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COST & MANAGEMENT

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 TABLE OF CONTENTS

SN NAME OF THE CHAPTER PAGE NOS

2 MATERIAL COST 1-9

3 EMPLOYEE COST 10-16

4 OVERHEADS: ABSORPTION COSTING METHOD 17-27

5 ACTIVITY BASED COSTING 28-36

6 COST SHEET 37-41

7 COST ACCOUNTING SYSTEM 42-51

8 UNIT & BATCH COSTING 52-53

9A JOB COSTING 54

9B CONTRACT COSTING 55-58

10 PROCESS & OPERATION COSTING 59-64

11 JOINT PRODUCTS & BY PRODUCTS 65-68

12 SERVICE COSTING 69-70

13 STANDARD COSTING 71-78

14 MARGINAL COSTING 79-87

15 BUDGET AND BUDGETARY CONTROL 88-93

 02 MATERIAL COST

SOLUTIONS
HOME WORK SECTION
Solution 1.
Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘Dee’:
Sales forecast of the product ‘Exe’ 10,000 units
Less: Opening stock of ‘Exe’ 900 units
Fresh units of ‘Exe’ to be produced 9,100 units
Raw material required to produce 9,100 units of ‘Exe’ 18,200 kg.
(9,100 units × 2 kg.)
Less: Opening Stock of ‘Dee’ 1,000 kg.
Annual demand for raw material ‘Dee’ 17,200 kg.

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

(iii) Re- Order level:

(iv) Minimum consumption per day of raw material ‘Dee’:

Average Consumption per day = 50 Kg.
Hence, Maximum Consumption per day = 50 kg. + 20 kg. = 70 kg.
So Minimum consumption per day will be

Average Consumption

1 MATERIAL COST
Or, 50 kg. =

Or, Min. consumption = 100 kg – 70 kg. = 30 kg.

(a) Re-order Quantity :
EOQ – 200 kg. = 1,200 kg. – 200 kg.= 1,000 kg.

(b) Maximum Stock level:

= Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead time)
= 560 kg. + 1,000 kg. – (30 kg. × 4 days) = 1,560 kg. – 120 kg. = 1,440 kg.

(c) Minimum Stock level:

= Re-order level – (Average consumption per day × Average lead time)
= 560 kg. – (50 kg. × 6 days) = 260 kg.

(d) Impact on the profitability of the company by not ordering the EOQ.
When purchasing the ROQ When purchasing the EOQ
I Order 1,000 kg. 1,200 kg.
quantity
II No. of orders
a year
III Ordering Cost 18 orders × ` 720 = `12,960 15 orders × ` 720 = `10,800
IV Average
Inventory
V Carrying Cost 500 kg. × ` 17.2 = ` 8,600 600 kg. × ` 17.2 = ` 10,320
VI Total Cost ` 21,560 ` 21,120
Extra Cost incurred due to not ordering EOQ = ` 21,560 - ` 21,120 = `440

Solution 2.
Statement of Total Cost and Ranking
Item Units % of Total Unit cost Total cost % of Total Ranking
units (`) (`) cost
A 12,000 15.30% 30.00 3,60,000 12.97% 2
B 18,000 22.94% 3.00 54,000 1.95% 11
C 6,000 7.65% 35.00 2,10,000 7.57% 5
D 750 0.96% 220.00 1,65,000 5.95% 7
E 3,800 4.84% 75.00 2,85,000 10.27% 4
F 400 0.51% 105.00 42,000 1.51% 12
G 600 0.76% 300.00 1,80,000 6.49% 6

MATERIAL COST 2
 H 300 0.38% 350.00 1,05,000 3.78% 10
I 3,000 3.82% 250.00 7,50,000 27.03% 1
J 20,000 25.49% 7.50 1,50,000 5.41% 9
K 11,500 14.66% 27.50 3,16,250 11.40% 3
L 2,100 2.68% 75.00 1,57,500 5.68% 8`
78,450 100.00% 27,74,750 100.00%

Statement of classification of Inventory

Ranking Item % of Total Cost (`) % of Total Category
units Cost
1 I 3.82% 7,50,000 27.03%
2 A 15.30% 3,60,000 12.97%
3 K 14.66% 3,16,250 11.40%
4 E 4.84% 2,85,000 10.27%
5 C 7.65% 2,10,000 7.57%
Total 46.27% 19,21,250 69.24% A
6 G 0.76% 1,80,000 6.49%
7 D 0.96% 1,65,000 5.95%
8 L 2.68% 1,57,500 5.68%
9 J 25.49% 1,50,000 5.41%
Total 29.89% 6,52,500 23.53% B
10 H 0.38% 1,05,000 3.78%
11 B 22.94% 54,000 1.95%
12 F 0.51% 42,000 1.51%
Total 23.84% 2,01,000 7.24 C
12 100% 27,74,750 100%

Solution 3.
(i) Optimal order quantity i.e. E.O.Q.

2x4,000x135
= 90,000 = 300 units
12

Relevant Cost of this order quantity Rs.
4000 1,890
Ordering cost = 13.33 say 14 orders at Rs. 135
300
1
Carrying cost = x300x12 1,800
2
Relevant cost 3,690

3 MATERIAL COST
 2x4,000x80
(ii) Revised EOQ = = 231 units
12

4,000
Ordering cost = = 17.32 say 18 orders at Rs. 80 1,440
231
1
Carrying cost = × 231 × 12 1,386
2

2,826
Different in cost on account of this error = 3,690 – 2,826 = Rs. 864

Solution 4.

2DS
(i) EOQ =
C
96,000units ×1kg.
A = Annual consumption = = 24,000 kgs.
4 units

O = Cost of placing order = Handling cost + Freight = ` 1,500 + ` 4,000 = ` 5,500

C = Carrying cost per kg. per annum
Carrying cost (` 1.50 × 12) = `18
Finance charges on investment in inventory = `8
` 26

2x24,000 kgs.x5,500
EOQ = 3,186.5 kgs.
` 26

(ii) Number of orders = 24,000 kgs./ 3,186.5 kgs. = 7.53 or 8 ordersFrequency in placing
orders = 365 days / 8 orders = 45.63 or 46 days
(iii) If company places orders on quarterly basis, percentage of discount in price of raw
material to be negotiated:
Cost under EOQ:
Ordering cost 8 orders ×` 5,500 44,000.00
Carrying cost 3,186.5kgs. × ½ × ` 26 41,424.50
Total 85,424.50
Cost under Ordering on Quarterly Basis :
Ordering cost 4 orders × ` 5,500 22,000.00
Carrying cost (24,000 kgs./ 4 orders) × ½ × ` 26 78,000.00 Inc
Total 1,00,000.00

MATERIAL COST 4
 Incremental cost if orders are placed on quarterly basis
= ` 1,00,000– ` 85,424.50 = ` 14,575.50
Reduction in purchase price to be negotiated
= ` 14,575.50 ÷ 24,000 kgs. = ` 0.61 per kg.
Percentage of discount to be negotiated 0.61 ÷ 54 × 100 = 1.13%.

Solution 5.
(i) Optimum run size or Economic Batch Quantity (EBQ) = 2XDXS
C

Where, D = Annual demand i.e. 1.15% of 8,00,00,000 = 9,20,000 units

S = Set-up cost per run = Rs. 3,500
C = Inventory holding cost per unit per annum
= Rs. 1.5 × 12 months = Rs. 18
2 9,20,000 unis Rs. 3,500
EBQ = =18,915 units
Rs.18

(ii) Calculation of T otal Cost of set-up and inventory holding

Batch No. of set-ups Set- up Cost (Rs.) Inventory holding Total Cost
size cost (Rs.) ( Rs.)
23 80,500 3,60,000
40,000 ( 23 × Rs. 3,500)
A 9,20,000 40,000xRs.18 4,40,500
units
40,000 2
49 1,71,500 1,70,235
18,915 9,20,000 18,915xRs.18 3,41,735
B (49x Rs.3,500)
units 18,915 2
Extra Cost (A – B) 98,765

(iii)
Costs Unit level Batch level
(a) Inventory carrying cost Variable cost Variable cost
(b) Designing cost for a job Fixed cost Variable cost, provided the entire job
work is processed in a single batch.
(c) Machine set-up cost to Fixed cost Variable cost
run production
(d) Depreciation of factory Fixed cost Fixed cost
building

5 MATERIAL COST
Solution 6.
Computation of cost per unit
(`)
Net purchase Price 800.00
Add: Packing charges (5 non-returnable boxes) 50.00
850.00
No. of units purchased 200 units
Cost per unit 4.25
Note:
(i) Cash discount is treated as interest and finance charges, hence, it is not considered for
valuation of material.
(ii) Input credit is available for IGST paid; hence it will not be added to purchase cost.

Solution 7.
Classification of the items of inventory as per ABC analysis
1. 15 number of varieties of inventory items should be classified as ‘A’ category items
because of the following reasons:
(i) Constitute 0.375% of total number of varieties of inventory handled by stores of
factory, which is minimum as per given classification in the table.
(ii) 50% of total use value of inventory holding (average), which is maximum, according
to the given table.
(iii) Highest in consumption, about 85% of inventory usage (in end- product).

2. 110 number of varieties of inventory items should be classified as ‘B’ category items
because of the following reasons:
(i) Constitute 2.750% of the total number of varieties of inventory items handled by
stores of factory.
(ii) Requires moderate investment of about 30% of total use value of inventory holding
(average).
(iii) Moderate in consumption, about 10% of inventory usage (in end– product).

3. 3,875 number of varieties of inventory items should be classified as ‘C’ category items
because of the following reasons:
(i) Constitute 96.875% of total varieties of inventory items handled by stores of factory.
(ii) Requires about 20% of total use value of inventory holding (average).
(iii) Minimum inventory consumption, i.e. about 5% of inventory usage (in end-product).

