COST ACCOUNTING

According to the following syllabus

Intermediate Level-I, ICMAB
BBA, BBS in Accounting & Finance
Public, Private & National University of Bangladesh

Features
As per ICMAB New Syllabus
Includes MCQ Questions and Answers
Includes CMA Past Questions and Solutions
Includes Mock Examination Question

Author
Md. Sajjad Hossain
CMA (1800 Passed), MBA, BBA, LLB, PGDCSE
Lawyer – Taxes Appellate Tribunal
Member – Dhaka Taxes Bar Association
Proprietor – S Hossain & Co.
Tax, VAT and Company Law Advisor

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1
 COST ACCOUNTING
No part of this publication may be reproduced, stored, transmitted in any form or by
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written permission of the Author. All rights reserved.

Edition : October 2023

Published By : Nobbodoy Publication

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This book is reviewed regularly to ensure maximum accuracy. However this may
contain some errors. Author, publisher, printers, designers, distributors, sellers
and related parties of this book are not liable for these unintentional errors.

2
 স঳এভএ অনরাইন ককাসেিং ক্লাচ঳ বসতথ েরচছ!

বফস঱ষ্ট্য ঳ভূ঴ঃ

√ স঳এভএ ফযাচেয ঳কর স঱ক্ষাথথী আইস঳এভএসফ প্রসতষ্ঠাচনয;

√ স঳এভএ স঳চরফাচ঳য ঩া঱া঩াস঱ সফগত ফছচযয প্রশ্ন ঳ভাধান কযা ঴য়;
√ একাউসটিং সফলয় ঳ভূচ঴ আই.এপ.আয.এ঳ অনু঳যন কযা ঴য়;
√ গাসণসতক ঳ভ঳যা ঳ভাধাচনয ঳঴জ ককৌ঱র ক঱খাচনা ঴য়।

শুক্রফাচযয ফযাে
যচয়চছ!
নফযদয় ফ্রী ক্লা঳ কচয
বসতথয স঳দ্ধান্ত
ঢাকা, ফািংরাচদ঱। সনন!
০১৭১১১-৩৭০৩৯

ক্লাস নিবেি লেখক ল াোঃ সাজ্জাদ ল াবসি, নসএ এ ১৮০০ পাশ

3
 BRIEF TABLE OF CONTENTS

Chapter Title Page No.

1. Introduction to cost accounting 13

2. Cost concepts and classifications 20

3. Cost statements 54

4. Costing of materials 89

5. Costing of labor 128

6. Costing of overhead 161

7. Job and batch costing 208

8. Contract costing 228

9. Process costing 262

10. Standard costing 330

11. Activity based costing 371

4
 স঳এভএ অনরাইন ককাসেিং ক্লাচ঳ বসতথ েরচছ!

বফস঱ষ্ট্য ঳ভূ঴ঃ

√ স঳এভএ ফযাচেয ঳কর স঱ক্ষাথথী আইস঳এভএসফ প্রসতষ্ঠাচনয;

√ স঳এভএ স঳চরফাচ঳য ঩া঱া঩াস঱ সফগত ফছচযয প্রশ্ন ঳ভাধান কযা ঴য়;
√ একাউসটিং সফলয় ঳ভূচ঴ আই.এপ.আয.এ঳ অনু঳যন কযা ঴য়;
√ গাসণসতক ঳ভ঳যা ঳ভাধাচনয ঳঴জ ককৌ঱র ক঱খাচনা ঴য়।

শুক্রফাচযয ফযাে
যচয়চছ!
নফযদয় ফ্রী ক্লা঳ কচয
বসতথয স঳দ্ধান্ত
ঢাকা, ফািংরাচদ঱। সনন!
০১৭১১১-৩৭০৩৯

ক্লাস নিবেি লেখক ল াোঃ সাজ্জাদ ল াবসি, নসএ এ ১৮০০ পাশ

5
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6
 আয়কর নরটাি নপ্রস্তুনিবি স ায়িা নিি

লসো স ূ োঃ

√ আয়কয সযটানথ প্রস্তুতকযণ;

√ কয অসপচ঳য কনাসটচ঱য জফাফ কদওয়া;
√ আয়কয ভাভরায প্রসতসনসধত্ব কযা;
√ আয়কয ঳িংক্রান্ত অনযানয ক঳ফা প্রদান;
√ বযাট সযটানথ প্রস্তুতকযণ;
√ বযাট ঳িংক্রান্ত অনযানয ক঳ফা প্রদান;
√ কেড রাইচ঳ন্স সনফন্ধন ও নফায়ন;
√ আইআযস঳ এফিং ইআযস঳ সনফন্ধন ও নফায়ন;
√ আন্তজথাসতক স্ট্যান্ডাডথ অনুমায়ী স঴঳াফ প্রস্তুতকযণ;
√ ইন্টাযনার অসডট ঳িংক্রান্ত ক঳ফা প্রদান।

এ঳ ক঴াচ঳ন এন্ড ককািং

঩সযোরনায়ঃ
সফ আইনজীফী কভাঃ ঳া াদ ক঴াচ঳ন
ঢাকা, ফািংরাচদ঱।
০১৭১১১-৩৭০৩৯

7
 PREFACE

The main objective of this book is to meet the basic requirements of the Accounting
courses. It is helpful to the students of Bachelor of Business Administration, and
Bachelor of Business Studies. It is also helpful for professional students and the
persons who are intended to get admission into a professional institute. This book is
written by following the curriculum of The Institute of Cost and Management
Accountants of Bangladesh, Public and Private University, and National University
of Bangladesh for the relative subject.

I am grateful and deserve my thanks to the publisher, printers, and designers of this
book.

Any criticism, favorable or unfavorable, and any constructive suggestion in regards

of this book will be gratefully received.

Be informed that we sell all of this books at the same price. But printing quality,
binding quality, etc is not the same. Please forgive us for this unintentional mistake.

Date: October 2023 Md. Sajjad Hossain

8
 Dedicated to my parents

9
 DETAILED TABLE OF CONTENTS

Chapter Title and Contents Page No.

Chapter-1: Introduction to cost accounting 13

1.1. Definition of cost accounting 13
1.2. Role of cost accounting 13
1.3. Principles of cost accounting 14
1.4. Methods of cost accounting 14
1.5. Techniques of cost accounting 16
1.6. Comparison between cost and financial accounting 17
Multiple choice questions and answers 18

Chapter-2: Cost concepts and classifications 20

2.1. Definition of cost 20
2.2. Classification of cost 20
2.3. Differences between direct and indirect cost 22
2.4. Methods for separating mixed cost 22
2.5. Advantages of high and low method 23
2.6. Limitations of high and low method 24
Multiple choice questions and answers 25
Modified true/false 30
Problems and solutions 32
Exercise questions 43
Exercise solutions 47

Chapter-3: Cost statements 54

3.1. Definition of cost statement 54
3.2. Features of cost statement 54
3.3. Types of cost statement 54
3.4. Advantages of cost statement 55
3.5. Format of statement of direct costs 55
3.6. Format of statement of cost of goods manufactured 56
3.7. Format of statement of cost of goods sold 56
3.8. Format of statement of profit or loss 57
Multiple choice questions and answers 58
Problems and solutions 63
Exercise questions 75
Exercise solutions 80

Chapter-4: Costing of materials 89

10
 4.1. Definition of material 89

Chapter Title and Contents Page No.

4.2. Classification of material 89

4.3. Objectives of material management 89
4.4. Definition of economic order quantity 90
4.5. Assumptions of economic order quantity 90
4.6. Benefits of economic order quantity 91
4.7. Criticisms of economic order quantity 92
4.8. Limitations of EOQ formula 93
4.9. Definition of safety stock 94
4.10. Calculation of safety stock 94
4.11. Importance of safety stock 95
Multiple choice questions and answers 97
Problems and solutions 101
Exercise questions 114
Exercise solutions 118

Chapter-5: Costing of labor 128

5.1. Definition of labor 128
5.2. Classification of labor 128
5.3. Differences between wages and salary 128
5.4. Remuneration methods 129
5.5. Definition of labor turnover 131
5.6. Measurement of labor turnover 131
5.7. Causes of labor turnover 132
5.8. Effects of labor turnover 133
Problems and solutions 134
Exercise questions 145
Exercise solutions 151

Chapter-6: Costing of overhead 161

6.1. Definition of overhead 161
6.2. Classification of overhead 161
6.3. Methods for allocating overhead 164
6.4. Predetermined overhead rate 165
6.5. Over or under absorption of overhead 165
6.6. Treatment of over or under absorption of overhead 166
Multiple choice questions and answers 167
Problems and solutions 171
Exercise questions 188
Exercise solutions 196

Chapter-7: Job and batch costing 208

11
 7.1. Definition of job costing 208

Chapter Title and Contents Page No.

7.2. Nature of job costing 208
7.3. Objectives of job costing 209
7.4. Importance of job costing 209
7.5. Limitations of job costing 209
7.6. Preparation of job cost sheet 210
7.7. Definition of batch costing 210
7.8. Features of batch costing 211
7.9. Importance of batch costing 211
7.10. Limitations of batch costing 211
7.11. Similarities between job and batch costing 212
7.12. Differences between job and batch costing 212
7.13. Concept of economic batch quantity 213
7.14. Factors determining economic batch quantity 213
7.15. Importance of economic batch quantity 213
Multiple choice questions and answers 214
Problems and solutions 218
Chapter-8: Contract costing 228
8.1. Definition of contract costing 228
8.2. Features of contract costing 228
8.3. Similarities between job and contract costing 228
8.4. Differences between job and contract costing 229
8.5. Types of contract costing 229
8.6. Definition of principal contractor 230
8.7. Roles of principal contractor 230
8.8. Responsibilities of principal contractor 231
8.9. Definition of subcontractor 232
8.10. Types of subcontractor 232
8.11. Benefits of subcontracting 232
8.12. Drawbacks of subcontracting 233
Problems and solutions 235
Exercise questions 249
Exercise solutions 254
Chapter-9: Process costing 262
9.1. Definition of process costing 262
9.2. Features of process costing 262
9.3. Types of process costing 263
9.4. Advantages of process costing 263
9.5. Limitations of process costing 264
9.6. Steps of process costing 265
9.7. Accounting for process costing 266

12
 9.8. Differences between process and job costing 267

Chapter Title and Contents Page No.

9.9. Cost of production report 268
9.10. Purposes of cost of production report 268
9.11. Three separate parts of cost of production report 268
9.12. Equivalent units of production 269
9.13. Calculation of equivalent units of production 269
9.14. Normal loss 271
9.15. Abnormal loss 272
9.16. Reporting normal and abnormal loss 272
9.17. Differences between normal and abnormal loss 272
Multiple choice questions and answers 273
Problems and solutions 279
Exercise questions 306
Exercise solutions 314
Chapter-10: Standard costing 330
10.1. Definition of standard costing 330
10.2. Process of standard costing 330
10.3. Types of cost standards 330
10.4. Benefits of standard costing 331
10.5. Problems with standard costing 332
10.6. Definition of variance analysis 333
10.7. Types of variance analysis 333
10.8. Advantages of variance analysis 336
10.9. Limitations of variance analysis 337
Multiple choice questions and answers 338
Problems and solutions 344
Exercise questions 354
Exercise solutions 360
Chapter-11: Activity based costing 371
9.1. Definition of activity based costing 371
9.2. Advantages of activity based costing 371
9.3. Disadvantages of activity based costing 372
9.4. Definition of traditional costing 373
9.5. Advantages of traditional costing 373
9.6. Disadvantages of traditional costing 374
9.7. Differences between activity based costing and
traditional costing 375
9.8. Which method should be used 376
Multiple choice questions and answers 378
Problems and solutions 382
Exercise questions 408

13
 Exercise solutions 419

CHAPTER - 1
INTRODUCTION TO COST ACCOUNTING

1.1. DEFINITION OF COST ACCOUNTING

The Chartered Institute of Management Accountants in England (CIMA) has

defined Cost Accounting as, „the process of accounting for cost from the point at
which expenditure is incurred or committed to establishment of its ultimate
relationship with cost centres and cost units. In its widest usage, it embraces the
preparations of statistical data, the application of cost control methods and the
ascertainment of the profitability of activities carried or planned‟. It is a formal
mechanism by means of which costs of products or services are ascertained and
controlled.

According to the Wheldon, “Cost accounting is the classifying, recording and

appropriate allocation of expenditure for the determination of the costs of products
or services, and for the presentation of suitably arranged data for purposes of control
and guidance of management. It includes the ascertainment of the cost of every
order, job, contract, process, service or unit as may be appropriate. It deals with the
cost of production, selling and distribution.”

Thus, cost accounting means such an analysis of information as to enable

management to know the cost of producing and selling, that is the total cost of
various products and services and also to know how the total cost is constituted.

1.2. ROLE OF COST ACCOUNTING

According to Blocker and Weltemer „Cost Accounting is to serve management in

the execution of policies and in comparison of actual and estimated results in order
that the value of each policy may be appraised and changed to meet the future
conditions‟. Followings are the major roles of cost accounting:
(i) To work out cost per unit of the different products manufactured by the
organization;
(ii) To provide an accurate analysis of this cost;
(iii) To maintain costs to the lowest point consistent with the most efficient
operating conditions;
(iv) To work out the wastage in each process of manufacture and to prepare reports
as may be necessary to assist in the control of wastage;
(v) To provide necessary data for the fixation of selling price of commodities
manufactured;

14
(vi) To compute profits earned on each of the products and to advise management as
to how these profits can be improved;
(vii) To help management in control of inventory so that there may be minimum
locking up of capital in stocks of raw materials, stores, work-in-process and finished
goods
(viii) To install and implement cost control systems like Budgetary Control and
Standard Costing for the control of expenditure on materials, labor and overheads;
(ix) To advise management on future expansion;
(x) To advise management on the profitability or otherwise of new lines of products;

1.3. PRINCIPLES OF COST ACCOUNTING

Cost Accounting principle is one of the basic underlying guidelines in accounting. It

requires that assets be recorded at the cash amount (or its equivalent) at the time that
an asset is acquired. Following are the main principles of Cost Accounting:

(a) Cause-effect relationship:

Cause-effect relationship should be established for each item of cost. Each item of
cost should be related to its cause as minutely as possible and the effect of the same
on the various departments should be ascertained. A cost should be shared only by
those units which pass through the departments for which such cost has been
incurred.

