to the production process for the relevant period -
Number of Number of Material Number of set-ups
Inspections Movements
A 200 15 100
B 250 20 125
C 900 100 600
D 650 85 400

The cost data also states that:

 Direct Labour cost: ₹ 60 per hour
 Machine hour rate: ₹ 280 per hour
 Production overheads are absorbed on machine hour basis.
 For activity-based costing, a thorough, analysis of the production process revealed that:
Costs relating to set-ups and inspection bears the equal percentage while costs relating to machinery
accounts for 20% of the production overhead.
Costs relating to material handling stands at 50% of costs relating to machinery. You are required to:
(i) Prepare a statement showing the unit costs and total costs of each product using the absorption
costing method.
(ii) Prepare a statement showing the unit costs and total costs of each product using activity - based
costing system. (10 Marks) (Sep’22)
Answer 3
(i) Cost per unit - Conventional Costing: Absorption rate method
Particulars A (₹) B (₹) C (₹) D (₹)
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Material 140 90 180 150

Labour @ ₹ 60 per labour hour 60 180 120 90
Overheads @ ₹ 280 per machine hour 840 560 1680 1120
Cost per unit (in ₹) 1,040 830 1,980 1,360
No of units 1,500 2,500 10,000 6,000
Total cost (₹) 15,60,000 20,75,000 1,98,00,000 81,60,000

(ii) Statement of apportionment of overheads:

Amount (₹)
Type of Cost Cost Driver A B C D
Setups No of 7,48,000 9,35,000 44,88,000 29,92,000
Setups (100 x 7,480) (125x7,480) (600 x 7,480) (400 x7,480)
Machinery Machine 2,52,000 2,80,000 33,60,000 13,44,000
hours (4,500 x 56) (5,000 x 56) (60,000 x 56) (24,000 x 56)
Material Handling No. of 1,78,500 2,38,000 11,90,000 10,11,500
Movements (15 x 11,900) (20 x 11,900) (100 x 11,900) (85 x 11,900)
of material
Inspection No. of 9,16,300 11,45,375 41,23,350 29,77,975
Inspections (200x4,581.50) (250x4,581.50) (900x4,581.50) (650x4,581.50)
Total 20,94,800 25,98,375 1,31,61,350 83,25,475
Output Units 1,500 2,500 10,000 6,000
Overhead/ unit 1,396.53 1,039.35 1,316.14 1,387.58
Statement showing Cost per unit and Total cost using Activity Based Costing
Particulars A (₹) B (₹) C (₹) D (₹)
Material 140.00 90.00 180.00 150.00
Labour 60.00 180.00 120.00 90.00
Total 200.00 270.00 300.00 240.00
No. of units 1,500 2,500 10,000 6,000
Total cost (excluding overheads) 3,00,000 6,75,000 30,00,000 14,40,000
Add: Overheads (as calculated) 20,94,800 25,98,375 1,31,61,350 83,25,475
Total cost 23,94,800 32,73,375 1,61,61,350 97,65,475
Cost per unit 1,596.53 1,309.35 1,616.14 1,627.58
Working Notes:
1. Calculation of Total machine hours
Particulars A B C D
(a) Machine hours per unit 3 2 6 4
(b) Production(units) 1,500 2,500 10,000 6,000
(c) Total machine hours (a) x(b) 4,500 5,000 60,000 24,000

Total Machine hours = 93,500

Total production overheads= 93,500 x 280 = ₹ 2,61,80,000
2. Calculation of cost driver rate
Cost pool Amount of Cost Driver Cost Driver Cost Driver Rate (₹)
cost (₹) (basis) (units)
Setups 91,63,000 No. of Setups 1,225 7,480 per set up
Machinery 52,36,000 Machine Hrs. 93,500 56 per machine hour
Material 26,18,000 No. of Material 220 11,900 per material
Handlings Movements movement
Inspection 91,63,000 No. of Inspections 2,000 4,581.50 per
inspection
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Question 4
WRITE DOWN the corresponding cost drivers related to the following activity cost pools:
Inspecting and testing costs, Setting-up machines cost, Machining costs, Supervising Costs,
Ordering and Receiving Materials cost (5 Marks) (Sep’22)
Answer 4
Activity Cost Pools Related Cost Drivers
Inspecting and testing costs Number of tests
Setting up machines cost Number of set-ups
Machining costs Machine hours
Supervising Costs Direct labour hours
Ordering and Receiving Materials cost Number of purchase orders

Question 5
ANI Limited is a trader of a Product Z. It has decided to analyse the profitability of its five new
customers. It buys Z article at ₹5,400 per unit and sells to retail customers at a listed price of ₹6,480
per unit. The data pertaining to five customers are:
Customers
A B C D E
Units sold 4,500 6,000 9,500 7,500 12,750
Listed Selling Price ₹6,480 ₹6,480 ₹6,480 ₹6,480 ₹6,480
Actual Selling Price ₹6,480 ₹6,372 ₹5,940 ₹6,264 ₹5,832
Number of Purchase orders 15 25 30 25 30
Number of Customer visits 2 3 6 2 3
Number of deliveries 10 30 60 40 20
Kilometers travelled per delivery 20 6 5 10 30
Number of expedited deliveries 0 0 0 0 1

Its five activities and their cost drivers are:

Activity Cost Driver Rate
Order taking ₹4,500 per purchase order
Customer visits ₹3,600 per customer visit
Deliveries ₹7.50 per delivery Km travelled
Product handling ₹22.50 per case sold
Expedited deliveries ₹13,500 per expedited delivery

Required:
(i) COMPUTE the customer-level operating income of each of five retail customers (A, B, C, D and E).
(ii) STATE the factors ANI Limited should consider in deciding whether to drop a customer.
(10 Marks) (Oct’22)
Answer 5
Working note:
Computation of revenues (at listed price), discount, cost of goods sold and customer level
operating activities costs:
Customers
A B C D E
Units sold: (a) 4,500 6,000 9,500 7,500 12,750
Revenues (at listed 2,91,60,000 3,88,80,000 6,15,60,000 4,86,00,000 8,26,20,000
price) (Rs.): (b)
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{(a) ×Rs.6,480)}

Revenues (at listed 2,91,60,000 3,82,32,000 5,64,30,000 4,69,80,000 7,43,58,000

price) (Rs.): (c) (4,500×6,480) (6,000×6,372) (9,500×5,940) (7,500×6,264) (12,750×5,832)
{(a) ×Actual selling
price)}
Discount (Rs.) (d) 0 6,48,000 51,30,000 16,20,000 82,62,000
{(b) – (c)}
Cost of goods sold 2,43,00,000 3,24,00,000 5,13,00,000 4,05,00,000 6,88,50,000
(Rs.) : (d)
{(a) x Rs.5,400}
Customer level operating activities costs
Order taking costs 67,500 1,12,500 1,35,000 1,12,500 1,35,000
(Rs.):
(No. of purchase
orders × Rs. 4,500)
Customer visits 7,200 10,800 21,600 7,200 10,800
costs (Rs.)
(No. of customer
visits x Rs. 3,600)
Delivery vehicles 1,500 1,350 2,250 3,000 4,500
travel costs (Rs.)
(Kms travelled by
delivery vehicles x Rs.
7.50 per km.)
Product handling 1,01,250 1,35,000 2,13,750 1,68,750 2,86,875
costs (Rs.)
{(a) x Rs. 22.50}
Cost of expediting - - - - 13,500
deliveries (Rs.)
{No. of expedited
deliveries x Rs.
13,500}
Total cost of
customer level
operating activities
(Rs.) 1,77,450 2,59,650 3,72,600 2,91,450 4,50,675

(i) Computation of Customer level operating income

Customers
A B C D E
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Revenues (At 2,91,60,000 3,82,32,000 5,64,30,000 4,69,80,000 7,43,58,000
list price)
(Refer to working
note)
Less: Cost of (2,43,00,000) (3,24,00,000) (5,13,00,000) (4,05,00,000) (6,88,50,000)
goods sold
(Refer to working
note)
Gross margin 48,60,000 58,32,000 51,30,000 64,80,000 55,08,000
Less: Customer
level operating
activities costs
(Refer to working
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note) (1,77,450) (2,59,650) (3,72,600) (2,91,450) (4,50,675)

Customer level 46,82,550 55,72,350 47,57,400 61,88,550 50,57,325

operating income

(ii) Factors to be considered for dropping a customer:

Dropping customers should be the last resort to be taken by an entity. Factors to be considered
should include:
- What is the expected future profitability of each customer?
- Are the currently least profitable or low profitable customers are likely to be highly profitable
in the future?
- What costs are avoidable if one or more customers are dropped?
- Can the relationship with the “problem” customers be restructured so that there is at “win-
win” situation

Question 6
Bopanna Ltd. produces three products Zm, Rm and Pm using the same plant and resources. It has
given the following information for the year ended on 31st March 2022:
Zm Rm Pm
Production Quantity (units) 6000 7200 9840
Cost per unit:
Direct Material (₹) 450 420 880
Direct Labour (₹) 80 150 200
Budgeted direct labour rate was ₹40 per hour and the production overheads, shown in table
below, were absorbed to products using direct labour hour rate.
Company followed Absorption Costing Method. However, the company is now considering
adopting Activity Based Costing Method.
Budgeted Cost Driver Remarks
Overheads (₹)
Material Procurement 2,50,000 No. of orders No. of orders was 30 units
for each product.
Set-up 1,50,000 No. of production All the three products are
Runs produced in production
runs of 50 units.
Quality Control 1,00,000 No. of Done for each production
Inspections run.
Maintenance 3,00,000 Maintenance Total maintenance hours
hours were 10,000 and was
allocated in the ratio of
2:1:2 between X, Y & Z.
Required:
(i) CALCULATE the total cost per unit of each product using the Absorption Costing Method.
(ii) CALCULATE the total cost per unit of each product using the Activity Based Costing
Method. (10 Marks March ‘23)
Answer 6
(i) Traditional Absorption Costing
Zm Rm Pm Total
(a) Quantity (units) 6,000 7,200 9,840 23,040
(b) Direct labour per unit (₹) 80 150 200 -
(c) Direct labour hours (a × b)/₹ 40 12,000 27,000 49,200 88,200
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Overhead rate per direct labour hour = Budgeted overheads / Budgeted labour hours
= (₹2,50,000 + ₹1,50,000 + ₹ 1,00,000 + ₹3,00,000) / 88,200 hours
= ₹8,00,000 / 88,200 hours
= ₹9 per direct labour hour(approx.)
Calculation of Cost per Unit
Zm Rm Pm
Direct Costs:
Direct Material 450 420 880
Direct Labour (₹) 80 150 200
Production Overhead: (₹) 18 33.75 45
(80× 9/40) (150× 9/40) (200× 9/40)
Total cost per unit (₹) 548 603.75 1125
(ii) Calculation of Cost-Driver level under Activity Based Costing
Zm Rm Pm Total

Quantity (units) 6,000 7,200 9,840 -

No. of orders (to be 200 240 328
768
rounded off for fraction) (6,000 / (7,200 / (9,840 / 30)
30) 30)
120 144 197
No. of production runs 461
(6,000 / (7,200 / (9,840 / 50)
50) 50)
No. of Inspections (done
for each production run) 120 144 197 461
Maintenance hours 4,000 2,000 4,000 10,000

Calculation of Cost-Driver rate

Budgeted Cost Cost-driver Cost Driver rate
Activity (₹) level (₹)
(a) (b) (c) = (a) / (b)
Material 2,50,000 768 325.5
procurement
Set-up 1,50,000 461 325.5
Quality control 1,00,000 461 217.0
Maintenance 3,00,000 10,000 30.0
Calculation of total cost of products using Activity Based Costing
Particulars Product
Zm (₹) Rm (₹) Pm (₹)
Direct Material 450 420 880
Direct Labour 80 150 200
Prime Cost per unit (A) 530 570 1080
Material procurement 10.85 10.85 10.85
(325.5×200/6000) (325.5×240/7200) (325.5×328/9840)
Set-up 6.51 6.51 6.51
(325.5×120/6000) (325.5×144/7200) (325.5×196.8/9840)
Quality control 4.34 4.34 4.34
(217×120/6000) (217×144/7200) (217×196.8/9840)
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Maintenance 20.0 8.3 12.2

(4000×30/6000) (2000×30/7200) (4000×30/9840)
Overhead Cost per unit 41.7 30.0 33.9
(B)
Total Cost per unit (A + B) 571.7 600.0 1113.9

Question 7
KD Ltd. is following Activity based costing. Budgeted overheads, cost drivers and volume are as
follows:
Cost pool Budgeted Cost driver Budgeted
overheads (₹) volume
Material procurement 18,42,000 No. of orders 1,200
Material handling 8,50,000 No. of movement 1,240
Maintenance 24,56,000 Maintenance hours 17,550
Set-up 9,12,000 No. of set-ups 1,450
Quality control 4,42,000 No. of inspection 1,820
The company has produced a batch of 7,600 units, its material cost was ₹24,62,000 and wages
₹4,68,500. Usage activities of the said batch are as follows:
Material orders 56
Material movements 84
Maintenance hours 1,420 hours
Set-ups 60
No. of inspections 18

Required:
(i) CALCULATE cost driver rates.
(ii) CALCULATE the total and unit cost for the batch. (5 Marks April ’23)
Answer 7
(i) Calculation of cost driver rate:
Cost pool Budgeted Cost driver Cost driver rate
overheads (₹) (₹)
Material procurement 18,42,000 1,200 1,535.00
Material handling 8,50,000 1,240 685.48
Maintenance 24,56,000 17,550 139.94
Set-up 9,12,000 1,450 628.97
Quality control 4,42,000 1,820 242.86
(ii) Calculation of cost for the batch:
Particulars Amount (₹) Amount (₹)
Material cost 24,62,000.00
Wages 4,68,500.00
Overheads:
- Material procurement (₹1,535×56 orders) 85,960.00
- Material handling (₹685.48×84 movements) 57,580.32
- Maintenance (₹139.94×1,420 hours) 1,98,714.80

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- Set-up (₹628.97×60 set-ups) 37,738.20
Chapter 5 Activity Based Costing
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- Quality control (₹242.86×18 inspections) 4,371.48 3,84,364.80

Total Cost 33,14,864.80
No. of units 7,600
Cost per units 436.17

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Chapter 6
Cost Sheet
Question 1
A Ltd. has the following expenditures for the year ended 31st March 2021:
Sl. Amount Amount (Rs.)
No. (Rs.)
(i) Raw materials purchased 10,00,00,000
(ii) Freight inward 11,20,600
(iii) Wages paid to factory workers 29,20,000
(iv) Royalty paid for production 1,72,600
(v) Amount paid for power & fuel 4,62,000
(vi) Job charges paid to job workers 8,12,000
(vii) Stores and spares consumed 1,12,000
(viii) Depreciation on office building 56,000
(ix) Repairs & Maintenance paid for:
- Plant & Machinery 48,000
- Sales office building 18,000 66,000
(x) Insurance premium paid for:
- Plant & Machinery 31,200
- Factory building 18,100 49,300
(xi) Expenses paid for quality control check activities 19,600
(xii) Research & development cost paid for 18,200
improvement in production process
(xiii) Expenses paid for pollution control and engineering 26,600
& maintenance
(xiv) Salary paid to Sales & Marketing mangers: 10,12,000
(xv) Salary paid to General Manager 12,56,000
(xvi) Packing cost paid for:
- Primary packing necessary to maintain 96,000
quality
- For re-distribution of finished goods 1,12,000 2,08,000
(xvii) Fee paid to independent directors 2,20,000
(xviii) Performance bonus paid to sales staffs 1,80,000
(xix) Value of stock as on 1st April, 2020:
- Raw materials 18,00,000
- Work-in-process 9,20,000
- Finished goods 11,00,000 38,20,000
(xx) Value of stock as on 31st March, 2021:
- Raw materials 9,60,000
- Work-in-process 8,70,000
- Finished goods 18,20,000 36,50,000
Amount realized by selling of scrap and waste generated during manufacturing process –
Rs. 86,000/-
From the above data you are requested to PREPARE Statement of cost for A Ltd. for the year ended
31st March, 2021, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of Production, (iv) Cost of
goods sold and (v) Cost of sales. (10 Marks, March ‘21)(Similar to Nov’21 & April ‘23 but different
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figures)
Answer 1

Statement of Cost of A Ltd. for the year ended 31st March, 2021:
Sl. No. Particulars Amount (Rs.) Amount (Rs.)
(i) Material Consumed:
- Raw materials purchased 10,00,00,000
- Freight inward 11,20,600
Add: Opening stock of raw materials 18,00,000
Less: Closing stock of raw materials (9,60,000) 10,19,60,600
(ii) Direct employee (labour) cost:
- Wages paid to factory workers 29,20,000
(iii) Direct expenses:
- Royalty paid for production 1,72,600
- Amount paid for power & fuel 4,62,000
- Job charges paid to job workers 8,12,000 14,46,600
Prime Cost 10,63,27,200
(iv) Works/ Factory overheads:
- Stores and spares consumed 1,12,000
- Repairs & Maintenance paid for plant & 48,000
machinery
- Insurance premium paid for plant & 31,200
machinery
- Insurance premium paid for factory 18,100
building
- Expenses paid for pollution control and
engineering & maintenance 26,600 2,35,900
Gross factory cost 10,65,63,100
Add: Opening value of W-I-P 9,20,000
Less: Closing value of W-I-P (8,70,000)
Factory Cost 10,66,13,100
(v) Quality control cost:
- Expenses paid for quality control check 19,600
activities
(vi) Research & development cost paid for 18,200
improvement in production process
(vii) Less: Realisable value on sale of scrap and (86,000)
waste
(viii) Add: Primary packing cost 96,000
Cost of Production 10,66,60,900
Add: Opening stock of finished goods 11,00,000
Less: Closing stock of finished goods (18,20,000)
Cost of Goods Sold 10,59,40,900
(ix) Administrative overheads:
- Depreciation on office building 56,000
- Salary paid to General Manager 12,56,000
- Fee paid to independent directors 2,20,000 15,32,000
(x) Selling overheads:
- Repairs & Maintenance paid for sales 18,000
office building
- Salary paid to Manager- Sales & 10,12,000
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Marketing
- Performance bonus paid to sales staffs 1,80,000 12,10,000
(xi) Distribution overheads:
- Packing cost paid for re-distribution of
finished goods 1,12,000
Cost of Sales 10,87,94,900

Question 2
The following data relates to manufacturing of a standard product during the month of
February, 2022:
Particulars Amount (in ₹)
Stock of Raw material as on 01-02-2022 1,20,000
Work in Progress as on 01-02-2022 75,000
Purchase of Raw material 3,00,000
Carriage Inwards 30,000
Direct Wages 1,80,000
Cost of special drawing 45,000
Hire charges paid for Plant (Direct) 36,000
Return of Raw Material 60,000
Carriage on return 9,000
Expenses for participation in Industrial exhibition 12,000
Maintenance of office building 3,000
Salary to office staff 37,500
Legal charges 3,750
Depreciation on Delivery van 9,000
Warehousing charges 2,250
Stock of Raw material as on 28-02-2022 45,000
Stock of Work in Progress as on 28-02-2022 36,000

 Store overheads on materials are 10% of material consumed.