MATERIAL COST 6
Solution 8.
Inventory turnover ratio
(Refer to working note)

Average number of days for which the average inventory is held

Working Note:
(`)
Opening stock of raw material  90,000
Add: Material purchases during the year  2,70,000
Less: Closing stock of raw material  1,10,000
Cost of stock of raw material consumed  2,50,000

Solution 9.
(A) (a) Value of Material Exe consumed during the period 1-4-2020 to 15-4-2020 by using
FIFO method.
Date Description Units Qty. (Units) Rate Amount
(`) (`)
1-4-2020 Opening balance 100 5 500
5-4-2020 Purchased 300 6 1,800
6-4-2020 Issued 100 5
150 6 1,400
8-4-2020 Purchased 500 7 3,500
10-4-2020 Issued 150 6
250 7 2,650
12-4-2020 Purchased 600 8 4,800
14-4-2020 Issued 250 7
250 8 3,750
15-4-2020 Balance 350 8 2,800
Total value of material Exe consumed during the period under FIFO method comes
to (` 1,400 + ` 2,650 + ` 3,750) ` 7,800 and balance on 15-4-2020 is of ` 2,800.
Value of material Exe consumed during the period 01-4-2020 to 15-4-2020 by
using LIFO method

7 MATERIAL COST
 Date Description Units Qty. (Units) Rate Amount
(`) (`)
1-4-2020 Opening balance 100 5 500
5-4-2020 Purchased 300 6 1,800
6-4-2020 Issued 250 6 1,500
8-4-2020 Purchased 500 7 3,500
10-4-2020 Issued 400 7 2,800
12-4-2020 Purchased 600 8 4,800
14-4-2020 Issued 500 8 4,000
15-4-2020 Balance 350 — 2,300*
Total value of material Exe issued under LIFO method comes to (` 1,500 + ` 2,800
+ ` 4,000) ` 8,300.
*The balance 350 units on 15-4-2020 of ` 2,300, relates to opening balance on 1-4-
2020 and purchases made on 5-4-2020, 8-4-2020 and 12-4-2020. (100 units @ ` 5,
50 units @ ` 6, 100 units @ ` 7 and 100 units @ ` 8).

(b) As shown in (a) above, the value of stock of materials on 15-4-2020: Under FIFO
method ` 2,800
Under LIFO method ` 2,300

(B) Total value of material Exe issued to production under FIFO and LIFO methods comes to
` 7,800 and ` 8,300 respectively. The value of closing stock of material Exe on 15-4-2020
under FIFO and LIFO methods comes to ` 2,800 and ` 2,300 respectively.
The reasons for the difference of ` 500 (` 8,300 – ` 7,800) as shown by the following table
in the value of material Exe, issued to production under FIFO and LIFO is as follows:
Date Quantity Value Total Value Total
Issued FIFO LIFO
(Units) (`) (`) (`) (`)
6 - 4-2020 250 1,400 1,500
10-4-2020 400 2,650 2,800
14-4-2020 500 3,750 7,800 4,000 8,300
1. On 6-4-2020, 250 units were issued to production. Under FIFO their value comes
to ` 1,400 (100 units × ` 5 + 150 units × ` 6) and under LIFO ` 1,500 (250 × ` 6).
Hence, ` 100 more was charged to production under LIFO.
2. On 10-4-2020, 400 units were issued to production. Under FIFO their value comes
to ` 2,650 (150 × ` 6 + 250 × ` 7) and under LIFO ` 2,800 (400 × ` 7). Hence, ` 150
more was charged to production under LIFO.

MATERIAL COST 8
 3. On 14-4-2020, 500 units were issued to production. Under FIFO their value comes
to ` 3,750 (250 × ` 7 + 250 × ` 8) and under LIFO ` 4,000 (500 × ` 8). Hence, ` 250
more was charged to production under LIFO.
Thus the total excess amount charged to production under LIFO comes to ` 500.

The reasons for the difference of ` 500 (` 2,800 – ` 2,300) in the value of 350 units of
Closing Stock of material Exe under FIFO and LIFO are as follows:
1. In the case of FIFO, all the 350 units of the closing stock belongs to the purchase
of material made on 12-4-2020, whereas under LIFO these units were from opening
balance and purchases made on 5-4-2020, 8- 4-2020 and 12-4-2020.
2. Due to different purchase price paid by the concern on different days of purchase,
the value of closing stock differed under FIFO and LIFO. Under FIFO 350 units
of closing stock were valued @ ` 8 p.u. Whereas under LIFO first 100 units were
valued @ ` 5 p.u., next 50 units @ ` 6 p.u., next 100 units @ ` 7 p.u. and last 100
units @ ` 8 p.u.

Thus, under FIFO, the value of closing stock increased by ` 500.

(iv) Base Stock Method: Minimum quantity of stock under this method is always held at a
fixed price as reserve in the stock, to meet the state of emergency, if it arises. This
minimum stock is known as base stock and is valued at a price at which the first lot of
materials is received and remains unaffected by subsequent price fluctuations.
This method of valuing inventory is different from other methods of valuing issues, as
the base stock of materials are valued at the original cost, whereas, materials other
than the base are valued using other methods like FIFO, LIFO etc. This method is not an
independent method as it uses FIFO or LIFO.
Advantages and disadvantages of this method depend upon the use of the other method
viz., FIFO or LIFO.

9 MATERIAL COST
 03 EMPLOYEE COST

SOLUTIONS
HOMEWORK SECTION
Solution 1.
Working Note:
Average number of workers on roll (for the quarter):
Employee Turnover rate using Replacement method

(i) Number of workers recruited and joined:

Employee turnover rate (Flux method)

No. of workers recruited and joined 42.

(ii) Number of workers left and discharged:

Employee turnover rate (Separation method)

Hence, number of workers left and discharged comes to 18

(iii) Calculation of Equivalent employee turnover rates:

EMPLOYEE COST 10


Solution 2.
Calculation of :
1. Time saved and wages:
Workmen A B
Standard time (hrs.) 40 40
Actual time taken (hrs.) 32 30
Time saved (hrs.) 8 10
Wages paid @ ` x per hr. (`) 32x 30x

2. Bonus Plan:
Halsey Rowan
Time saved (hrs.) 8 10
Bonus (`) 4x 7.5x
8hrsx`x 10hrs
x30hrsx`x
2 40hrs

3. Total wages:
Workman A: 32x + 4x = ` 36x
Workman B: 30x + 7.5x = ` 37.5x
Statement of factory cost of the job
Workmen A (`) B (`)
Material cost (assumed) y y
Wages (shown above) 36x 37.5x
Works overhead 240 225
Factory cost (given) 2,600 2,600

The above relations can be written as follows:

36x + y + 240 = 2,600 (i)
37.5x+ y+ 225 = 2,600 (ii)
Subtracting (i) from (ii) we get
1.5x – 15 = 0
Or, 1.5 x = 15 Or, x = ` 10 per hour

11 EMPLOYEE COST
 On substituting the value of x in (i) we get y = ` 2,000
Hence the wage rate per hour is ` 10 and the cost of raw material is ` 2,000 on the job.

Solution 3.
50,000
Output by experienced workers in 50,000 hours = = 5,000 units
10

Output by new recruits = 60% of 5,000 = 3,000

units Loss of output = 5,000 – 3,000 = 2,000 units
Total loss of output = Due to delay recruitment + Due to inexperience
= 10,000 + 2,000 = 12,000 units
Contribution per unit = 20% of `180 = ` 36
Total contribution lost = `36 × 12,000 units = ` 4,32,000
Cost of repairing defective units = 3,000 units × 0.2 × ` 25 = ` 15,000
Profit forgone due to labour turnover
(`)
Loss of Contribution 4,32,000
Cost of repairing defective units 15,000
Recruitment cost 1,56,340
Training cost 1,13,180
Settlement cost of workers leaving 1,83,480
Profit forgone in 2017-18 9,00,000

Solution 4.
(i) Halsey Premium plan :
1
= (Time taken x Rateper hour) + ( x Time saved x Rate per hour)
2

1
= (30 hours x ` 75) + ( x 10 hours x ` 75)
2
= ` 2,250 + ` 375 = ` 2,625

(ii) Rowan Premium plan :

Time saved
= (Time taken × Rateper hour) + ( × Time saved × Rate per hour)
Time allowed
10
= (30 hours × ` 75) + ( × 30 × ` 75)
40

= ` 2,250 + ` 375 = ` 2,625

= ` 2,250 + ` 562.5 = ` 2,812.5 or ` 2,813

EMPLOYEE COST 12
(iii) Time wage system :
= Time taken × Rate per hour
= 30 × ` 75 = ` 2,250

(iv) Piece Rate System :

= Std. T ime × Rate per hour
= 40 × ` 75 = ` 3,000

(v) Emerson plan :

Efficiency level = 40/30 = 133.33%
Time taken × (120% + 33.33%) of Rate
= 30 hours × 153.33% of ` 75
= ` 3,450

Solution 5.
`
(i) Rowan Plan : Normal time wage = 15 hours @ ` 5= 75
5 18.75
Bonus = Time saved /Time allowed × (Time taken × Time rate) = X(15 x 5)
20
93.75
(ii) Halsey Plan: Normal time wage = 15 hours @ ` 5= 75
Bonus = 50% of (Time saved x Time rate) = 50% of (5x5)= 12.5
87.5

Statement of Comparative Factory cost of work

Rowan Halsey
Plan ` Plan `
Materials 50 50
Direct Wages 93.75 87.5
Prime Cost 143.75 137.5
Factory Overhead (100% of Direct wages) 93.75 87.5
Factory Cost 237.5 225

13 EMPLOYEE COST
Solution 6.
Statement showing computation of effective hourly cost of employee ‘X’
Per month (`) Per annum (`)
(A) Earning of Employee ‘X’:
Basic pay 10,000 1,20,000
Dearness Allowance 2,000 24,000
Bonus 2,400 28,800
Employer’s contribution to provident fund 1,200 14,400
Other allowances 2,500 30,000
18,100 2,17,200
(B) Effective working hours (refer workings) 2,000 hours
(C) Effective hourly cost {(A) ÷ (B)} `108.60
Workings:
Calculation of effective working hours:
Annual working hours less Normal idle time = 2,400 hours – 400 hours = 2,000 hours.