(b) Charge of cost only after its incurrence:

Unit cost should include only those costs which have been actually incurred. For
example unit cost should not be charged with selling cost while it is still in factory.

(c) Past costs should not form part of future costs:

Past costs (which could not be recovered in past) should not be recovered from
future costs as it will not only affect the true results of future period but will also
distort other statements.

(d) Exclusion of abnormal costs from cost accounts:

All costs incurred because of abnormal reasons (like theft, negligence) should not be
taken into consideration while computing the unit cost. If done so, it will distort the
cost figures and mislead management resulting in wrong decisions.

(e) Principles of double entry should be followed preferably:

To lessen the chances of any mistake or error, cost ledgers and cost control accounts,
as far as possible, should be maintained on double entry principles. This will ensure
the correctness of cost sheets and cost statements which are prepared for cost
ascertainment and cost control.

1.4. METHODS OF COST ACCOUNTING

15
Cost Accounting is the technique and process of ascertaining costs. Keeping this
definition in view, various methods have been developed to ascertain costs. A few of
the important methods are listed below:
(a) Job costing:
In job costing, the costing of each job undertaken and executed is calculated. This
method is adapted in production units that do not involve highly repetitive work. In
commercial foundries, drop forging shops, and specialized industrial equipment
manufacturers, job costing is commonly used.

(b) Batch costing:

When orders or jobs are arranged into different batches, after taking into account the
convenience of producing items, it is known as batch costing. Under batch costing,
the cost of a group of products is ascertained. In pharmaceutical companies, batch
costing is also used advantageously and effectively.

(c) Contract costing:

Job costing and contract costing are the same in terms of their underlying principles.
A contract is a big job, whereas a job is typically small. Job costing and contract
costing are also frequently referred to as terminal costing.

(d) Cost-plus costing:

This is an aspect of contract costing. Cost-plus costing occurs when, for a contract,
both the contract price and an extra agreed sum are paid to the contractor.

(e) Process costing:

When a product passes through different stages, each of which is distinct, well-
defined, and easily separable, process costing can be applied. Process costing helps
to calculate the cost of production at each stage. Extractive industries, including
companies dealing in chemicals, paints, foods, or soaps, can effectively and
advantageously use the process costing method.

(f) Single costing:

Single costing is also known as unit costing or output costing. Under single costing,
the cost per unit of output or production is ascertained. Each element constituting
such a cost is determined separately. This costing method is suitable in industries
such as brick-making, paper mills, and flour mills.

(g) Multiple costing:

In this costing method, the costs of different sections of production are combined
after ascertaining the cost of each and every part manufactured. In the automotive
industry, as well as other industries in which products are comprised of many
assembled parts, multiple costing is frequently applied.

(h) Operating costing:

16
When expenses are incurred to provide services such as those rendered by bus
companies, transport agencies, and electricity companies, the operating costing
method is used to good effect.

(i) Departmental costing:

In this method, the main objective is to ascertain separately the cost of outputs for
each department. Whenever an organization consists of several departments,
departmental costing is a reasonable option to adopt.

(j) Operation costing:

Operation costing is a refinement of process costing. When mass production or
repetitive productions are carried out or where components must be stocked in a
semi-finished stage, operation costing is suitable and used with advantage.

1.5. TECHNIQUES OF COST ACCOUNTING

In addition to the above mentioned cost accounting methods, there are different
types/techniques of cost accounting. These refer to the various systems that are used
to ascertain and analyze costs. They include the following:

(a) Historical costing:

Ascertaining and recording costs after they have been incurred is known as historical
costing. It provides the management with a record of what has happened and,
therefore, is a postmortem of the actual costs. This approach is known as
conventional costing or actual costing.

(b) Standard costing:

Under standard costing, costs are calculated in advance based on normal or probable
expectations. These costs are known as standards or standard costs. They are
compared to actual costs when incurred to ascertain the variances or differences.
These variances or differences are analyzed in terms of their causes later on. As a
result, management can take corrective action when necessary.

(c) Marginal costing:

Under marginal costing, costs are classified as fixed or variable and only the
variable costs for additional units produced will be considered. Fixed costs are not
taken into consideration as they do not vary with changes in production. The main
objective of marginal costing is to deal with the effects of changes in the volume or
range of output on the costs or profit of a business concern.

(d) Direct costing:

Under direct costing, all the direct costs incurred for a particular product, process or
project are charged to it and the indirect costs are written-off to profit and loss. This
differs from marginal costing in that some fixed costs could be considered to be
direct costs in appropriate circumstances.

17
(e) Absorption costing:
Under absorption costing, no distinction is made between fixed costs and variable
costs. Furthermore, all costs, whether fixed or variable, are considered to determine
the cost of production. Absorption costing is also known as full costing.
(f) Uniform costing:
Under uniform costing, same costing practices are followed across certain
units. This enables the performance comparison of different undertakings to be
undertaken easily and effectively, leading to the common advantage of all
participating undertakings.

1.6. COMPARISON BETWEEN COST AND FINANCIAL ACCOUNTING

Cost accounting generates information so as to keep a check on operations, with an

aim of maximizing profit and efficiency of the concern. Conversely, financial
accounting ascertains the financial results, for the accounting period and the position
of the assets and liabilities on the last day of the period. There is no comparison
between these two because they are equally important for the users. Here we are
presenting the difference between cost accounting and financial accounting in
tabular form.

Basis of Cost accounting Financial accounting

comparison
(a) Meaning Cost Accounting is an Financial Accounting is an
accounting system, through accounting system that
which an organization keeps captures the records of
the track of various costs financial information about the
incurred in the business in business to show the correct
production activities. financial position of the
company at a particular date.
(b) Information Records the information Records the information which
type related to material, labor and are in monetary terms.
overhead, which are used in
the production process.
(c) Users Information provided by the Users of information provided
cost accounting is used only by the financial accounting are
by the internal management internal and external parties
of the organization like like creditors, shareholders,
employees, directors, customers etc.
managers, supervisors etc.
(d) Valuation of At cost Cost or Net Realizable Value,
stock whichever is less.
(e) Profit Generally, the profit is Income, expenditure and profit
analysis analyzed for a particular are analyzed together for a
product, job, batch or particular period of the whole
process. entity.

18
 (f) Purpose Reducing and controlling Keeping complete record of
costs. the financial transactions.
(g) Forecasting Forecasting is possible Forecasting is not at all
through budgeting possible.
techniques.
MULTIPLE CHOICE QUESTIONS AND ANSWERS
There are ten multiple choice questions with five options. Pick the option that best
explains the given question.

1. Cost accounting concepts include all the following except___.

(a) planning
(b) controlling
(c) profit sharing
(d) product costing
(e) service costing
Answer: (c)
2. Cost accounting was developed because of the___.
(a) limitations of the financial accounting
(b) limitations of the management accounting
(c) limitations of the human resource accounting.
(d) limitations of the double entry accounting
(e) limitations of the forensic accounting
Answer: (a)
3. The main objective of cost accounting is:
(a) To record day-to-day business transactions
(b) To measure managerial efficiency
(c) To ascertain the true cost of products and services
(d) To determine tender price
(e) To help in inventory valuation
Answer: (c)
4. Cost accounting started as a branch of___.
(a) corporate accounting
(b) management accounting
(c) project accounting
(d) financial accounting
(e) portfolio accounting
Answer: (d)
5. Cost accounting is applied to___.
(a) public undertakings only
(b) private undertakings only
(c) large business enterprises only
(d) small business enterprises only
(e) manufacturing and services concerns
Answer: (e)

19
6. Cost accounting provides___cost information to various levels of management for
efficient performance of their functions.
(a) single
(b) detailed
(c) limited
(d) simple
(e) expended
Answer: (b)

7. Compared with financial accounting cost accounting is relatively___development.

(a) old
(b) recent
(c) earliest
(d) ancient
(e) past
Answer: (b)

8. ___refer to presentation of cost primarily used by the management at different

levels.
(a) Cost audit
(b) Cost reports
(c) Cost sheet
(d) Cost system
(e) Cost card
Answer: (c)
9. Which of the following is not a method of costing?
(a) Contract costing
(b) Operating costing
(c) Batch costing
(d) Job costing
(e) Marginal costing
Answer: (e)

10. Which of the following is not a component of quality costing?

(a) Assessment cost
(b) Prevention cost
(c) Appraisal cost
(d) Internal failure cost
(e) External failure cost
Answer: (a)

20
 CHAPTER - 2
COST CONCEPTS AND CLASSIFICATIONS

2.1. DEFINITION OF COST

As per Bangladesh Cost Accounting Standards-1, “Cost is a measurement, in

monetary terms, of the amount of resources utilized for the production of goods or
rendering of services. Resources could be money, efforts, materials, time and
utilities consumed, assumed risk, opportunities forgone, in production and delivery
of goods or services.

From a business perspective, cost expresses the amount of money that is spent on
the creation of a good or providing a service. Cost does not include a mark-up for
profit.

From a seller‟s point of view, cost is the amount of money spent to produce a
product or good. If sellers sold their goods at the same price as they cost to produce,
they would neither lose money nor make a profit on their sales.

From the buyer‟s point of view, cost is the price charged for a product by the seller,
and it includes both the cost to make the product and the mark-up added by the seller
to produce a profit.

2.2. CLASSIFICATION OF COST

Classification of cost refers to a complete idea of separation of expenses in the

different sector as like manufacturing cost, product cost, sunk cost, variable cost,
direct cost, and indirect cost, etc. It is impossible to operate a business efficiently
without understanding it properly. We can divide the cost classification into several
categories. Here are including the main categories.

(a) Classification by nature: By nature, cost can be divided into two main
categories: direct cost and indirect cost. These are briefly discussed below.

(i) Direct cost: Direct cost is the cost that is directly related to a product or service.
In a manufacturing company, direct cost is called the cost of goods sold. In a retail
or wholesale business, direct cost is called the cost of sales.

21
(ii) Indirect cost: Indirect cost is the cost that is not directly related to a product or
service. It is also known as overhead cost. Indirect cost incurred in manufacturing
operation is known as manufacturing overhead, while indirect cost incurred in the
general and administrative area is known as administrative overhead.

(b) Classification by behavior: By behavior, cost is classified as variable cost,

fixed cost, step cost and mixed cost which is explained below.

(i) Variable cost: Variable cost refers to the cost that changes proportionately if the
number of goods or services produced changes. Variable cost includes raw
materials, labor and distribution costs.

(ii) Fixed cost: Fixed cost refers to the cost that doesn‟t change if the number
of goods or services produced changes. But this cost may be changed after a long
time. For example, office rent, insurance, and hospital cost.

(iii) Step cost: Step cost refers to the cost that remains constant for a certain level of
quantity, but changes when the quantity is crossed. Step cost is also referred to as a
stepped cost, step-variable cost, or step-fixed cost. If the cost is changed with small
changes in quantity, the term step-variable cost is more likely to be used. If the cost
is changed with large changes in quantity, the term step-fixed cost is more likely to
be used.

(iv) Mixed cost: A mixed cost refers to the cost that consists of fixed cost and
variable cost. This means that some costs vary proportionately if the number of
goods or services produced changes and others might not.

(c) Classification by function: Cost is also classified by its function. The main
categories of functional costs are given below.

(i) Manufacturing cost: Manufacturing cost is the cost that is incurred during the
production of a product whether direct or indirect, variable or fixed. It is mainly the
combination of direct material cost, direct labor cost, and manufacturing overheads.

(ii) Non-manufacturing cost: Non-manufacturing cost is the cost that is not

incurred during the production of a product but is incurred for other business
activities of an entity. It includes administrative costs as well as selling and
distribution costs.

(d) Classification by time: By time, costs are mainly divided into two categories:
historical cost and predetermined cost. These are discussed below.

(i) Historical cost: Historical cost of an asset refers to its purchase price or its
original monetary value. Based on the historical cost principle, a business must
account for and record all assets at the purchase price or original cost on
their balance sheet, and it also applies to liabilities.

22
(ii) Predetermined cost: Predetermined cost is an estimated cost computed by a
manufacturing company before completion of production of a product. It is
determined even before the production of a product starts.

2.3. DIFFERENCES BETWEEN DIRECT AND INDIRECT COST

When one is working on costs, he/she should have a thorough knowledge of the
difference between direct cost and indirect cost. Check the following differences to
have a clear understanding on the two.

Basis of Direct cost Indirect cost

difference
(a) Meaning Direct cost is the cost that is Indirect cost is the cost that is
directly related to a product not directly related to a
or service. product or service.
(b) Traceable It can be identified and It can‟t be identified and
traced easily. traced easily.
(c) Per unit cost It can be converted into per It can‟t be converted into per
unit cost of the product. unit cost of the product.
(d) Aggregate Total direct cost is known as Total indirect cost is known as
prime cost. overhead.
(e) Vary It varies proportionately It does not vary
according to the change in proportionately according to
output. the change in output.
(f) Example Direct materials cost, direct Indirect materials cost,
labor cost and other direct indirect labor cost and other
expenses. indirect expenses.

2.4. METHODS FOR SEPARATING MIXED COST

Several methods are used for separating mixed costs into fixed and variable
cost. There are three major techniques that are found in practice and they are
discussed below.

(a) Visual fit method:

The visual fit method (also known as scatter graph method) is a graphical method of
separating mixed cost into fixed and variable cost. With this method, the points are
plotted on a graph. The activity levels (such as direct labor hours, units of output, or
percentage of capacity) are plotted on a horizontal line (the x-axis), and the mixed
costs are plotted on a vertical line (the y-axis). A straight line is drawn to this scatter
of points by visual approximation. The slope of the line is used to estimate the
variable costs and the intercept of the line with the y-axis is considered as the
estimated fixed cost.

23
No mathematical analysis is done in this method. Here, a graphical representation is
required.

(b) High and low method:

The high and low method is a method of cost accounting in which the mixed cost is
separated into fixed and variable cost. In this method, both the high-point units and
the low-point units are considered. After this, the total cost is compared at both the
points.

The variable cost per unit of the mixed cost can be calculated by dividing the
difference between the high-point cost and the low-point cost with the high-point
units and the low-point units.

The fixed cost of the mixed cost can be calculated by multiplying the variable cost
per unit with the high-point units and then subtracting the value from the high-point
cost.

(c) Regression method:

Linear regression is considered the most accurate method in separating mixed costs
into fixed and variable components. The regression method follows the simple linear
cost function: Y = a + bX, where a is the fixed cost, and b is the variable cost per
unit.