 Factory overheads are 20% of the Prime cost.
 10% of the output was rejected and a sum of ₹ 7,500 was realized on sale of scrap.
 10% of the finished product was found to be defective and the defective products were
rectified at an additional expenditure which is equivalent to 20% of proportionate direct
wages.
 The total output was 8,000 units during the month.
You are required to PREPARE a Cost Sheet for the above period showing the:
(i) Cost of Raw Material consumed.
(ii) Prime Cost
(iii) Work Cost
(iv) Cost of Production
(v) Cost of Sales (10 Marks March ‘22)
Answer 2
Statement of Cost for the month of February, 2022
Particulars Amount (₹) Amount (₹)
(i) Cost of Material Consumed:
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Raw materials purchased (₹ 3,00,000 – ₹ 2,40,000

60,000)
Carriage inwards 30,000
Add: Opening stock of raw materials 1,20,000
Less: Closing stock of raw materials (45,000) 3,45,000
Direct Wages 1,80,000
Direct expenses:
Cost of special drawing 45,000
Hire charges paid for Plant (Direct) 36,000 81,000
(ii) Prime Cost 6,06,000
Carriage on return 9,000
Store overheads (10% of material consumed) 34,500
Factory overheads (20% of Prime cost) 1,21,200
Additional expenditure for rectification of 3,240 1,67,940
defective products (refer working note)
Gross factory cost 7,73,940
Add: Opening value of W-I-P 75,000
Less: Closing value of W-I-P (36,000)
(iii) Works/ Factory Cost 8,12,940
Less: Realisable value on sale of scrap (7,500)
(iv) Cost of Production 8,05,440
Add: Opening stock of finished goods -
Less: Closing stock of finished goods -
Cost of Goods Sold 8,05,440
Administrative overheads:
Maintenance of office building 3,000
Salary paid to Office staff 37,500
Legal Charges 3,750 44,250
Selling overheads:
Expenses for participation in Industrial 12,000 12,000
exhibition
Distribution overheads:
Depreciation on delivery van 9,000
Warehousing charges 2,250 11,250
(v) Cost of Sales 8,72,940
Working Notes:
1. Number of Rectified units
Total Output 8,000 units
Less: Rejected 10% 800 units
Finished product 7,200 units
Rectified units (10% of finished product) 720 units
2. Proportionate additional expenditure on 720 units
= 20% of proportionate direct wages
= 0.20 x (₹ 1,80,000/8,000) x 720
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= ₹ 3,240

Question 3
Comput Ltd. has capacity to produce 1,00,000 units of a product every month. Its fixed general
administration expenses amount to ₹ 7,50,000 and fixed marketing expenses amount to ₹
12,50,000 per month respectively. The variable distribution cost amounts to ₹ 150 per unit. Its
works cost at varying levels of production is as under:
Level Works cost per unit (₹)
10% 2,000
20% 1,950
30% 1,900
40% 1,850
50% 1,800
60% 1,750
70% 1,700
80% 1,650
90% 1,600
100% 1,550
It can sell 100% of its output at ₹ 2,500 per unit provided it incurs the following additional
expenditure:
(i) it spends ₹ 5,00,000 on refreshments served every month to its customers;
(ii) it gives gift items costing ₹ 150 per unit of sale;
(iii) it sponsors a television programme every week at a cost of ₹ 1,00,00,000 per month.
(iv) it has lucky draws every month giving the first prize of ₹ 2,50,000; 2nd prize of ₹ 1,25,000, 3rd
prize of ₹ 50,000 and three consolation prizes of ₹ 25,000 each to customers buying the
product. However, it can market 30% of its output at ₹ 2,750 per unit without incurring any of
the expenses referred to in (i) to (iv) above. PREPARE a cost sheet for the month showing total
cost and profit at 30% and 100% capacity level. (10 Marks April ’22)
Answer 3
Cost Sheet (For the month)
Level of Capacity 30% 100%
30,000 units 1,00,000 units
Per unit (₹) Total (₹) Per unit (₹) Total (₹)
Works Cost 1,900.00 5,70,00,000 1,550.00 15,50,00,000
Add: Fixed general administration 25.00 7,50,000 7.50 7,50,000
expenses
Add: Fixed marketing expenses 41.67 12,50,000 12.50 12,50,000
Add: Variable distribution cost 150.00 45,00,000 150.00 1,50,00,000
Add: Special Costs:
- Refreshments - - 5.00 5,00,000
- Gift items costs - - 150.00 1,50,00,000
- Television - - 100.00 1,00,00,000
programme
sponsorship cost
- Customers’ prizes* - - 5.00 5,00,000
Cost of sales 2,116.67 6,35,00,000 1,980.00 19,80,00,000
Profit (Balancing figure) 633.33 1,90,00,000 520.00 5,20,00,000
Sales revenue 2,750.00 8,25,00,000 2,500.00 25,00,00,000
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*Customers’ prize cost:

Amount (₹)
1st Prize 2,50,000
2nd Prize 1,25,000
3rd Prize 50,000
Consolation Prizes (3 × ₹ 25,000) 75,000
Total 5,00,000

Question 4
The following data relates to the manufacturing project received for the budgeted output of
19,600 units. You are required to CALCULATE the selling price per unit covering a profit of 25%
on the selling price.
Direct materials: 40 sq. m. per unit @ ₹ 10.60 per sq. m.
Direct wages: Bonding department 48 hours per unit @ ₹ 25
per hour Finishing department 30 hours per unit @ ₹ 19 per hour
Budgeted costs and hours per annum- Variable overhead:

(₹) Total hours

Bonding department 15,00,000 10,00,000
Finishing department 6,00,000 6,00,000
Fixed overhead-
(₹)
Production 15,68,000
Selling and distribution 7,84,000
Administration (General) 3,92,000
(10 Marks , March ‘22)
Answer 4
Decision making Cost Sheet (per unit)
Particulars (Amount in ₹) (Amount in ₹)
Direct materials 40 m2 at ₹ 10.60 per m2 424
Direct wages:
Bonding department- 48 hours at ₹ 25 per hour 1,200
Finishing department- 30 hours at ₹ 19 per hour 570 1,770
Prime Cost 2,194
Variable overhead:*
Bonding department- 48 hours at ₹ 1.50 per hour 72
Finishing department- 30 hours at ₹ 1.00 per hour 30 102
Variable production cost 2,296
Fixed production overhead# 80
Total production cost 2,376
Selling and distribution cost$ 40
Administration cost$ 20 60
Total Cost 2,436

Selling price per unit = Rs. 2,436 X = Rs. 3,248

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Chapter 6 Cost Sheet
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Working Notes:
* Variable overhead rates –

, ,
Bonding : = Rs. 1.50
, ,

, ,
Finishing : = Rs. 1.00
, ,

, ,
# Fixed production overhead rate per unit of output = = Rs. 80
,

, ,
$ Selling and production cost per unit of output = = Rs. 40
,

, ,
Administration cost per unit of output = = Rs. 20
,

Question 5
The following information pertains to A Limited for the year 1st April 2021 to 31st March 2022:
Particulars Amount (₹)
Sales 50,00,000
Direct labour 10,50,000
Administrative overheads (relating to production activity) 1,50,000
Selling expenses 2,50,000
Inventory details are as follows:
As on 1st April 2021 As on 31st March 2022
(Amount in ₹) (Amount in ₹)
Raw materials 5,00,000 6,30,000
Finished goods 9,80,000 10,50,000
Work in Progress 6,00,000 8,00,000

Additional Information:
 Direct labour would be 175% of works overheads.
 Cost of goods sold would be ₹ 6,900 per unit
 Selling expenses would be ₹ 500 per unit.
You are required to PREPARE a cost sheet for the year ended 31st March, 2022 showing:
(i) Value of material purchased
(ii) Prime cost
(iii) Works cost
(iv) Cost of production
(v) Cost of goods sold
(vi) Cost of Sales
(vii) Profit earned
(viii) Profit as a percentage of sales (10 Marks)(Sep’22)
Answer 5
Cost Sheet of A Limited for the year ended 31st March 2022
Particulars Amount (₹) Amount (₹)
Opening Stock of Raw materials 5,00,000
Add: Purchases (balancing figure) 20,50,000

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Chapter 6 Cost Sheet
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Less: Closing stock of raw materials 6,30,000

Direct material consumed (balancing figure) 19,20,000
Direct labour 10,50,000
Prime Cost 29,70,000
Add: Factory Overheads (10,50,000 / 175%) 6,00,000
Add: Opening Stock of Work in Progress 6,00,000
41,70,000
Less: Closing Stock of Work in Progress 8,00,000
Works Cost 33,70,000
Add: Administrative Overheads (relating to production 1,50,000
activity)
COST OF PRODUCTION 35,20,000
Add: Opening stock of finished goods 9,80,000
Cost of Goods available for sale 45,00,000
Less: Closing Stock of finished goods 10,50,000
COST OF GOODS SOLD 34,50,000
(Working Note: (iv))
Add: Selling and Distribution Overhead 2,50,000
COST OF SALES 37,00,000
Add: Profit (Balancing figure) [ Sales - Cost of Sales] 13,00,000
SALES 50,00,000
Profit as a % of sales

= 100 26%
Working Notes:
(i) The cost sheet is completed by Reverse Working. Purchases amount is the balancing figure.
(ii) Direct labour = 175% of factory overhead (given). Hence, if direct labour = 10,50,000, then
Factory Overhead = 10,50,000 / 175% = ₹ 6,00,000
(iii) Selling Overhead ₹ 2,50,000 (total), selling per unit ₹ 500.
Number of units sold = ₹ 2,50,000/ ₹ 500 = 500 units
(iv) Cost of goods sold = 500 units x ₹ 6,900 = ₹ 34,50,000

Question 6
A factory can produce 1,80,000 units per annum at its 60% capacity. The estimated costs of
production are as under:
Direct material ₹300 per unit
Direct employee ₹160 per unit
cost
Indirect expenses:
- Fixed ₹32,50,000 per annum
- Variable ₹50 per unit
- Semi- ₹20,000 per month up to 50% capacity and ₹2,500 for every
variabl 20% increase in the capacity or part thereof.
e
If production program of the factory is as indicated below and the management desires to ensure
a profit of ₹1,00,00,000 for the year, DETERMINE the average selling price at which each unit should
be quoted:
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First three months of the year- 50% of capacity;

Remaining nine months of the year- 75% of capacity. (10 Marks) (Oct’22)
Answer 6
Statement of Cost
First three Remaining nine Total (Rs.)
months (Rs.) months (Rs.)
37,500 units 1,68,750 units 2,06,250 units
Direct material 1,12,50,000 5,06,25,000 6,18,75,000
Direct employee cost 60,00,000 2,70,00,000 3,30,00,000
Indirect- variable expenses 18,75,000 84,37,500 1,03,12,500
Indirect – fixed expenses 8,12,500 24,37,500 32,50,000
Indirect- semi-variable expenses
- For first three months @ 60,000
Rs.20,000 p.m.
- For remaining nine months @ 2,25,000 2,85,000
Rs.25,000 p.m.
Total cost 1,99,97,500 8,87,25,000 10,87,22,500
Desired profit - - 1,00,00,000
Sales value - - 11,87,22,500
Average selling price per unit 575.62

Question 7
Following information obtained from the records of a Manufacturing Company for the month
of March:
Direct labour cost ₹ 25,000 being 150% of works overheads.
Cost of goods sold excluding administrative expenses ₹ 75,000.
Inventory accounts showed the following opening and closing balances:
March 1 (₹) March 31 (₹)
Raw materials 11,600 15,370
Work-in-progress 15,225 21,025
Finished goods 25,520 27,550

Other information is as follows:

(₹)
Selling expenses 6,125
General and administration expenses 4,375
Sales for the month 1,05,250
Required to:
(i) FIND out the value of materials purchased.
(ii) PREPARE a cost statement showing the various elements of cost and also the profit
earned. (10 Marks March ‘23)
Answer 7
(i) Computation of the value of materials purchased
To find out the value of materials purchased, reverse calculations from the given data can
be presented as below:
Particulars (₹)
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Cost of goods sold 75,000

Add: Closing stock of finished goods 27,550
Less: Opening stock of finished goods (25,520)
Cost of production 77,030
Add: Closing stock of work-in-progress 21,025
Less: Opening stock of work-in-progress (15,225)
Works cost 82,830
Less: Factory overheads: (16,667)
[₹25,000×100/150]
Prime cost 66,163
Less: Direct labour (25,000)
Raw material consumed 41,163
Add: Closing stock of raw materials 15,370
Raw materials available 56,533
Less: Opening stock of raw materials (11,600)
Value of materials purchased 44,933
(ii) Cost statement
(₹)
Raw material consumed [Refer to statement (i) above] 41,163
Add: Direct labour cost 25,000
Prime cost 66,163
Add: Factory overheads 16,667
Works cost 82,830
Add: Opening work-in-progress 15,225
Less: Closing work-in-progress (21,025)
Cost of production 77,030
Add: Opening stock of finished goods 25,520
Less: Closing stock of finished goods (27,550)
Cost of goods sold 75,000
Add: General and administration expenses 4,375
Add: Selling expenses 6,125
Cost of sales 85,500
Profit (sales i.e ₹1,05,250 – Cost of sales i.e ₹ 85,500) 19,750
Sales 1,05,250

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Chapter 7
Cost Accounting System
Question 1
“Is reconciliation of cost accounts and financial accounts necessary in case of integrated accounting
system?” EXPLAIN. (March ’19 , March ’23 & April ‘23 , 5 Marks )
Answer 1
In integrated accounting system cost and financial accounts are kept in the same set of books.
Such a system will have to afford full information required for Costing as well as for Financial Accounts. In
other words, information and data should be recorded in such a way so as to enable the firm to ascertain
the cost (together with the necessary analysis) of each product, job, process, operation or any other
identifiable activity. It also ensures the ascertainment of marginal cost, variances, abnormal losses and
gains. In fact all information that management requires from a system of Costing for doing its work
properly is made available. T he integrated accounts give full information in such a manner so that the
profit and loss account and the balance sheet can be prepared according to the requirements of law and
the management maintains full control over the liabilities and assets of its business.
Since, only one set of books are kept for both cost accounting and financial accounting purpose so there
is no necessity of reconciliation of cost and financial accounts.

Question 2
A manufacturing company disclosed a net profit ₹10,20,000 as per their cost accounts for the year
ended 31st March, 2023. The financial accounts however disclosed a net profit of ₹ 6,94,000 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 80,000
(ii) Administration Overheads over-absorbed 1,20,000
(iii) Depreciation charged in Financial Accounts 6,50,000
(iv) Depreciation charged in Cost Accounts 5,50,000
(v) Interest on investments not included in Cost Accounts 1,92,000
(vi) Income-tax provided 1,08,000
(vii) Interest on loan funds in Financial Accounts 4,90,000
(viii) Transfer fees (credit in financial books) 48,000
(ix) Stores adjustment (credit in financial books) 28,000
(x) Dividend received 64,000
PREPARE a Reconciliation statement. (5 Marks April 23, March ’21 & March ‘19)
Answer 2
Statement of Reconciliation
Particulars Amount (₹) Amount (₹)
Net profit as per Cost accounts 10,20,000
Add:
Administration Overheads over-absorbed 1,20,000
Interest on investments 1,92,000
Transfer fees 48,000
Stores adjustment 28,000
Dividend received 64,000 4,52,000
Less:
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Factory Overheads under-absorbed 80,000

Depreciation under charged 1,00,000
Income-tax provided 1,08,000
Interest on loan funds 4,90,000 (7,78,000)
Net profit as per Financial accounts 6,94,000

Question 3
EXPLAIN what are the essential pre-requisites of Integrated accounting system? (4 Marks March ‘’22)
Answer 3
Essential pre-requisites for Integrated Accounts: The essential pre-requisites for integrated accounts
include the following steps-
1. The management’s decision about the extent of integration of the two sets of books. Some concerns
find it useful to integrate up to the stage of prime cost or factory cost while other prefers full
integration of the entire accounting records.
2. A suitable coding system must be made available so as to serve the accounting purposes of financial
and cost accounts.
3. An agreed routine, with regard to the treatment of provision for accruals, prepaid expenses, other
adjustment necessary for preparation of interim accounts.
4. Perfect coordination should exist between the staff responsible for the financial and cost aspects of
the accounts and an efficient processing of accounting documents should be ensured.

Question 4
BRIEF OUT advantages of Integrated Accounts. (4 Marks April ’22)
Answer 4
Advantages of Integrated Accounts are as follows:
(i) No need for Reconciliation- The Question of reconciling costing profit and financial profit does not
arise, as there is only one figure of profit.
(ii) Less efforts- Due to use of one set of books, there is a significant saving in efforts made.
(iii) Less time consuming- No delay is caused in obtaining information as it is provided from books of
original entry.
(iv) Economical process- It is economical also as it is based on the concept of “Centralisation of Accounting
function”.

Question 5
LIST OUT five purely financial expenses that are included only in Financial Accounts. (5 Marks) (Sep’22)
Answer 5
Purely Financial Expenses included in Financial Accounts only:
(i) Interest on loans or bank mortgages.
(ii) Expenses and discounts on issue of shares, debentures etc.
(iii) Other capital losses i.e., loss by fire not covered by insurance etc.
(iv) Losses on the sales of fixed assets and investments
(v) Income tax, donations, subscriptions
(vi) Expenses of the company’s share transfer office, if any. (Any five)

Question 6
N Ltd a vehicle manufacturer has prepared sales budget for the next few months, and the following
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draft figures are available:

Month No. of
vehicles
October 40,000
November 35,000
December 45,000
January 60,000
February 65,000
To manufacture a vehicle a standard cost of ₹5,71,400 is incurred and sold through dealers at a uniform
selling price of ₹8,57,100 to customers. Dealers are paid 15% 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 each month to cover 40% of next month’s production.
48,000 units of Part-X are in stock as on 1st October.
There are 9,500 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
(i) PREPARE Production budget (in nos.) for the month of October, November, December and
January.
(ii) PREPARE a Purchase budget for Part-X (in units) for the months of October, November and
December.
(iii) CALCULATE the budgeted gross profit for the quarter October to December. (10 Marks) (Oct’22)
Answer 6

(i) Preparation of Production Budget (in units)

October November December January
Demand for the month (Nos.) 40,000 35,000 45,000 60,000
Add: 20% of next month’s demand 7,000 9,000 12,000 13,000
Less: Opening Stock (9,500) (7,000) (9,000) (12,000)
Vehicles to be produced 37,500 37,000 48,000 61,000

(ii) Preparation of Purchase budget for Part-X

October November December
Production for the month (Nos.) 37,500 37,000 48,000
Add: 40% of next month’s 14,800 19,200 24,400
production (40% of 37,000) (40% of 48,000) (40% of 61,000)
52,300 56,200 72,400
No. of units required for 2,09,200 2,24,800 2,89,600
production (52300 × 4 units) (56200 × 4 units) (72,400 × 4 units)
Less: Opening Stock (48,000) (59,200) (76,800)
(14800 × 4 units) (19200 × 4 units)
No. of units to be purchased 1,61,200 1,65,600 2,12,800

(iii) Budgeted Gross Profit for the Quarter October to December

October November December Total
Sales in nos. 40,000 35,000 45,000 1,20,000
Net Selling Price per unit* 7,28,535 7,28,535 7,28,535
Sales Revenue (Rs. in lakh) 2,91,414 2,54,987.25 3,27,840.75 8,74,242
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Less: Cost of Sales (Rs. in lakh) 2,28,560 1,99,990.00 2,57,130.00 6,85,680

(Sales unit × Cost per unit)
Gross Profit (Rs. in lakh) 62,854 54,997.25 70,710.75 1,88,562
* Net Selling price unit = Rs. 8,57,100 – 15% commission on Rs. 8,57,100
= Rs.7,28,535.