Solution 7.
Statement showing Earnings of Workers A and B
A (`) B (`)
Basic wages 10,000 16,000
Dearness Allowance (50% of Basic Wages) 5,000 8,000
Overtime wages (Refer to Working Note 1) 1,500 --
Gross wages earned 16,500 24,000
Less: Contribution to Provident fund (800) (1,280)
Less: Contribution to ESI (200) (320)
Net wages earned 15,500 22,400

Statement of Employee Cost

A (`) B (`)
Gross Wages (excluding overtime) 15,000 24,000
Add: Employer’s contribution to PF 800 1,280
Add: Employer’s contribution to ESI 200 320
Gross wages earned 16,000 25,600
Normal working hours 200 200
Ordinary wages rate per hour 80 128

Statement Showing Allocation of Wages to Jobs

Total Jobs
Wages (`) X (`) Y (`) Z (`)
Worker A:

EMPLOYEE COST 14
 - Ordinary Wages (4: 3 : 3) 16,000 6,400 4,800 4,800
- Overtime 1,500 -- 1,500 --
Worker B:
- Ordinary Wages (5 : 2 : 3) 25,600 12,800 5,120 7,680
43,100 19,200 11,420 12,480

Working Notes
1. Normal Wages are considered as basic wages

Solution 8.
Calculation of total earnings:
= Time taken × Time rate + 50% (Time Allowed – Time Taken) × Time rate
= 6 hrs. × `60 + 1/2 × (2 hrs. × `60) or `360 + `60 = `420
Of his total earnings, `360 is on account of the time worked and `60 is on account of his share
of the premium bonus.

Solution 9.
Calculation of total earnings:
=Time taken × Rate per hour + × Time taken × Rate per hour
= 6 hours × `60 + x 6 hours × ` 60 = ` 360 + ` 90 = ` 450

Solution 10.
Total earnings (under 50% Halsey Scheme) = Hours worked x Rate per hour + ½
x time saved x Rate per hour
= 3 hours x ` 30 + ½ x1 hour x `30 = `105

Effective hourly rate =

Working Note:
Let T hours be the total time worked in hours by the skilled workers (machine man P), `30
is the rate per hour; standard time is 4 hours per unit and effective hourly earnings rate is
`37.50 then

15 EMPLOYEE COST
Earning (under Rowan plan) = Hours worked x Rate per hr + x
Time taken x Rate per hr

`37.5 T =

(both sides are divided by T)

` 37.5 = ` 30 + (4 – T) x ` 7.5
` 37.5 = ` 30 + `30 - 7.5T
or, ` 7.5 T = `60-`37.5
or, ` 7.5 T = ` 22.5
or, T = 3 hours.

Solution 11.
(`)
Wages paid to worker during the year {(` 10,000 +2,000) × 12} 1,44,000
Add: Employer Contribution to:
Provident Fund @ 10% 14,400
E.S.I. Premium @ 4.75% (6.5 – 1.75) 6,840
Bonus at 2 months’ wages (Basic + DA) 24,000
Total 1,89,240
Effective hours per year: 285 days × 8 hours = 2,280 hours
Wage-rate per hour (for costing purpose): `1,89,240/2,280 hours = `83

Solution 12.
(i) Effective working days in a year  300
Less: Leave days on full pay  20
Effective working days  280 days
Total effective working hours (280 days × 8 hours)  2,240
(ii) Total wages paid in a year  (`)
Basic pay 1,20,000
D.A.  36,000
Fringe benefits  12,000
 1,68,000
(iii) Hourly rate : `1,68,000/2,240 hours  `75.00

EMPLOYEE COST 16
 OVERHEADS :
04 ABSORPTION COSTING
SOLUTIONS
HOMEWORK SECTION
Solution 1.
Computation of Over/Under-absorbed overhead expenses during the month of August
(`) (`)
Total expenses incurred in the month of August: 80,000
Less: The amount paid according to labour court award 15,000
(Assumed to be non-recurring)
Expenses of previous year 5000 (20,000)
Net overhead expenses incurred for the month 60,000
Overhead recovered for 10,000 hours @ ` 5 per hour (50,000)
Under-absorbed overheads 10,000
60% of under-absorbed overhead was due to defective planning, it will be charged to costing
profit & loss account.
40% of under-absorbed overhead i.e. `4,000 may be distributed over Finished Goods and Cost
of Sales using supplementary overhead rate:

Supplementary rate =

= = `0.10
Amount of under-absorbed overheads charged to finished goods
= 10,000 units × `0.10 = `1,000
Amount of under-absorbed overheads charged to cost of sales
= 30,000 units × `0.10 = `3,000

Solution 2.
(i) Amount of under-absorption of production overheads during the year 20x1-x2
(`)
Total production overheads actually incurred  6,00,000
during the year 2019-20
Less : ‘Written off’ obsolete stores ` 45,000
Wages paid for strike period ` 30,000  75,000

17 OVERHEADS : ABSORPTION COSTING

 Net production overheads actually incurred : (A)  5,25,000
Production overheads absorbed by 48,000 machine
hours @ ` 10 per hour : (B)  4,80,000
Amount of under – absorption of production overheads : [(A) – (B)]  45,000

(ii) Accounting treatment of under absorption of production overheads

It is given in the statement of the question that 20,000 units were completely finished
and 8,000 units were 50% complete, one third of the under-absorbed overheads were
due to lack of production planning and the rest were attributable to normal increase in
costs.
(`)
1. (33 – 1/3% of ` 45,000) i.e., ` 15,000 of under-absorbed
overheads were due to lack of production planning.
This being abnormal, should be debited to the Costing
Profit and Loss A/c.  15,000
2. Balance (66–2/3% of ` 45,000) i.e., ` 30,000
of under-absorbed overheads should be distributed
over work-in-progress, finished goods and cost of
sales by using supplementary rate.  30,000
Total under-absorbed overheads  45,000

Apportionment of unabsorbed overheads of ` 30,000 over, work-in progress, finished

goods and cost of sales
Equivalent
Completed Units 
(`)
Work-in-Progress 4,000  5,000
(4,000 units × ` 1.25)
(Refer to working note)
Finished goods 2,000 2,500
(2,000 units × ` 1.25)
Cost of sales 18,000  22,500
(18,000 units × ` 1.25)
24,00030,000
Working Note
Supplementary rate per unit = = ` 1.25

OVERHEADS : ABSORPTION COSTING 18

Solution 3.
(i) Amount of under/ over absorption of production overheads during the period of first six
months of the year 2017-2018:
Amount (`) Amount (`)
Total production overheads actually incurred 24,88,200
during the period
Less: Amount paid to worker as per court order 1,28,000
Expenses of previous year booked in the
current year 1,200
Wages paid for the strike period under an award 44,000
Obsolete stores written off 6,700 (1,79,900)
Less: Production overheads absorbed as per
machine hour rate (1,16,000 hours × `20*) 23,20,000
Amount of over absorbed production overheads 11,700

`44,00,000
*Budgeted Machine hour rate (Blanket rate) = = ` 20per hour
2,20,000 hours

(ii) Accounting treatment of over absorbed production overheads: As, one fourth of the
over absorbed overheads were due to defective production policies, this being abnormal,
hence should be transferred to Costing Profit and Loss Account.
Amount to be transferred to Costing Profit and Loss Account = (11,700 × ¼) = ` 2,925
Balance of over absorbed production overheads should be distributed over Works in
progress, finished goods and Cost of sales by applying supplementary rate*.
Amount to be distributed = (11,700 × ¾) =` 8,775

`8,775
Supplementary rate = = 0.2659per unit
33,000 units

(iii) Apportionment of under absorbed production overheads over WIP, Finished goods
and Cost of sales:
Equivalent completed Amount (`)
units
Work-in-Progress (18,000 units × 50% × ` 0.2659) 9,000 2,393
Finished goods (2,400 units × ` 0.2659) 2,400 638
Cost of sales (21,600 units × ` 0.2659) 21,600 5,744
Total 33,000 8,775

19 OVERHEADS : ABSORPTION COSTING

Solution 4.
Working Notes:
(i) Total Productive hours = Estimated Working hours – Machine Maintenance hours
= 2,200 hours – 200 hours = 2,000 hours

Rs.10,000 - Rs. 1,000

(ii) Depreciation per annum = = Rs.900
10years

(iii) Chemical solution cost per annum = Rs. 20 × 50 weeks = Rs.1,000

Rs. 120×50 weeks

(iv) Wages of attendants (per annum) = = Rs.1,000
6 machines
Calculation of Machine hour rate
Amount (per Amount (per
annum) hour)
A. Standing Charge
(i) Wages of attendants 1,000
(ii) Departmental and general works overheads 2,000
Total Standing Charge 3,000
3,000
Standing Charges per hour
2,000 1.5
B. Machine Expense
(iii) Depreciation 900 0.45
(iv) Electricity - 1.37
Rs.0.09 x 16units x 1,900hours
2,000hours
(v) Chemical solution 1,000 0.50
(vi) Maintenance cost 1,200 0.60
Machine operating cost per hour (A + B) 4.42