When applying the regression method, the variable cost per unit (b) can be
n xy   x  y
calculated by using this formula: b =
n  x 2  ( x ) 2

After calculating the variable costs per unit (b), the fixed cost can be calculated

using this formula: a =

 y  b x
n

2.5. ADVANTAGES OF HIGH AND LOW METHOD

The high and low method is widely used technique for computing the variable cost
rate and the total amount of fixed costs that are part of mixed costs. Accountants
segregate variable and fixed costs with the high and low method easily. Followings
are the several advantages that are inherent in this method.
(a) This method is easy to use. By the cost information from the highest and lowest
activity level and some simple algebra, managers can get information about cost
behavior in just a few minutes.
(b) The separation between variable and fixed cost will not require any complex data
or calculation.
(c) This method doesn't require any kind of tools or programs. This method is also
inexpensive to implement.

24
(d) Lack of formality is required in this method. The accountant can analyze cost
function using data from the monthly expenses and the activity level.
(e) This method only requires two sets of numbers to calculate the fixed and variable
costs. These include the activity level and the total cost.
(f) If the activity and costs are perfectly linear to each other, this method can provide
correct results.

2.6. LIMITATIONS OF HIGH AND LOW METHOD

The high and low method is a common tool employed to determine what portion of a
cost is fixed and what portion of a cost is variable. Business owners can use this
information to understand how changes in volume affect the costs in total and on a
per unit basis. However, the high and low method comes with some disadvantages
which are briefly outlined below.
(a) This method only takes into account the highest and lowest figure and ignores
the remaining data.
(b) This method assumes that fixed costs remain the same at all levels of production.
In practical, fixed costs changes when there is a large change in production.
(c) Inflation is wholly ignored in this method. The variable and fixed cost will not be
the same if we consider inflation.
(d) This method only works if the activity and total cost have a linear relationship. In
the real situation, it is hard to find the perfect linear relationship between activity
and mixed cost.
(e) This method calculates for cost estimates through the use of records of
production levels from past periods in the business.
(f) This method is very simple for estimating cost behavior. The relation between the
manufacturing units and cost is more complicated in a practical world.
(g) Another problem with this method is that if costs are relatively unstable, it could
produce inaccurate results.

25
MULTIPLE CHOICE QUESTIONS AND ANSWERS
There are twenty five multiple choice questions with five options. Pick the option
that best explains the given question.

1. What is the basic premise of cost concept?

(a) Cost ascertainment
(b) Tax compliance
(c) VAT compliance
(d) Financial audit
(e) Profit analysis
Answer: (a)
2. In how many ways can cost classification be done?
(a) Three ways
(b) Two ways
(c) Four ways
(d) Five ways
(e) Many ways
Answer: (e)

3. The cost which is to be incurred even when a business unit is closed is a___.
(a) Imputed cost
(d) Shutdown cost
(b) Historical cost
(c) Sunk cost
(e) None of these
Answer: (b)
4. What are direct expenses also known as?
(a) Overhead expenses
(b) Sundry expenses
(c) Chargeable expenses
(d) Major expenses
(e) Minor expenses
Answer: (c)
5. Warehouse rent is a part of which cost?
(a) Distribution cost
(b) Production cost
(c) Prime cost
(d) Factory cost

26
(e) Administrative cost
Answer: (a)
6. What kind of firm is costing the most?
(a) Bricklaying companies
(b) Oil refining companies
(c) Hospitals
(d) Restaurant
(e) Transport firms
Answer: (b)
7. Salary paid to permanent employees is an example of what cost?
(a) Implicit cost
(b) Explicit cost
(c) Work cost
(d) Variable cost
(e) Fixed cost
Answer: (e)
8. Cost and expense differ in that:
(a) Expense is a part of cost
(b) Cost is a part of expense
(c) Cost is short-term and expense is long-term
(d) Cost is small and expense is large
(e) There is no connection between them
Answer: (a)
9. A variable cost is one that:
(a) Remains constant per unit and varies in total
(b) Remains constant per unit and varies per unit
(c) Remains constant in total and varies per unit
(d) Remains constant in total and varies in total
(e) Remains constant in total and per unit
Answer: (a)
10. Audit fees is a part of___.
(a) Works on cost
(b) Selling overhead
(c) Distribution overhead
(d) Administration overhead
(e) None of these
Answer: (d)
11. Why classification of cost is necessary?
(a) To find gross profit
(b) To find net profit
(c) To identify costs
(d) To identify efficiency
(e) To identify productivity
Answer: (c)
12. What are the classifications of cost by element?

27
(a) Materials
(b) Labor
(c) Overheads
(d) All of the above
(e) None of the above
Answer: (d)

13. What are the classifications of cost by function?

(a) Manufacturing costs
(b) Non-manufacturing costs
(c) Conversion cost
(d) Both a and b
(e) Both a and c
Answer: (d)
14. What are the classifications of cost by nature?
(a) Period cost
(b) Direct costs
(c) Indirect costs
(d) Both a and c
(e) Both b and c
Answer: (e)
15. What are the classifications of cost by behavior?
(a) Fixed
(b) Variable
(c) Semi-variable
(d) Step cost
(e) All of the above
Answer: (e)

16. Raw materials, components, consumables are subdivision examples of___.

(a) Materials
(b) Labor
(c) Overheads
(d) Components
(e) Consumables
Answer: (a)
17. Examples of non-manufacturing costs includes___.
(a) Administrative costs
(b) Selling costs
(c) Distribution costs
(d) Finance costs
(e) All of the above
Answer: (e)
18. Cost unit of a sugar industry can be___.
(a) Per ton
(b) Per liter

28
(c) Per meter
(d) Per inch
(e) Per meter
Answer: (a)

19. A fixed cost is a cost which is incurred for an accounting period, and which___.
(a) Always remains fixed
(b) Within certain activity levels remains constant
(c) Increases with increase in activity level
(d) Decreases with decrease in activity level
(e) Changes with change in activity level
Answer: (b)
20. A stepped fixed cost is a cost which___.
(a) Has a fixed cost behavior pattern within a limited range of activity
(b) Has a variable cost behavior pattern within a limited range of activity
(c) Goes up or down in steps when the volume of activity rises above or falls below
certain levels
(d) Both a and c
(e) Both b and c
Answer: (d)
21. Which of the following is correct for indirect costs?
(a) An indirect cost is any cost that is not a direct cost.
(b) Indirect costs cannot be attributed directly.
(c) Indirect costs include production overheads and non-production overheads.
(d) All of the above are correct
(e) None of the above is correct
Answer: (d)

22. Which of the following methods are used for separating mixed costs into their
fixed and variable elements?
(a) High and low method
(b) Regression method
(c) Repeated distribution
(d) Only a and b
(e) Only a and c
Answer: (d)
23. Y = a + bX is the formula used for___.
(a) Equation of a straight line
(b) Linear functions
(c) Cost equations
(d) Cost functions
(e) All of the above
Answer: (e)

24. For the cost equations formula (Y = a + bX) which of the following is correct?
(a) Y‟ is the total cost = Fixed cost + Variable cost

29
(b) a‟ is the fixed cost per period
(c) b‟ is the variable cost per unit
(d) X‟ is the activity level
(e) Each of above is correct
Answer: (e)
25. The high and low method refers to the___.
(a) Highest and lowest cost
(b) Highest and lowest volume
(c) Highest and lowest capacity
(d) Highest and lowest money
(e) Highest and lowest return
Answer: (b)

স঳এভএ অনরাইন ককাসেিং ক্লাচ঳ বসতথ েরচছ!

বফস঱ষ্ট্য ঳ভূ঴ঃ

√ স঳এভএ ফযাচেয ঳কর স঱ক্ষাথথী আইস঳এভএসফ প্রসতষ্ঠাচনয;

√ স঳এভএ স঳চরফাচ঳য ঩া঱া঩াস঱ সফগত ফছচযয প্রশ্ন ঳ভাধান কযা ঴য়;
√ একাউসটিং সফলয় ঳ভূচ঴ আই.এপ.আয.এ঳ অনু঳যন কযা ঴য়;
√ গাসণসতক ঳ভ঳যা ঳ভাধাচনয ঳঴জ ককৌ঱র ক঱খাচনা ঴য়।

শুক্রফাচযয ফযাে
যচয়চছ!
নফযদয় ফ্রী ক্লা঳ কচয
বসতথয স঳দ্ধান্ত
ঢাকা, ফািংরাচদ঱। সনন!
০১৭১১১-৩৭০৩৯

30
 ক্লাস নিবেি লেখক ল াোঃ সাজ্জাদ ল াবসি, নসএ এ ১৮০০ পাশ

MODIFIED TRUE/FALSE
There are ten statements given under the question. Identify the statements as True or
False. If the statement is false, rewrite the statement on the answer script to make it
„True‟. Reasoning is NOT required.
1. Cost is a part of expense.
2. Historical cost of an asset refers to its purchase price or its original monetary
value.
3. Manufacturing cost is equal to sum of prime cost and conversion cost
4. Conversion cost is equal to prime cost plus manufacturing overhead.
5. Administration costs are the costs of providing administration services for the
entity. They might be called „head office costs‟.
6. The variable cost of a cost unit is also called the marginal cost of the unit.
7. A semi-variable cost is a cost which contains part of variable costs.
8. Opportunity cost is the cost of next best alternative.
9. Stepped fixed cost is a type of fixed cost that is always fixed.
10. The visual fit method is a quantitative method of separating mixed cost into
fixed and variable cost.

Answer:

1. False.
Correct answer: Expense is a part of cost.

2. True.

3. False.
Correct answer: Manufacturing cost is equal to sum of direct materials and
conversion cost. Or, Manufacturing cost is equal to sum of prime cost and
manufacturing overhead.

4. False.
Correct answer: Conversion cost is equal to direct labor plus manufacturing
overhead.

5. True.

6. True.

31
7. False.
Correct answer: A semi-variable cost is a cost which contains both fixed and
variable costs.

8. True.

9. False.
Correct answer: Stepped fixed cost is a type of fixed cost that is only fixed within
certain levels of activity.

10. False.
Correct answer: The visual fit method is a graphical method of separating mixed
cost into fixed and variable cost.

আয়কর নরটাি নপ্রস্তুনিবি স ায়িা নিি

লসো স ূ োঃ

√ আয়কয সযটানথ প্রস্তুতকযণ;

√ কয অসপচ঳য কনাসটচ঱য জফাফ কদওয়া;
√ আয়কয ভাভরায প্রসতসনসধত্ব কযা;
√ আয়কয ঳িংক্রান্ত অনযানয ক঳ফা প্রদান;
√ বযাট সযটানথ প্রস্তুতকযণ;
√ বযাট ঳িংক্রান্ত অনযানয ক঳ফা প্রদান;
√ কেড রাইচ঳ন্স সনফন্ধন ও নফায়ন;
√ আইআযস঳ এফিং ইআযস঳ সনফন্ধন ও নফায়ন;
√ আন্তজথাসতক স্ট্যান্ডাডথ অনুমায়ী স঴঳াফ প্রস্তুতকযণ;
√ ইন্টাযনার অসডট ঳িংক্রান্ত ক঳ফা প্রদান।

32
 এ঳ ক঴াচ঳ন এন্ড ককািং
঩সযোরনায়ঃ
সফ আইনজীফী কভাঃ ঳া াদ ক঴াচ঳ন
ঢাকা, ফািংরাচদ঱।
০১৭১১১-৩৭০৩৯

PROBLEMS AND SOLUTIONS

P-1. Consider the following costs:

100 units 200 units

Material Tk.500 Tk.1,000
Labor Tk.1,000 Tk.2,000
Rent Tk.2,000 Tk.2000
Electricity Tk.700 Tk.900

Required:
Identify if the costs are fixed, variable or semi-variable.

Solution:

Material:

Material is Tk.500 for 100 units, therefore Tk.5 per unit (Tk.500 ÷ 100 units), and
Tk.1,000 for 200 units, therefore Tk.5 per unit (Tk.11,000 ÷ 200 units).

As the material cost increases proportionately when the number of units increases,
this is a variable cost.

Labor:

Labor is Tk.1,000 for 100 units, therefore Tk.10 per unit (Tk.1,000 ÷ 100 units), and
Tk.2,000 for 200 units, therefore Tk.10 per unit (Tk.2,000 ÷ 200 units).

As the labor cost increases proportionately when the number of units increases, this
is a variable cost.

Rent:

Rent is Tk.2,000 for both 100 units and 200 units.

As the rent doesn‟t change when the number of units changes, this is a fixed cost.

33
Electricity:

Electricity is Tk.700 for 100 units, therefore Tk.7 per unit (Tk.700 ÷ 100 units), and
Tk.900 for 200 units, therefore Tk.4.50 per unit (Tk.900 ÷ 200 units).

As electricity contains both fixed and variable cost, this is a semi-variable cost.

P-2. Which of the following costs would be classified as step cost?

(a) The cost of material is Tk.3 per kg for purchases up to 10,000 kg. From 10,001
kg to 15,000 kg the cost is Tk.2.80 per kg. Thereafter the cost is Tk.2.60 per kg.
(b) The cost of supervisory labor is Tk.18,000 per period for output up to 10,000
units. From 10,001 units to 15,000 units the cost is Tk.37,000 per period. Thereafter
the cost is Tk.58,000 per period.
(c) The cost of machine rental is Tk.4,500 per period for output up to 3,000 units.
From 3,001 units to 6,000 units the cost is Tk.8,700 per period. Thereafter the cost is
Tk.12,200 per period.
(d) The mileage charge for a rental car is Tk.0.05 per mile up to 400 miles. From
401 miles to 700 miles the charge is Tk.0.07 per mile. Thereafter the cost is Tk.0.08
per mile.

Solution:

Step cost refers to the cost that remains constant for a certain level of quantity, but
changes when the quantity is crossed.

According to the definition, cost (b) and (c) are step cost.

Cost (a) and (d) are not step cost. These are non-linear variable cost.

P-3. Saad Fashion is a readymade garments manufacturer. It has incurred the

following costs for the month of April 2023:

Particulars Tk.
Fabric 30,000
Thread 6,000
Accessories 8,000
Pattern cutters salary 9,500
Machine operators salary 7,000
Packers salary 4,000
Factory supervisors salary 4,500
Depreciation of factory machinery 2,000
Accountants salary 5,000
Sales people salary 4,800
Office rent 9,000

34
 Interest expense 3,500

From the above table, you are required to calculate the manufacturing cost and non-
manufacturing cost of Saad Fashion incurred during April 2023.