Question 7
DISCUSS the essentials of good Cost Accounting System. (5Marks) (Oct’22)
Answer 7
The essential features, which a good cost and management accounting system should possess, are as
follows:
(a) Informative and simple: Cost and management accounting system should be tailor-made, practical, simple
and capable of meeting the requirements of a business concern. The system of costing should not sacrifice
the utility by introducing meticulous and unnecessary details.
(b) Accurate and authentic: The data to be used by the cost and management accounting system should be
accurate and authenticated; otherwise it may distort the output of the system and a wrong decision may
be taken.
(c) Uniformity and consistency: There should be uniformity and consistency in classification, treatment and
reporting of cost data and related information. This is required for benchmarking and comparability of
the results of the system for both horizontal and vertical analysis.
(d) Integrated and inclusive: The cost and management accounting system should be integrated with other
systems like financial accounting, taxation, statistics and operational research etc. to have a complete
overview and clarity in results.
(e) Flexible and adaptive: The cost and management accounting system should be flexible enough to make
necessary amendments and modification in the system to incorporate changes in technological, reporting,
regulatory and other requirements.
(f) Trust on the system: Management should have trust on the system and its output. For this, an active role
of management is required for the development of such a system that reflect a strong conviction in using
information for decision making.

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Chapter 8
Unit & Batch Costing
Question 1
Arnav Confectioners (AC) owns a bakery which is used to make bakery items like pastries, cakes
and muffins. AC use to bake atleast 50 units of any item at a time. A customer has given an order
for 600 cakes. To process a batch of 50 cakes, the following cost would be incurred:
Direct materials - Rs. 5,000
Direct wages - Rs. 500
Oven set-up cost Rs. 750
AC absorbs production overheads at a rate of 20% of direct wages cost. 10% is added to the total
production cost of each batch to allow for selling, distribution and administration overheads.
AC requires a profit margin of 25% of sales value. Required:
(i) DETERMINE the price to be charged for 600 cakes.
(ii) CALCULATE cost and selling price per cake.
(iii) DETERMINE what would be selling price per unit If the order is for 605 cakes. (5 Marks Aug ’18 &
March ‘23)
Answer 1
Statement of cost per batch and per order
No. of batch = 600 units ÷ 50 units = 12 batches

Particulars Cost per batch Total Cost

(Rs.) (Rs.)
Direct Material Cost 5,000.00 60,000
Direct Wages 500.00 6,000
Oven set-up cost 750.00 9,000
Add: Production Overheads (20% of Direct wages) 100.00 1,200
Total Production cost 6,350.00 76,200
Add: S&D and Administration overheads 635.00 7,620
(10% of Total production cost)
Total Cost 6,985.00 83,820
Add: Profit (1/3rd of total cost) 2,328.33 27,940
(i) Sales price 9,313.33 1,11,760
No. of units in batch 50 units
(ii) Cost per unit (Rs.6,985 ÷ 50 units) 139.70
Selling price per unit (9,313.33 ÷ 50 units) 186.27
(iii) If the order is for 605 cakes, then selling price per cake would be as below:
Particulars Total Cost (Rs.)
Direct Material Cost 60,500
Direct Wages 6,050
Oven set-up cost 9,750
Add: Production Overheads (20% of Direct wages) 1,210
Total Production cost 77,510
Add: S&D and Administration overheads 7,751
(10% of Total production cost)
Total Cost 85,261
Add: Profit (1/3rd of total cost) 28,420

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Sales price 1,13,681

No. of units 605 units
Selling price per unit (Rs.1,13,681 ÷ 605 units) 187.90

Question 2
In Batch Costing, STATE how is Economic Batch Quantity determined? (4 Marks Mar 22, Mar 18)
Answer 2
The economic batch size or Economic Batch Quantity may be determined by calculating the total
cost for a series of possible batch sizes and checking which batch size gives the minimum cost. The
objective here being to determine the production lot (Batch size) that optimizes on both set up and
inventory holding cots formula. The mathematical formula usually used for its determination is as
follows:

(EBQ) =

Where,
D = Annual demand for the product

S =Setting up cost per batch

C=Carrying cost per unit of production

Question 3
Arnav Ltd. operates in beverages industry where it manufactures soft -drink in three sizes of
Large (3 litres), Medium (1.5 litres) and Small (600 ml) bottles. The products are processed in
batches. The 5,000 litres capacity processing plant consumes electricity of 90 Kilowatts per hour
and a batch takes 1 hour 45 minutes to complete. Only symmetric size of products can be
processed at a time. The machine set-up takes 15 minutes to get ready for next batch
processing. During the set-up, power consumption is only 20%.
(I) The current price of Large, Medium and Small are ₹ 150, ₹ 90 and ₹ 50 respectively.
(II) To produce a litre of beverage, 14 litres of raw material-W and 25 ml of Material-C are required
which costs ₹ 0.50 and ₹1,000 per litre respectively.
(III) 20 direct workers are required. The workers are paid ₹ 880 for 8 hours shift of work.
(IV) The average packing cost per bottle is ₹3
(V) Power cost is ₹ 7 per Kilowatt -hour (Kwh)
(VI) Other variable cost is ₹ 30,000 per batch.
(VII) Fixed cost (Administration and marketing) is ₹ 4,90,00,000.
(VIII) The holding cost is ₹ 1 per bottle per annum.
The marketing team has surveyed the following demand (bottle) of products:
Large Medium Small
3,00,000 7,50,000 20,00,000

Required:
CALCULATE net profit/ loss of the organization and also COMPUTE Economic Batch Quantity
(EBQ). (10 Marks April ’22)
Answer 3
Workings:
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1. Maximum number of bottles that can be processed in a batch:

,
=
Large Medium Small
Qty (ltr) Max bottles Qty (ltr) Max bottles Qty (ml) Max bottles
3 1,666 1.5 3,333 600 8,333
For simplicity of calculation small fractions has been ignored.
2. Number of batches to be run:
Large Medium Small Total
A Demand 3,00,000 7,50,000 20,00,000
B Bottles per batch (Refer WN- 1,666 3,333 8,333
1)
C No. of batches [A÷B] 180 225 240 645
For simplicity of calculation small fractions has been ignored.
3. Quantity of Material-W and Material C required to meet demand:
Particulars Large Medium Small Total
A Demand (bottle) 3,00,000 7,50,000 20,00,000
B Qty per bottle (Litre) 3 1.5 0.6
C Output (Litre) [A×B] 9,00,000 11,25,000 12,00,000 32,25,000
D Material-W per litre 14 14 14
of output (Litre)
E Material-W required (Litre) 1,26,00,000 1,57,50,000 1,68,00,000 4,51,50,000
[C×D]
F Material-C required per 25 25 25
litre of output (ml)
G Material-C required (Litre) 22,500 28,125 30,000 80,625
[(C×F)÷1000]

4. No. of Man-shift required:

Large Medium Small Total
A No. of batches 180 225 240 645
B Hours required per batch (Hours) 2 2 2
C Total hours required (Hours) [A×B] 360 450 480 1,290
D No. of shifts required [C÷8] 45 57 60 162
E Total manshift [D×20 workers] 900 1,140 1,200 3,240
For simplicity of calculation small fractions has been ignored.
5. Power consumption in Kwh
Large Medium Small Total
For processing
A No. of batches 180 225 240 645
B Hours required per batch 1.75 1.75 1.75 1.75
(Hours)
C Total hours required (Hours) 315 393.75 420 1,128.75
[A×B]

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D Power consumption per hour 90 90 90 90

(Kwh)
E Total Power consumption 28,350 35,437.5 37,800 1,01,587
(Kwh) [C×D]
F Per batch consumption* 157.5 157.5 157.5 157.5
(Kwh) [E÷A]
For set-up
G Hours required per batch 0.25 0.25 0.25 0.25
(Hours)
H Total hours required (Hours) 45 56.25 60 161.25
[A×G]
I Power consumption per hour 18 18 18 18
(Kwh) [20%×90]
J Total Power consumption 810 1,012.5 1,080 2,902.5
(Kwh) [H×I]
K Per batch consumption* 4.5 4.5 4.5 4.5
(Kwh) [J÷A]
* Per batch consumption can be directly calculated as [Hours required per batch x Power
consumption per hour]
Calculation of Profit/ loss per batch:
Particulars Large Medium Small Total
A Demand (bottle) 3,00,000 7,50,000 20,00,000 30,50,000
B Price per bottle (₹) 150 90 50
C Sales value (₹) [A×B] 4,50,00,000 6,75,00,000 10,00,00,000 21,25,00,000
Direct Material cost:
E Material-W (₹) [Qty in 63,00,000 78,75,000 84,00,000 2,25,75,000
WN-3 × ₹0.50]
F Material-C (₹) [Qty in 2,25,00,000 2,81,25,000 3,00,00,000 8,06,25,000
WN-3 × ₹1,000]
G [E+F] 2,88,00,000 3,60,00,000 3,84,00,000 10,32,00,000
H Direct Wages (₹) [Man- 7,92,000 10,03,200 10,56,000 28,51,200
shift in WN-4 × × ₹880]
I Packing cost (₹) 9,00,000 22,50,000 60,00,000 91,50,000
[A×₹3]
Power cost (₹)
J For processing (₹) 1,98,450 2,48,062.5 2,64,600 7,11,112.5
[WN-5 × ₹7]
K For set-up time (₹) [WN-5 5,670 7,087.5 7,560 20,317.5
× ₹7]
L [J+K] 2,04,120 2,55,150 2,72,160 7,31,430
M Other variable cost (₹) 54,00,000 67,50,000 72,00,000 1,93,50,000
[No. of batch in WN-2 ×
₹30,000]
N Total Variable cost per 3,60,96,120 4,62,58,350 5,29,28,160 13,52,82,630
batch
[G+H+I+L+M]
O Profit/ loss before 89,03,880 2,12,41,650 4,70,71,840 7,72,17,370
fixed cost [C-N]
P Fixed Cost 4,90,00,000
Q Net Profit [O-P] 2,82,17,370

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Chapter 8 Unit & Batch Costing
 M 8.5

Computation of Economic Batch Quantity (EBQ):

EBQ  

D = Annual Demand for the Product = Refer A below

S = Set-up cost per batch = Refer D below
C = Carrying cost per unit per annum =Refer E below

Particulars Large Medium Small

A Annual Demand (bottle) 3,00,000 7,50,000 20,00,000
B Power cost for set-up time (₹) 31.50 31.50 31.50
[Consumption per batch in WN-5 × ₹7]
C Other variable cost (₹) 30,000 30,000 30,000
D Total Set-up cost [B+C] 30,031.50 30,031.50 30,031.50
E Holding cost: 1.00 1.00 1.00
F EBQ (Bottle) 1,34,234 2,12,243 3,46,592

Question 4
DESCRIBE Unit Costing. WHAT kind of industries follow this method of costing? (5 Marks) (Sep’22)
Answer 4
Unit costing: It is that method of costing where the output produced is identical and each unit of
output requires identical cost. Unit costing is synonymously known as single or output costing, but
these are sub-division of unit costing method.
This method of costing is followed by industries which produce single output or few variants of a single
output, therefore, this method of costing, finds its application in industries like paper, cement, steel
works, mining, breweries etc. These types of industries produce identical products and therefore have
identical costs.

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Chapter 8 Unit & Batch Costing
 M 9.1

Chapter 9
Job Costing and Contract Costing
Question 1
Define cost plus contract? STATE its advantages. (March ’19 & April ’23 , 5 Marks)
Answer 1
Cost plus contract: Under cost plus contract, the contract price is ascertained by adding a
percentage of profit to the total cost of the work. Such types of contracts are entered into when it
is not possible to estimate the contract cost with reasona ble accuracy due to unstable condition of
material, labour services etc.
Following are the advantages of cost plus contract:
(i) The contractor is assured of a fixed percentage of profit. T here is no risk of incurring any loss on the
contract.
(ii) It is useful specially when the work to be done is not definitely fixed at the time of making the
estimate.
(iii) Contractee can ensure himself about the ‘cost of contract’ as he is empowered to examine the books
and documents of the contractor to ascertain th e veracity of the cost of contract.

Question 2
The following expenses were incurred on a contract:
(₹)
Materials purchased 7,20,000
Material drawn from stores 1,20,000
Wages 2,70,000
Plant issued 90,000
Chargeable expenses 90,000
Apportioned indirect expenses 30,000
The contract was for ₹ 24,00,000 and it commenced on April 1, 2021. The value of the work
completed and certified upto 28th February, 2022 was ₹ 15,60,000 of which ₹ 12,48,000 was
received in cash, the balance being held back as retention money by the contractee. The value
of work completed subsequent to the architect’s certificate but before 31st March, 2022 was ₹
72,000. There were also lying on the site materials of the value of ₹ 48,000. It was estimated that
the value of plant as at 31st March, 2022 was ₹ 36,000. You are required to COMPUTE notional
profit on the contract till the year ended 31st March, 2022. .(5 Marks March ’22)
Answer 2
Contract Account
Particulars (₹) Particulars (₹)
To Material purchased 7,20,000 By Work-in-progress:
” Stores issued 1,20,000 Value of work certified 15,60,000
” Wages 2,70,000 Cost of work 72,000
uncertified
” Plant 90,000 ” Material unused 48,000
” Chargeable expenses 90,000 ” Plant less depreciation 36,000
” Indirect expenses 30,000
” Costing P&L A/c 3,96,000
(Notional profit) (bal.
fig.)
17,16,000 17,16,000
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Question 3
A contractor prepares his accounts for the year ending 31st March each year. He commenced a
contract on 1st July, 2021.
The following information relates to the contract as on 31st March, 2022:
(₹)
Material issued 7,53,000
Wages 16,96,800
Salary to Foreman 2,43,900
A machine costing ₹ 7,80,000 has been on the site for 146 days, its working life is estimated at 7
years and its final scrap value at ₹ 45,000. A supervisor, who is paid ₹ 24,000 p.m. has devoted
one-half of his time to this contract. All other expenses and administration charges amount to ₹
4,09,500. Material in hand at site costs ₹ 1,06,200 on 31st March, 2022.
The contract price is ₹ 60,00,000. On 31st March, 2022 two-third of the contract was completed.
The architect issued certificates covering 50% of the contract price, and the contractor had been
paid ₹ 22,50,000 on account. PREPARE Contract A/c and show the notional profit or loss as on
31st March, 2022. (5 Marks April ’22)
Answer 3
Contract Account
Particulars (₹) Particulars (₹)
To Material issued 7,53,000 By Machine (Working note 7,38,000
1)
” Wages 16,96,800 ” Material (in hand) 1,06,200
” Foreman’s salary 2,43,900 ” Works cost (balancing 31,47,000
figure)
” Machine 7,80,000
” Supervisor’s salary 1,08,000
(₹ 24,000 × 9)/2
” Administrative charges 4,09,500
39,91,200 39,91,200
” Works cost 31,47,000 ” Value of work 30,00,000
certified
” Costing P&L A/c 6,39,750 ” Cost of work 7,86,750
(Notional profit) uncertified
(Working Note 2)
37,86,750 37,86,750
Working notes:
1. Written down value of Machine:
. , , . ,
= X = Rs. 42,000

Hence, the value of machine after the period of 146 days = ₹ 7,80,000 – ₹ 42,000 = ₹ 7,38,000
2. The cost of 2/3rd of the contract is ₹ 31,47,000

. , ,
∴ Cost of 100% 2/3rd of the contract is X 3 = Rs. 47,20,500
∴ Cost of 50% of the contract which has been certified by the architect is ₹ 23,60,250. Also, the
cost of the contract, which has been completed but not certified by the architect is ₹ 7,86,750.