OVERHEADS : ABSORPTION COSTING 20

Solution 5.
Secondary Overhead Distribution Statement
Items of cost Basis of Total Production Departments
(as per primary apportionment (`) A (`) B (`) C (`)
distribution
summary)
Cost as per primary 80,00,000 30,00,000 26,00,000 24,00,000
distribution
summary
Stores (5:3:2) Value of Store 4,00,000 2,00,000 1,20,000 80,000
requisition
Time-keeping and No. of workers 3,00,000 1,20,000 90,000 90,000
Accounts (4:3:3)
Power (3:3:2) H.P. of Machine 1,60,000 60,000 60,000 40,000
Canteen (4:3:3) No. of workers 1,00,000 40,000 30,000 30,000
89,60,000 34,20,000 29,00,000 26,40,000

Solution 6.
Summary of Overhead Distribution
Departments X (`) Y (`) A (`) B (`)
Amount as given above 2,00,000 1,50,000 3,00,000 3,20,000
Expenses of service dept.-X is (2,00,000) 50,000 80,000 70,000
apportioned among other departments-
Y, A and B in the ratio (5:8:7)
2,00,000 3,80,000 3,90,000
Expenses of Dept.-Y apportioned - (2,00,000) 80,000 1,20,000
between department A and B in the
ratio (2:3)
Total Nil Nil 4,60,000 5,10,000

Solution 7.
The total expenses of the two service departments will be determined as follows: Let B stand
for Boiler House expenses and P for Pump Room expenses.
Then
B = 3,00,000 + 0.50 P
P = 60,000 + 0.05 B
Substituting the value of B,
P = 60,000 + 0.05 (3,00,000 + 0.5 P)

21 OVERHEADS : ABSORPTION COSTING

 = 60,000 + 15,000 + 0.025 P
= 75,000 + 0.025 P
P - 0.025P = 75,000
P = 75,000
0.975
P = `76,923
The total of expenses of the Pump Room is `76,923 and that of the Boiler House is
`3,38,462 i.e., `3,00,000 + 0.5 × ` 76,923.
The expenses will be allocated to the production departments as under:
Production Department
Dept.-A Dept.-B
Boiler House (60% and 35% of ` 3,38,462) 2,03,077 1,18,462
Pump Room (10% and 40% of ` 76,923) 7,692 30,769
Total 2,10,769 1,49,231
The total of expenses apportioned to A and B is ` 3,60,000.

Solution 8.
(i) Computation of percentage recovery rates of factory overheads and administrative
overheads.
Let the factory overhead recovery rate as percentage of direct wages be F and
administrative overheads recovery rate as percentage of factory cost be A.
Factory Cost of Jobs:
Direct materials + Direct wages + Factory overhead
For Job 101 = ` 54,000 +` 42,000 + ` 42,000F
For Job 102 = ` 37,500 +` 30,000 + ` 30,000F
Total Cost of Jobs:
Factory cost + Administrative overhead
For Job 101 = (` 96,000 + ` 42,000F) + (` 96,000+ ` 42,000F) A = ` 1,51,500*
For Job-102 = (` 67,500 + ` 30,000F) + (` 67,500+ ` 30,000F) A = ` 1,06,875**
The value of F & A can be found using following equations
96,000 + 42,000F + 96,000A + 42,000AF = 1,51,500 …………eqn (i)
67,500 + 30,000F + 67,500A + 30,000AF = 1,06,875 …………eqn (ii)
Multiply equation (i) by 5 and equation (ii) by 7

4,80,000 + 2,10,000F + 4,80,000A + 2,10,000AF = 7,57,500 ……eqn (iii)

4,72,500 + 2,10,000F + 4,72,500A + 2,10,000AF = 7,48,125 ……eqn (iv)
- - - - -

OVERHEADS : ABSORPTION COSTING 22

 7,500 + 7,500A = 9,325
7,500 A = 9,325 – 7,500
A = 0.25
Now put the value of A in equation (i) to find the value of F
96,000 + 42,000F + 24,000 + 10,500F = 1,51,500
52,500F = 1,51,500 – 1,20,000
F = 0.6
On solving the above relations: F = 0.60 and A = 0.25
Hence, percentage recovery rates of:
Factory overheads = 60% of wages and
Administrative overheads = 25% of factory cost.

Working note:

(ii) Statement of jobs, showing amount of factory overheads, administrative overheads

and profit:
Job 101 Job 102
(`) (`)
Direct materials 54,000 37,500
Direct wages 42,000 30,000
Prime cost 96,000 67,500
Factory overheads
60% of direct wages 25,200 18,000
Factory cost 1,21,200 85,500
Administrative overheads
25% of factory cost 30,300 21,375
Total cost 1,51,500 1,06,875
Profit (10% & 20% respectively) 15,150 21,375
Selling price 1,66,650 1,28,250

23 OVERHEADS : ABSORPTION COSTING

(iii) Selling price of Job 103
(`)
Direct materials 24,000
Direct wages 20,000
Prime cost 44,000
Factory overheads (60% of Direct Wages) 12,000
Factory cost 56,000
Administrative overheads (25% of factory cost) 14,000
Total cost 70,000
Profit margin (balancing figure) 10,000

Selling price 80,000

Solution 9.
Statement of Profit or Loss on Various Products during the year ended March 31, 2020.
Total (`) Products
A (`) B (`) C (`) D (`)
Sales 1,50,00,000 30,00,000 50,00,000 25,00,000 45,00,000
Variable costs:
Cost of goods sold 1,08,50,000 20,00,000 45,00,000 21,00,000 22,50,000
Commissions 4% of sales 6,00,000 1,20,000 2,00,000 1,00,000 1,80,000
Packing wages & 10,00,000 2,00,000 3,00,000 1,50,000 3,50,000
materials @ ` 2 per
parcel
Stationery @ ` 1 per 4,00,000 80,000 1,40,000 60,000 1,20,000
invoice
Total variable costs 1,28,50,000 24,00,000 51,40,000 24,10,000 29,00,000
Contribution 21,50,000 6,00,000 (1,40,000) 90,000 16,00,000
(Sales – variable cost)
Fixed Costs:
Rent & Insurance 3,00,000 75,000 60,000 1,20,000 45,000
(5:4:8:3)
Depreciation (4:6:3:7) 1,00,000 20,000 30,000 15,000 35,000
Salesmen’s salaries 6,00,000 1,20,000 2,00,000 1,00,000 1,80,000
& expenses (6:10:5:9)
Administrative wages & 5,00,000 1,00,000 1,75,000 75,000 1,50,000
salaries (4:7:3:6)
Total Fixed costs 15,00,000 3,15,000 4,65,000 3,10,000 4,10,000

OVERHEADS : ABSORPTION COSTING 24

 Profit or Loss 6,50,000 2,85,000 (6,05,000) (2,20,000) 11,90,000
(Contribution–fixed
Costs)
Percentage of profit or 4.33 9.50 (12.10) (8.80) 26.4
Loss on sales (%)

Solution 10.
(i) Computation of overhead absorption rate
(as per the current policy of the company)
Department Budgeted factory Budgeted direct
Overheads wages
(`) (`)
Machinery 3,60,000 80,000
Assembly 1,40,000 3,50,000
Packing 1,25,000 70,000
Total 6,25,000 5,00,000

Budgeted factory overheads

Overhead absorption rate = x 100
Budgeted direct wages
` 6,25,000
= x 100 = 125% of Direct wages
` 5,00,000

Selling Price of the Job No. CW-7083

(`)
Direct materials (` 1,200 + ` 600 + ` 300) 2,100.00
Direct wages (` 240 + ` 360 + ` 60) 660.00
Overheads (125% × ` 660) 825.00
Total factory cost 3,585.00
Add: Mark-up (30% × ` 3,585) 1,075.50
Selling price 4,660.50

(ii) Methods available for absorbing factory overheads and their overhead recovery rates
in different departments
1. Machining Department
In the machining department, the use of machine time is the predominant factor
of production. Hence machine hour rate should be used to recover overheads in
this department. The overhead recovery rate based on machine hours has been
calculated as under:

25 OVERHEADS : ABSORPTION COSTING

 Budgeted factory overheads
Machine hour rate=
Budgeted machine hours
` 3,60,000
= = ` 4.50 per hour
80,000 hours

2. Assembly Department
In this department direct labour hours is the main factor of production. Hence direct
labour hour rate method should be used to recover overheads in this department.
The overheads recovery rate in this case is:

Budgeted factory overheads

Direct labour hour rate=
Budgeted direct labour hours
`1, 40,000
= = ` 1.40 per hour
1,00,000 hours

3. Packing Department
Labour is the most important factor of production in this department. Hence direct
labour hour rate method should be used to recover overheads in this department.
The overhead recovery rate in this case comes to:
Budgeted factory overhead

Budgeted factory overheads

Direct labour hour rate=
Direct labour hours

`1,25,000
= = ` 2.50 per hour
50,000 hours

(iii) Selling Price of Job CW-7083 [based on the overhead application rates calculated in
(ii) above]
(`)
Direct materials 2,100.00
Direct wages 660.00
Overheads (Refer to Working note) 1,078.00
Factory cost 3,838.00
Add: Mark up (30% of ` 3,838) 1,151.40
Selling price 4,989.40

OVERHEADS : ABSORPTION COSTING 26

 Working note:
Overhead Summary Statement
Dept. Basis Hours Rate (`) Overheads
(`)
Machining Machine hour 180 4.50 810
Assembly Direct labour hour 120 1.40 168
Packing Direct labour hour 40 2.50 100
Total 1,078