Solution:

Manufacturing cost
= Direct materials + Direct labor + Manufacturing overhead
= Tk.(30,000 + 6,000 + 8,000) + Tk.(9,500 + 7,000 + 4,000) + Tk.(4,500 + 2,000)
= Tk.44,000 + Tk.20,500 + Tk.6,500
= Tk.71,000

Non-manufacturing cost
= Tk.5,000 + Tk.4,800 + Tk.9,000 + Tk.3,500

P-4. Suppose you are a Cost Accountant of Alfa Company. The company has
decided to use the visual fit method to split its production cost into variable and
fixed components. Following is the data which is provided to you for the analysis:

Month Units produced Total cost

January 2,000 Tk.15,000
February 5,000 Tk.30,000
March 3,400 Tk.22,000
April 8,100 Tk.45,500
May 9,900 Tk.54,500
June 7,000 Tk.40,000
July 4,600 Tk.28,000
August 6,000 Tk.35,000

From the above data you are required to determine the fixed and variable costs using
the method prescribed by the company.

Solution:

60,000

50,000
Y axis: Total cost

40,000

30,000

20,000

10,000

0
35 0 2,000 4,000 6,000 8,000 10,000 12,000
X axis: Units produced
Fixed cost per month = Y intercept = Tk.5,000

Variable cost per unit = Slope of straight line

To calculate slop we will take two points on line: (0, 5000) and (6000, 35000)

Tk.35,000  Tk.5,000
Variable cost per unit =
6,000 units  0 unit
Tk.30,000
=
6,000 units
= Tk.5

P-5. Based on the following overhead cost information, develop a total cost formula
and estimate total overhead costs for January 2023, if direct labor hours for the
month estimated to be 20,000.

Overhead cost elements Fixed component Variable component

(Per direct labor hour)
Utility Tk.5,000 Tk.2.10
Maintenance Tk.8,000 Tk.5.30
Depreciation Tk.12,000 -
Insurance - Tk.3.90
Supplies Tk.3,000 Tk.2.20
Rend Tk.15,000 -
Factory wage - Tk.5.50

Solution:

Overhead cost elements Fixed component Variable component

(Per direct labor hour)
Utility Tk.5,000 Tk.2.10
Maintenance Tk.8,000 Tk.5.30
Depreciation Tk.12,000 -
Insurance - Tk.3.90
Supplies Tk.3,000 Tk.2.20
Rent Tk.15,000 -
Factory wage _______- Tk.5.50
Total Tk.43,000 Tk.19.00

Total cost formula, Y = a + bX

36
Where,
a = Fixed cost per month
b = Variable cost per hour

Therefore, Y = Tk.43,000 + Tk.19X

Total overhead costs = Tk.43,000 + (Tk.19 x 20,000 hours)

= Tk.43,000 + Tk.380,000
= Tk.423,000
P-6. Information concerning the number of deliveries and total delivery costs for
Mark, Inc. for the first six months of 2022 appears below:

Month No. of deliveries Delivery costs

January 120 Tk.5,400
February 110 Tk.5,000
March 115 Tk.5,200
April 130 Tk.5,800
May 140 Tk.6,200
June 125 Tk.5,600

Required:
(a) Develop a cost formula by applying the high-low method and using the formula
estimate total delivery costs for July if number of deliveries for the month is
expected to be 135.
(b) Determine the fixed and variable costs by applying linear regression and then
convert your results into the form of a cost formula.

Solution:

(a)

High point 140 deliveries Tk.6,200

Low point 110 deliveries Tk.5,000
Difference 30 deliveries Tk.1,200

Tk.1,200
Variable cost per delivery =
30 deliveries
= Tk.40

Total delivery costs at the high point Tk.6,200

Less: Variable costs (140 deliveries x Tk.40) Tk.5,600
Fixed cost per month Tk.600

The cost formula, Y = a + bX

37
Where,
a = Fixed cost per month
b = Variable cost per delivery

Therefore, Y = Tk.600 + Tk.40X

Total delivery costs = Tk.600 + (Tk.40 x 135 toys)

= Tk.600 + Tk.5,400
= Tk.6,000
(b) The linear regression equation is Y = a + bX

Where,

Fixed cost per month, a =

 y  b x
n
n xy   x  y
Variable cost per delivery, b =
n  x 2  ( x ) 2

No. of deliveries (x) Delivery costs (y) x2 xy

120 5,400 14,400 648,000
110 5,000 12,100 550,000
115 5,200 13,225 598,000
130 5,800 16,900 754,000
140 6,200 19,600 868,000
125 5,600 15,625 700,000
∑x = 740 ∑y = 33,200 ∑x2 = 91,850 ∑xy = 4,118,000

n xy   x  y
b=
n  x 2  ( x ) 2
(6 x 4,118,000)  (740 x 33,200)
=
(6 x 91,850)  (740) 2
24,708,000  24,568,000
=
551,100  547,600
140,000
=
3,500
= 40

a=
 y  b x
n
33,200  (40 x 740)
=
6
33,200  29,600
=
6

38
 3,600
=
6
= 600

Thus,
a = Tk.600
b = Tk.40

Therefore,
The cost formula, Y = Tk.600 + Tk.40X

P-7. The number of headphone sold and the total cost over the last eight months in
an outlet of Mission Electric Ltd. are given below:

Si. No. Month No. of headphones sold Total costs (Tk.)

1 January 420 8,700
2 February 450 9,300
3 March 380 7,900
4 April 360 7,500
5 May 340 7,100
6 June 300 6,300
7 July 370 7,700
8 August 400 8,300

Required:
(a) Using the high-low method, determine a formula for headphone costs. What
headphone costs would you expect to be incurred during a month in which 480
headphones are sold?
(b) Prepare the formula for headphone costs by using least-squares regression
method. You are advised to assume that the number of headphones sold is
appropriate cause of the costs.

Solution:

(a)

High point 450 headphones Tk.9,300

Low point 300 headphones Tk.6,300
Difference 150 headphones Tk.3,000

Tk.3,000
Variable cost per headphone =
150 headphones
= Tk.20

Total costs at the high point Tk.9,300

39
Less: Variable costs (450 headphones x Tk.20) Tk.9,000
Fixed cost per month Tk.300

The cost formula, Y = a + bX

Where,
a = Fixed cost per month
b = Variable cost per headphone
Therefore, Y = Tk.300 + Tk.20X

Expected headphone costs = Tk.300 + (Tk.20 x 480 headphones)

= Tk.300 + Tk.9,600
= Tk.9,900

(b) The least-squares regression equation is Y = a + bX

Where,

Fixed cost per month, a =

 y  b x
n
n xy   x  y
Variable cost per headphone, b =
n  x 2  ( x ) 2

No. of headphones Total costs (y) x2 xy

sold (x)
420 8,700 176,400 3,654,000
450 9,300 202,500 4,185,000
380 7,900 144,400 3,002,000
360 7,500 129,600 2,700,000
340 7,100 115,600 2,414,000
300 6,300 90,000 1,890,000
370 7,700 136,900 2,849,000
400 8,300 160,000 3,320,000
∑x = 3,020 ∑y = 62,800 ∑x2 = 1,155,400 ∑xy = 24,014,000

n xy   x  y
b=
n  x 2  ( x ) 2
(8 x 24,014,000)  (3,020 x 62,800)
=
(8 x1,155,400)  (3,020) 2
192,112,000 189,656,000
=
9,243,200  9,120,400
2,456,000
=
122,800

40
 = 20

a=
 y  b x
n
62,800  (20 x 3,020)
=
8
62,800  60,400
=
8
2,400
=
8
= 300

Thus,
a = Tk.300
b = Tk.20

Therefore,
The cost formula, Y = Tk.300 + Tk.20X

P-8. A&B PLC products a wide range of electronic components including its best
selling item, the laser switch. The company is preparing the budgets for 2022 and
knows that the key element in the master budget is the contribution expected from
the laser switch. The records for this component for the past five years are
summarized below with the costs and revenues adjusted to 2022 values:

Year Sales Sales revenue Variable costs Contribution

Units Tk. Tk. Tk.
2017 1,500 30,000 16,000 14,000
2018 1,800 35,000 20,000 15,000
2019 2,000 35,000 22,000 13,000
2020 2,300 40,000 24,000 16,000
2021 2,400 45,000 27,000 18,000

It has been estimated that sales in 2022 will be 2,700 units.

Required:
(a) Develop an equation for contribution by using linear regression.
(b) What will be the forecasted contribution for the year 2022?
(c) Comment on the advantages of using linear regression for forecasting.

Solution:

(a) The linear regression equation is Y = a + bX

Where,

41
Fixed contribution per year, a =
 y  b x
n
n xy   x  y
Variable contribution per unit, b =
n  x 2  ( x ) 2

Sales units in Contribution (y) x2 xy

thousand (x)
1.50 14,000 2.25 21,000
1.80 15,000 3.24 27,000
2.00 13,000 4.00 26,000
2.30 16,000 5.29 36,800
2.40 18,000 5.76 43,200
2
∑x = 10.00 ∑y = 76,000 ∑x = 20.54 ∑xy = 154,000

n xy   x  y
b=
n  x 2  ( x ) 2
(5 x 154,000)  (10 x 76,000)
=
(5 x 20.54)  (10) 2
770,000  760,000
=
102.70 100
10,000
=
2.70
= 3,704

a=
 y  b x
n
76,000  (3,704 x 10)
=
5
76,000  37,040
=
5
38,960
=
5
= 7,792

The equation for contribution is Tk.7,792 per year plus Tk.3,704 per thousand units
sold or Tk.3.70 per unit.

Therefore,
Y = Tk.7,792 + Tk.3.70X

(b) The forecasted contribution for the year 2022

42
= Tk.7,792 + Tk.3.70X
= Tk.7,792 + (Tk.3.70 x 2,700 units)
= Tk.7,792 + Tk.9,990
= Tk.17,782

(c) The advantages of using linear regression for forecasting:

- It takes into account all available observations and yields more accurate results
than the high-low method.
- It determines the line of best fit mathematically and is more accurate than visually
determining the line of best fit using graphical or scatter graph method.
- It is statistically valid method and is preferable to subjective methods based on
guesswork from past observations.

স঳এভএ অনরাইন ককাসেিং ক্লাচ঳ বসতথ েরচছ!

বফস঱ষ্ট্য ঳ভূ঴ঃ

√ স঳এভএ ফযাচেয ঳কর স঱ক্ষাথথী আইস঳এভএসফ প্রসতষ্ঠাচনয;

√ স঳এভএ স঳চরফাচ঳য ঩া঱া঩াস঱ সফগত ফছচযয প্রশ্ন ঳ভাধান কযা ঴য়;
√ একাউসটিং সফলয় ঳ভূচ঴ আই.এপ.আয.এ঳ অনু঳যন কযা ঴য়;
√ গাসণসতক ঳ভ঳যা ঳ভাধাচনয ঳঴জ ককৌ঱র ক঱খাচনা ঴য়।

শুক্রফাচযয ফযাে
যচয়চছ!
নফযদয় ফ্রী ক্লা঳ কচয
বসতথয স঳দ্ধান্ত
ঢাকা, ফািংরাচদ঱। সনন!
০১৭১১১-৩৭০৩৯

43
 ক্লাস নিবেি লেখক ল াোঃ সাজ্জাদ ল াবসি, নসএ এ ১৮০০ পাশ

EXERCISE QUESTIONS
E-1. Raising Institute is estimating it‟s fixed and variable costs. The following costs
were incurred during the month of May by Raising Institute when 10 rooms were
cleaned:

Cleaning supplies Tk.2,400

Hourly wages Tk.4,850
Depreciation– cleaning equipment Tk.1,050
Manager‟s salary Tk.1,400
Office rent Tk.1,200
Total cost Tk.10,900

Required:
Classify each cost as fixed or variable based on judgment and then determine total
variable and fixed cost.

E-2. From the following type of cost, determine the manufacturing and non-
manufacturing item by tabular form.

Si. No. Type of cost Si. No. Type of cost

01 Cotton fabric 09 Sales staff cost
02 Button 10 Pattern master salary
03 Office rent and electricity 11 Thread
04 Office stationary 12 Denim fabric
05 Machine spare parts 13 Accounts staff cost
06 Depreciation on producing 14 Machine operator salary
equipment
07 Distributor‟s commission 15 Finance cost
08 Factory manager salary 16 Marketing people salary

E-3. Pakiza Company produces its product in batches. The company provided you
the following overhead cost data for seven production runs.

Batch Production units Overhead cost

1 1,000 Tk.10,000
2 7,400 Tk.35,600

44
 3 5,300 Tk.27,200
4 2,100 Tk.14,400
5 6,000 Tk.30,000
6 8,600 Tk.40,400
7 3,800 Tk.21,200

Required:
You are instructed to determine the cost function from the data provided by Pakiza
Company using scatter graph method of mixed cost analysis.
E-4. Maria, an accountant for Golden Jubilee, Inc., has decided to estimate the fixed
and variable components associated with the company‟s repair activity. She has
collected the following data for the past 6 months:

Repair hours Total repair costs (Tk.)

10 800
20 1,100
15 900
12 900
18 1,050
25 1,250

Required:
(a) Estimate the fixed and variable components for the repair costs using the high-
low method. Using the cost formula, predict the cost of repair if 14 hours are used.
(b) Estimate the fixed and variable components using the method of least-squares.
Translate your results into the form of a cost formula, and using that formula, predict
the total cost of repairs if 14 hours are used.
CMA Adapted - June 2020

E-5. As the manager of a Bangladeshi restaurant with a take-away service, you have
been asked to prepare a detailed budget for the next year. To help you with this, you
need to know the fixed and variable cost elements of your delivery cost to
customers‟ homes. The following information is available from the monthly
accounts:

Month No. of deliveries Total delivery costs

July 403 Tk.662.70
August 291 Tk.561.90
September 348 Tk.613.20
October 364 Tk.627.60
November 521 Tk.768.90
December 387 Tk.648.30

Required:
(a) Calculate the fixed and variable cost elements using the high-low method.