Question 4
EFF Limited, a construction company, entered into a contract for ₹ 14,50,000 on 1st July, 2021. On
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30th June, 2022 when the accounts were closed, the following details were gathered about the
Chapter 9 Job Costing and Contract Costing
 M 9.3

contract:

Amount (₹)
Materials purchased 2,90,000
Wages paid 1,30,500
General expenses 29,000
Materials on hand (30-6-2022) 72,500
Wages accrued (30-6-2022) 14,500
Work certified 5,80,000
Work uncertified 43,500
Cash received 4,35,000
The above contract contained "Escalation clause" which read as follows:
"In the event of increase in the prices of materials and rates of wages by more than 5%, the contract
price would be increased accordingly by 25% of the rise in the cost of materials and wages beyond
5% in each case."
It was found that since the date of signing the agreement, the prices of materials and wage rates
increased by 25% leading to increase the values from the very beginning. However, the value of the
work certified does not take into account the effect of the above clause.
You are required to CALCULATE the 'value of work certified' after taking the effect of 'Escalation
Clause' as on 30th June, 2022. (Sep’22)

Answer 4
Workings:
(i) Percentage of work certified:
Value of workcertified ₹ 5,80,000
( 100 + ( 100 + 40%
Contract price ₹14,50,000
(ii) Value of material and labour used in the contract:
Particulars Amount (₹) Amount (₹)
Material purchased 2,90,000
Less: Material on hand (30-06-2022) (72,500) 2,17,500
Wages paid 1,30,500
Add: Wages accrued (30-06-2022) 14,500 1,45,000
3,62,500
Price of materials and wages has been increased by 25%, the value before price increase is:
₹ , ,
( 100 +₹ 2,90,000

(iii) Calculation of Value of work certified:

The value of the contract would be increased by 25% of the price increased beyond 5%. Price increased
beyond 5%
= ₹ (3,62,500 – 2,90,000) – 5% of ₹ 2,90,000
= ₹ 72,500 – ₹ 14,500 = ₹ 58,000
Value of contract would be increased by 25% of ₹ 58,000
= ₹ 14,500 Therefore, the revised contract value = ₹ 14,50,000 + ₹ 14,500 = ₹ 14,64,500
Calculation of the Value of work certified after taking the effect of escalation clause:
= Revised contract value × Percentage of work certified
= ₹ 14,64,500 × 40% = ₹ 5,85,800

Question 5
Premier Construction Company undertook a contract for ₹50,00,000 on 1st August, 2021. On 31st
March, 2022 when the accounts were closed, the following information was available:
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Cost of work uncertified ₹12,00,000

Cash received ₹25,00,000 (80 of work certified)
Profit transferred to costing Profit and Loss account at the end ₹8,00,000
of the year on Incomplete contract
CALCULATE:
(i) The value of work in progress certified
(ii) Degree of completion of contract
(iii) Notional Profit and
Cost of contract as on 31-03-2022.(5 Marks) (Oct’22)
Answer 5
(i) Value of work in progress certified:
Since, Cash Received of Rs. 25,00,000 is 80% of work certified
. ,
Therefore, Value of work in progress certified = %
= Rs. 31,25,000

(ii) Degree of completion of contract:

Valueofworkcertified
( 100
Valueofcontract
12. , ,
( 100 = 62.5%
. , ,

(iii) Notional Profit:

3425 1676896:
Profit transferred to Costing Profit & Loss A/c = ×Notional Profit ×
;4<=6 >? @>AB 76AC8?86:
(Since contract completion is 62.5% i.e. more than 50%)

. , ,
Or, Rs. 8,00,000 = × Notional Profit× . , ,
Notional Profit = Rs. 15,00,000

(iv) Cost of contract as on 31-03-2022:

= Value of Work certified + Cost of work uncertified – Notional profit
= Rs. 31,25,000 + Rs.12,00,000 – Rs. 15,00,000
= Rs. 28,25,000

Question 6
Ultra Builders Ltd. has started a contract on 1st April 2021. The Trial balance as on 31st March
2022 showed the following balances:

Particulars Dr. (₹) Cr. (₹)

Paid up share capital 2,05,75,000
Land and buildings 50,60,000
Machinery at cost (85% at site) 39,60,000
Cash and bank 33,000
Materials at cost 27,78,600
Creditors for materials 11,33,660
Direct wages 14,60,800
Site expenses 10,56,000
Vehicles 40,00,000
Furniture
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7,00,000
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 M 9.5

Office equipment 12,00,000

Postage and Stationery 32,560
Office expenses 6,88,600
Rates and taxes 28,160
Fuel and power 9,30,600
Outstanding wages
2,21,200
Advance rates and taxes 1,540
2,19,29,860 2,19,29,860

The contract price is ₹ 2,00,00,000 and work certified is ₹80,00,000. The cost of work uncertified
is ₹ 9,60,000. Machinery costing ₹ 1,60,000 was returned to stores at the end of the year. Stock
of material at site on 31st March 2022 was of the value of ₹40,000. Depreciation on Machinery,
Vehicles and furniture are 10%, 15% and 10% respectively. You are required to calculate the
profit from the contract. (10 Marks March ‘23)
Answer 6
Contract Account

Particulars Amount Amount Particulars Amount Amount

(₹)
(₹) (₹) (₹)
To Materials 27,78,600 By material at site 40,000
To Direct wages 14,60,800 By Work in
progress:
Add: outstanding 2,21,200 16,82,000 - Work certified 80,00,000
To Site expenses 10,56,000 - Work uncertified 9,60,000 89,60,000
To Office expenses 6,88,600
To Postage 32,560
and
Stationery
To Rates and taxes 28,160
Less: Advance (1,540) 26,620
To Fuel and power 9,30,600
To Depreciation* 10,06,600
To Notional Profit 7,98,420
c/d
90,00,000 90,00,000
*Depreciation
(i) On Machinery = {10% on (₹39,60,000 × 0.85)} = ₹ 3,36,600
(ii) On Vehicles = 15% on ₹40,00,000 = ₹ 6,00,000
(iii) On Furniture = 10% on ₹7,00,000 = ₹ 70,000
Total = Rs. 9,86,800

Question 7
MT Ltd. pays the followings to skilled workers engaged in production works. The following are
the employee benefits paid to the employees:
(a) Basic salary per day ₹1,000
(b) Dearness allowance (DA) 20% of basic salary
(c) House rent allowance 16% of basic salary
(d) Transport allowance ₹50 per day of actual work
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(e) Overtime Twice the hourly rate (considers basic and DA),
only if works more than 9 hours a day otherwise
no overtime allowance. If works for more than 9
hours a day then overtime is considered after 8th
hours.
(f) Work of holiday and Sunday Double of per day basic rate provided works at
least 4 hours. The holiday and Sunday basic is
eligible for all allowances and statutory
deductions.
(h) Earned leave & Casual leave These are paid leave.
(h) Employer’s contribution to Provident 12% of basic and DA
fund
(i) Employer’s contribution to Pension 7% of basic and DA
fund
The company normally works 8-hour a day and 26-day in a month. The company provides 30
minutes lunch break in between.
During the month of August 2020, Mr. Z works for 23 days including 15th August and a Sunday
and applied for 3 days of casual leave. On 15th August and Sunday he worked for 5 and 6 hours
respectively without lunch break.
On 5th and 13th August he worked for 10 and 9 hours respectively. During the month Mr. Z worked
for 100 hours on Job no.HT200. You are required to CALCULATE:
(i) Earnings per day
(ii) Effective wages rate per hour of Mr. Z.
(iii) Wages to be charged to Job no.HT200 [10 Marks April ‘23]
Answer 7
Workings:
1. Normal working hours in a month = (Daily working hours – lunch break) × no. of days
= (8 hours – 0.5 hours) × 26 days = 195 hours
2. Hours worked by Mr.Z = No. of normal days worked + Overtime + holiday/ Sunday
worked
= (21 days × 7.5 hours) + (9.5 hours + 8.5 hours) + (5 hours + 6 hours)
= 157.5 hours + 18 hours + 11 hours = 186.50 hours.
(i) Calculation of earnings per day

Particulars Amount (₹)

Basic salary (₹1,000 × 26 days) 26,000
Dearness allowance (20% of basic salary) 5,200
31,200
House rent allowance (16% of basic salary) 4,160
Employer’s contribution to Provident fund (12% × ₹31,200) 3,744
Employer’s contribution to Pension fund (7% × ₹31,200) 2,184
41,288
No. of working days in a month (days) 26
Rate per day 1,588
Transport allowance per day 50
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Chapter 9 Job Costing and Contract Costing
 M 9.7

Earnings per day 1,638

(ii) Calculation of effective wage rate per hour of Mr. Z:

Particulars Amount (₹)

Basic salary (₹1,000 × 26 days) 26,000
Additional basic salary for Sunday & holiday (₹1,000 × 2 days) 2,000
Dearness allowance (20% of basic salary) 5,600
33,600
House rent allowance (16% of basic salary) 4,480
Transport allowance (₹50 × 23 days) 1,150
Overtime allowance (₹160 × 2 × 2 hours)* 640
Employer’s contribution to Provident fund (12% × ₹33,600) 4,032
Employer’s contribution to Pension fund (7% × ₹33,600) 2,352
Total monthly wages 46,254
Hours worked by Mr.Z (hours) 186.5
Effective wage rate per hour 248
*(Daily Basic+DA) ÷ 7.5 hours
= (1,000+200) ÷ 7.5 = ₹₹160 per hour
(iii) Calculation of wages to be charged to Job no. HT200
= ₹248 × 100 hours = ₹24,800

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Chapter 9 Job Costing and Contract Costing
 M 10.1

Chapter 10
Process & Operation Costing
Question 1
Chill Ltd. uses process costing to manufacture water density sensor for hydro sector. The following
information pertains to operations for the month of February:
Particulars Units
Beginning WIP, February 1 22,400
Started in production during February 1,40,000
Completed production during February 1,28,800
Ending work in progress, February 28 33,600
The beginning work in progress was 50% complete for materials and 30% complete for conversion
costs. The ending inventory was 80% complete for material and 30% complete for conversion
costs.
Costs pertaining to the month of February are as follows:
Beginning inventory costs are material ₹ 1,38,350, direct labour ₹ 1,50,600 and factory overhead
₹ 63,600
Cost incurred during February are material ₹ 23,95,000, direct labour ₹ 9,14,400, factory
overheads ₹ 19,55,800.
CALCULATE:
(i) Using the FIFO method, the equivalent units of production for material.
(ii) Cost per equivalent unit for conversion cost. .(5 Marks March ’22)
Answer 1
i. Calculation of equivalent units of production:
Equivalent Units
Input Details Units Output Units Material Conversion cost
Particulars
% Units % Units
Beginning WIP 22,400 From 22,400 50 11,200 70 15,680
beginning WIP
Unit 1,40,000 Completed 1,06,400 100 1,06,400 100 1,06,400
Introduced output
Closing W-I-P 33,600 80 26,880 30 10,080
Total 1,62,400 Total 1,62,400 1,44,480 1,32,160

ii. Calculation of cost per equivalent unit for conversion costs

Particulars
Direct labour ₹ 9,14,400
Factory overheads ₹ 19,55,800
Total ₹ 28,70,200
Equivalent units 1,32,160 units
Cost per equivalent unit ₹ 21.72

Question 2
What is inter-process profit? STATE its advantages and disadvantages. (4 Marks Mar’22)
Answer 2
Inter-Process Profit: To control cost and to measure performance, different processes within an

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Chapter 10 Process & Operation Costing
 M 10.2

organization are designated as separate profit centres. In this type of organizational structure, the
output of one process is transferred to the next process not at cost but at market value or cost plus a
percentage of profit. The difference between cost and the transfer price is known as inter - process
profits. The advantages and disadvantages of using inter-process profit, in the case of process type
industries are as follows:
Advantages:
1. Comparison between the cost of output and its market price at the stage of completion
is facilitated.
2. Each process is made to stand by itself as to the profitability.
Disadvantages:
1. The use of inter-process profits involves complication.
2. The system shows profits which are not realised because of stock not sold out.

Question 3
A Manufacturing unit manufactures a product which passes through three distinct Processes - A, B
and C. The following data is given:
Process A Process B Process C
Material consumed (in ₹) 36,400 31,500 28,000
Direct wages (in ₹) 56,000 49,000 42,000

 The total Production Overhead of ₹ 2,20,500 was recovered @ 150% of Direct wages.
 15,000 units at ₹ 28 each were introduced to Process 'A'.
 The output of each process passes to the next process and finally, 12,000 units were
transferred to Finished Stock Account from Process ' C'.
 No stock of materials or work in progress was left at the end. The following additional
information is given:
Process % of wastage to normal Value of Scrap per unit (₹)
input
A 6% 15.40
B ? 28.00
C 5% 14.00
You are required to:
(i) FIND OUT the percentage of wastage in process 'B', given that the output of Process 'B' is
transferred to Process 'C' at ₹ 56 per unit.
(ii) PREPARE Process accounts for all the three processes A, B and C. (10 Marks April ’22)
Answer 3
Dr. Process-A Account Cr.
Particulars Units (₹) Particulars Units (₹)
To Material 15,000 4,20,000 By Normal Loss A/c 900 13,860
introduced [(6% of 15,000
units)
x ₹ 15.40]
” Additional -- 36,400 ” Process-B A/c 14,100 5,82,540
material (₹ 41.31* × 14,100
units)
” Direct wages -- 56,000
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Chapter 10 Process & Operation Costing
 M 10.3

” Production OH -- 84,000
15,000 5,96,400 15,000 5,96,400
* Cost per unit of completed units
. , , . ,
= = = Rs. 41.31
,

15,000 units - 900 units

Dr. Process-B Account Cr.
Particulars Units (₹) Particulars Units (₹)
To Process-A A/c 14,100 5,82,540 By Normal Loss A/c 1,895 53,060
[(#13.44% of 14,100
units) x ₹ 28]

” Additional -- 31,500 ” Process-C A/c 12,205 6,83,480

material (₹ 56 × 12,205 units)

” Direct wages -- 49,000

” Production OH -- 73,500
14,100 7,36,540 14,100 7,36,540
#Calculation for % of wastage in process ‘B’:
Let’s consider number of units lost under process ‘B’ = b
Now, Total Cost - Realisable value from normal loss / Inputs units - Normal loss units = 56
.!, , ."
,
= Rs. 56

₹ 7,36,540 - ₹ 28b = ₹ 7,89,600 - ₹ 56b

28b = ₹ 53,060 => b = 1,895 units
% of wastage = 1,895 units /14,100 units = 13.44%
Dr. Process-C Account Cr.
Particulars Units (₹) Particulars Units (₹)
To Process-B A/c 12,205 6,83,480 By Normal Loss A/c 610 8,540
[(5% of 12,205
units)
x ₹ 14]
” Additional -- 28,000 ” Finished Stock 12,000 8,36,160
material A/c (₹ 69.68$ ×
12,000
” Direct wages -- 42,000 units)
” Production OH -- 63,000
” Abnormal gain 405 28,220
(₹ 69.68$ × 405
units)
12,610 8,44,700 12,610 8,44,700
Cost per unit of completed units
. , , . ,
= = ","
= Rs. 69.68

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Chapter 10 Process & Operation Costing
 M 10.4

Question 4
XYZ Ltd. is manufacturer of medicines. It carries on production operation in two processes. The
material first passes through Process I, where Medicine ' X' is produced. Following data are given for
the month October, 2022:
Opening work-in-progress quantity (in Liter) 12,000
(Material 100% and conversion 50% complete)
Material input quantity (in Liter) 60,000
Work completed quantity (in Liter) 40,000
Closing work-in-progress quantity (in Liter) 15,000
(Material 100% and conversion 80% complete)
Opening work-in-progress cost
Material cost (in ₹) 1,75,000
Processing cost (in ₹) 1,40,000
Material input cost (in ₹) 7,70,000
Processing cost (in ₹) 8,35,000
Normal process loss is 15% of material input. It has no realizable value.
Any quantity of Medicine 'X' can be sold for ₹ 42.50 per Liter. Alternatively, it can be transferred to
Process II for further processing and then sold as Medicine ' XYZ' for ₹ 50 per Liter. Further materials are
added in Process II, which yield 1.25 Liter of Medicine ' XYZ' for every Liter of Medicine 'X' of Process I.
Out of the 40,000 Liter of work completed in Process I, 10,000 Liter are sold as Medicine 'X' and 30,000
Liter are passed through Process II for sale as Medicine 'XYZ'.
The monthly costs incurred in Process II (other than the cost of Medicine ' X') are:
Input 30,000 Liter of Medicine 'X'
Materials Cost ₹ 2,75,000
Processing Costs ₹ 2,50,000

You are required to:

(i) PREPARE Statement of Equivalent production and determine the cost per Liter of Medicine 'X' in
Process I, using the weighted average cost method.
(ii) Company is mulling over the option to sell the 30,000 Liter of Medicine ' X' at Process-I without
processing it further in Process-II. WILL IT BE beneficial for the company over the current pattern of
processing 30,000 Liter in process-II?(10 Marks) (Sep’22)

Answer 4
(i) Process I Statement of Equivalent Production (Under Weighted Average Method)
Particulars Input Particulars Output Equivalent Production
units units (in Material Conversion
(in Liter) (%) Equivalen t (%) Equivalent
Liter) units (in units
Liter) (in Liter)
Opening WIP 12,000 Units introduced 40,000 100 40,000 100 40,000
and completed
New Material 60,000 Normal Loss (15% 9,000 - - - -
Introduced of 60,000 liters)
Closing WIP 15,000 100 15,000 80 12,000
Abnormal Loss
(Bal. fig.) 8,000 100 8,000 100 8,000
72,000 72,000 63,000 60,000
Statement of Cost for Each Element
Elements of Costs Material (₹) Conversion Cost (₹)

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Costs of Opening WIP 1,75,000 1,40,000

Cost of the Process (for the period) 7,70,000 8,35,000
Total Cost 9,45,000 9,75,000
Equivalent Units (in liter) 63,000 60,000
Cost Per equivalent Units (in liter) ₹ 15 ₹ 16.25
Therefore, Cost of Medicine ‘X’ is ₹ 31.25 per liter (₹ 15 + ₹ 16.25)
(ii) Statement showing comparative data to decide whether 30,000 Liters of Medicine ‘X' should be
further processed into 'XYZ'

Alternative 1 Alternative 2
Sell medicine 'X' Process further into
afterProcess I 'XYZ'
(₹) (₹)
Sales 12,75,000 18,75,000
(30,000 liters x ₹ 42.50) (37,500 liters x ₹ 50)
Less: Costs:
Process I - Costs (30,000 liters x ₹ 31.25)
9,37,500 9,37,500
Material in Process II - 2,75,000
Conversion cost in Process II - 2,50,000
Total Cost 9,37,500 14,62,500
Profit 3,37,500 4,12,500
Hence, company should process further as it will increase profit further by ₹ 75,000 (₹ 4,12,500 – ₹
3,37,500)

Question 5
The following data are available in respect of Process-I for January 2022:
(1) Opening stock of work in process: 600 units at a total cost of ₹ 8,40,000.
(2) Degree of completion of opening work in process:

Material 100%
Labour 60%
Overheads 60%
(3) Input of materials at a total cost of ₹1,10,40,000 for 9,200 units.
(4) Direct wages incurred ₹37,20,000
(5) Production overhead ₹17,26,000.
(6) Units scrapped 200 units. The stage of completion of these units was:

Materials 100%
Labour 80%
Overheads 80%
(7) Closing work in process; 700 units. The stage of completion of these units was:

Material 100%
Labour 70%
Overheads 70%
(8) 8,900 units were completed and transferred to the next process.
(9) Normal loss is 4% of the total input (opening stock plus units put in)
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 M 10.6

(10) Scrap value is ₹600 per

unit. You are required to:
(i) COMPUTE equivalent production,
(ii) CALCULATE the cost per equivalent unit for each element.
CALCULATE the cost of abnormal loss (or gain), closing work in process and the
units transferred to the next process using the FIFO method. (10 Marks) (Oct’22)
Answer 5
(i) Statement of Equivalent Production (FIFO Method)
Input Output Equivalent Production
Materials Labour Production
Overhead
Details Units Details Units % Units % Units % Units
Opening 600 From opening 600 - - 40 240 40 240
Stock stock
- From fresh 8,300 100 8,300 100 8,300 100 8,300
materials
Closing W-I-P 700 100 700 70 490 70 490
Fresh inputs 9,200 Normal loss 392 - - - - - -
9,992 9,000 9,030 9,030
Less: Abnormal
Gain (192) 100 (192) 100 (192) 100 (192)
9,800 9,800 8,808 8,838 8,838

(ii) Statement of Cost per equivalent units

Elements (Rs.) Cost (Rs.) Equivalent Cost per EU
units (EU) (Rs.)
Material Cost 1,10,40,000
Less: Scrap realisation 392 (2,35,200) 1,08,04,800 8,808 1,226.70
units @ Rs. 600/- p.u.
Labour cost 37,20,000 8,838 420.91
Production OH Cost 17,26,000 8,838 195.29
Total Cost 1,62,50,800 1,842.90

(iii) Cost of Abnormal Gain – 192 Units

(Rs.) (Rs.)
Material cost of 192 units @ Rs. 1,226.70 p.u. 2,35,526.40
Labour cost of 192 units @ Rs. 420.91 p.u. 80,814.72
Production OH cost of 192 units @ Rs. 195.29 p.u. 37,495.68 3,53,836.80
Cost of closing WIP – 700 Units
Material cost of 700 equivalent units @ Rs. 1,226.70 p.u. 8,58,690.00
Labour cost of 490 equivalent units @ Rs. 420.91 p.u. 2,06,245.90
Production OH cost of 490 equivalent @ Rs. 95,692.10 11,60,628.00
195.29 p.u.
Cost of 8,900 units transferred to next process
(i) Cost of opening W-I-P Stock b/f – 600 units 8,40,000.00
(ii) Cost incurred on opening W-I-P stock