(iv) Department-wise statement of total under or over recovery of overheads

(a) Under current policy
Departments
Machining Assembly Packing Total
(`) (`) (`) (`)
Direct wages (Actual) 96,000 2,70,000 90,000
Overheads recovered @ 1,20,000 3,37,500 1,12,500 5,70,000
125% of Direct wages: (A)
Actual overheads: (B) 3,90,000 84,000 1,35,000 6,09,000
(Under)/Over recovery of (2,70,000) 2,53,500 (22,500) (39,000)
overheads : (A—B)

(b) As per methods suggested

Basis of overhead recovery
Machine Direct labour Direct labour Total
hours hours hours (`)
Hours worked 96,000 90,000 60,000
Rate/hour (`) 4.50 1.40 2.50
Overhead recovered (`): (A) 4,32,000 1,26,000 1,50,000 7,08,000
Actual overheads (`): (B) 3,90,000 84,000 1,35,000 6,09,000
(Under)/Over recovery: 42,000 42,000 15,000 99,000
(AB)

27 OVERHEADS : ABSORPTION COSTING

 05 ACTIVITY BASED COSTING

SOLUTIONS
HOME WORK SECTION
Solution 1.
(i) Statement of cost allocation to each product from each activity
Product
M (`) S (`) T (`) Total (`)
Power (Refer to 40,000 80,000 60,000 1,80,000
working note) (10,000 kWh (20,000 kWh (15,000 kWh
× `4) ×`4) ×`4)
Quality Inspections 1,05,000 75,000 90,000 2,70,000
(Refer to (3,500 (2,500 (3,000
working note) inspections inspections × inspections ×
× `30) ` 30) ` 30)
Working note
Rate per unit of cost driver:
Power (` 2,00,000 / 50,000 kWh) ` 4/kWh
Quality Inspection (` 3,00,000 / 10,000 ` 30 per inspection
inspections)

(ii) Computation of cost of unused capacity for each activity:

(`)
Power (` 2,00,000 – ` 1,80,000) or 5,000 x 4 20,000
Quality Inspections (` 3,00,000 – ` 2,70,000) or 1,000 x 30 30,000
Total cost of unused capacity 50,000

(iii) Factors management consider in choosing a capacity level to compute the budgeted
fixed overhead cost rate:
- Effect on product costing & capacity management
- Effect on pricing decisions.
- Effect on performance evaluation
- Effect on financial statements
- Regulatory requirements.
- Difficulties in forecasting.

ACTIVITY BASED COSTING 28

Solution 2.
(i) RST Limited’s
Statement of operating income and gross margin percentage for each of its three
distribution channel
particulars General Super Drugstore Chains Chemist Shops Total
Market Chains
Revenues: (`) 2,80,41,750 2,38,21,875 1,49,73,750 6,68,37,375
(330 × ` 84,975) (825 × ` 28,875) (2,750 × ` 5,445)
Less: Cost of 2,72,25,000 2,26,87,500 1,36,12,500 635,25,000
goods sold: (`) (330 × ` 82,500) (825 × ` 27,500) (2,750 × ` 4,950)
Gross Margin: 8,16,750 11,34,375 13,61,250 33,12,375
(`)
Less: Other
operating
costs: (`) 8,27,970
Operating 24,84,405
income: (`)
Gross Margin 2.91% 4.76 % 9.09% 4.96%
Operating 3.72
income %

(ii) Computation of rate per unit of the cost allocation base for each of the five activity
areas for April 2020
(`)
Customer purchase order processing (` 40 per order
2,20,000/ 5,500 orders)
Line item ordering 3 per line item order
(` 1,75,560/ 58,520 line items)
Store delivery 50 per delivery
(` 1,95,250/ 3,905 store deliveries)
Cartons dispatched 1 per dispatch
(` 2,09,000/ 2,09,000 dispatches)
Shelf-stocking at customer store (`) 16 Per hour
(` 28,160/ 1,760 hours)

29 ACTIVITY BASED COSTING

(iii) Operating Income Statement of each distribution channel in April-2020 (Using the
Activity based Costing information)
General Super Drugstore Chemist Shops
Market Chains Chains
Gross margin (`) : (A) 8,16,750 11,34,375 13,61,250
(Refer to (i) part of the answer)
Operating cost (`): (B) 1,62,910 1,90,410 4,74,650
(Refer to working note)
Operating income (`): (A–B) 6,53,840 9,43,965 8,86,600
Operating income (in %) 2.33 3.96 5.92
(Operating income/Revenue) × 100
Comments and new insights: The activity-based cost information highlights, how the
‘Chemist Shops’ uses a larger amount of RST Ltd.’s resources per revenue than do the
other two distribution channels. Ratio of operating costs to revenues, across these
markets is:
General supermarket chains 0.58%
(` 1,62,910/ ` 2,80,41,750) × 100
Drug store chains 0.80%
(` 1,90,410/ ` 2,38,21,875) × 100
Chemist shops 3.17%
(` 4,74,650/ ` 1,49,73,750) ×100

Working note:
Computation of operating cost of each distribution channel:
General Super Drugstore Chemist Shops
Market Chains Chains
(`) (`) (`)
Customer purchase order 15,400 39,600 1,65,000
processing (` 40 × 385 (` 40 × 990 (` 40 ×4125
orders) orders) orders)
Line item ordering 16,170 35,640 1,23,750
(` 3 × 14 x (` 3 × 12 x 990) (` 3 × 10 ×
385) 4125)
Store delivery 16,500 41,250 1,37,500
(` 50 × 330 (` 50 × 825 (` 50 × 2750
deliveries) deliveries) deliveries)

ACTIVITY BASED COSTING 30

 Cartons dispatched 99,000 66,000 44,000
( ` 1× 300 ( ` 1 × 80 ( ` 1 × 16
cartons × 300 cartons × 825 cartons × 2,750
deliveries) deliveries) deliveries)
Shelf stocking 15,840 7,920 4,400
(` 16 × 330 (` 16 × 825 (` 16 × 2,750
deliveries × 3 deliveries × 0.6 deliveries × 0.1
Av. hrs.) Av. hrs) Av. hrs)
Operating cost 1,62,910 1,90,410 4,74,650

(iv) Challenges faced in assigning total operating cost of ` 8,27,970:

- Choosing an appropriate cost driver for activity area.
- Developing a reliable data base for the chosen cost driver.
- Deciding, how to handle costs that may be common across several activities.
- Choice of the time period to compute cost rates per cost driver.
- Behavioural factors.

Solution 3.
(i) Traditional Absorption Costing
BABYSOF BABYSOFT BABYSOFT Total
T- Gold - Pearl - Diamond
(a) Production of soaps 4,000 3,000 2,000 9,000
(Units)
(b) Direct labour 30 40 60 -
(minutes)
(c) Direct labour hours 2,000 2,000 2,000 6,000
(a × b)/60 minutes
Overhead rate per direct labour hour:
= Budgeted overheads ÷ Budgeted labour hours
= ` 1,98,000 ÷ 6,000 hours
= ` 33 per direct labour hour

31 ACTIVITY BASED COSTING

 Unit Costs:
BABYSOFT- BABYSOFT- BABYSOFT-
Gold (`) Pearl (`) Diamond (`)
Direct Costs:
- Direct Labour 5.00 6.67 10.00

- Direct Material 167.50 215.50 248.50

(Refer working note1)
Production Overhead: 16.50 22.00 33.00

Total unit costs 189.00 244.17 291.50

Number of units 4,000 3,000 2,000
Total costs 7,56,000 7,32,510 5,83,000

Working note-1
Calculation of Direct material cost
BABYSOFT- BABYSOFT- BABYSOFT-
Gold (`) Pearl (`) Diamond (`)
Essential oils 120.00 165.00 195.00

Cocoa Butter 40.00 40.00 40.00

Filtered water 4.50 4.50 4.50

Chemicals 3.00 6.00 9.00

Total costs 167.50 215.50 248.50

ACTIVITY BASED COSTING 32

(ii) Activity Based Costing
BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Total
Diamond
Quantity 4,000 3,000 2,000 -
(units)
Weight per 108 106 117 -
unit (grams) {(60×0.8)+20+30+10} {(55×0.8)+20+30+12} {(65×0.8)+20+30+15}
Total weight 4,32,000 3,18,000 2,34,000 9,84,000
(grams)
Direct labour 30 40 60 -
(minutes)
Direct labour 2,000 2,000 2,000 6,000
hours

Machine 5 5 6 -
operations
per unit
Total 20,000 15,000 12,000 47,000
operations
Forklifting rate per gram = ` 58,000 ÷ 9,84,000 grams
= ` 0.06 per gram
Supervising rate per direct = ` 60,000 ÷ 6,000 hours labour hour
= ` 10 per labour hour
Utilities rate per machine = ` 80,000 ÷ 47,000 machine operations
= ` 1.70 per machine operations

Unit Costs under ABC:

BABYSOFT- BABYSOFT- BABYSOFT-
Gold (`) Pearl (`) Diamond (`)
Direct Costs:
- Direct Labour 5.00 6.67 10.00
- Direct material 167.50 215.50 248.50
Production Overheads:
Forklifting cost 6.48 6.36 7.02
(0.06 X 108) (0.06 X 106) (0.06 X 117)

33 ACTIVITY BASED COSTING

 Supervising cost 5.00 6.67 10.00

Utilities 8.50 8.50 10.20

(1.70 x 5) (1.70 x 5) (1.70 x 6)
Total unit costs 192.48 243.70 285.72
Number of units 4,000 3,000 2,000
Total costs 7,69,920 7,31,100 5,71,440

(iii) Comments: The difference in the total costs under the two systems is due to the
differences in the overheads borne by each of the products. The Activity Based Costs
appear to be more accurate.