45
(b) Develop a cost formula for delivery cost (Y) assuming that number of deliveries
(X) is the appropriate cause of the costs.
(c) Estimate the total delivery costs for next November if number of deliveries for
the month is estimated at 723.
CMA Adapted - December 2017

E-6. Nova Company‟s total overhead cost at various levels of activity is presented
below:

Month Machine hours Total overhead costs

April 70,000 Tk.198,000
May 60,000 Tk.174,000
June 80,000 Tk.222,000
July 90,000 Tk.246,000

Assume that the total overhead costs above consist of utilities, supervisory salaries,
and maintenance. The breakdown of these costs at the 60,000 machine hours level of
activity is:

Utilities (Variable) Tk.48,000

Supervisory salaries (Fixed) Tk.21,000
Maintenance (Mixed) Tk.105,000
Total overhead cost Tk.174,000

Nova Company‟s management wants to breakdown the maintenance cost into its
variable and fixed cost elements.

Required:
(a) Estimate how much of the Tk.246,000 of overhead cost in July was maintenance
cost.
(b) Using the high-low method, estimate a cost formula for maintenance.
(c) What total overhead cost would you expect to be incurred at an operating activity
level of 75,000 machine hours?
CMA Adapted - June 2019

E-7. Azad Company has an exclusive franchise to purchase a product from the
manufacturer and distribute it on retail level. As an aid in planning, the company has
decided to start using the contribution approach to the income statement internally.
To have data to prepare such a statement, the company has analyzed its expenses
and develops the following cost formula:

Particulars Cost formula

Cost of goods sold Tk.30 per unit sold
Advertising expenses Tk.120,000 per quarter
Sales commission 5% of sales

46
 Shipping expenses ?
Administrative salaries Tk.100,000 per quarter
Depreciation expenses Tk.60,000 per quarter

Management has concluded that shipping expenses is a mixed cost, containing both
variable and fixed cost elements. Units sold and the related shipping expenses over
the last four quarters are as follows:

Year 2022 Sales quantity Shipping expenses

1st Quarter 6,000 units Tk.72,000
2nd Quarter 5,000 units Tk.65,000
3rd Quarter 7,000 units Tk.77,000
4th Quarter 8,000 units Tk.80,000

Azad Company‟s President would like a cost formula derived for shipping expenses
so that a budgeted income statement using the contribution approach can be
prepared for the next quarter.

Required:
(a) Using the least-squares regression method, estimate a cost formula for shipping
expenses.
(b) In the 1st quarter of year 2023, the company plans to sell 10,000 units at Tk.100
per unit. Prepare an income statement for the quarter using the contribution format.

47
EXERTICE SOLUTIONS

E-1

Cleaning supplies is variable cost as the total cost of cleaning supplies increases
when more rooms are cleaned.

Hourly wages is variable cost as the total cost of hourly wages increases when more
rooms are cleaned.

Depreciation is fixed cost as the total cost of depreciation is the same regardless of
the number of rooms cleaned.

Manager's salary is fixed cost as the manager's salary is the same regardless of the
number of hours worked or the number of rooms cleaned.

Office rent is fixed cost as the monthly office rent is the same regardless of the
number of rooms cleaned.

Total variable cost = Tk.2,400 + Tk.4,850

= Tk.7,250

Total fixed cost = Tk.1,050 + Tk.1,400 + Tk.1,200

= Tk.3,650

E-2

Si. No. Manufacturing items Non-manufacturing items

01 Cotton fabric
02 Button
03 Office rent and electricity
04 Office stationary
05 Machine spare parts
06 Depreciation on producing
equipment
07 Distributor‟s commission

48
 08 Factory manager salary
09 Sales staff cost
10 Pattern master salary
11 Thread
12 Denim fabric
13 Accounts staff cost
14 Machine operator salary
15 Finance cost
16 Marketing people salary
E-3
Scatter Graph

45,000
40,000
Y axis: Overhead cost

35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
0 2,000 4,000 6,000 8,000 10,000
X axis: Production units

Fixed cost per batch = Y intercept = Tk.6,000

Variable cost per unit = Slope of straight line

To calculate slop we will take two points on line: (0, 6000) and (6000, 30000)

Tk.30,000  Tk.6,000
Variable cost per unit =
6,000 units  0 unit
Tk.24,000
=
6,000 units
= Tk.4

The cost function, Y = a + bX

Where,
a = Fixed cost per batch
b = Variable cost per unit

49
Therefore, Y = Tk.6,000 + Tk.4X

E–4

(a)

High point 25 hours Tk.1,250

Low point 10 hours Tk.800
Difference 15 hours Tk.450
Tk.450
Variable cost per hour =
15 hours
= Tk.30

Total repair costs at the high point Tk.1,250

Less: Variable costs (25 hours x Tk.30) Tk.750
Fixed cost per month Tk.500

The cost formula, Y = a + bX

Where,
a = Fixed cost per month
b = Variable cost per hour

Therefore, Y = Tk.500 + Tk.30X

Total cost of repair = Tk.500 + (Tk.30 x 14 hours)

= Tk.500 + Tk.420
= Tk.920

(b) The least-squares equation is Y = a + bX

Here,

Fixed cost per month, a =

 y  b x
n
n xy   x  y
Variable cost per hour, b =
n  x 2  ( x ) 2

Repair hours (x) Total repair costs (y) x2 xy

10 800 100 8,000
20 1,100 400 22,000
15 900 225 13,500
12 900 144 10,800
18 1,050 324 18,900

50
 25 1,250 625 31,250
2
∑x = 100 ∑y = 6,000 ∑x = 1,818 ∑xy = 104,450

n xy   x  y
b=
n  x 2  ( x ) 2
(6 x 104,450)  (100 x 6,000)
=
(6 x 1,818)  (100) 2
626,700  600,000
=
10,908  10,000
26,700
=
908
= 30

a=
 y  b x
n
6,000  (30 x 100)
=
6
6,000  3,000
=
6
3,000
=
6
= 500

Thus,
a = Tk.500
b = Tk.30

The cost formula, Y = Tk.500 + Tk.30X

Total cost of repair = Tk.500 + (Tk.30 x 14 hours)

= Tk.500 + Tk.420
= Tk.920
E-5

(a)

High point 521 deliveries Tk.768.90

Low point 291 deliveries Tk.561.90
Difference 230 deliveries Tk.207.00

Tk .207.00
Variable cost per delivery =
230 deliveries

51
 = Tk.0.90

Total delivery costs at the high point Tk.768.90

Less: Variable costs (521 deliveries x Tk.0.90) Tk.468.90
Fixed cost per month Tk.300.00

(b)

The cost formula, Y = a + bX

Where,
a = Fixed cost per month
b = Variable cost per delivery

Therefore, Y = Tk.300.00 + Tk.0.90X

(c) Total delivery costs for next November,

= Tk.300.00 + (Tk.0.90 x 723 deliveries)
= Tk.300.00 + Tk.650.70
= Tk.950.70

E-6

(a)

Total overhead costs Tk.246,000

Less:
Utilities @ Tk.0.80* per hour Tk.72,000
Supervisory salaries Tk.21,000
Maintenance Tk.153,000

*Tk.48,000 ÷ 60,000 hours = Tk.0.80 per hour

(b)

High point 90,000 hours Tk.153,000

Low point 60,000 hours Tk.105,000
Difference 30,000 hours Tk.48,000

Tk.48,000
Variable cost per hour =
30,000 hours
= Tk.1.60

Total maintenance costs at the high point Tk.153,000

Less: Variable costs (90,000 hours x Tk.1.60) Tk.144,000
Fixed cost per month Tk.9,000

52
The cost formula, Y = a + bX

Where,
a = Fixed cost per month
b = Variable cost per delivery

Therefore, Y = Tk.9,000 + Tk.1.60X

(c) The breakdown of costs at the 75,000 machine hours:

Variable cost per Fixed cost

machine hour
Utilities Tk.0.80
Supervisory salaries Tk.21,000
Maintenance Tk.1.60 Tk.9,000
Total overhead costs Tk.2.40 Tk.30,000

Therefore,
Total overhead costs = Tk.30,000 + (Tk.2.40 x 75,000 hours)
= Tk.30,000 + Tk.180,000
= Tk.210,000
E-7

(a) The cost formula for shipping expenses, Y = a + bX

Here,

Fixed cost per quarter, a =

 y  b x
n
n xy   x  y
Variable cost per unit, b =
n  x 2  ( x ) 2

Year 2022 Sales quantity Shipping x2 xy

in thousand (x) expenses (y)
1st Quarter 6 Tk.72,000 36 432,000
2nd Quarter 5 Tk.65,000 25 325,000
3rd Quarter 7 Tk.77,000 49 539,000
4th Quarter 8 Tk.80,000 64 640,000
∑x = 26 ∑y = 294,000 ∑x2 = 174 ∑xy = 1,936,000

n xy   x  y
b=
n  x 2  ( x ) 2
(4 x1,936,000)  (26 x 294,000)
=
(4 x174)  (26) 2

53
 7,744,000  7,644,000
=
696  676
100,000
=
20
= 5,000

a=
 y  b x
n
294,000  (5,000 x 26)
=
4
294,000 130,000
=
4
164,000
=
4
= 41,000

The cost formula for shipping expenses is Tk.41,000 per quarter plus Tk.5,000 per
thousand units sold or Tk.5 per unit.

Therefore,
Y = Tk.41,000 + Tk.5X

(b)
Azad Company
Income statement
For the 1st quarter of year 2023

Tk. Tk.
Sales (10,000 units x Tk.100) 1,000,000
Less: Variable expenses:
Variable cost of goods sold @ Tk.30 300,000
Variable sales commission @ 5% of sales 50,000
Variable shipping expenses @ Tk.5 50,000
Total variable expenses 400,000
Contribution margin 600,000
Less: Fixed expenses:
Advertising expenses 120,000
Shipping expenses 41,000
Administrative salaries 100,000
Depreciation expenses 60,000
Total fixed expenses 321,000
Operating income 279,000

54
 CHAPTER - 3
COST STATEMENTS

3.1. DEFINITION OF COST STATEMENT

All costs incurred or expected to be incurred during a given period are presented in
the form of a statement, popularly called cost sheet or statement of cost or
production statement.

The chartered Institute of Management Accountants, London defines cost statement

as “a document which provides for the assembly of the detailed cost of a cost centre
or cost unit.”

According to Walter W. Bigg, “The expenditure, which has been incurred upon
production for a period, is extracted from the financial books and the store records,
and out in a memorandum statement. If this statement is confined to the discloser of
the cost of the units production during the period, it is termed cost statement or cost
sheet.”

3.2. FEATURES OF COST STATEMENT

Most cost sheets contain a minimum of three primary sections labeled direct
materials, direct labor and overhead. Direct materials refer to the raw materials or
parts necessary to make the actual product. On a construction project, for example,
plywood and roofing material would appear in the direct materials section. Direct
labor refers to the required labor needed to complete the project. Overhead consists
of standard costs associated with carrying out the project, such as insurance and
utilities. Some cost sheets include sections such as indirect labor, which covers
support staff, and indirect materials, which represent a negligible expense.
Management determines the level of detail required, which can range from a single
sum per category to a detailed list in every category.

3.3. TYPES OF COST STATEMENT

55
When we talk about the cost statement or cost sheet, we can say that it is calculated
by all kinds of organizations belonging to different industries. Thus, it can be
bifurcated into two major categories:

Historical cost sheet:

The statement of cost which records all those expenses or costs that have already
been incurred by the organization, i.e., the actual cost born (direct or indirect) on the
business operations in a particular period, is called a historical cost sheet.

Estimated cost sheet:

It is a cost statement which is prepared in advance before the actual production of
goods or services take place. It is made to predict or determine the cost which will
be incurred by the organization, the potential or profitability of the product or
service and to fix a suitable selling price. This type of cost statement is usually
prepared at the time of filling tenders or taking contracts to quote an appropriate
price of the goods or service.

3.4. ADVANTAGES OF COST STATEMENT

Cost statement is an essential statement for the organization engaged in the

production of goods or services. Following are some of the benefits of preparing a
cost sheet:
(a) A cost statement provides per unit cost of a product or service which the
organization incurs at every stage of business operation, which helps the
management to analyze and control such overheads.
(b) It also helps in deciding the selling price of a product or service based on the cost
incurred and profit expected out of it.
(c) The cost managers or production managers can study the past figures of the
company‟s cost statement to ensure the efficiency of business operations and for
eliminating the non-productive expenses.
(d) It also acts as a base for comparing the actual cost incurred, with that of the
estimated or budgeted cost, to find out any deviations and take the necessary
corrective actions.
(e) The preparation of a cost statement is an essential document for the application
of kaizen costing in the business.
(f) A cost statement provides for the adjustments of the opening and closing stocks
of raw material, work-in-process and finished goods.

3.5. FORMAT OF STATEMENT OF DIRECT COSTS

Company Name
Statement of Direct Costs
For the period ended…………………….

Particulars Amount Amount

Raw materials at beginning X

56
 Add: Cost of raw materials purchased
Purchase of raw materials X
Less: Purchase returns and allowances X
Less: Purchase discount X
Net purchase of raw materials X
Add: Transportation-in X
Add: Customs X
Cost of raw materials purchased X
Cost of raw materials available for use X
Less: Raw materials at end X
Direct materials consumed X
Add: Direct labor (including contribution to RPF X
and other benefits)
Add: Other direct expenses X
Prime costs X

3.6. FORMAT OF STATEMENT OF COST OF GOODS MANUFACTURED

Company Name
Statement of Cost of Goods Manufactured
For the period ended………………….….

Particulars Amount Amount

Prime costs X
Add: Manufacturing/ factory overhead:
Indirect materials/ supplies X
Indirect labor X
Factory rent X
Factory depreciation X
Factory utilities X
Factory maintenance X
Loss of production X
Rework/ spoilage X
Other factory related expenses X
Total manufacturing/ factory overhead X
Total manufacturing costs/ Cost of production X
Add: Work-in-process at beginning X
Total cost of work-in-process X
Less: Work-in-process at end X
Cost of goods manufactured X

3.7. FORMAT OF STATEMENT OF COST OF GOODS SOLD

Company Name
Statement of Cost of Goods Sold

57
 For the period ended…………………….

Particulars Amount
Finished goods at beginning X
Add: Cost of goods manufactured X
Cost of goods available for sale X
Less: Finished goods at end X
Cost of goods sold X
3.8. FORMAT OF STATEMENT OF PROFIT OR LOSS

Company Name
Statement of Profit or Loss (Absorption Costing)
For the period ended…………………….

Particulars Amount Amount

Sales X
Less: Sales returns and allowances X
Less: Sales discount X X
Net sales X
Less: Cost of goods sold X
Gross profit X
Less: Administrative, selling and distribution X
expenses
Operating profit or loss X

Company Name
Statement of Profit or Loss (Variable Costing)
For the period ended…………………….