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 M 10.7

Material cost —
Labour cost 240 equivalent units @ Rs. 420.91 p.u. 1,01,018.40
Production OH cost 240 equivalent units @ Rs197.29 p.u. 47,349.60
1,48,368.00
(i) Cost of 8,300 completed units
8,300 units @ Rs. 1,842.90 p.u. 1,52,96,070.00
Total cost [(i) + (ii) + (iii))] 1,62,84,438.00

Question 6
SM Pvt. Ltd. manufactures their products in three consecutive processes. The details are as
below:

Process X Process Y Process Z

Transferred to next Process 60% 50%
Transferred to warehouse for 40% 50% 100%
sale
In each process, there is a weight loss of 2% and scrap of 4% of input of each process. The realizable
value of scrap of each process is as below:
Process X @ ₹ 3 per
ton Process Y @ ₹ 5
per ton Process Z @
₹ 7 per ton.
The following particulars relate to January 2023:
Process X Process Y Process Z
Materials used (in Tons) 1,500 454 189
Rate per ton ₹ 21.5 ₹ 14 ₹ 12
Direct Wages ₹ 5,000 ₹ 3,260 ₹ 2,540
Direct Expenses ₹ 3,820 ₹ 2,775 ₹ 1,900
PREPARE Process Accounts- X, Y and Z & calculate cost per ton at each process. (10 Marks March ‘23)
Answer 6
Process X Account
Particulars Tones Amount Particulars Tones Amount
(₹) (₹)
To Materials 1,500 32,250 By Weight Loss 30 ---
To Wages 5,000 By Scrap 60 180
To Direct Expenses 3,820 By Process Y 846 24,534
By Warehouse 564 16,356
Total 1,500 41,070 Total 1,500 41,070

Cost per Ton = (41,070 - 180)/(1,500-30-60) = ₹ 29 per ton

Process Y account
Amount Amount
Particulars Tones Particulars Tones
(₹) (₹)
To Process X 846 24,534 By Weight Loss 26 ---

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To Materials 454 6,356 By Scrap 52 260

To Wages 3,260 By Process Z 611 18,332.5
To Direct Expenses 2,775 By Warehouse 611 18,332.5
Total 1300 36,925 Total 1300 36,925
Cost per Ton = (36,925-260)/(1,300-26-52)= ₹30 per ton

Process Z Accounts
Amount
Particulars Tones Particulars Tones Amount (₹)
(₹)
To Process Y 611 18332.5 By Weight Loss 16 ---
To Materials 189 2,268 By Scrap 32 224
To Wages 2,540 By Warehouse 752 24,817
To Direct Expenses 1,900
Total 800 25,041 Total 800 25041
Cost per Ton = (25,041-224)/(800-16-32) = ₹ 33 per ton

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Chapter 10 Process & Operation Costing
 M 11.1

Chapter 11
Joint Product and By Product
Question 1
Mili Ltd., a manufacturing company, produces two main products and a by-product out of a joint
process. The ratio of output quantities to input quantities of direct material used in the joint process
remains consistent on yearly basis. Company has employed the physical volume method to allocate
joint production costs to the main products. The net realizable value of the by-product is used to
reduce the joint production costs before the joint costs are allocated to the main products. During a
month, company incurred joint production costs of ₹ 15,00,000. The main products are not
marketable at the split off point and thus have to be processed further. Details of company’s
operation are given in the table below.
Particulars Product-Q Product-R By product
Monthly output in kg. 90,000 1,80,000 75,000
Selling price per kg. ₹ 50 ₹ 30 ₹5
Process costs ₹ 3,00,000 ₹ 4,50,000

FIND OUT the amount of joint product cost that Mili Ltd. would allocate to product-R by using the
physical volume method to allocate joint production costs? .(5 Marks March ’22)
Answer 1
Calculation of Net joint costs to be allocated:
Particulars Amount (₹)
Joint Costs 15,00,000
Less: Net Realizable value of by-product (75,000 × 5) 3,75,000
Net joint costs to be allocated 11,25,000
Therefore, amount of joint product cost that Mili Ltd. would allocate to the product-R by using the
physical volume method to allocate joint production costs:

= X Net joint costs to be allocated

, ,
= , ,
X 11,25,000 = Rs. 7,50,000

Question 2
Following information is available for A Ltd.:
Sales- P: 200 kg @ ₹ 120 per kg. Q: 240 kg @ ₹ 60 per kg.
Joint costs- Marginal cost ₹ 17,600 Fixed cost ₹ 15,600
You are required to FIND OUT the cost of joint products P and Q using contribution margin method.
(5 Marks April ’22)
Answer 2
The marginal cost (variable cost) of ₹ 17,600 is apportioned over the joint products P and Q in the ratio
of their physical quantity i.e. 200 : 240
Marginal cost for Product P : ₹ 17,600 × 200/440 = ₹ 8,000
Marginal cost for Product Q : ₹ 17,600 × 240/440 = ₹ 9,600
The fixed cost of ₹ 15,600 is apportioned over the joint products P and Q in the ratio of their
contribution margin i.e. 160 : 48 (Refer to working note)
Product P : ₹ 15,600 × 160/208 = ₹ 12,000 Product Q : ₹ 15,600 × 48/208 = ₹ 3,600 Working

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 M 11.2

Note:
Computation of contribution margin ratio
Products Sales revenue Marginal cost Contribution
(₹) (₹) (₹)
P 24,000 8,000 16,000
Q 14,400 9,600 4,800
(Refer to above)
Contribution ratio is 160 : 48

Question 3
A manufacturing process yields the following products out of the raw materials introduced in the
process:
Main Product X 60% of Raw Materials
By-Product Y 15% of Raw Materials
By Product Z 20% of Raw Materials
Wastage 5% of Raw Materials
Other information is as follows:
a. Total Cost: Raw Materials 1,000 units of ₹ 9,200; Labour ₹ 8,200; Overheads ₹ 12,000
b. One unit of product z requires ½ the raw materials required for one unit of product Y, one unit
of product X requires1½ times the raw materials required for product Y.
c. Product X required double the time needed for production of one unit of Y and one unit of Z.
d. Product Z requires ½ the time required for the production of one unit of product Y.
e. Overheads are to be apportioned in the ratio of 6:1:1.
You are required to CALCULATE the total and per unit of cost of each of the products. (Sep’22)

Answer 3
Statement of Distribution of Costs
Cost Elements Basis Total Main Product X By-Product Y By-Product Z
Cost (600 Units) (150 Units) (200 Units)
Total Per Total Per Total Per
Unit Unit Unit
Raw Materials 18:3:2 9,200 7,200 12 1,200 8 800 4
Labour 36:3:2 8,200 7,200 12 600 4 400 2
Overheads 6:1:1 12,000 9,000 15 1,500 10 1,500 7.50
Total 29,400 23,400 39 3,300 22 2,700 13.50

Working Notes:
1. Calculation of Units produced:

Main Product X 60% of Raw Materials 600 Units

By-Product Y 15% of Raw Materials 150 Units
By Product Z 20% of Raw Materials 200 Units
Wastage 5% of Raw Materials 50 Units 1000 Units
2. Cost Allocation Raw Materials
Let Product Z requires 1 unit of raw materials then, Product Y will require 2 units of raw materials and
Product X will require 3 units of raw materials.
Product X Y Z Individual Unit ratio
(a) 3 : 2 : 1
Units (b) 600 : 150 : 200

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 M 11.3

Ratio for Cost Allocation (a*b) 1800 : 300 : 200

Ratio 18 : 3 : 2
Labour:
Let Product Z requires 1 hour of Labour then, Product Y will require 2 hours of Labour and Product X
will require 6 hours of Labour.
Product X Y Z
Individual hour ratio (a) 6 : 2 : 1
Units (b) 600 150 200
Ratio for Cost Allocation (a*b) 3600 : 300 : 200
Ratio 36 : 3 : 2

Question 4

Nero Chemicals Ltd. operates a simple chemical process to convert material RV into three separate
items, such as T, U and V. All three end products are separated simultaneously at a single split-off
point, at which time Product T and Product U are ready for sale without additional costs. Product
V, however, is processed further before being sold. There is no available market price for V at the
split-off point.
The selling prices quoted here are expected to remain the same in the coming year. During
2021-22, the selling prices of the items and the total units sold were:
T – 1,000 tons sold for ₹ 6,000 per ton U – 2500
tons sold for ₹ 5,000 per ton V – 3000 tons sold
for ₹ 6,500 per ton
The total joint manufacturing costs for the year were ₹62,50,000. An additional ₹9,00,000 was spent
to finish product V.
There were no opening inventories of T, U or V at the end of the year. The following inventories of
complete units were on hand.
T - 900 tons U - 300 Tons
V - 125 tons
There was no opening or closing work-in-progress. Required:
COMPUTE the cost of inventories of T, U and V and cost of goods sold for year ended March
31,2022, using Net realizable value (NRV) method of joint cost allocation. (10 Marks March ‘23)
Answer 4
(i) (a) Statement of Joint Cost allocation of inventories of X, Y and Z

(By using Net Realisable Value Method)

Products Total
T U V
(₹) (₹) (₹) (₹)
Final sales value of 1,14,00,000 1,40,00,000 2,03,12,500 4,57,12,500
total production (1,900 × ₹ 6,000) (2,800 × ₹5,000) (3,125 × ₹6,500)
(Working Note 1)
Less: Additional cost -- -- (9,00,000) (9,00,000)
Net realisable value 1,14,00,000 1,40,00,000 1,94,12,500 4,48,12,500
(at split-off point)
Joint cost allocated 15,89,958 19,52,580 27,07,462 62,50,000

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 M 11.4

(Working Note 2)
Cost of goods sold as on March 31,
2022
(By using Net Realisable Value Method)
Products Total
T U V
(₹) (₹) (₹) (₹)
Allocated joint cost 15,89,958 19,52,580 27,07,462 62,50,000
Additional costs -- -- 9,00,000 9,00,000
Cost of goods 15,89,958 19,52,580 36,07,462 71,50,000
available for sale
(CGAS)
Less: Cost of ending 7,53,138 2,09,205 1,44,298 11,06,642
inventory
(Working Note 1) (CGAS×47.37%) (CGAS × 10.71%) (CGAS × 4%)
Cost of goods sold 8,36,820 17,43,375 34,63,163 60,43,358

Working Note:
1. Total production of three products for the year 2021-2022
Products Quantity Quantity of ending Total Ending inventory
sold in tones inventory in tons production percentage (%)
1 2 3 (4) = [(2) + (3)} (5) = (3)/ (4)
T 1000 900 1900 47.37
U 2500 300 2800 10.71
V 3000 125 3125 4.00
2. Joint cost apportioned to each product:

!
X Net Realisable value of each Product
" ,# ,
Total Cost of Product T = X1,14,00,000 = 15,89,958
$,$ , ,#
" ,# ,
Total Cost of Product U = $,$ , ,#
X1,40,00,000 = 19,52,580
" ,# ,
Total Cost of Product T = $,$ , ,#
X 1,94,12,500 = 27,07,462

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 price for Z at the split-off point.
The selling prices quoted here are expected to remain the same in the coming year. During 2022-23,
the selling prices of the items and the total amounts sold were:
X –186 tons sold for ₹3,000 per ton Y –527 tons sold for ₹2,250 per ton
Z –736 tons sold for ₹1,500 per ton

The total joint manufacturing costs for the year were ₹12,50,000.

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 M 11.5

An additional ₹6,20,000 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:
X 180 tons
Y 60 Tons
Z 25 tons
There was no opening or closing work-in-progress.
Required:
COMPUTE the cost of inventories of X, Y and Z and cost of goods sold for year ended March 31,
2023, using Net realizable value (NRV) method of joint cost allocation. [10 Marks April ‘23]
Answer 5
Statement of Joint Cost allocation of inventories of X, Y and Z
(By using Net Realisable Value Method)

Products
Total
X Y Z
( ₹) (₹) ( ₹) (₹)
Final sales value of total 10,98,000 13,20,750 11,41,500 35,60,250
production (Working Note 1) (366 × ₹3,000) (587 × ₹2,250) (761 × ₹1,500)
Less: Additional cost -- -- (6,20,000) (6,20,000)
Net realisable value 10,98,000 13,20,750 5,21,500 29,40,250
(at split-off point)
Joint cost allocated 4,66,797 5,61,496 2,21,707 12,50,000
(Working Note 2)
Cost of goods sold as on March 31, 2023
(By using Net Realisable Value Method)

Products
Total
X Y Z
( ₹) (₹) ( ₹) ( ₹)
Allocated joint cost 4,66,797 5,61,496 2,21,707 12,50,000
Additional costs -- -- 6,20,000 6,20,000
Cost of goods 4,66,797 5,61,496 8,41,707 18,70,000
available for sale
(CGAS)
Less: Cost of ending 2,29,571 57,385 27,692 3,14,648
inventory (CGAS×49.18%) (CGAS × 10.22%) (CGAS × 3.29%)
(Working Note 1)
Cost of goods sold 2,37,226 5,04,111 8,14,015 15,55,352

Working Notes
1. Total production of three products for the year 2022-2023
Products Quantity sold in Quantity of Total Ending
tones ending production inventory
inventory in percentage (%)
tons
(1) (2) (3) (4) = [(2) + (3)} (5) = (3)/

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 M 11.6

(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:

X Net Realizable Value of each Product

%
. ,# ,
Total Cost of Product X = . ',$ , #
X Rs. 10,98,000 = Rs. 4,66,797
. ,# ,
Total Cost of Product Y = X Rs. 13,20,750= Rs. 5,61,496
. ',$ , #
. ,# ,
Total Cost of Product Z = X Rs. 5,21,500 = Rs. 2,21,707
. ',$ , #

Vishesh Khatwani | 8555070670 Chapter 11 Joint Product And By Product

 12.1

Chapter 12
Service Costing
Question 1
YSPP Transport Company is running local city buses. It has a fleet of 20 Buses. Each bus can carry average
40 passengers per day and cover distance of 112.50 kms per day. Due to Covid-19 pandemic, the company
is running 90% buses on average.
Below are the operational expenses worked out for the month of November, 2021:
Original cost per bus ₹ 48,00,000
Insurance for 20 buses ₹ 63,36,000 per annum
Diesel & Oil ₹ 10 per km.
Salary of drivers per bus ₹ 25,000
Salary of cleaners per bus ₹ 15,000
Tyres and tubes ₹ 12,58,040
Lubricants ₹ 10,70,000
Repairs ₹ 24,70,000
Road tax per bus ₹ 1,50,000
Administrative overhead ₹ 50,88,000 per annum
Depreciation on buses is computed @ 20% using Straight Line Method. Passenger tax is 15% on total
taking. Based on abovementioned information, you are required to COMPUTE the fare to be charged
from each passenger per kilometer assuming 25% margin on total taking (Total receipts from
passengers.) (10 Marks March ‘22)
Answer 1
Operating Cost Statement
Particulars Total Cost Per
Month (in ₹)
Fixed Charges:
Salary of Drivers (₹ 25,000 × 20 buses) 5,00,000
Salary of Cleaners (₹ 15,000 × 20 buses) 3,00,000
Road Tax (₹ 1,50,000 × 20 buses) 30,00,000
Insurance (₹ 63,36,000/12 months) 5,28,000
Depreciation 16,00,000
48,00,000 20% 20
12 ℎ

Administrative Overheads (₹ 50,88,000/12 months) 4,24,000

Total (A) 63,52,000
Variable Charges:
Diesel (60,750 km. × ₹10) 6,07,500
Tyres and Tubes 12,58,040
Lubricants 10,70,000
Repairs 24,70,000
Total (B) 54,05,540
Total Operating Cost (A+B) 1,17,57,540
Add: Passenger tax (Refer to WN-1) 29,39,385
Add: Profit (Refer to WN-1) 48,98,975
Total takings (C) 1,95,95,900
No. of passengers kms.
Vishesh Khatwani | 8555070670 in a month (D) 24,30,000
Chapter 12 Service Costing
 12.2

Cost per passenger km. (C/D) 8.06

Working Notes:
1. Let total takings be X then Passenger tax and profit will be as follows: X =₹
1,17,57,540 + 0.15X + 0.25X
X – 0.40X = ₹ 1,17,57,540

, , ,
X = .
= ₹ 1,95,95,900

Passenger tax = ₹ 1,95,95,900 × 0.15 = ₹ 29,39,385

Profit = ₹ 1,95,95,900 × 0.25 = ₹ 48,98,975
2. Total Kilometres to run during the month of November, 2021
= (112.50 km. × 30 days × 20 Buses) x 90% = 60,750 Kilometres
3. Total passenger Kilometres during the month of November, 2021
= 60,750 km. × 40 passengers = 24,30,000 Passenger- km.

Question 2
STATE the unit of cost for the following service industries:
(i) Electricity Supply service
(ii) Hospital
(iii) Cinema
(iv) Hotels (4 Marks April ’22)
Answer 2
S. Service industry Unit of cost
No.
(i) Electricity Supply service Kilowatt- hour (kWh)
(ii) Hospital Patient per day, room per day or per bed, per operation
etc.
(iii) Cinema Per ticket.
(iv) Hotels Guest Days or Room Days

Question 3
Answer the following:
A company has the following three alternative proposals for conveyance facilities for its sales personnel
who has to do substantial traveling, approximately 20,000 kilometers yearly:
(i) Purchasing and maintaining its own fleet of cars. The average cost of a car is ₹ 7,20,000
(ii) Allow the Executive to use their own car and reimburse the expenses @ ₹ 12 per kilometer and also
bear insurance costs.
(iii) Hire cars from an agency at ₹ 2,16,000 per year per car. The company will have to bear costs of petrol,
taxes and tyres.
The following further details are available:
Petrol ₹ 7.20 per km.
Tyre ₹ 0.144 per km.
Taxes ₹ 960 per car per annum
Repairs and maintenance ₹ 0.24 per km.
Insurance ₹ 1,440 per car per annum
Life of the car 5 years with annual mileage of 20,000 km.
Resale value ₹ 96,000 at the end of the fifth year. WORK OUT the relative costs of three proposals
and rank them. (Sep’22)
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Chapter 12 Service Costing
 12.3

Answer 3
Calculation of relative costs of three proposals and their ranking
I- Use of II- Use of III- Use of
company’s car own car hired car
per km. (₹) per km. (₹) per km. (₹)
Reimbursement -- 12.00 --
Hire Charges -- -- 10.80*
Fixed cost:
Insurance 0.072 0.072 --
Taxes 0.048 -- 0.048
Depreciation 6.24# -- --
Running and Maintenance Cost:
Petrol 7.20 -- 7.20
Repairs and Maintenance 0.24 -- --
Tyre 0.144 -- 0.144
Total cost per km. 13.944 12.072 18.192
Cost for 20,000 km. 2,78,880 2,41,440 3,63,840
Ranking of proposals II I III
*(₹ 2,16,000 ÷ 20,000 km.) = ₹ 10.80
#[(₹ 7,20,000 - ₹ 96,000) ÷ 5 years] ÷ 20,000 km. = ₹ 6.24
The Second alternative i.e., use of own car by the executive and reimbursement of expenses by the
company is the best alternative from company’s point of view.