Solution 4.
(i) Statement of Operating income and Operating income as a percentage of revenues
for each product line
(When support costs are allocated to product lines on the basis of cost of goods sold of
each product)
Soft Drinks Fresh Packaged Total
(`) Produce Foods (`)
(`) (`)
Revenues: (A) 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost of Goods sold (COGS): (B) 30,00,000 75,00,000 45,00,000 1,50,00,000
Support cost (30% of COGS): 9,00,000 22,50,000 13,50,000 45,00,000
(C)
(Refer working notes)
Total cost: (D) = {(B) + (C)} 39,00,000 97,50,000 58,50,000 1,95,00,000
Operating income: E= 67,500 7,53,000 1,99,500 10,20,000
{(A)-(D)}
Operating income as a 1.70% 7.17% 3.30% 4.97%
percentage of revenues: (E/A)
× 100)

Working notes:
1. Total support cost:
(`)
Bottles returns 60,000
Ordering 7,80,000

ACTIVITY BASED COSTING 34

 Delivery 12,60,000
Shelf stocking 8,64,000
Customer support 15,36,000
Total support cost 45,00,000

2. Percentage of support cost to cost of goods sold (COGS):

3. Cost for each activity cost driver:

Activity (1) Total cost (`) Cost allocation Cost driver rate
(2) base (4)=[(2)÷(3)]
(3)
Ordering 7,80,000 1,560 purchase ` 500 per purchase
orders order
Delivery 12,60,000 3,150 ` 400 per delivery
deliveries
Shelf-stocking 8,64,000 8,640 hours ` 100 per stocking
hour
Customer support 15,36,000 15,36,000 ` 1 per item sold
items sold

(ii) Statement of Operating income and Operating income as a percentage of revenues for
each product line
(When support costs are allocated to product lines using an activity- based costing
system)
Soft drinks Fresh Packaged Total
Produce Food
(`) (`) (`) (`)
Revenues: (A) 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost & Goods sold 30,00,000 75,00,000 45,00,000 1,50,00,000
Bottle return costs 60,000 0 0 60,000
Ordering cost* (360:840:360) 1,80,000 4,20,000 1,80,000 7,80,000
Delivery cost* (300:2190:660) 1,20,000 8,76,000 2,64,000 12,60,000

35 ACTIVITY BASED COSTING

 Shelf stocking cost* 54,000 5,40,000 2,70,000 8,64,000
(540:5400:2700)
Customer Support cost* 1,26,000 11,04,000 3,06,000 15,36,000
(1,26,000:11,04,000:3,06,000)
Total cost: (B) 35,40,000 1,04,40,000 55,20,000 1,95,00,000
Operating income C:{(A)- (B)} 4,27,500 63,000 5,29,500 10,20,000
Operating income as a % of 10.78% 0.60% 8.75% 4.97%
revenues
* Refer to working note 3

ACTIVITY BASED COSTING 36

 06 COST SHEET

SOLUTIONS
HOMEWORK SECTION
Solution 1.
No. of bags manufactured = 1,000 units
Cost sheet for the month of September 2019
Particulars Total Cost Cost per unit
(`) (`)
1. Direct materials consumed:
- Leather sheets 3,20,000 320.00
- Cotton cloths 15,000 15.00
Add: Freight paid on purchase 8,500 8.50
2. Directwages (`80 × 2,000 hours) 1,60,000 160.00
3. Direct expenses (` 10 × 2,000 hours) 20,000 20.00
4. Prime Cost 5,23,500 523.50
5. Factory Overheads: Depreciation on machines
{(`22,00,000×90%)÷120 months} 16,500 16.50
Apportion cost of factory rent 98,000 98.00
6. Works/ Factory Cost 6,38,000 638.00
7. Less: Realisable value of cuttings (‘150×35 kg.) (5,250) (5.25)
8. Cost of Production 6,32,750 632.75
9. Add: Opening stock of bags 0
10. Less: Closing stock of bags (100 bags × ‘632.75) (63,275)
11. Cost of Goods Sold 5,69,475 5,69,475
12. Add: Administrative Overheads: 45,000
- Staff salary 45.00
- Apportioned rent for administrative office 12,000 12.00
13. Add: Selling and Distribution Overheads
- Staff salary 72,000 80.00
- Apportioned rent for sales office 10,000 11.11
- Freight paid on delivery of bags 18,000 20.00
14. Cost of Sales (18+19+20) 7,26,475 800.86
Apportionment of Factory rent: To factory building {(`1,20,000 ÷ 2400 sq.feet) × 1,960 sq.
feet} = ` 98,000
To administrative office {(`1,20,000 ÷ 2400 sq.feet) × 240 sq. feet} = `12,000
To sale office {(`1,20,000 ÷ 2400 sq.feet) × 200 sq. feet} = `10,000

37 COST SHEET
Solution 2.
(i) Cost Sheet of M/s Areeba Pvt. Ltd. for the year 2019.
Normal Capacity: 36,000 units p.a
3 Months 4,500 Units 9 Months 21,600 units
Amount(`) Cost perunit Amount(`) Cost perunit
(`) (`)
Direct material 1,80,000 8,64,000
Less: Scrap (22,500) (1,08,000)
Materials consumed 1,57,500 35 7,56,000 35
Direct Wages 1,44,000 32 6,48,000 30
Prime Cost 3,01,500 67 14,04,000 65
Factory overheads:
- Fixed 90,000 2,70,000
- Variable 45,000 2,16,000
- Semi variable 27,000 36 1,51,200 29.50
Works Cost 4,63,500 103 20,41,200 94.50
Add: Administrative 1,29,600 28.80 3,88,800 18
overheads
Cost of Production 5,93,100 131.80 24,30,000 112.5
Selling Overheads 36,000 8 1,72,800 8
Cost of Sales 6,29,100 139.80 26,02,800 120.5

Working Notes:
1. Calculation of Costs
Particulars 4,500 units Amount (`) 21,600 units Amount (`)
Material 1,80,000 (` 40 × 4,500 units) 8,64,000 (` 40 × 21,600 units)
Wages 1,44,000 (Max. of ` 30 × 4,500units 6,48,000 (21600 Units × 30)
= ` 1,35,000 and ` 48,000× 3 months
= ` 1,44,000)
Variable 45,000 (` 10 × 4,500 units) 2,16,000 (` 10 × 21,600 units)
Cost
Semi-
`1,08,000 `1,08,000
variable 27,000 x 3 months 1,51,200 x 9 months
12 months 12 months
Cost
+ 46,800 (for 20 % increase)
+ 23,400 (for 10% increase)
Selling 36,000 (` 8 × 4,500 units) 1,72,800(` 8 × 21,600 units)
Overhead

COST SHEET 38
Notes:
1. Alternatively scrap of raw material can also be reduced from Work cost.
2. Administrative overhead may be treated alternatively as a part of general overhead.
In that case, Works Cost as well as Cost of Production will be same i.e. ` 4,63,500 and Cost of
Sales will remain same as ` 6,29,100.
(ii) Calculation of Selling price for nine months period
Particulars Amount (`)
Total Cost of sales ` (6,29,100 +26,02,800) 32,31,900
Add: Desired profit 8,76,600
Total sales value 41,08,500
Less: Sales value realised in first three months (`145 × 4,500 units) (6,52,500)
Sales Value to be realised in next nine months 34,56,000
No. of units to be sold in next nine months 21,600
Selling price per unit (` 34,56,000 ÷ 21,600 units) 160

Solution 3.
Cost Sheet
(for the quarter ending 30 September 2018)
Amount (`)
(i) Raw materials consumed
Opening stock of raw materials 2,45,600
Add: Purchase of materials 12,22,650*
Less: Closing stock of raw materials (2,08,000)
Raw materials consumed 12,60,250
Add: Direct wages (1,47,000×175%) 2,57,250
Direct Expenses 1,80,000
(ii) Prime cost 16,97,500
Add: Factory overheads (2,57,250/175%) 1,47,000
Gross Factory cost 18,44,500
Add: Opening work-in-process 1,70,800
Less: Closing work-in-process (1,90,000)
(iii) Factory cost 18,25,300
Add: Administration overheads (10% of factory overheads) 14,700
Add: Opening stock of finished goods 3,10,000
Less: Closing stock of finished goods (2,75,000)
(iv) Cost of goods sold 18,75,000
Add: Selling & distribution overheads 60,000
Cost of sales 19,35,000
(v) Net Profit 2,75,000
Sales 22,10,000

39 COST SHEET
 *(18,75,000 + 2,75,000 – 3,10,000– (1,47,000× 10%)+ 1,90,000–1,70,800– (2,57,250×
100/175%) - 1,80,000 – 2,57,250 + 2,08,000 – 2,45,600)= 12,22,650

Working notes :
Purchase of raw materials = Raw material consumed + Closing stock - opening stock of raw
material
Raw material consumed = Prime cost - Direct wages - Direct expenses Factory Overheads =
2,57,250*100/175
Prime cost = Factory cost + Closing WIP – Opening WIP – Factory overheads
Factory Cost = Cost of Production goods sold + Closing stock of Finished goods – Opening stock
of finished goods – Administrative overheads
Net Profit = Sales - Cost of sales
Alternative solution
Cost Sheet
(for the quarter ending 30 September 2018)
Amount (`)
(i) Raw materials consumed
Opening stock of raw materials 2,45,600
Add: Purchase of materials 12,37,350*
Less: Closing stock of raw materials (2,08,000)
Raw Material consumed 12,74,950
Add: Direct wages (1,47,000×175% 2,57,250
Direct Expenses 1,80,000
(ii) Prime cost 17,12,,200
Add: Factory overheads (2,57,250/175%) 1,47,000
Gross Factory cost 18,59,200
Add: Opening work-in-process 1,70,800
Less: Closing work-in-process (1,90,000)
(iii) Factory cost/works cost/cost of production 18,40,000
Add: Opening stock of finished goods 3,10,000
Less: Closing stock of finished goods (2,75,000)
(iv) Cost of goods sold 18,75,000
Add: Administration overheads (10% of factory overheads) 14,700
Add: Selling & distribution overheads 60,000
Cost of sales 19,49,700
(v) Net Profit 2,60,300
Sales 22,10,000
*(18,75,000 + 2,75,000 – 3,10,000+ 1,90,000–1,70,800– 1,47,500 - 1,80,000 – 2,57,250 +
2,08,000 – 2,45,600)= 12,37,350

COST SHEET 40
Working notes
Purchase of raw materials = Raw material consumed + Closing stock - opening stock of raw
material
Raw material consumed = Prime cost - Direct wages - Direct expenses
Factory Overheads = 257250*100/175
Prime cost = Factory cost + Closing WIP – Opening WIP – Factory overheads
Factory Cost = Cost of Production goods sold + Closing stock of Finished goods – Opening stock
of finished goods
Net Profit = Sales - Cost of sales.