Particulars Amount Amount

Sales X
Less: Sales returns and allowances X
Less: Sales discount X X
Net sales X
Less: Variable expenses
Variable cost of goods sold:
Finished goods at beginning X
Add: Variable cost of goods manufactured X
Variable cost of goods available for sale X
Less: Finished goods at end X
Variable cost of goods sold X
Add: Variable administrative, selling and X
distribution expenses
Total variable expenses X
Contribution margin X

58
 Less: Fixed expenses:
Fixed manufacturing expenses X
Fixed administrative, selling and distribution X
expenses
Total fixed expenses X
Operating profit or loss X

MULTIPLE CHOICE QUESTIONS AND ANSWERS

There are twenty three multiple choice questions with five options. Pick the option
that best explains the given question.

1. Total of all direct costs is termed as___.

(a) Direct cost
(b) Prime cost
(c) Work cost
(d) Production cost
(e) Total cost
Answer: (b)

2. Which one of the following is not considered for preparation of cost sheet?
(a) Factory cost
(b) Material cost
(c) Selling cost
(d) Labor cost
(e) Goodwill written off
Answer: (e)
3. Indirect material scrap is adjusted along with___.
(a) Prime cost
(b) Factory cost
(c) Labor cost
(d) Material cost
(e) Conversion cost
Answer: (b)
4. Indirect material used in production is classified as___.
(a) Office overhead
(b) Selling overhead
(c) Production overhead
(d) Distribution overhead
(e) General overhead
Answer: (c)
5. Sale of defectives is reduced from___.
(a) Prime cost
(b) Works cost
(c) Cost of production

59
(d) Cost of sales
(e) Cost of defective
Answer: (c)
6. Cost of sales plus profit is___.
(a) Selling price
(b) Value of finished product
(c) Value of goods produced
(d) Value of stocks
(e) Accumulated cost
Answer: (a)

7. Office and administrative expenses can be charged on the basis of___.

(d) Factory cost
(c) Prime cost
(a) Material cost
(b) Labor cost
(e) Overhead cost
Answer: (b)

8. Selling and distribution expenses can be charged on the basis of___.

(a) Material cost
(b) Labor cost
(c) Prime cost
(d) Factory cost
(e) Other cost
Answer: (c)

9. Classification and accumulation of costs by fixed and variable costs of special

importance in___.
(a) Operating coasting
(b) Operation costing
(c) Unit costing
(d) Process costing
(e) Equivalent costing
Answer: (a)
10. Operating costing is a___.
(a) Method of costing
(b) Technique of costing
(c) Norm of costing
(d) Procedure of costing
(e) Standard of costing
Answer: (a)
11. Operating costing is suitable for___.
(a) Contractors
(b) Manufacturers
(c) Job order business

60
(d) Service industries
(e) Sugar industries
Answer: (d)
12. Prime cost plus variable overhead is known as___.
(a) Cost of goods sold
(b) Manufacturing cost
(c) Total variable cost
(d) Total cost
(e) Marginal cost
Answer: (e)
13. Depreciation of plant and machinery is a part of___.
(a) Selling overhead
(b) Distribution overhead
(c) Administrative overhead
(d) Factory overhead
(e) General overhead
Answer: (d)
14. Absorption costing is known as___.
(a) Variable costing
(b) Marginal costing
(c) Full costing
(d) Allocation costing
(e) Distribution costing
Answer: (c)
15. Variable costing is known as___.
(a) Marginal costing
(b) Total costing
(c) Absorption costing
(d) Simultaneous costing
(e) Business costing
Answer: (a)
16. Sales minus cost of goods sold is termed as___.
(a) Net sales
(b) Net cost
(c) Operating profit
(d) Net profit
(e) Gross profit
Answer: (e)

17. The difference between total revenues and total variable costs is known as ___.
(a) Operating income
(b) Contribution margin
(c) Gross margin
(d) Net margin
(e) Fixed cost
Answer: (b)

61
18. Selling and distribution costs include___.
(a) Salary of employees working in the selling and distribution departments
(b) Sales commissions for sales representatives
(c) Advertising costs and other marketing costs
(d) Operating costs for delivery vehicles
(e) All of the above
Answer: (e)

19. Prime cost plus a share of production overheads are the___.

(a) Full production cost of the cost unit
(b) Part production cost of the cost unit
(c) Fully absorbed production cost of the cost unit
(d) Partly absorbed production cost of the cost unit
(e) Both a and c
Answer: (e)

20. Costs that become part of the cost of goods manufactured are called___.
(a) Product costs
(b) Period costs
(c) Material costs
(d) Unit costs
(e) Activity costs
Answer: (a)
21. Calculate the prime cost from the following information:
Direct material purchased: Tk.100,000
Direct material consumed: Tk.90,000
Direct labor: Tk.60,000
Direct expenses: Tk.20,000
Manufacturing overheads: Tk.30,000
(a) Tk.180,000
(b) Tk.200,000
(c) Tk.170,000
(d) Tk.210,000
(e) Tk.150,000
Answer: (c)

22. Total cost of a product is Tk.10,000 and profit is 25% on selling price. Profit is:
(a) Tk.2,500
(b) Tk.3,000
(c) Tk.3,333
(d) Tk.2,000
(e) Tk.2,200
Answer: (c)
23. Calculate cost of sales from the following:
Net work costs: Tk.200,000
Office and administrative overheads: Tk.100,000

62
Opening stock of WIP: Tk.10,000
Closing Stock of WIP: Tk.20,000
Closing stock of finished goods: Nil
Closing stock of finished goods: Tk.30,000
Selling overheads: Tk.10,000
(a) Tk.270,000
(b) Tk.280,000
(c) Tk.300,000
(d) Tk.320,000
(e) Tk.340,000
Answer: (b)

স঳এভএ অনরাইন ককাসেিং ক্লাচ঳ বসতথ েরচছ!

বফস঱ষ্ট্য ঳ভূ঴ঃ

√ স঳এভএ ফযাচেয ঳কর স঱ক্ষাথথী আইস঳এভএসফ প্রসতষ্ঠাচনয;

√ স঳এভএ স঳চরফাচ঳য ঩া঱া঩াস঱ সফগত ফছচযয প্রশ্ন ঳ভাধান কযা ঴য়;
√ একাউসটিং সফলয় ঳ভূচ঴ আই.এপ.আয.এ঳ অনু঳যন কযা ঴য়;
√ গাসণসতক ঳ভ঳যা ঳ভাধাচনয ঳঴জ ককৌ঱র ক঱খাচনা ঴য়।

শুক্রফাচযয ফযাে
যচয়চছ!
নফযদয় ফ্রী ক্লা঳ কচয
বসতথয স঳দ্ধান্ত
ঢাকা, ফািংরাচদ঱। সনন!
০১৭১১১-৩৭০৩৯

63
 ক্লাস নিবেি লেখক ল াোঃ সাজ্জাদ ল াবসি, নসএ এ ১৮০০ পাশ

PROBLEMS AND SOLUTIONS

P-1. Gama Limited is a manufacturing company that located in Dhaka. The

company uses job order costing system. During December, the following costs were
incurred in completing job-X:

Particulars Tk.
Direct materials 20,000
Direct labor (1,000 hours) 15,000
Marketing expenses 10,000
Selling expenses 5,000
Opening work-in-process 12,000
Closing work-in-process 7,000

Manufacturing overhead was applied at the rate of Tk.10 per direct labor hour.
During the month 5,000 units were produced in job-X and 4,000 units were sold.

Required:
Determine the cost of goods manufactured per unit for job-X.

Solution:

Direct materials Tk.20,000

Add: Direct labor 15,000
Prime costs Tk.35,000
Add: Manufacturing overhead (1,000 hours x Tk.10) 10,000
Total manufacturing costs Tk.45,000
Add: Opening work-in-process 12,000
Total cost of work-in-process Tk.57,000
Less: Closing work-in-process 7,000
Cost of goods manufactured Tk.50,000
Units produced 5,000 units
Cost of goods manufactured per unit Tk.10

P-2. The First Bakery‟s factory produces 500-pound cake in the year 2022. During
the year, the factory purchased Tk.361,920 of direct materials. The factory‟s direct
labor costs for the year were Tk.99,085 (10,430 hours @ Tk.9.50) and indirect labor

64
costs were Tk.126,750 (20,280 hours @ Tk.6.25). Account balances for the year
were given below.

Particulars Tk.
Plant supervision 42,500
Factory insurance 18,100
Utilities, factory 29,220
Depreciation, factory building 46,200
Depreciation, factory equipment 62,800
Factory repair and maintenance 14,440
Selling and administrative expenses 76,480
Direct materials, beginning 26,490
Work-in-process, beginning 101,640
Finished goods, beginning 148,290
Direct materials, ending 24,910
Work-in-process, ending 100,400
Finished goods, ending 141,100

Required:
(a) Compute the direct materials consumed during the year.
(b) Compute the total manufacturing costs for the year.
(c) Compute the cost of goods manufactured during the year.

Solution:

(a)

Particulars Tk.
Direct materials, beginning 26,490
Add: Cost of direct materials purchased 361,920
Cost of direct materials available for use 388,410
Less: Direct materials, ending 24,910
Direct materials consumed 363,500

(b)

Particulars Tk. Tk.

Direct materials consumed [from (a)] 363,500
Add: Direct labor 99,085
Prime costs 462,585
Add: Manufacturing overheads
Indirect labor 126,750
Plant supervision 42,500
Factory insurance 18,100
Utilities, factory 29,220

65
 Depreciation, factory building 46,200
Depreciation, factory equipment 62,800
Factory repair and maintenance 14,440
Total manufacturing overheads 340,010
Total manufacturing costs 802,595

(c)

Particulars Tk.
Total manufacturing costs [from (b)] 802,595
Add: Work-in-process, beginning 101,640
Total cost of work-in-process 904,235
Less: Work-in-process, ending 100,400
Cost of goods manufactured 803,835

P-3. SRM Limited is a metal manufacturer, selling products to the home

construction market. Consider the following data for the year 2021:

Particulars Tk.
Materials handling costs 70,000
Lubricant 7,000
Indirect manufacturing labor 40,000
Direct manufacturing labor 300,000
Direct materials, January 1, 2021 40,000
Direct materials, December 31, 2021 50,000
Finished goods, January 1, 2021 100,000
Finished goods, December 31, 2021 150,000
Work-in-process, January 1, 2021 10,000
Work-in-process, December 31, 2021 14,000
Plant leasing costs 54,000
Depreciation- plant equipment 36,000
Property taxes on plant equipment 4,000
Fire insurance on plant equipment 3,000
Direct materials purchased 460,000
Sales revenue 1,360,000
Sales commissions 60,000
Sales salaries 100,000
Distribution costs 70,000
Administrative costs 100,000

Required:
(a) Prepare a statement of cost of goods manufactured for the year ended December
31, 2021.

66
(b) Prepare a statement of profit or loss for the year ended December 31, 2021.

Solution:

(a)
SRM Limited
Statement of Cost of Goods Manufactured
For the year ended December 31, 2021
Particulars Tk. Tk.
Direct materials, January 1, 2021 40,000
Add: Cost of direct materials purchased 460,000
Cost of direct materials available for use 500,000
Less: Direct materials, December 31, 2021 50,000
Direct materials consumed 450,000
Add: Direct manufacturing labor 300,000
Prime costs 750,000
Add: Manufacturing overheads
Materials handling costs 70,000
Lubricant 7,000
Indirect manufacturing labor 40,000
Plant leasing costs 54,000
Depreciation- plant equipment 36,000
Property taxes on plant equipment 4,000
Fire insurance on plant equipment 3,000
Total manufacturing overheads 214,000
Total manufacturing costs 964,000
Add: Work-in-process, January 1, 2021 10,000
Total cost of work-in-process 974,000
Less: Work-in-process, December 31, 2021 14,000
Cost of goods manufactured 960,000

(b)
SRM Limited
Statement of Profit or Loss
For the year ended December 31, 2021

Particulars Tk. Tk.

Sales revenue 1,360,000
Less: Cost of goods sold
Finished goods, January 1, 2021 100,000
Add: Cost of goods manufactured 960,000
Cost of goods available for sale 1,060,000
Less: Finished goods, December 31, 2021 150,000
Cost of goods sold 910,000
Gross profit 450,000

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 Less: Administrative, selling and distribution 330,000
expenses (100,000 + 60,000 + 100,000 + 70,000)
Operating profit 120,000

P-4. Doremon Company had the following account balances as of December 1,

2022:

Raw materials (direct and indirect) Tk.18,600

Work-in-process Tk.27,500
Finished goods Tk.35,600

During December the company incurred the following factory‟s costs:

(a) Purchased Tk.178,000 of raw materials on account.
(b) Direct materials of Tk.134,000 and indirect materials of Tk.48,000 were issued.
(c) Direct labor of Tk.62,000 and indirect labor of Tk.26,000 were accrued.
(d) Factory utility costs of Tk.8,000 were accrued.
(e) Property taxes on the factory were accrued in the amount of Tk.2,200.
(f) Prepaid insurance of Tk.1,800 on factory equipment expired in December.
(g) Depreciation on factory buildings were Tk.40,000.
(h) It is the company policy to transfer actual overhead to work-in-process.
(i) Productions were completed for Tk.340,000 and added to final product.
(j) Some goods were sold on credit for Tk.700,000. The original cost of the goods
were Tk.350,000.
(k) Selling and distribution expenses were Tk.280,000 (Credit various accounts).

Required:
(i) Journalize the above transaction for December 2022.
(ii) Prepare a statement of cost of goods manufactured.
(iii) Prepare a statement of profit or loss showing the cost of goods sold in good
form.