Question 4
Answer any four of the following: (5 Marks) (Sep’22)
LIST OUT cost unit examples of following service industry:
Hospital, Electricity Supply service, Cinema, Canteen, Hotels
Answer 4
Service industry Unit of cost (examples)
Hospital Patient per day, room per day or per bed, per operation etc.
Electricity Supply service Kilowatt- hour (kWh)
Cinema Per ticket
Canteen Per item, per meal etc.
Hotels Guest Days or Room Days

Question 5
Royal transport company has been given a 50-kilometre-long route to run 6 buses. The cost of each bus
is ₹ 75,00,000. The buses will make 3 round trips per day carrying on an average 75 percent passengers
of their seating capacity. The seating capacity of each bus is 48 passengers. The buses will run on an
average 25 days in a month. The other information for the year 2021-22 is given below:
Garage Rent ₹ 60,000 per month
Annual Repairs & Maintenance ₹ 2,40,000 each bus
Salaries of 6 drivers ₹ 20,000 each per month
Wages of 6 conductors ₹ 16,000 each per month
Wages of 6 cleaners ₹ 10,000 each per month
Manager’s salary ₹ 50,000 per month
Road Tax, Permit fee, etc. ₹ 60,000 for a quarter
Office expenses ₹ 25,000 per month
Cost of diesel per litre ₹92
Kilometer run per litre for each bus 6 kilometres
Annual Depreciation 20% of cost
Vishesh Khatwani | 8555070670
Chapter 12 Service Costing
 12.4

Annual Insurance 4% of cost

Engine oils & lubricants (for 1,000 kilometres) ₹ 20,000
You are required to calculate the bus fare to be charged from each passenger per kilometer (upto four
decimal points), if the company wants to earn profit of 33 percent on taking (total receipts from
passengers). (10 Marks) (Oct’22)
Answer 5
Working Notes:
1. Total Kilometres to be run during the year 2021-22
= 50 km.× 2 sides × 3 trips × 25 days × 12 months × 6 buses = 5,40,000 Kilometres
2. Total passenger Kilometres
= 5,40,000 km. × 48 passengers × 75% = 1,94,40,000 Passenger- km.
Operating Cost Sheet for the year 2021- 22
Particulars Total Cost (Rs.)
A. Fixed Charges:
Garage rent (Rs. 60,000 × 12 months) 7,20,000
Salary of drivers (Rs. 20,000 × 6 drivers ×12 months) 14,40,000
Wages of Conductors (Rs. 16,000 × 6 conductors × 12 months) 11,52,000
Wages of Cleaners (Rs. 10,000 × 6 cleaners × 12 months) 7,20,000
Manager’s salary (Rs.50,000 × 12 months) 6,00,000
Road Tax, Permit fee, etc. (Rs. 60,000 × 4 quarters) 2,40,000
Office expenses (Rs. 25,000 × 12 months) 3,00,000
Depreciation (Rs. 75,00,000 × 6 buses × 20%) 90,00,000
Insurance (Rs. 75,00,000 × 6 buses × 4%) 18,00,000
Total (A) 1,59,72,000
B. Variable Charges:
Repairs and Maintenance (Rs. 2,40,000 × 6 buses) 14,40,000
Diesel {(5,40,000 km. ÷ 6 km.) × Rs.92} 82,80,000
Engine oils & lubricants {(Rs. 20,000. ÷ 1000 km.) × 5,40,000 km} 1,08,00,000
Total (B) 2,05,20,000
Total Cost (A+B) 3,64,92,000
Add: 33 1/3 % Profit on takings or 50% on cost 1,82,46,000
C. Total Takings (Total bus fare collection) 5,47,38,000
D. Total Passenger-km. (Working Note 2) 1,94,40,000
E. Bus fare to be charged from each passenger per km. (C ÷ D) 2.82

Question 6
Secure lifeline Ltd. operates in life insurance business. It launched a new insurance policy 'Total
secure'. The company has incurred the following expenditures during the last year for the policy:
₹
Cost of marketing of the policy 74,58,000
Sales support expenses 18,89,250
Policy issuance cost 16,59,735
Claims management cost 2,07,240
Policy development cost 18,56,250
Postage and logistics 16,91,250
Facilities cost 25,14,600
Policy servicing cost 58,09,155
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Chapter 12 Service Costing
 12.5

Employees cost 9,24,000

IT cost 1,22,62,800
Office administration cost 26,73,660
Number of policies sold- 844. Total insured value of policies - ₹ 1,640 crore.
Required:
(i) CALCULATE total cost for Professionals Protection Plus’ policy segregating the costs into four
main activities namely (a) Marketing and Sales support, (b) Operations, (c) IT and (d) Support
functions.
(ii) CALCULATE cost per policy.
(iii) CALCULATE cost per rupee of insured value. (5 Marks March ’23)
Answer 6
(i) Calculation of total cost for ‘Professionals Protection Plus’ policy
Particulars Amount (₹) Amount (₹)
1 Marketing and Sales support:
- Policy development cost 18,56,250
- Cost of marketing 74,58,000
- Sales support expenses 18,89,250 1,12,03,500
2 Operations:
- Policy issuance cost 16,59,735
- Policy servicing cost 58,09,155
- Claims management cost 2,07,240 76,76,130
3 IT Cost 1,22,62,800
4 Support functions
- Postage and logistics 16,91,250
- Facilities cost 25,14,600
- Employees cost 9,24,000
- Office administration cost 26,73,660 78,03,510
Total Cost 3,89,45,940
!" # $ /,01, ,1
(ii) Calculation of Cost per policy %&'()* + , "-.-)$
= 0
= Rs. 46,144.48

!" # $ /,01, ,1
(iii) Cost per rupee of insured value !" -2$&*)3 4!"&)
= , .* *)
= Rs. 0.0024

Question 7
Arnav LMV Pvt. Ltd, operates cab/ car rental service in Delhi/NCR. It provides its service to the offices
of Noida, Gurugram and Faridabad. At present it operates CNG fueled cars but it is also considering
to upgrade these into Electric vehicle (EV). The following details related with the owning of CNG &
EV propelled cars are as tabulated below:
Particulars CNG Car EV Car
Car purchase price (₹) 9,20,000 15,20,000
Govt. subsidy on purchase of car (₹) -- 1,50,000
Life of the car 15 years 10 years
Residual value (₹) 95,000 1,70,000
Mileage 20 km/kg 240 km per charge
Electricity consumption per full charge -- 30 Kwh
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CNG cost per Kg (₹) 90 --

Power cost per Kwh (₹) -- 7.60
Annual Maintenance cost (₹) 8,000 5,200
Annual insurance cost (₹) 7,600 14,600
Tyre replacement cost in every 5 -year (₹) 16,000 16,000
Battery replacement cost in every 8- year (₹) 12,000 5,40,000
Apart from the above, the following are the additional information:
Particulars
Average distance covered by a car in a month 1,500 km
Driver’s salary (₹) 20,000 p.m
Garage rent per car (₹) 4,500 p.m
Share of Office & Administration cost per car (₹) 1,500 p.m

Required:
CALCULATE the operating cost of vehicle per month per car for both CNG & EV options. [10 Marks
April ‘23]
Answer 7
Working Notes:
1. Calculation of Depreciation per month:
Particulars CNG Car EV Car
A Car purchase price (₹) 9,20,000 15,20,000
B Less: Govt. subsidy (₹) -- (1,50,000)
C Less: Residual value (₹) (95,000) (1,70,000)
D Depreciable value of car (₹) [A-B-C] 8,25,000 12,00,000
E Life of the car 15 years 10 years
F Annual depreciation (₹) [D÷E] 55,000 1,20,000
G Depreciation per month (₹) [F÷12] 4,583.33 10,000

2. Fuel/ Electricity consumption cost per month:

Particulars CNG Car EV Car
A Average distance covered in a month (KM) 1,500 1,500
B Mileage (KM) 20 240
C Qty. of CNG/ Full charge required [A÷B] 75 kg. 6.25
D Electricity Consumption [C×30kwh] - 187.5
E Cost of CNG per kg (₹) 90 -
F Power cost per Kwh (₹) - 7.60
G CNG Cost per month (₹) [C×E] 6,750 -
H Power cost per month (₹) [D×F] - 1,425
3. Amortised cost of Tyre replacement:
Particulars CNG Car EV Car
A Life of vehicle 15 years 10 years
B Replacement interval 5 years 5 years
C No. of time replacement required 2 times 1 time
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Chapter 12 Service Costing
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D Cost of tyres for each replacement (₹) 16,000 16,000

E Total replacement cost (₹) [C×D] 32,000 16,000
F Amortised cost per year (₹) [E÷A] 2,133.33 1,60
0
E Cost per month (₹) [F÷12] 177.78 133.33
4. Amortised cost of Battery replacement:
Particulars CNG Car EV Car
A Life of vehicle 15 years 10 years
B Replacement interval 8 years 8 years
C No. of time replacement required 1 time 1 time
D Cost of battery for each replacement (₹) 12,000 5,40,000
E Total replacement cost (₹) [C×D] 12,000 5,40,000
F Amortised cost per year (₹) [E÷A] 800 54,00
0
E Cost per month (₹) [F÷12] 66.67 4,500
Calculation of Operating cost per month:
Particulars CNG Car (₹) EV Car (₹)
A Running cost:
Fuel cost/ Power consumption cost [Refer WN-2] 6,750 1,425
B Maintenance cost:
Annual Maintenance cost [Annual cost ÷12] 666.67 433.33
Annual Insurance cost [Annual cost ÷12] 633.33 1,216.67
Amortised cost of Tyre replacement [Refer WN- 177.78 133.33
3]
Amortised cost of Battery replacement [Refer 66.67 4,500
WN-4]
1,544.45 6,283.33
C Fixed cost:
Depreciation [Refer WN-1] 4,583.33 10,000
Driver’s salary 20,000 20,000
Garage rent 4,500 4,500
Share of Office & Administration cost 1,500 1,500
30,583.33 36,000
D Operating cost per month [A+B+C] 38,877.78 43,708.33

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Chapter 12 Service Costing
 M 13.1

Chapter 13
Standard Costing
Question 1
Following data is extracted from the books of XYZ Ltd. for the month of January, 2020:
(i) Estimation-
Particulars Quantity (kg.) Price (₹) Amount (₹)
Material-A 800 ? --
Material-B 600 30.00 18,000
--
Normal loss was expected to be 10% of total input materials.
(ii) Actuals- 1480 kg of output produced.
Particulars Quantity (kg.) Price (₹) Amount (₹)
Material-A 900 ? --
Material-B ? 32.50 --
59,825

(iii) Other Information-

Material Cost Variance = ₹ 3,625 (F) Material
Price Variance = ₹ 175 (F)
You are required to CALCULATE:
(i) Standard Price of Material-A;
(ii) Actual Quantity of Material-B;
(iii) Actual Price of Material-A;
(iv) Revised standard quantity of Material-A and Material-B; and
(v) Material Mix Variance; (10 Marks, Oct.’20 & March ‘23)
Answer 1
(i) Material Cost Variance (A + B) = {(SQ × SP) – (AQ × AP)}

₹ 3,625 = (SQ × SP) – ₹ 59,825

(SQ × SP) = ₹ 63,450
(SQA × SPA) + (SQB × SPB) = ₹ 63,450 (940 kg × SPA) + (705 kg × ₹ 30) = ₹ 63,450
(940 kg × SPA) + ₹ 21,150 = ₹ 63,450
(940 kg × SPA) = ₹ 42,300
SPA = ₹ 42,300 / 940kg
Standard Price of Material-A = ₹ 45
Working Note:
SQ i.e. quantity of inputs to be used to produce actual output
,
= %
= 1,645kg

SQA = 1,645 . = 940kg

SQB = 1,645 . = 705kg

(ii) Material Price Variance (A + B) = {(AQ × SP) – (AQ × AP)}

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Chapter 13 Standard Costing
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₹ 175 = (AQ × SP) – ₹ 59,825

(AQ × SP) = ₹ 60,000 (AQA
× SPA) + (AQB × SPB) = ₹ 60,000
(900 kg × ₹ 45 (from (i) above)) + (AQB × ₹30) = ₹ 60,000
₹ 40,500 + (AQB × ₹ 30) = ₹ 60,000
(AQB × ₹ 30) = ₹ 19,500
AQB = 19,500 / 30 = 650 kg
Actual Quantity of Material B = 650 kg.
(iii) (AQ × AP) = ₹ 59,825
(AQA × APA) + (AQB × APB) = ₹ 59,825
(900 kg × APA) + (650 kg (from (ii) above) × ₹ 32.5) = ₹ 59,825 (900 kg × APA) + ₹ 21,125
= ₹ 59,825
(900 kg × APA) = ₹ 38,700
APA = 38,700 / 900 = 43
Actual Price of Material-A = ₹ 43

(iv) Total Actual Quantity of Material-A and Material-B

= AQA + AQB

= 900 kg + 650 kg (from (ii) above)

= 1,550 kg
Now,

Revised SQA = 800kg /800+600 X 1,550kg. = 886kg.

Revised SQB = 600kg/(800+600)X 1,550kg. = 664kg.

(v) Material Mix Variance (A + B) = {(RSQ × SP) – (AQ × SP)}

= {(RSQA × SPA) + (RSQB × SPB) – 60,000}
= (886 kg (from (iv) above) × ₹ 45 (from (i) above))
+ (664 kg (from (iv) above) × ₹ 30) - ₹60,000
= (39,870 + 19,920) – 60,000 = ₹ 210 (A)

Question 2
CALCULATE (i) Efficiency ratio (ii) Activity Ratio (iii) Capacity Ratio. The relevant data is as below:
Budgeted Production 1,44,000 units Standard Hours per unit 12 Actual Production 1,20,000 units
Actual Working Hours 12,00,000 (5 Marks March ’23 ,Aug ’18 & Oct ‘19)
Answer 2
! "# ! $
(i) Efficiency Ratio = %! " & '(
X 100
),*+,+++ $ ( , )* (.
= )*,++,+++ (,
X 100 = 120%

! "# ! $
(ii) Activity Ratio = - ./ / 0 (
X 100
)1,1+,++++
= ),11,+++ 2 $ ( , )* (
X 100 = 83.34%
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Chapter 13 Standard Costing
 M 13.3

%! "0 ( & '/

(iii) Capacity Ratio = - ./ / 0 (
X 100
)*,++,++++
= X 100 = 69.45%
),11,+++ 2 $ ( , )* (

Question 3
Rounak Minerals Ltd. operates in iron ore mining through open cast mining method. Explosives and
detonators are used for excavation of iron ores from the mines. The following are the details of
standard quantity of explosives materials used for mining:
Particulars Rate (₹) Standard Qty. for Standard Qty. for
Iron ore Overburden (OB)
SME 40.00 per kg. 2.4 kg per tonne 1.9 kg per cubic-
meter
Detonators 20.00 per piece 2 pcs per tonne 2 pcs per cubic-meter

The standard stripping ratio is 3:1 (means 3 cubic- meter of overburden soil to be removed to get one
tonne of iron ore). During the month of December 2021, the company produced 20,000 tonnes of iron
ore and removed 58,000 cubic- meter of OB. The quantity of explosive materials used and paid for
the month is as below:
Material Quantity Amount (₹)
SME 1,67,200 kg. 63,53,600
Detonators 1,18,400 pcs 24,27,200

You are required to COMPUTE:

(i) Material price variance
(ii) Material quantity variance
(iii) Material cost variance. (10 Marks April ’22)
Answer 3
Workings:
1. Calculation of Standard Qty. of Explosives and Detonators for actual output:
Particulars Iron ore Overburden (OB) Total
SME:
A Actual Output 20,000 tonne 58,000 M3
B Standard Qty per unit 2.4 kg./tonne 1.9 kg./M3
C Standard Qty. for actual 48,000 kg. 1,10,200 kg. 1,58,200 kg.
production [A×B]
Detonators:
D Standard Qty per unit 2 pcs/ tonne 2 pcs/ M3
E Standard Qty. for actual 40,000 pcs. 1,16,000 pcs 1,56,000 pcs
production [A×D]

2. Calculation of Actual Price per unit of materials:

Material Quantity [A] Amount (₹) Rate (₹) [C = B÷A]
[B]
SME 1,67,200 kg. 63,53,600 38.00

Detonators 1,18,400 pcs 24,27,200 20.50

(i) Computation of material price variance:

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Chapter 13 Standard Costing
 M 13.4

Material Price Variance = Actual Qty. × (Std. Price - Actual Price)

SME = 1,67,200 kg. × (₹40 – ₹38) = ₹ 3,34,400 (F)
Detonators = 1,18,400 pcs × (₹20 – ₹20.5) = ₹ 59,200 (A)
Total = ₹ 2,75,200 (F)
(ii) Computation of material quantity variance:
Material Qty. Variance = Std. Price × (Std. Qty for actual output - Actual Qty.)