41 COST SHEET
 07 COST ACCOUNTING SYSTEM

SOLUTIONS
HOMEWORK SECTION
Solution 1.
Journal entries are as follows:
Stores Ledger Control A/c……………………………… Dr. 2,00,000
To Payables (Creditors)/ Bank A/c 2,00,000
(Materials purchased)
Work-in-Process Control A/c…………………………… Dr. 1,50,000
To Stores Ledger Control A/c 1,50,000
(Materials issued to production)
Wages Control A/c………………………………………. Dr. 1,20,000
To Bank A/c 1,20,000
(Wages paid)
Factory Overhead Control A/c…………………………. Dr. 36,000
To Wages Control A/c 36,000
(30% of wages paid being indirect charged to overhead)
Work-in-Process Control A/c…………………………… Dr. 84,000
To Wages Control A/c 84,000
(Direct wages charged to production)
Factory Overhead Control A/c………………………… Dr. 84,000
To Bank A/c 84,000
(Manufacturing overhead incurred)
Work-in-Process Control A/c…………………………… Dr. 92,000
To Factory Overhead Control A/c 92,000
(Manufacturing overhead charged to production)
Selling & Distribution Overhead Control A/c………. Dr. 20,000
To Bank A/c 20,000
(Selling and distribution costs incurred)
Finished Goods Control A/c……………………………. Dr. 2,00,000
To Work-in-Process Control A/c 2,00,000
(Cost of finished goods)
Cost of Sales A/c………………………………………… Dr. 2,20,000
To Finished Goods Control A/c 2,00,000

COST ACCOUNTING SYSTEM 42

 To Selling and Distribution Control A/c 20,000
(Costs of sales)
Receivables (Debtors)/ Bank A/c…………………………… Dr. 2,90,000
To Sales A/c 2,90,000
(Finished goods sold)
Bank A/c…………………………………………………... Dr. 69,000
To Receivables (Debtors) A/c 69,000
(Receipts from receivables)
Payables (Creditors) A/c………………………………... Dr. 1,10,000
To Bank A/c 1,10,000
(Payment made to payables)

Solution 2.
Stores Ledger Control A/c
(`) (`)
To Balance b/d 15,000 By Work-in-process 80,000
Control A/c (Issued to
WIP)
To Cost Ledger Control A/c 80,000 By Overhead Control A/c 10,000
(Purchases) (Issued for repairs)
To Work-in-process Control 40,000 By Cost Ledger Control 5,000
A/c (Return from WIP) A/c (Sold at cost)
By Overheads Control 3,000
A/c* (Shortages)
By Balance c/d 37,000
1,35,000 1,35,000
* Assumed normal
Wages Control A/c
(`) (`)
To Cost Ledger Control A/c 35,000 By Work-in-process 30,000
Control A/c
By Overhead Control A/c 5,000
35,000 35,000

Overhead Control A/c

(`) (`)
To Stores Ledger Control A/c 10,000 By Work-in-process 1,20,000
To Stores Ledger Control A/c 3,000 Control A/c
To Cost Ledger Control A/c 1,25,000

43 COST ACCOUNTING SYSTEM

To Wages Control A/c 5,000 By Balance c/d 23,000
1,43,000 1,43,000

WIP Control A/c

(`) (`)
To Balance b/d 30,000 By Stores Ledger Control A/c 40,000
To Stores Ledger Control A/c 80,000 By Finished goods Control 2,00,000*
A/c
To Wages Control A/c 30,000
To Overheads Control A/c 1,20,000 By Balance c/d 20,000
2,60,000 2,60,000
* Finished output at cost 2,00,000
Profit at 10% on actual cost from WIP Sales 20,000
2,20,000

Statement of Profit as per Costing Records

(`)
Direct material Cost (`80,000 – `40,000) 40,000
Direct wages 30,000
Prime Cost 70,000
Production Overheads 1,20,000
Works Cost 1,90,000
Add: Opening WIP 30,000
2,20,000
Less: Closing WIP (20,000)
Cost of finished goods 2,00,000
Profit (10% of cost) 20,000
Sales 2,20,000

Profit & Loss A/c

(`) (`)
To Material (Op. bal. + 90,000 By Sales A/c 2,20,000
Purchases - Sale)
To Opening WIP 30,000 By Closing WIP 20,000
To Wages for the period 35,000 By Closing stock of Raw 37,000
Material
To Overheads expenses 1,25,000 By Net loss 3,000
2,80,000 2,80,000

COST ACCOUNTING SYSTEM 44

 Reconciliation Statement
(`)
Profit (loss) as per Financial Accounts (3,000)
Add: Overheads over absorbed (refer Overhead control A/c) 23,000
Net Profit as per Cost Accounts 20,000

Solution 3.
(i) Statement of Profit as per Financial records
(for the year ended March 31, 20X8)
(`) (`)
To Opening stock of Finished Goods 53,125 By Sales 22,80,000
To Work-in-process 46,000 By Closing stock of finished
Goods 45,650
To Raw materials consumed 8,40,000 By Work-in-Process 41,200
To Direct labour 6,10,000 By Rent received 46,000
To Factory overheads 4,22,000 By Interest received 38,000
To Administration overheads 1,98,000 To Selling & distribution
overheads 72,000
To Dividend paid 1,22,000
To Bad debts 18,000 To Profit 69,725
24,50,850 24,50,850

Statement of Profit as per Costing records

(for the year ended March 31,20X8) (`)
Sales revenue (A)
(12,615 units) 22,80,000
Cost of sales:
Opening stock 75,000
(625 units × ` 120)
Add: Cost of production of 12,405 units 21,63,350
(Refer to working note 2)
Less: Closing stock (`174.39 × 415 units) (72,372)
Cost of goods sold (12,615 units) 21,65,978
Selling & distribution overheads
(12,615 units ×` 3) 37,845
Cost of sales: (B) 22,03,823
Profit: {(A) – (B)} 76,177

45 COST ACCOUNTING SYSTEM

(ii) Statement of Reconciliation
(Reconciling the profit as per costing records with the profit as per financial records)
(`) (`)
Profit as per Cost Accounts 76,177
Add: Administration overheads over absorbed 83,550
(` 2,81,550 – ` 1,98,000)
Opening stock overvalued 21,875
(` 75,000 – ` 53,125)
Interest received 38,000
Rent received 46,000
Factory overheads over recovered 5,000 1,94,425
(` 4,27,000 – ` 4,22,000) 2,70,602
Less: Selling & distribution overheads under recovery 34,155
(` 72,000 – ` 37,845)
Closing stock overvalued (` 72,372 – ` 45,650) 26,722
Dividend 1,22,000
Bad debts 18,000 (2,00,877)
Profit as per financial accounts 69,725

Working notes:
1. Number of units produced Units
Sales 12,615
Add: Closing stock 415
Total 13,030
Less: Opening stock (625)
Number of units produced 12,405

2. Cost Sheet (`)

Raw materials consumed 8,40,000
Direct labour 6,10,000
Prime cost 14,50,000
Factory overheads 4,27,000
(70% of direct wages)
Factory cost 18,77,000
Add: Opening work-in-process 46,000
Less: Closing work-in-process 41,200
Factory cost of goods produced 18,81,800
Administration overheads 2,81,550
(15% of factory cost)
Cost of production of 12,405 units 21,63,350
Total Cost of Production `21,63,350
= = =`174.39
No. of units produced 12,405units

COST ACCOUNTING SYSTEM 46

Solution 4.
(i) Raw Material Control A/c
(`) (`)
To Balance b/d 2,82,450 By General Ledger Adjustment 27,200
A/c
” General Ledger
Adjustment A/c 12,43,810 ” Work-in-progress Control A/c 13,60,430
Costing P & L A/c 6,000
(Loss) (OR GLA)
” Balance c/d 1,32,630
15,26,260 15,26,260

(ii) Work-in-Progress Control A/c

(`) (`)
To Balance b/d 2,38,300
” Raw Material Control A/c 13,60,430 ” Finished Goods Control A/c 13,76,200
” Wages Control A/c 2,56,800 Costing P&L A/c (OR GLA)
” Factory OH Control A/c 1,36,350 ” Balance c/d 6,03,380
19,91,880 19,91,880

(iii) Finished Goods Control A/c

(`) (`)
To Balance b/d 3,92,500 By Cost of goods sold 14,56,500
A/c (OR GLA)
General Ledger 45,900
Adjustment A/c
” Work-in-process 13,76,200 ” Balance c/d 3,58,100
Control A/c
18,14,600 18,14,600