Solution:

(i)
Doremon Company
Journal Entries

Si. Particulars Folio Debit Credit

No. (Tk.) (Tk.)
(a) Raw materials 178,000
Accounts payable 178,000
(To record purchase of raw materials on
account)
(b) Work-in-process 134,000
Manufacturing overhead 48,000

68
 Raw materials 182,000
(To record issue of raw materials)
(c) Work-in-process 62,000
Manufacturing overhead 26,000
Accrued payroll 88,000
(To record accrued payroll)
(d) Manufacturing overhead 8,000
Utility payable
(To record accrued utility) 8,000
(e) Manufacturing overhead 2,200
Property taxes payable 2,200
(To record accrued property taxes)
(f) Manufacturing overhead 1,800
Prepaid insurance 1,800
(To record prepaid insurance expired)
(g) Manufacturing overhead 40,000
Accumulated depreciation- 40,000
Factory buildings
(To record depreciation on factory
buildings)
(h) Work-in-process 126,000
Manufacturing overhead 126,000
(To record transfer of overhead to work-in-
process)
(i) Finished goods 340,000
Work-in-process 340,000
(To record transfer of work-in-process to
finished goods)
(j) Accounts receivable 700,000
Sales 700,000
(To record sales on account)
(k) Cost of goods sold 350,000
Finished goods 350,000
(To record cost of goods sold)
(l) Selling and distribution expenses 280,000
Various accounts 280,000
(To record selling and distribution expenses)

(ii)
Doremon Company
Statement of Cost of Goods Manufactured
For the year ended December 31, 2022

Particulars Tk. Tk.

Raw materials at beginning 18,600

69
 Add: Cost of raw materials purchased 178,000
Cost of raw materials available for use 196,600
Less: Indirect materials used 48,000
Less: Raw materials at end 14,600
(18,600 + 178,000 – 182,000)
Direct materials consumed 134,000
Add: Direct labor 62,000
Prime costs 196,000
Add: Manufacturing overheads
Indirect materials 48,000
Indirect labor 26,000
Factory utilities 8,000
Factory property taxes 2,200
Factory insurance 1,800
Factory depreciation 40,000
Total manufacturing overheads 126,000
Total manufacturing costs 322,000
Add: Work-in-process at beginning 27,500
Total cost of work-in-process 349,500
Less: Work-in-process at end 9,500
(27,500 + 134,000 + 62,000 + 126,000 - 340,000)
Cost of goods manufactured 340,000

(iii)
Doremon Company
Statement of Profit or Loss
For the year ended December 31, 2022

Particulars Tk. Tk.

Sales 700,000
Less: Cost of goods sold
Finished goods at beginning 35,600
Add: Cost of goods manufactured 340,000
Cost of goods available for sale 375,600
Less: Finished goods at end 25,600
(35,600 + 340,000 - 350,000)
Cost of goods sold 350,000
Gross profit 350,000
Less: Selling and distribution expenses 280,000
Operating profit 70,000

P-5. Keya Company produces and sells a single product, a wooden hand loom for
weaving small item such as scarves. Selected costs and operating data relating to the
product for the year 2020 are given below:

70
 Units in beginning inventory 0
Units produced during the year 10,000
Units sold during the year 8,000
Units in ending inventory 2,000
Selling price per unit Tk.50
Direct material cost per unit Tk.11
Direct labor cost per unit Tk.6
Variable manufacturing overhead cost per unit Tk.3
Variable administrative and selling expense per unit sold Tk.5
Fixed manufacturing overhead costs per year Tk.120,000
Fixed administrative and selling expenses per year Tk.90,000

Required:
(a) Prepare a statement of profit or loss for the year 2020, assuming that the
company uses absorption costing.
(b) Prepare a statement of profit or loss for the year 2020, assuming that the
company uses variable costing.

Solution:

Cost of goods manufactured per unit:

Particulars Absorption Variable

costing costing
Tk. Tk.
Direct material 11 11
Direct labor 6 6
Variable manufacturing overhead 3 3
Fixed manufacturing overhead (Tk.120,000 / 12 _-
10,000 units)
Total 32 20

(a)
Keya Company
Statement of Profit or Loss
For the year ended December 31, 2020

Particulars Tk. Tk.

Sales 400,000
Less: Cost of goods sold
Beginning inventory 0
Add: Cost of goods manufactured 320,000
(10,000 units x Tk.32)
Cost of goods available for sale 320,000
Less: Ending inventory (2,000 units x Tk.32) 64,000

71
 Cost of goods sold 256,000
Gross profit 144,000
Less: Administrative and selling expenses 130,000
(8,000 units x Tk.5) + Tk.90,000
Operating profit 14,000

(b)
Keya Company
Statement of Profit or Loss
For the year ended December 31, 2020

Particulars Tk. Tk.

Sales 400,000
Less: Variable expenses
Variable cost of goods sold:
Beginning inventory 0
Add: Variable cost of goods manufactured 200,000
(10,000 units x Tk.20)
Variable cost of goods available for sale 200,000
Less: Ending inventory (2,000 units x Tk.20) 40,000
Variable cost of goods sold 160,000
Add: Variable administrative and selling expenses 40,000
(8,000 units x Tk.5)
Total variable expenses 200,000
Contribution margin 200,000
Less: Fixed expenses
Fixed manufacturing overhead 120,000
Fixed administrative and selling expenses 90,000
Total fixed expenses 210,000
Operating loss (10,000)

P-6. Dolan Company is a manufacturer in Bangladesh that produces various kinds of

products. At the beginning of September, certain records in the books of the
company had following balances:

Particulars Debit Credit

Work-in-process Tk.1,010
Materials 3,690
Accrued payroll Tk.436

The payable register shows the following balances at the end of September:

Particulars Debit Credit

72
 Trade payable Tk.13,820
Purchase discount lost Tk.108
Materials 5,300
Accrued payroll 4,352

Materials requisition indicates:

For production Tk.4,270

For supplies 600
For rework 250
Total 5,120

The labor distribution sheet shows:

Direct labor (2,000 hours) Tk.6,000

Indirect labor:
Supervisor salary Tk.900
Salespeople salary 680 1,580
Total 7,580

Work-in-process account details are as follows:

Particulars September 1 September 30

Materials Tk.320 Tk.560
Direct labor (Tk.3 per hour) 450 720
Applied manufacturing overhead 240 384
Total 1,010 1,664

The finished orders for the month are given below:

Direct materials Tk.4,030

Direct labor (1,910 hours) 5,730
Applied manufacturing overhead 3,056
Total 12,816

Required:
(a) A statement of cost of goods manufactured for the month of September.
(b) A calculation of the under- or over-applied factory overhead for the month of
September.

Solution:

(a)
Dolan Company
Statement of Cost of Goods Manufactured

73
 For the month ended September 30

Particulars Tk.
Materials, September 1 3,690
Add: Cost of materials purchased 5,300
Cost of materials available for use 8,990
Less: Indirect materials used (600 + 250) 850
Less: Materials, September 30 (3,690 + 5,300 – 5,120) 3,870
Direct materials consumed 4,270
Add: Direct labor 6,000
Prime costs 10,270
Add: Applied manufacturing overhead (384 + 3,056 – 240) 3,200
Total manufacturing costs 13,470
Add: Work-in-process, September 1 1,010
Total cost of work-in-process 4,210
Less: Work-in-process, September 30 1,664
Cost of goods manufactured 12,816

(b)

Particulars Tk.
Supplies 650
Rework 250
Indirect labor 1,580
Actual manufacturing overhead 2,430
Less: Applied manufacturing overhead 3,200
Over-applied manufacturing overhead (770)

P-7. Consider the information below for the year ended December 31, 2022 and
complete the statement of cost of goods manufactured in good form.

Particulars Tk. Tk.

Raw materials, beginning inventory 15,000
Raw materials, ending inventory 25,000
Purchase of raw materials 90,000
Purchase discount 4,000
Purchase returns and allowances 10,000
Payroll 98,000
Property tax 15,000
Income tax 17,000
Work-in-process, beginning inventory 60,000
Work-in-process, ending inventory 39,000
Finished goods, beginning inventory 70,000
Finished goods, ending inventory 50,000

74
 Carriage inward 10,000
Carriage outward 15,000
Rent 20,000
Depreciation:
Factory building 8,000
Factory plant 9,000
Office building 7,000
Office furniture 6,000 30,000
Interest on borrowings 23,000
Insurance 11,000
Utility 10,000

Additional information:
(a) For both direct and indirect material, the company uses a single account. Records
show that direct material is 8 times higher than indirect material.
(b) Payroll account includes payment made to both direct and indirect labor. As a
policy, payment for direct labor is 80% higher than indirect labor.
(c) 80% of rent is related to factory.
(d) 80% of property tax is related to factory.
(e) 70% of utility is related to factory.

Solution:
Statement of Cost of Goods Manufactured
For the year ended December 31, 2022

Particulars Tk. Tk.

Raw materials, beginning inventory 15,000
Add: Cost of raw materials purchased
Purchase of raw materials 90,000
Less: Purchase returns and allowances 10,000
Less: Purchase discount 4,000
Net purchase of raw materials 76,000
Add: Carriage inward 10,000
Cost of purchase of raw materials 86,000
Cost of raw materials available for use 101,000
Less: Indirect materials (Tk.90,000 x 1/9) 10,000
Less: Raw materials, ending inventory 25,000
Direct materials consumed 66,000
Add: Direct labor (Tk.98,000 x 180/280) 63,000
Prime costs 129,000
Add: Manufacturing overheads
Indirect materials 10,000
Indirect labor (Tk.98,000 – Tk.63,000) 35,000
Factory rent (Tk.20,000 x 80%) 16,000
Factory property tax (Tk.15,000 x 80%) 12,000

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 Factory utility (Tk.10,000 x 70%) 7,000
Depreciation– factory building 8,000
Depreciation– factory plant 9,000
Total manufacturing overheads 97,000
Total manufacturing costs 226,000
Add: Work-in-process, beginning inventory 60,000
Total cost of work-in-process 286,000
Less: Work-in-process, ending inventory 39,000
Cost of goods manufactured 247,000
EXERCISE QUESTIONS
E-1. Prepare a statement of cost of goods manufactured (in good form) for the T
Company from the following information for June 2023:

Inventories Beginning Ending

Raw materials Tk.6,700 Tk.8,900
Work-in-process Tk.17,700 Tk.22,650
Finished goods Tk.29,730 Tk.19,990

Additional information:
(a) Purchases of raw materials were Tk.46,700;
(b) 19,700 direct labor hours were worked at Tk.11.30 per hour;
(c) Overhead costs were Tk.33,300.
CMA Adapted – December 2019

E-2. During November 2022, the following costs were incurred for ABC
Manufacturing Ltd.:

Direct materials Tk.95,000, direct labor Tk.110,000, administrative expenses

Tk.35,000, selling expenses Tk.40,000 (variable Tk.15,000 and fixed Tk.25,000),
manufacturing overhead Tk.70,000. Sales Tk.350,000 for the month.

Other information are as below:

On November 1, 2022, work-in-process & finished goods were Tk.25,000 &
Tk.15,000 respectively and on November 30, 2022, work-in-process & finished
goods were Tk.10,000 & Tk.45,000 respectively.

Required:
Compute the cost of goods sold from the above information.

CMA Adapted – December 2016

E-3. MONYEM Sportswear manufactures a specialty line of T-shirts using a job

order costing system. During December, the following costs were incurred in
completing Job-XZ:

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Direct materials Tk.13,700
Direct labor Tk.4,800
Administrative expenses Tk.1,400
Selling expenses Tk.5,600

Manufacturing overhead was applied at the rate of Tk.25 per machine hour, and Job-
XZ required 800 machine hours. Job-XZ resulted in 7,000 good T-shirts.

Required:
What would be the cost of goods sold per T-shirt?

E-4. Clean Company submits the following data as on June 30, 2023:

Particulars Dept. A Dept. B

Direct materials put into process Tk.42,300
Direct labor:
Hours worked 12,250 hours 19,750 hours
Hourly rate Tk.3.90 Tk.4.20
Manufacturing overhead: Hourly rate Tk.2.50 Tk.2.10
Inventories: July 1, 2022 June 30, 2023
Raw materials Tk.15,000 Tk.19,200
Work-in-process Tk.17,300 Tk.19,425
Finished goods Tk.11,300 Tk.9,400

Required:
Prepare a formal cost of goods sold statement.

E-5. Excel Manufacturer is operating since 2015. Following costs and inventory data
for the year 2022 are taken from its accounting records:

Particulars Tk.
Advertising expenses 100,000
Direct labor cost 90,000
Purchase of raw materials 132,000
Factory rent 80,000
Indirect labor 56,300
Sales commissions 35,000
Utilities for factory 9,000
Factory equipment maintenances 24,000
Factory supplies 700
Depreciation- Office equipment 8,000
Depreciation- Factory equipment 40,000

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 Inventories: January 1, 2022 December 31, 2022
Raw materials Tk.8,000 Tk.10,000
Work-in-process Tk.5,000 Tk.20,000
Finished gods Tk.70,000 Tk.25,000

Required:
(a) Prepare a statement of cost of goods manufactured.
(b) Prepare the cost of goods sold section of company‟s statement of profit or loss
for the year ended December 31, 2022.
CMA Adapted – June 2016
E-6. Sky Mark International had the following account balances as of December 1,
2021:
Raw materials Tk.20,000
Work-in-process Tk.30,000
Finished goods Tk.40,000

During December, the company incurred following factory costs:

(a) Purchased of raw materials on account Tk.200,000.
(b) Issued of raw materials Tk.210,000 of which Tk.150,000 were direct materials.
(c) Factory payroll was accrued Tk.100,000; of which Tk.70,000 was for direct labor
and the rest was for supervisors.
(d) Straight-line depreciation on factory equipment was Tk.50,000.
(e) Actual overhead was transferred to work-in-process inventory.
(f) Goods costing Tk.380,000 were transferred to finished goods.
(g) Sales on account totaled Tk.900,000.
(h) Cost of goods sold was Tk.400,000.
(i) Administrative expenses were Tk.300,000.

Required:
(i) Journalize the above transaction for December 2021.
(ii) Prepare a statement of cost of goods manufactured.
(iii) Prepare an income statement showing cost of goods sold in detail.

E-7. Aleya Limited produces an electronic product that is highly demandable in the
local market. The budgeting department of the company has provided the following
data for the year 2020:
Selling price Tk.5.00/unit
Direct materials Tk.1.30/unit
Direct labor Tk.1.50/unit
Variable overhead Tk.0.20/unit
Fixed overhead (Tk.140,000/140,000 units of normal volume) Tk.1.00/unit
Fixed selling and distribution expenses Tk.65,000/year
Sales commission 4% of sales value
Output and sales in units:
Opening stock 30,000

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Closing stock 10,000
Production 140,000
Sales 160,000

Required:
Prepare a profit or loss statement for the year ended December 31, 2020 under each
of the following methods:
(a) Absorption costing;
(b) Variable costing.