SME = ₹40 × (1,58,200 kg. - 1,67,200 kg.) = ₹ 3,60,000 (A)

Detonators = ₹20 × (1,56,000 pcs -1,18,400 pcs) = ₹ 7,52,000 (F)
Total = ₹ 3,92,000 (F)
(iii) Computation of material cost variance:
Material cost variance = Std. cost – Actual Cost
Or, (Std. Price × Std. Qty) – (Actual Price × Actual Qty.)
SME = (₹40 × 1,58,200 kg) – (₹38 × 1,67,200 kg.)
= ₹63,28,000 – ₹63,53,600 = ₹ 25,600 (A)
Detonators = (₹20 × 1,56,000 pcs) – (₹20.50 × 1,18,400 pcs)
= ₹31,20,000 – ₹24,27,200 = ₹ 6,92,800 (F)
Total = ₹ 6,67,200 (F)

Question 4
Following are the details given:
Budgeted Days 25
Budgeted Fixed Overheads 1,00,000
Budgeted Production 800 units per day
Actual Production 21,000 units
Fixed Overheads are absorbed @ ₹ 10 per
hour.
Fixed overheads efficiency variance 10,000A
Fixed overheads calendar variance 8,000F
Fixed overheads cost variance 15,000A
You are required to CALCULATE:

(a) Actual Fixed Overheads

(b) Actual Days

(c) Actual Hours

(d) Fixed overheads Expenditure variance

(e) Fixed overheads volume variance

(f) Fixed overheads capacity variance (10 Marks March ‘22)

Answer 4
(i) Fixed Overhead Cost Variance = (Std Fixed Overheads – Actual Fixed Overheads)
= ( 1,00,000 / 20,000 X 21,000 units – Actual Fixed Overheads) = 15,000A
= (1,05,000 - Actual Fixed Overheads) = 15,000A
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Chapter 13 Standard Costing
 M 13.5

=> Actual Fixed Overheads = 1,20,000

(ii) Fixed Overhead Calendar Variance=(Actual Days – Budgeted Days) x Budgeted rate per day
, ,
= (Actual Days -25)X 34
= 8,000 F
= (Actual Days -25) =2

=> Actual Days = 27

(iii) Fixed Overhead Efficiency Variance =(Standard Hours for Actual Production – Actual Hours) x
Budgeted rate per hour
,
= 53 ,
6 21,000 9 :;<=>? @A=BCD X 10 = 10,000A

= (10,500 – Actual Hours) = -1,000

=> Actual Hours = 11,500
(iv) Fixed overheads Expenditure variance=(Budgeted Fixed Overheads – Actual Fixed Overheads)
= (1,00,000 – 1,20,000) = 20,000A

(v) Fixed overheads volume variance = (Budgeted units – Actual Units ) x Budgeted Rate per unit
, ,
= (20,000 – 21,000) X 3 , = 5,000F
(vi) Fixed overheads capacity variance = (Budgeted Hours for Actual Days – Actual Hours)
x Budgeted Rate per Hour
,
=5 34
6 27 9 11,500D X 10 = 7,000F

Question 5
The details regarding a product manufactured by the company for the last one week are as follows:
Standard cost (per unit)
Direct materials 10 units @ ₹ 22.50 ₹ 225
Direct wages 5 hours @ ₹ 120 ₹ 600
Total: ₹ 825
Actual (for whole activity):
Direct materials ₹ 96,525
Direct wages ₹ 2,44,860
Analysis of variances:
Direct materials:
Price ₹ 8,775 (Adverse)
Usage ₹ 5,625 (Favourable)
Direct wages (labour):
Efficiency ₹ 5,400 (Adverse)
You are required to CALCULATE:
(i) Material Cost variance
(ii) Actual output units
(iii) Actual price of material per unit
(iv) Actual Wages rate per labour hour
(v) Labour rate variance
(vi) Labour Cost variance (10 Marks) (Sep’22)
Answer 5
(i) Material Cost Variance = Material Price Variance+ Material Usage Variance
= ₹ 8,775 A + ₹ 5,625 F= ₹ 3,150 Adverse
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Chapter 13 Standard Costing
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(ii) Actual output units

Let x be the actual quantity of output
Then Standard Quantity of input for actual output ‘x’
SQ = 10x
Material cost variance = (SQ x SP) - (AQ x AP)
-3,150 = (10x x 22.50) - ₹ 96,525
-3,150 = 225x - ₹ 96,525
225x = 96,525 – 3,150
= ₹ 93,375
X = 93,375/225 = 415 Units

(iii) Actual Price of Material per unit

Material Usage variance = (SQ - AQ) x SP 5,625 = (10x - AQ) x ₹ 22.50
5,625 = (10 x 415 units - AQ) x ₹ 22.50
5,625/22.50 = 4,150 - AQ
AQ = 4,150 - 250 = 3,900 units
Now, AQ x AP = ₹ 96,525 (given) AP = ₹ 96,525/AQ
= ₹ 96,525/3,900 units = ₹ 24.75
(iv) Actual wages rate per labour hour
Labour efficiency variance = 5,400 Adverse (given)
Standard rate per hour (Standard time – Actual time) = -5,400
₹ 120 [(Actual output units x Number of hours per output) – Actual time] = -5,400
₹ 120 [(415 units x 5 hrs) – Actual time] = -5,400 2,075 hrs – Actual time
= -5,400/120
Actual time = 2,075 + 45
= 2,120 hrs
Now Direct wages = ₹ 2,44,860 (given) Actual time x Actual rate per
hour
= ₹ 2,44,860
Actual rate per hour = ₹ 2,44,860 / 2,120 hrs
= ₹ 115.50
(v) Labour rate variance
= Actual time (Standard Rate – Actual Rate)
= 2,120 hrs (₹ 120 - ₹ 115.50)
= 2,120 hrs x ₹ 4.50 = 9,540 Favourable
(vi) Labour Cost variance
= Labour rate variance+ Labour efficiency variance
= 9,540 F +
Vishesh Khatwani | 8555070670 5,400 A = 4,140 Favourable
Chapter 13 Standard Costing
 M 13.7

Question 6
The following information is available from the cost records of a company for the month of July, 2022:
(1) Material purchased 22,000 pieces ₹ 9,00,000
(2) Material consumed 21,000 pieces
(3) Actual wages paid for 5,150 hours ₹ 2,57,500
(4) Fixed Factory overhead incurred ₹ 4,60,000
(5) Fixed Factory overhead budgeted ₹ 4,20,000
(6) Units produced 1,900
(7) Standard rates and prices are:
Direct material ₹ 45 per piece
Standard input 10 pieces per unit
Direct labour rate ₹ 60 per hour
Standard requirement 2.5 hours per unit
Overheads ₹ 80 per labour hour
You are required to CALCULATE the following variances:
(i) Material price variance
(ii) Material usage variance
(iii) Labour rate variance
(iv) Labour efficiency variance
(v) Fixed overhead expenditure variance
(vi) Fixed overhead efficiency variance

Fixed overhead capacity variance (10 Marks) (Oct’22)

Answer 6
(i) Material price variance (on the basis of Single plan):
= Actual Quantity PQRSTUVWX (Std. Price – Actual Price)
=22,000 pcs
ZV. , ,
(YC. 45 − [\.33, ]^\= Rs.90,000* (Favourable)

OR
Material price variance (on the basis of Partial plan):
= Actual Quantity S_`VQaWX (Std. Price – Actual Price)
= 21,000 pcs (Rs. 45 − Rs.9,00,000 = Rs.85,909* (Favourable)
)
(*Figure may slightly differ due to rounding off the actual price per unit)

(ii) Material usage variance:

= Std. price per piece (Std. Quantity – Actual Quantity S_`VQaWX
= Rs.45 (1,900 units × 10 – 21,000) = Rs. 90,000 (Adverse)

(iii) Labour rate variance:

= Actual hours paid (Std. rate – Actual rate)
ZV.3,4b,4
= 5,150 hours (Rs. 60 − 4, 4 cdef\ = Rs. 51,500 (Favourable)

(iv) Labour efficiency variance:

= Std. rate per hour (Std. hours – Actual Quantity g_RhWX
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Chapter 13 Standard Costing
 M 13.8

= Rs.60 (1,900 units × 2.5 hours – 5,150 hours) = Rs. 24,000 (Adverse)

(v) Fixed overhead expenditure variance:

= Budgeted Overhead – Actual Overhead
= Rs. 4,20,000 – Rs. 4,60,000 = Rs. 40,000 (Adverse)

(vi) Fixed overhead efficiency variance:

= Std. rate (Std. hours - Actual hours worked)
= Rs.80 (1,900 units × 2.5 hours - 5,150 hours) = Rs. 32,000 (Adverse)
Or,
Fixed overhead efficiency variance on basis of units
= Std. rate per unit (Actual output – Standard output for actual hours)
= Rs.200 (1,900 units - 5,150 / 2.5 hours) = Rs. 32,000 (Adverse)

(vii) Fixed overhead capacity variance:

= Std. rate (Actual hours worked – Budgeted hours)
[\.. ,3 ,
= Rs. 80 (5,150hours − [\. = Rs. 8,000 (Adverse)

Or,
Fixed overhead capacity variances on basis of units
= Std. rate per unit (Standard output for actual hours – Budgeted output)
= Rs.200 (2,060 units - 4,20,000 / 200) = Rs. 8,000 (Adverse)

Vishesh Khatwani | 8555070670

Chapter 13 Standard Costing
 M 14.1

Chapter 14
Marginal Costing
Question 1
NG Ltd. has an annual fixed cost of ₹ 98,50,000. In the year 2022-23, sales amounted to ₹7,80,60,000
as compared to ₹5,93,10,000 in the preceding year 2021-22. Profit in the year 2022-23 is ₹37,50,000
more than that in 2021-22.

Required:
(i) CALCULATE Break-even sales of the company.
(ii) DETERMINE profit/ loss on a forecasted sales volume of ₹8,20,00,000.
(iii) If there is a reduction in selling price by 10% in the financial year 2022-23 and
company desires to earn the same amount of profit as in 2021-22, COMPUTE the
required sales amount? (5 Marks April ‘23 & March ‘19)
Answer 1

(i) Break-even Sales =

. , ,
P/v Ratio = X 100 or, X 100
. , , , . , ,! ,
. , ,
Or, .!, , ,
X 100 or,20%
. , ,
Break-even Sales = " %
= Rs. 4,92,50,000

(ii) Profit/ loss = Contribution – Fixed Cost

= ₹8,20,00,000 × 20% - ₹98,50,000
= ₹1,64,00,000 – ₹98,50,000 = ₹65,50,000
(iii) To earn same amount of profit in 2022-23 as it was in 2021-22, the company has to earn the
same amount of contribution as it had earned in 2021-22.
Sales – Variable cost = Contribution equal to 2021-22 contribution

Contribution in 2021-22 = Sales in 2021-22 × P/V Ratio in 2021-22

= ₹5,93,10,000 × 20% = ₹1,18,62,000
Let the number of units to be sold in 2022-23 = X
Sales in 2022-23 – Variable cost in 2022-23 = Desired
Contribution 90 X – 80 X = ₹1,18,62,000
Or, 10 X = 1,18,62,000
Or, X = 11,86,200 units
Therefore, Sales amount required to earn a profit equal to 2021-22 profit
= ₹ 90 × 11,86,200 units = ₹ 10,67,58,000

Question 2
At budget activity of 80% of total capacity, a company earns a P/V ratio of 30% and a profit of 15% of
total sales. Due to covid pandemic resulting in poor demand, the company has to reduce its selling price
by 10%. The company was able to achieve a production and sales volume for the year equivalent to 50%
of total capacity. The sales value at this level was ₹ 27,00,000 at a reduced price of ₹ 18 per unit. Due to
reduction in production, the actual variable cost went up by 5% of the budget.
You are required to:
(i) PREPARE statement of profitability at budget and actual activity.
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(ii) FIND P/V ratio and BES (in ₹ and unit of the actual sales activity). (10 Marks March ‘22)
Answer 2
Actual Sales ₹ 27,00,000
Actual Selling Price per unit 18
Actual units (50%)
" , ,
( ! )
1,50,000
Therefore, budgeted units (80%)
(1,50,000 X )
2,40,000

Budgeted Selling Price ( 18 / 90%)

20

$",% , &" '$! . ' , ,

Budgeted Variable Cost per unit = ",% , (
= ",% , (
= Rs. 14

(i) Statement of profitability at budget and actual activity

Particulars Budget (80%) Actual (50%)
Units 2,40,000 1,50,000
Sales (₹) (a) 48,00,000 27,00,000
Variable cost (₹) (b) 33,60,000 22,05,000
Contribution (₹) (c = a - b) 14,40,000 4,95,000
Fixed cost (₹) (d) 7,20,000 7,20,000
Profit (₹) (e = c – d) 7,20,000 (2,25,000)

(ii) Calculation of P/V ratio and BES

)(
P/V ratio = *100
%, ,
=" , ,
* 100 = 18.33%

," ,
Break Even Sales (in Rs.) = = ! . %
= Rs. 39,27,987

," ,
Break Even Sales (In Units) = = = 2,18,182 Units
)( - ( . ∗

%, ,
∗ /01234562401 Per unit = = = 3.3 per unit
!, ,, (

Question 3
Company manufacture and sell 3 types of mobile handset. It also manufactures wireless charger for
mobile. The company has worked out following estimates for next year.
Annual Demand Selling Price Material cost Labour cost
(in units) (₹ per unit) (₹ per unit) (₹ per unit)
X5 5,000 8,000 2,000 1,000
X6 4,000 9,000 2,500 1,500
X7 3,000 12,000 3,000 2,000
Wireless Charger 15,000 1,500 300 200
To encourage the sale of wireless charger a discount of 10% in its price is being offered if it were to
be purchased along with mobile. It is expected that customer buying mobile will also buy the
wireless charger. The company factory has an effective capacity of 35,000 labour hours. The labour
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is paid @ ₹ 500 per hour. Overtime of labour has to be paid at double the normal rate. Other variable
cost work out to be 50% of direct labour cost and fixed cost is ₹ 1,00,00,000. There will be no
inventory at the end of the year. PREPARE statement of profitability. (10 Marks April ’22)
Answer 3
Calculation of Labour overtime hours
Total hours required for production
X5 (5,000 x 2 hrs) 10,000
X6 (4,000 x 3 hrs) 12,000
X7 (3,000 x 4 hrs) 12,000
Wireless Charger (15,000 x 0.40 hrs) 6,000
40,000
Hours available (35,000)
Overtime 5,000
Statement of Profitability
Particulars Amount (₹) Amount (₹)
Sales
X5 (5,000 x 8,000) 4,00,00,000
X6 (4,000 x 9,000) 3,60,00,000
X7 (3,000 x 12,000) 3,60,00,000
Wireless Charger [(12,000 x 1,350) + (3,000 x 1,500) 2,07,00,000 13,27,00,000
Less: Variable cost
Material:
X5 (5,000 x 2,000)
X6 (4,000 x 2,500)
X7 (3,000 x 3,000)
Wireless Charger (15,000 x 300) 3,35,00,000
Labour:
X5 (5,000 x 1,000)
X6 (4,000 x 1,500)
X7 (3,000 x 2,000)
Wireless Charger (15,000 x 200)
Overtime (5,000 x 1,000) 2,50,00,000
Other variable overheads 1,25,00,000 7,10,00,000
Contribution 6,17,00,000
Less: Fixed Cost 1,00,00,000
Profit 5,17,00,000

Question 4
PS Limited is a manufacturing company and is operating at 75% capacity utilization. The PV ratio at this
level of activity is 40%.
The flexible budget drafted by the company for two levels of activity is given below:
Capacity utilization (75 %) Capacity utilization (100 %)
Amount in ₹ (Lakhs) Amount in ₹ (Lakhs)
Direct materials 180 240
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Direct wages 120 160

Power and fuel 12 16
Repairs and maintenance 18 21
Consumables 21 28
Supervision 20 20
Indirect labour 36 42
Administrative expenses 21 21
Selling expenses 18 18
Depreciation 54 54

You are required to:

i. CALCULATE the profit earned by PS Limited at 75% level of activity.
ii. CALCULATE the break-even level of activity. (10 Marks) (Sep’22)
Answer 4
Calculation of Semi Variable component
Repairs and Maintenance (₹) Indirect labour (₹)
At 75% capacity 18,00,000 36,00,000
At 100% capacity 21,00,000 42,00,000
Variable component for 25% 3,00,000 6,00,000
Hence variable cost at 75% 3,00,000 x 75/25=9,00,000 6,00,000 x 75/25 =
18,00,000
Fixed cost at 75% capacity 18,00,000 – 9,00,000 = 9,00,000 36,00,000 –
18,00,000=18,00,000
Segregation of Fixed and Variable cost
75% 100% VC at 75% FC at 75%
Direct Material 180 240 180
Direct Labour 120 160 120
Power and fuel 12 16 12
Repairs and maintenance 18 21 9 9
Consumables 21 28 21
Supervision 20 20 20
Indirect labour 36 42 18 18
Administrative expenses 21 21 21
Selling expenses 18 18 18
Depreciation 54 54 54
Total 500 620 360 140
(i) Calculation of profit earned at 75% capacity
Given PV ratio = 40%, Hence variable cost would be 60%
If variable cost is ₹ 360 lakhs then sales would be 360/ 0.60 = ₹ 600 lakhs

Less: Variable cost = ₹ 360 lakhs

Less: Fixed cost = ₹ 140 lakhs
Profit = ₹ 100 lakhs
(ii) Break-even level of activity
BEP Sales = FC/ P/V ratio = 140 /0.40 = ₹ 350 lakhs

Question 5
Answer the following:
A company makes 1,500 units of a product for which the profitability statement is given below:
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(₹)
Sales 1,20,000
Direct Materials 30,000
Direct Labour 35,000
Variable Overheads 15,000
Fixed Cost 16,800
Profit 22,200
After the first 500 units of production, the company has to pay a premium of ₹ 5 per unit towards
overtime labour. The premium so paid has been included in the direct labour cost of ₹ 35,000 given
above.
You are required to COMPUTE the Break-even point.
(5 Marks) (Oct’22)
Answer 5
Data / Unit 1– 501 –
500 1,500
(Rs.) (Rs.)
Sales (Rs.1,20,000 / 1,500 units) 80 80
Direct Material (Rs.30,000 / 1,500 units) 20 20
Direct Labour* 20 25
Variable Overheads (Rs.15,000 / 1,500 units) 10 10
Contribution 30 25

Contribution at 500 units = Rs. 15,000

Fixed Cost = Rs. 16,800
Shortfall = Rs. 1,800
No. of units to recover shortfall = 72 units (Rs. 1,800 / Rs.25)
Break Even Point = 572 units (500 units + 72
units)
(*)
Let X be the Direct Labour per unit up to 500 units. Total Direct Labour-
500X + 1,000 × (X + 5) = 35,000
1,500X + 5,000 = 35,000
X = 20
Therefore, up to 500 units the Direct Labour is Rs. 20. After 500 units it is Rs. 25.

Question 6
LNP Ltd. and MNT Ltd. are engaged in manufacturing of identical products. Existing revenue and
cost data is as follows:

LNP Ltd. (₹) MNT Ltd. (₹)

Sales 13,60,000 17,00,000
Variable Cost 10,88,000 10,20,000
Fixed Cost 1,72,000 5,80,000

You are required to calculate:

(i) Break-even point (in Value) for each company
(ii) Sales at which each company will earn a profit of ₹ 5,00,000
(iii) Sales at which both companies will have same profits. (10 Marks March ‘23)
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Answer 6
Income Statement

LNP Ltd. MNT Ltd.

(₹) (₹)
Sales (Rs.) 13,60,000 17,00,000
Less: Variable Cost 10,88,000 10,20,000
Contribution 2,72,000 6,80,000
)(
20% 40%
P.V. Ratio ( * 100'

Fixed Cost (₹) 1,72,000 5,80,000

Profit (₹) 1,00,000 1,00,000

(i) Break even point = .7.

.!. ".
LNP Ltd. = = Rs. 8,60,000
" %
. , ,
MNT Ltd. = % %
= Rs. 14,50,000
(ii) Sales value to earn a profit of ₹ 5,00,000
89
Sales =
.7.
!. ". 8 , ,
LNP Ltd. = % %
= Rs. 33,60,000
, , 8 , ,
MNT Ltd. = % %
= Rs. 27,00,000

(iii) Sales value at which both companies will earn same profit
Let S = Sales value and P = Profit
Sales – Variable cost = Fixed cost + Profit
or, Contribution = Fixed cost + Profit
LNP Ltd.:
20% S = ₹1,72,000 + P
or, 0.20S = ₹ 1,72,000 + P................................................ (i)
MNT Ltd.
40% S = ₹5,80,000 + P
or, 0.40S = ₹ 5,80,000 + P............................................(ii)
By solving these equations, we will get the value of ‘S’ and ‘P’
0.20S = 1,72,000 + P
0.40S = 5,80,000 + P
- - -
- 0.20S = -4,08,000
or, S = ₹ 20,40,000
Putting the value of ‘S’ in equation no. (i) we will get the value of ‘P’
0.20 × 20,40,000 = 1,72,000 + P
or, P = ₹2,36,000
Therefore, at Sale value of ₹20,40,000 both the companies will earn same profit of ₹ 2,36,000
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Question 7
The following figures are related to KG Limited for the year ending 31st March, 2023:

Sales - 48,000 units @ ₹ 400 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 ₹ 22,00,000 for a year.
(iv) Number of units to be sold to earn a net income of 25% on cost.[5 Marks April ‘23]
Answer 7
Break- even point (in units) is 50% of sales i.e. 24,000 units.