E-8. The cost data and other information of Purple Manufacturer for the month of
June 2023 has been accumulated below from different sources and you are asked to
prepare a statement of cost of goods sold and income statement for the month.
(a) The month started with no material and during the month 45,000 kgs of materials
were purchased at a cost of Tk.7.8 per kg.
(b) Purple has 200 workers who were worked in total of 32,000 hours during the
month. The hourly wage rate is Tk.8.
(c) Indirect material costs were 2.5% of direct material consumed on an average.
(d) No overtime is done in the month and indirect labor cost will be 3% of direct
labor cost.
(e) Utility cost is a semi-variable cost and utility cost function is Y = Tk.2,500 +
Tk.0.8X where, Y represents total utility cost and X represents number of units
produced.
(f) During the month a total of 12,000 units were produced and sold. 3.5 kgs of
materials are used to produce each unit.
(g) Purple is a wholesaler and unit selling price is set at Tk.100.
(h) Accounting staff salaries amounted to Tk.20,000 and salesperson salaries
amounted to Tk.12,000 for the month.
(i) Other expenses incurred during the month:
Advertising expenses Tk.1,000
Property taxes Tk.1,500
Freight-out Tk.600
Depreciation- factory Tk.800
Depreciation- office Tk.700

E-9. Titas Company is a manufacturer of computers. Its Senior Accountant is

resigned in September 2022. An inexperienced Assistant Accountant has joined the
company in October 2022 and prepared the following financial statement.

Titas Company
Statement of Profit or Loss
For the month ended October 31, 2022

Particulars Tk. Tk.

Net sales 715,000
Less: Operating expenses

79
 Raw materials purchases 264,000
Direct labor cost 190,000
Advertising expense 90,000
Sales manager‟s salary 42,000
Executives salary 33,000
Depreciation on office equipment 45,000
Depreciation on factory equipment 31,000
Indirect labor cost 28,000
Utility expense 12,000
Insurance expense 8,000
Total operating expenses 743,000
Operating loss (28,000)

The Controller of the company is concerned about the accuracy of the financial
statement as the Assistant Accountant has no experience in this matter. You are a
professional Cost Accountant and the company hired you to review the statement
and make necessary corrections. After examining other manufacturing cost data, you
have acquired the following additional information.

1. Inventory balances at the beginning and end of October 2022:

Particulars October 1 October 31

Tk. Tk.
Raw materials 18,000 34,000
Work-in-process 16,000 14,000
Finished gods 30,000 48,000

2. Only 50% of the utility expense and 60% of the insurance expense is concerned to
the factory operations.

Required:
(a) Prepare a schedule of cost of goods manufactured for October 2022.
(b) Prepare a revised statement of profit or loss for October 2022.

80
EXERCISE SOLUTIONS

E–1
T Company
Statement of Cost of Goods Manufactured
For the month ended June 30, 2023

Particulars Tk.
Raw materials, beginning 6,700
Add: Cost of raw materials purchased 46,700
Cost of raw materials available for use 53,400
Less: Raw materials, ending 8,900
Direct materials consumed 44,500
Add: Direct labor (19,700 hours x Tk.11.30) 222,610
Prime costs 267,110
Add: Manufacturing overheads 33,300
Total manufacturing costs 300,410
Add: Work-in-process, beginning 17,700
Total cost of work-in-process 318,110
Less: Work-in-process, ending 22,650
Cost of goods manufactured 295,460

E–2
ABC Manufacturing Ltd.
Computation of Cost of Goods Sold
For the month ended November 30, 2022

Particulars Tk.
Direct materials 95,000
Add: Direct labor 110,000
Prime costs 205,000
Add: Manufacturing overheads 70,000
Total manufacturing costs 275,000
Add: Work-in-process on November 1, 2022 25,000
Total cost of work-in-process 300,000
Less: Work-in-process on November 30, 2022 10,000

81
Cost of goods manufactured 290,000
Add: Finished goods on November 1, 2022 15,000
Cost of goods available for sale 305,000
Less: Finished goods on November 30, 2022 45,000
Cost of goods sold 260,000

E–3
MONYEM Sportswear
Determination of Cost of Goods Sold
For the month ended December 31

Direct materials Tk.13,700

Add: Direct labor 4,800
Prime costs Tk.18,500
Add: Manufacturing overheads (800 hours x Tk.25) 20,000
Total manufacturing costs Tk.38,500
Add: Work-in-process at beginning ____0
Total cost of work-in-process Tk.38,500
Less: Work-in-process at end ____0
Total cost of goods manufactured Tk.38,500
Add: Finished goods at beginning ____0
Cost of goods available for sale Tk.38,500
Less: Finished goods at end ____0
Total cost of goods sold Tk.38,500
Number of T-shirts 7,000
Cost of goods sold per T-shirt Tk.5.50
E-4
Clean Company
Statement of Cost of Goods Sold
For the year ended June 30, 2023
Particulars Tk.
Raw materials at July 1, 2022 15,000
Add: Cost of raw materials issued 46,000
Cost of raw materials available for use 61,500
Less: Raw material at June 30, 2023 19,200
Direct materials put into process 42,300
Add: Direct labor 130,025
(12,250 hours x Tk.3.90) + (19,750 hours x Tk.4.20)
Prime costs 173,025
Add: Manufacturing overhead 72,100
(12,250 hours x Tk.2.50) + (19,750 hours x Tk.2.10)
Total manufacturing costs 245,125

82
 Add: Work-in-process at July 1, 2022 17,300
Total cost of work-in-process 262,425
Less: Work-in-process at June 30, 2023 19,425
Cost of goods manufactured 243,000
Add: Finished goods at July 1, 2022 11,300
Cost of goods available for sale 254,300
Less: Finished goods at June 30, 2023 9,400
Cost of goods sold 244,900
E–5

(a)
Excel Manufacturer
Statement of Cost of Goods Manufactured
For the year ended December 31, 2022

Particulars Tk. Tk.

Raw materials, January 1, 2022 8,000
Add: Cost of raw materials purchased 132,000
Cost of raw materials available for use 140,000
Less: Raw materials, December 31, 2022 10,000
Direct materials consumed 130,000
Add: Direct labor 90,000
Prime costs 220,000
Add: Manufacturing overheads
Factory supplies 700
Indirect labor 56,300
Factory rent 80,000
Utilities for factory 9,000
Factory equipment maintenances 24,000
Depreciation- Factory equipment 40,000
Total manufacturing overheads 210,000
Total manufacturing costs 430,000
Add: Work-in-process, January 1, 2022 5,000
Total cost of work-in-process 435,000
Less: Work-in-process, December 31, 2022 20,000
Cost of goods manufactured 415,000

(b)
Excel Manufacturer
Statement of Profit or Loss
(Cost of goods sold section)
For the year ended December 31, 2022

Particulars Tk.
Finished goods, January 1, 2022 70,000

83
 Add: Cost of goods manufactured 415,000
Cost of goods available for sale 485,000
Less: Finished goods, December 31, 2022 25,000
Cost of goods sold 460,000

E–6

(i)
Sky Mark International
Journal Entries

Si. Particulars Folio Debit Credit

No. (Tk.) (Tk.)
(a) Raw materials 200,000
Accounts payable 200,000
(To record purchase of raw materials on
account)
(b) Work-in-process 150,000
Manufacturing overhead 60,000
Raw materials 210,000
(To record issue of raw materials)
(c) Work-in-process 70,000
Manufacturing overhead 30,000
Accrued payroll 100,000
(To record accrued payroll)
(d) Manufacturing overhead 50,000
Accumulated depreciation- 50,000
Factory equipment
(To record depreciation on factory
equipment)
(e) Work-in-process 140,000
Manufacturing overhead 140,000
(To record transfer of overhead to work-in-
process)
(f) Finished goods 380,000
Work-in-process 380,000
(To record transfer of work-in-process to
finished goods)
(g) Accounts receivable 900,000
Sales 900,000
(To record sales on account)
(h) Cost of goods sold 400,000

84
 Finished goods 400,000
(To record cost of goods sold)
(i) Administrative expenses 280,000
Accounts payable/ Cash 280,000
(To record administrative expenses)

(ii)
Sky Mark International
Statement of Cost of Goods Manufactured
For the year ended December 31, 2021

Particulars Tk. Tk.

Raw materials at beginning 20,000
Add: Cost of raw materials purchased 200,000
Cost of raw materials available for use 220,000
Less: Indirect materials used (210,000 - 150,000) 60,000
Less: Raw materials at end 10,000
(20,000 + 200,000 – 210,000)
Direct materials consumed 150,000
Add: Direct labor 70,000
Prime costs 220,000
Add: Manufacturing overheads
Indirect materials (210,000 – 150,000) 60,000
Indirect labor (100,000 – 70,000) 30,000
Factory depreciation 50,000
Total manufacturing overheads 140,000
Total manufacturing costs 360,000
Add: Work-in-process at beginning 30,000
Total cost of work-in-process 390,000
Less: Work-in-process at end 10,000
(30,000 + 150,000 + 70,000 + 140,000 - 380,000)
Cost of goods manufactured 380,000

(iii)
Sky Mark International
Statement of Profit or Loss
For the year ended December 31, 2021

Particulars Tk. Tk.

Sales 900,000
Less: Cost of goods sold
Finished goods at beginning 40,000

85
 Add: Cost of goods manufactured 380,000
Cost of goods available for sale 420,000
Less: Finished goods at end 20,000
(40,000 + 380,000 - 400,000)
Cost of goods sold 400,000
Gross profit 500,000
Less: Selling and administrative expenses 300,000
Operating profit 200,000

E–7

Cost of goods manufactured per unit:

Particulars Absorption Variable

costing costing
Tk. Tk.
Direct materials 1.30 1.30
Direct labor 1.50 1.50
Variable overhead 0.20 0.20
Fixed overhead 1.00 ___-
Total 4.00 3.00

(a)
Aleya Limited
Statement of Profit or Loss
For the year ended December 31, 2020

Particulars Tk. Tk.

Sales (160,000 units x Tk.5) 800,000
Less: Cost of goods sold
Opening stock (30,000 units x Tk.4) 120,000
Add: Cost of goods manufactured 560,000
(140,000 units x Tk.4)
Cost of goods available for sale 680,000
Less: Closing stock (10,000 units x Tk.4) 40,000
Cost of goods sold 640,000
Gross profit 160,000
Less: Selling and distribution expenses 97,000
(Tk.800,000 x 4%) + Tk.65,000
Operating profit 63,000

(b)
Aleya Limited
Statement of Profit or Loss
For the year ended December 31, 2020

86
 Particulars Tk. Tk.
Sales (160,000 units x Tk.5) 800,000
Less: Variable expenses
Variable cost of goods sold:
Opening stock (30,000 units x Tk.3) 90,000
Add: Variable cost of goods manufactured 420,000
(140,000 units x Tk.3)
Variable cost of goods available for sale 510,000
Less: Closing stock (10,000 units x Tk.3) 30,000
Variable cost of goods sold 480,000
Add: Variable selling and distribution expenses 32,000
(Tk.800,000 x 4%)
Total variable expenses 512,000
Contribution margin 288,000
Less: Fixed expenses
Fixed manufacturing overhead 140,000
Fixed selling and distribution expenses 65,000
Total fixed expenses 205,000
Operating profit 83,000

E–8
Purple Manufacturer
Statement of Cost of Goods Sold
For the month ended June 30, 2023

Particulars Tk. Tk.

Materials at beginning 0
Add: Cost of materials purchased 351,000
(45,000 kgs x Tk.7.8)
Cost of materials available for use 351,000
Less: Materials at end 23,400
{45,000 kgs – (12,000 units x 3.5 kgs)} x Tk.7.8
Direct materials consumed 327,600
Add: Direct labor (32,000 hours x Tk.8) 256,000
Prime costs 583,600
Add: Manufacturing overheads
Indirect materials (Tk.327,600 x 2.5%) 8,190
Indirect labor (Tk.256,000 x 3%) 7,680
Utility cost {Tk.2,500 + (12,000 units x Tk.0.8)} 12,100
Depreciation– factory 800
Total manufacturing overheads 28,770
Total manufacturing costs 612,370
Add: Work-in-process at beginning _____0
Total cost of work-in-process 612,370

87
 Less: Work-in-process at end _____0
Cost of goods manufactured 612,370
Add: Finished goods at beginning _____0
Cost of goods available for sale 612,370
Less: Finished goods at end _____0
Cost of goods sold 612,370

Purple Manufacturer
Statement of Profit or Loss
For the month ended June 30, 2023

Particulars Tk. Tk.

Sales (12,000 units x Tk.100) 1,200,000
Less: Cost of goods sold 612,370
Gross profit 587,630
Less: Administrative expenses
Accounting staff salaries 20,000
Property taxes 1,500
Depreciation– office 700
Total administrative expenses 22,200
Less: Selling and distribution expenses
Salesperson salaries 12,000
Freight-out 600
Advertising expenses 1,000
Total selling and distribution expenses 13,600
Operating profit 551,830

E–9
(a)
Titas Company
Schedule of Cost of Goods Manufactured
For the month ended October 31, 2022

Particulars Tk. Tk.

Raw materials, October 1 18,000
Add: Cost of raw materials purchased 264,000
Cost of raw materials available for use 282,000
Less: Raw materials, October 31 34,000
Direct materials consumed 248,000
Add: Direct labor 190,000
Prime costs 438,000
Add: Manufacturing overheads
Indirect labor cost 28,000

88
 Depreciation on factory equipment 31,000
Utility expense (Tk.12,000 x 50%) 6,000
Insurance expense (Tk.8,000 x 60%) 4,800
Total manufacturing overheads 69,800
Total manufacturing costs 507,800
Add: Work-in-process, October 1 16,000
Total cost of work-in-process 523,800
Less: Work-in-process, October 31 14,000
Cost of goods manufactured 509,800
(b)
Titas Company
Statement of Profit or Loss
For the month ended October 31, 2022

Particulars Tk. Tk.

Net sales 715,000
Less: Cost of goods sold
Finished goods, October 1 30,000
Add: Cost of goods manufactured 509,800
Cost of goods available for sale 539,800
Less: Finished goods, October 31 48,000
Cost of goods sold 491,800
Gross profit 223,200
Less: Administrative expenses
Executives salary 33,000
Depreciation on office equipment 45,000
Utilities expense (Tk.12,000 x 50%) 6,000
Insurance expense (Tk.8,000 x 40%) 3,200
Total administrative expenses 87,200
Less: Selling and distribution expenses
Sales manager‟s salary 42,000
Advertising expense 90,000
Total selling and distribution expenses 132,000
Operating profit 4,000

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