Hence, Break- even point (in sales value) is 24,000 units × ₹ 400 = ₹ 96,00,000

(i) Break even Sales = :

Or, Rs. 96,00,000 = " %

Or, Fixed Cost = ₹ 96,00,000 × 25%

= ₹ 24,00,000
So Fixed Cost for the year is ₹ 24,00,000
(ii) Contribution for the year = (48,000 units × ₹ 400) × 25%
= ₹ 48,00,000
Profit for the year = Contribution – Fixed Cost
= ₹48,00,000 - ₹ 24,00,000
= ₹ 24,00,000
(iii) Target net profit is ₹22,00,000
Hence, Target contribution = Target Profit + Fixed Cost
= ₹ 22,00,000 + ₹ 24,00,000
= ₹ 46,00,000
Contribution per unit = 25% of ₹ 400 = ₹ 100 per unit
.% , ,
No. of units = .! - (
= 46,000 units

So, 46,000 units to be sold to earn a target net profit of ₹ 22,00,000 for a year.
(iv) Let desired total Sales (Number of units × Selling price) be x then desired profit is
25% on Cost or 20% on Sales i.e. 0.2 x
89
Desired Sales = :
;
."%, , 8 ."
= " %

or, 0.25 x = ₹ 24,00,000 + 0.2 x

or, 0.05 x = ₹ 24,00,000
or, x = ₹ 4,80,00,000
₹ %, , ,
No. of units to be sold = = 1,20,000 units
.%
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Chapter 15
Budget & Budgetary Control
Question 1
SP 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.
You are required to PREPARE flexible budget for both the products:
(i) Before marketing efforts
(ii) After marketing efforts(5 Marks April ’23 & March ‘19)
Answer 1
(i) 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
(ii) 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

Question 2
Soya B Limited is presently operating at 50% capacity and producing 50,000 units. The entire output
is sold at a price of Rs. 180 per unit. The cost structure at the 50% level of activity is as under:
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(₹)
Direct Material 60 per unit
Direct Wages 20 per unit
Variable Overheads 20 per unit
Direct Expenses 12 per unit
Factory Expenses (30% fixed) 16 per unit
Selling and Distribution Exp. (85% variable) 10 per unit
Office and Administrative Exp. (100% fixed) 6 per unit

The company anticipates that the variable costs will go up by 20% and fixed costs will go up by
10%.
You are required to prepare an Expense budget, based on marginal cost for the company at
50%,75% and 100% level of activity and find out the profits at respective levels. (10 Marks March
’23 , March ’18 )
Answer 2
Expense Budget of Soya B Ltd. for the period
50,000 75,000 1,00,000
Per units units units
unit
(₹) Amount (₹) Amount (₹) Amount (₹)
Sales (A) 180 90,00,000 1,35,00,000 1,80,00,000
Less: Variable Costs:
- Direct Material 72 36,00,000 54,00,000 72,00,000
- Direct Wages 24 12,00,000 18,00,000 24,00,000
- Variable Overheads 24 12,00,000 18,00,000 24,00,000
- Direct Expenses 14.4 7,20,000 10,80,000 14,40,000
- Variable factory expenses
13.44 6,72,000 10,08,000 13,44,000
(70% of Rs 16 p.u.)x 120%
- Variable Selling & Dist.
exp. 10.2 5,10,000 7,65,000 10,20,000
(85% of Rs 10 p.u.)x120%
Total Variable Cost (B) 158.04 79,02,000 1,18,53,000 1,58,04,000
Contribution (C) = (A – B) 21.96 10,98,000 16,47,000 21,96,000
Less: Fixed Costs:
- Office and Admin. exp.
-- 3,30,000 3,30,000 3,30,000
(100%)
- Fixed factory exp. (30%) -- 2,64,000 2,64,000 2,64,000
- Fixed Selling & Dist. exp.
-- 82,500 82,500 82,500
(15%)
Total Fixed Costs (D) -- 6,76,500 6,76,500 6,76,500
Profit (C – D) -- 4,21,500 9,70,500 15,19,500

Question 3
Explain the difference between fixed budget and flexible budget. (Mar’22,Aug. ‘18, 5 Marks)
Answer 3
Difference between Fixed and Flexible Budgets:
S. No. Fixed Budget Flexible Budget
1. It does not change with actual volume of It can be re-casted on the basis of
activity achieved. Thus it is known as rigid activity level to be achieved. Thus it
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or inflexible budget. is not rigid.

2. It operates on one level of activity and It consists of various budgets for

under one set of conditions. It assumes that different levels of activity.
there will be no change in the prevailing
conditions, which is unrealistic.
3. Here as all costs like - fixed, variable and Here analysis of variance provides
semi-variable are related to only one level useful information as each cost is
of activity so variance analysis does not analysed according to its behaviour.
give useful information.
4. If the budgeted and actual activity levels Flexible budgeting at different levels
differ significantly, then the aspects like cost of activity facilitates the
ascertainment and price fixation do not give ascertainment of cost, fixation of
a correct picture. selling price and tendering of
quotations.
5. Comparison of actual performance with It provides a meaningful basis of
budgeted targets will be meaningless comparison of the actual
specially when there is a difference performance with the budgeted
between the two activity levels. targets.

Question 4
V Ltd. produces and markets a very popular product called ‘X’. The company is interested in presenting
its budget for the second quarter of 2019.
The following information are made available for this purpose:
(i) It expects to sell 50,000 bags of ‘X’ during the second quarter of 2019 at the selling price of Rs. 900
per bag.
(ii) Each bag of ‘X’ requires 2.5 kgs. of a raw – material called ‘Y’ and 7.5 kgs. of raw – material called ‘Z’.
(iii) Stock levels are planned as follows:
Particulars Beginning of Quarter End of Quarter
Finished Bags of ‘X’ (Nos.) 15,000 11,000
Raw – Material ‘Y’ (Kgs.) 32,000 26,000
Raw – Material ‘Z’ (Kgs.) 57,000 47,000
Empty Bag (Nos.) 37,000 28,000
(iv) ‘Y’ cost Rs.120 per Kg., ‘Z’ costs Rs.20 per Kg. and ‘Empty Bag’ costs Rs.80 each.
(v) It requires 9 minutes of direct labour to produce and fill one bag of ‘X’. Labour cost is Rs.50 per hour.
(vi) Variable manufacturing costs are Rs.45 per bag. Fixed manufacturing costs Rs.30,00,000 per quarter.
(vii) Variable selling and administration expenses are 5% of sales and fixed administration and selling
expenses are Rs.20,50,000 per quarter.
Required
(i) PREPARE a production budget for the said quarter.
(ii) PREPARE a raw – material purchase budget for ‘Y’, ‘Z’ and ‘Empty Bags’ for the said quarter in
quantity as well as in rupees.
(iii) COMPUTE the budgeted variable cost to produce one bag of ‘X’.
(iv) PREPARE a statement of budgeted net income for the said quarter and show both per unit and
total cost data. (Oct. ’19 & April ’23 ,10 Marks)

Answer 4
(i) Production Budget of ‘X’ for the Second Quarter
Particulars Bags (Nos.)
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Budgeted Sales 50,000

Add: Desired Closing stock 11,000
Total Requirements 61,000
Less: Opening stock 15,000
Required Production 46,000
(ii) Raw–Materials Purchase Budget in Quantity as well as in Rs. for 46,000 Bags of ‘X’
Particulars ‘Y’ ‘Z’ Empty Bags
Kgs. Kgs. Nos.
Production Requirements 2.5 7.5 1.0
Per bag of ‘X’
Requirement for Production 1,15,000 3,45,000 46,000
(46,000 × 2.5) (46,000 × 7.5) (46,000 ×1)
Add: Desired Closing Stock 26,000 47,000 28,000
Total Requirements 1,41,000 3,92,000 74,000
Less: Opening Stock 32,000 57,000 37,000
Quantity to be purchased 1,09,000 3,35,000 37,000
Cost per Kg./Bag Rs.120 Rs.20 Rs.80
Cost of Purchase (Rs.) 1,30,80,000 67,00,000 29,60,000
(iii) Computation of Budgeted Variable Cost of Production of 1 Bag of ‘X’
Particulars (Rs.)
Raw – Material
Y 2.5 Kg @120 300.00
Z 7.5Kg. @20 150.00
Empty Bag 80.00
Direct Labour (Rs.50× 9 minutes / 60 minutes) 7.50
Variable Manufacturing Overheads 45.00
Variable Cost of Production per bag 582.50
(iv) Budgeted Net Income for the Second Quarter
Particulars Per Bag (Rs.) Total (Rs.)
Sales Value (50,000 Bags) 900.00 4,50,00,000
Less: Variable Cost:
Production Cost 582.50 2,91,25,000
Admn. & Selling Expenses (5% of Sales Price) 45.00 22,50,000
Budgeted Contribution 272.50 1,36,25,000
Less: Fixed Expenses:
Manufacturing 30,00,000
Admn. & Selling 20,50,000
Budgeted Net Income 85,75,000

Question 5
F Ltd. requires you to PREPARE the Master budget for the next year from the following
information:
Sales ₹ 1,20,00,000
Direct material cost 60% of sales
Direct wages 20 workers @ ₹ 2,250 per month
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Factory overheads:
Indirect labour –
Works manager ₹ 7,500 per month
Foreman ₹ 6,000 per month
Stores and spares 2.5% on sales
Depreciation on machinery ₹ 1,89,000
Light and power (fixed) ₹ 45,000
Repairs and maintenance ₹ 1,20,000
Other sundries 10% on direct wages
Administration, selling and distribution ₹ 5,40,000 per year
expenses
(5 Marks April ’22)
Answer 5
Master Budget for the year ending _____
Particulars Amount (₹) Amount (₹)
Sales 1,20,00,000
Less: Cost of production:
Direct materials (60% of ₹ 1,20,00,000) 72,00,000
Direct wages (20 workers × ₹ 2,250 × 12 5,40,000
months)
Prime Cost 77,40,000
Fixed Factory Overhead:
Works manager’s salary (7,500 × 12) 90,000
Foreman’s salary (6,000 × 12) 72,000
Depreciation 1,89,000
Light and power 45,000 3,96,000
Variable Factory Overhead:
Stores and spares (2.5% of ₹ 1,20,00,000) 3,00,000
Repairs and maintenance 1,20,000
Sundry expenses (10% of ₹ 5,40,000) 54,000 4,74,000
Works Cost 86,10,000
Gross Profit (Sales – Works cost) 33,90,000
Less: Adm., selling and distribution expenses 5,40,000
Net Profit 28,50,000

Question 6
A firm has a total capacity of producing 1,00,000 units of an item. The budgeted expenses at this level
of activity are as under:

Per unit (₹)

Direct Materials 650
Direct Wages 325
Direct Expenses 125
Variable overheads 50
Fixed Production Overheads 25
Selling and Distribution Overheads (20% fixed) 25
Administrative Expenses (100% fixed) 60
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Total 1,260
The selling price is ₹ 1,750 per unit and is anticipated to remain constant.
You are required to PREPARE a flexible budget, on the basis of marginal costing, for 60,000 and 75,000
units of output level showing the profit and P/V Ratio. (10 Marks) (Sep’22)

Answer 6
Workings -
1. Fixed Production overheads (given) = ₹ 25 per unit
So, at 1,00,000 units capacity, it will be ₹ 25,00,000 (1,00,000 units x ₹ 25)
2. Selling and distribution overheads:
Given (1,00,000 units x ₹ 25) = ₹ 25,00,000
So, Fixed component = ₹ 25,00,000 x 20% = ₹ 5,00,000

Hence, variable component = ₹ 25,00,000 - ₹ 5,00,000 = ₹ 20,00,000

Variable per unit = ₹ 20,00,000/1,00,000 units

= ₹ 20 per unit
Flexible Budget
Particulars Per unit (₹) Output Level
60,000 units (₹) 75,000 units (₹)
Sales (A) 1,750 10,50,00,000 13,12,50,000
Variable costs:
Direct Material 650 3,90,00,000 4,87,50,000
Direct Wages 325 1,95,00,000 2,43,75,000
Direct expenses 125 75,00,000 93,75,000
Variable overheads 50 30,00,000 37,50,000
Selling and distribution overheads 20 12,00,000 15,00,000
Total Variable cost (B) 1,170 7,02,00,000 8,77,50,000
Contribution (C = A - B) 3,48,00,000 4,35,00,000
Fixed costs:
Production overheads 25,00,000 25,00,000
Administrative overheads 60,00,000 60,00,000
Selling and distribution overheads 5,00,000 5,00,000
Total Fixed cost (D) 90,00,000 90,00,000
Profit (C-D) 2,58,00,000 3,45,00,000
P/V Ratio = (₹ 3,48,00,000/₹ 10,50,00,000) x 100 = 33.143%

OR
P/V Ratio = (₹ 4,35,00,000/₹ 13,12,50,000) x 100 = 33.143%

Question 7
N Ltd a vehicle manufacturer has prepared sales budget for the next few months, and the following
draft figures are available:
Month No. of
vehicles
October 40,000
November 35,000
December 45,000
January 60,000
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Chapter 15 Budget & Budgetary Control
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February 65,000
To manufacture a vehicle a standard cost of ₹5,71,400 is incurred and sold through dealers at a uniform
selling price of ₹8,57,100 to customers. Dealers are paid 15% 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 each month to cover 40% of next month’s
production. 48,000 units of Part-X are in stock as on 1st October.
There are 9,500 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
(i) PREPARE Production budget (in nos.) for the month of October, November, December and
January.
(ii) PREPARE a Purchase budget for Part-X (in units) for the months of October, November and
December.
(iii) CALCULATE the budgeted gross profit for the quarter October to December. (10 Marks)
(Oct’22)
Answer 7

(i) Preparation of Production Budget (in units)

October November December January
Demand for the month (Nos.) 40,000 35,000 45,000 60,000
Add: 20% of next month’s demand 7,000 9,000 12,000 13,000
Less: Opening Stock (9,500) (7,000) (9,000) (12,000)
Vehicles to be produced 37,500 37,000 48,000 61,000

(ii) Preparation of Purchase budget for Part-X

October November December
Production for the month (Nos.) 37,500 37,000 48,000
Add: 40% of next month’s 14,800 19,200 24,400
production (40% of 37,000) (40% of 48,000) (40% of 61,000)
52,300 56,200 72,400
No. of units required for 2,09,200 2,24,800 2,89,600
production (52300 × 4 units) (56200 × 4 units) (72,400 × 4 units)
Less: Opening Stock (48,000) (59,200) (76,800)
(14800 × 4 units) (19200 × 4 units)
No. of units to be purchased 1,61,200 1,65,600 2,12,800

(iii) Budgeted Gross Profit for the Quarter October to

December
October November December Total
Sales in nos. 40,000 35,000 45,000 1,20,000
Net Selling Price per unit* 7,28,535 7,28,535 7,28,535
Sales Revenue (Rs. in lakh) 2,91,414 2,54,987.25 3,27,840.75 8,74,242
Less: Cost of Sales (Rs. in lakh) 2,28,560 1,99,990.00 2,57,130.00 6,85,680
(Sales unit × Cost per unit)
Gross Profit (Rs. in lakh) 62,854 54,997.25 70,710.75 1,88,562
* Net Selling price unit = Rs. 8,57,100 – 15% commission on Rs. 8,57,100
= Rs.7,28,535.
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Chapter 15 Budget & Budgetary Control
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Question 8
STATE the advantages of Zero-based budgeting. (5 Marks March ’23)
Answer 8
The advantages of zero-based budgeting are as follows:
 It provides a systematic approach for the evaluation of different activities and ranks them in
order of preference for the allocation of scarce resources.
 It ensures that the various functions undertaken by the organization are critical for the
achievement of its objectives and are being performed in the best possible way.
 It provides an opportunity to the management to allocate resources for various activities only
after having a thorough cost-benefit-analysis. The chances of arbitrary cuts and enhancement
are thus avoided.
 The areas of wasteful expenditure can be easily identified and eliminated.
 Departmental budgets are closely linked with corporation objectives.
 The technique can also be used for the introduction and implementation of the system of
‘management by objective.’ Thus, it cannot only be used for fulfillment of the objectives of traditional
budgeting but it can also be used for a variety of other purposes.

Question 9
Following are the standard cost for a product-X:
(₹)
Direct materials 10 kg @ ₹ 90 per kg 900
Direct labour 8 hours @ ₹100 per hour 800
Variable Overhead 8 hours @ ₹15 per hour 120
Fixed Overhead 400
2,220
Budgeted output for the year was 2,000 units. Actual output is 1,800
units. Actual cost for year is as follows:
(₹)
Direct Materials 17,800 Kg @ ₹ 92 per Kg. 16,37,600
Direct Labour 14,000 hours @ ₹ 104 per hour 14,56,000
Variable Overhead incurred 2,17,500
Fixed Overhead incurred 7,68,000
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. [10 Marks April ‘23]

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Chapter 15 Budget & Budgetary Control
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Answer 9
(i) Material Usage Variance = Std. Price (Std. Quantity – Actual Quantity)
= ₹ 90 (18,000 kg. – 17,800 kg.)
= ₹ 18,000 (Favourable)
(ii) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
= 17,800 kg. (₹ 90 – ₹ 92) = ₹ 35,600 (Adverse)
(iii) Material Cost Variance = Std. Material Cost – Actual Material Cost
= (SQ × SP) – (AQ × AP)
= (18,000 kg. × ₹ 90) – (17,800 kg. × ₹ 92)
= ₹ 16,20,000 – ₹ 16,37,600
= ₹17,600 (Adverse)
(iv) Labour Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)
= ₹ 100 (1,800 units × 8 – 14,000 hrs.)
= ₹ 100 (14,400 hrs. – 14,000 hrs.)
= ₹ 40,000 (Favourable)
(v) Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)
= 14,000 hrs. (₹ 100 – ₹104)
= ₹ 56,000 (Adverse)
(vi) Labour Cost Variance = Std. Labour Cost – Actual Labour Cost
= (SH × SR) – (AH × AR)
= (14,400 hrs. × ₹ 100) – (14,000 hrs. × ₹ 104)
= ₹ 14,40,000 – ₹ 14,56,000
= ₹16,000 (Adverse)
(vii) Variable Cost Variance = Std. Variable Cost – Actual Variable Cost
= (14,400 hrs. × ₹ 15) – ₹2,17,500
= ₹ 1,500 (Adverse)
(viii) Fixed Overhead Cost Variance = Absorbed Fixed Overhead – Actual Fixed Overhead
= (1,800 units × ₹400) - ₹ 7,68,000
= ₹ 7,20,000 – ₹ 7,68,000 = ₹ 48,000 (Adverse)

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Chapter 15 Budget & Budgetary Control