(iv) General Ledger Adjustment A/c

(`) (`)
To Costing P&L A/c (sales) 25,68,910 By Balance b/d 9,13,250
(Balancing figure)
” Raw Material Control A/c 27,200 ” Raw Material Control A/c 12,43,810
” Wages Control A/c 2,56,800
” Factory OH Control A/c 1,36,350
” Finished Goods Control A/c 45,900
25,96,110 25,96,110

47 COST ACCOUNTING SYSTEM

 OR
General ledger adjustment account
(`) (`)
To Raw Material Control A/c 27,200 By Balance b/d 9,13,250
” Raw Material control 6,000 ” Raw Material Control A/c 12,43,810
account(loss)
‘’ WIP control Account ” Wages Control A/c 2,56,800
(rejection) 12,300
“ Finished stock Control ” Factory OH Control A/c 1,36,350
Account 14,56,500
“” Balance c/d 10,94,110 ” Finished Goods Control A/c 45,900
25,96,110 25,96,110

Working:
(`) (`)
To General Ledger 1,36,350 By Work-in-progress A/c 1,36,350
Adjustment A/c
1,36,350 1,36,350

Solution 5.
Memorandum Reconciliation Accounts
Dr. Cr.
(Rs.) (Rs.)
To Net Loss as per Costing By Administration overheads
books 3,47,000 over recovered in cost
accounts 60,000
By Interest on investment not
included in Cost Accounts 96,000
To Factory overheads under By Transfer fees in Financial
absorbed in Cost Accounts 40,000 books 24,000
To Depreciation under 50,000 By Stores adjustment
charged in Cost Accounts (Credit in financial books) 14,000
To Income- Tax not provided By Dividend received in
in Cost Accounts 54,000 financial books 32,000
To Interest on Loan Funds 2,45,000 By Net loss as per Financial
in Financial Accounts books 5,10,00
0
7,36,000 7,36,00
0

COST ACCOUNTING SYSTEM 48

Solution 6.
Memorandum Reconciliation Account
Particulars (Rs.) Particulars (Rs.)
To Net loss as per Costing By Administrative overhead over
books 2,25,000 absorbed in costs 3,000
To Factory overheads under 5,000 By Depreciation over charged
absorbed in Cost books(Rs. 80,000 –
Rs.70,000) 10,000
To Income tax not provided By Interest on investments
in Cost books 65,000 not included in Cost books 20,000
To Preliminary expenses written By Transfer fees not
off in Financial books 3,000 considered in Cost books 2,000
To Over-valuation of Closing By Net loss as per Financial
Stock of finished goods in books 2,70,000
Cost books 7,000
3,05,000 3,05,000

Solution 7.
Stores Ledger Control A/c
Particulars (`) Particulars (`)
To Balance b/d 1,08,000 By Work in Process A/c 5,76,000
To General LedgerAdjustment A/c 5,76,000 By Overhead Control A/c 72,000
To Work in Process A/c 2,88,000 By Overhead Control A/c
(Deficiency) 21,600*
By Balance c/d 3,02,400
9,72,000 9,72,000
*Deficiency assumed as normal (alternatively can be treated as abnormal loss)

Work in Progress Control A/c

Particulars (`) Particulars (`)
To Balance b/d 2,16,000 By Stores Ledger Control A/c 2,88,000
To Stores Ledger Control A/c 5,76,000 By Costing P/L A/c
(Balancing figures being Costof
finished goods) 14,40,000
To Wages Control A/c 2,16,000 By Balance c/d 1,44,000
To Overheads Control A/c 8,64,000
18,72,000 18,72,000

49 COST ACCOUNTING SYSTEM

 Overheads Control A/c
Particulars (`) Particulars (`)
To Stores Ledger Control A/c 72,000 By Work in Process A/c 8,64,000
To Stores Ledger Control A/c 21,600 By Balance c/d(Under
absorption) 1,65,600
To Wages Control A/c
(Rs.2,52,000- Rs.2,16,000) 36,000
To Gen. Ledger Adjust. A/c 9,00,000
10,29,600 10,29,600

Costing Profit & Loss A/c

Particulars (`) Particulars (`)
To Work in progress 14,40,000 By Gen. ledger Adjust.
A/c(Sales) (Rs. 14,40,000 ×
115%) 16,56,000
To Gen. Ledger Adjust.
A/c (Profit) 2,16,000
16,56,000 16,56,000

Solution 8.
Materials Control A/c
(`) (`)
To Balance b/d 32,000 By Work-in-process control 53,000
Cost Ledger Control A/c A/c
To Payables (Creditors) A/c 92,000 By Balance c/d 71,000
(Purchases)
1,24,000 1,24,000

Manufacturing Overheads A/c

(`) (`)
To Bank A/c (amount spent) 29,600 By Work-in-process control 28,000
A/c (`4 × 7,000 hours)
By Costing P/L A/c 1,600
(Under-absorbed OH)
29,600 29,600

Work-in-Process Control A/c

(`) (`)
To Balance b/d 9,200 By Finished Goods Control 1,51,000
A/c
COST ACCOUNTING SYSTEM 50
To Wages Control A/c 70,000 By Balance c/d:
(`10 × 7,000 hours)
To Overheads Control A/c 28,000 -Material 5,000
(`4 × 7,000 hours) -Wages (`10 × 3,000
300 hours)
To Materials Control A/c 53,000 - Overheads (`4
(Balancing figure) × 300 hours) 1,200 9,200
1,60,200 1,60,200

Finished Goods Control A/c

(`) (`)
To Balance b/d 24,000 By Cost of sales A/c (Bal. 1,45,000
fig.)
To Work-in-process Control 1,51,000 By Balance c/d 30,000
A/c (as above)
1,75,000 1,75,000

Payables (Creditors) A/c

(`) (`)
To Bank A/c 89,200 By Balance b/d 16,400
To Balance c/d 19,200 By Material Control A/c 92,000
(Purchases)
(Balancing fig.)
1,08,400 1,08,400

51 COST ACCOUNTING SYSTEM

 08 UNIT & BATCH COSTING

SOLUTIONS
HOMEWORK SECTION
Solution 1.
2DS
Economic Batch Quantity (EBQ)=
C

Where,D = Annual demand for the product

S = Setting up cost per batch
C = Carrying cost per unit of production

(i) Computation of EBQ :

2×19,00,000×`5,200
=
`1.5

= 1,14,775 bottles

(ii) Computation of savings in cost by adopting EBQ:

Batch No. of Set-up cost Carrying cost Total Cost
Size Batch
1,60,000 62,400 1,20,000
bottles 12 (‘5,200 × 12) (‘1.5 ×1,20,000 ½ × 1,60,000) 1,82,400

1,14,775 88,081.25 86,081.25

bottles 17 (‘5,200 × 88,40017) (‘1.586,081.25 × ½ × 1,14,775) 1,74,481.25
Saving 7,918.75

UNIT & BATCH COSTING 52

Solution 2.
Statement of cost per batch and per order
No. of batch = 600 units ÷ 50 units = 12 batches
Particulars Cost per Total Cost (`)
batch (`)
Direct Material Cost 500.00 6,000
Direct Wages 50.00 600
Oven set-up cost 150.00 1,800
Add: Production Overheads (20% of Direct wages) 10.00 120
Total Production cost 710.00 8,520
Add: S&D and Administration overheads (10% of Total 71.00 852
production cost)
Total Cost 781.00 9,372
Add: Profit (1/3rd of total cost) 260.33 3,124
Selling price 1,041.33 12,496
Selling Price per unit = 1041.33÷ 50 = ` 20.83

Solution 3.
Statement of Cost per Unit  No. of units produced: 10,000 units
Particulars Cost per Amount
unit (`) (`)
Raw Materials Consumed 40.00 4,00,000
Direct Wages 24.00 2,40,000
Prime cost 64.00 6,40,000
Add: Manufacturing Overheads (3,200 hours × ` 40) 12.80 1,28,000
Works cost 76.80 7,68,000
Add: Office Overheads (10% of Works Cost) 7.68 76,800
Cost of goods sold 84.48 8,44,800
Add: Selling Overheads (10,000 units × ` 20) 20.00 2,00,000
Cost of sales / Total cost 104.48 10,44,800
Add: Profit (Bal Figure) 15.52 1,55,200
Sales 120.00 12,00,000

53 UNIT & BATCH COSTING

 09 JOB COSTING

SOLUTIONS
HOME WORK SECTION

Solution 1.
Determination of quotation price for the job
Cost (`)
Direct Material (10kg × `10) 100
Direct Labour (20hrs × `5) 100
Variable production overhead (20hrs × `2) 40
1,00,000
Fixed Overhead x 20hours
10,000 budgeted hours
Other costs 50
Total costs 490
Net profit is 30% of sales, therefore total costs represent 70% (` 490 × 100) ÷ 70 = ` 700 price
to quote for job.
To check answer is correct; profit achieved will be ` 210 (` 700 - ` 490) = ` 210 ÷ ` 700 = 30%

JOB COSTING 54
 9B CONTRACT COSTING

SOLUTIONS
HOME WORK SECTION
Solution 1.
Contract Account
Particulars (`) Particulars (`)
To Material issued 9,48,000 By Machine (Working note 1)** 7,45,270
” Direct Wages 3,49,200
(4,57,200 – 1,08,000) 3,49,200
” Administrative charges 7,20,000
” Supervisor’s salary 3,00,000
(` 50,000 × 9 × 2/3)
” Machine** 7,85,270 ” Works cost 23,57,200
(balancing figure)
31,02,470 31,02,470
” Works cost 23,57,200 ” Value of work certified
(50%×42,00,000)
” Costing P&L A/c 3,32,100 ” Cost of work uncertified
(Notional profit) (Working Note 2) 5,89,300
26,89,300 26,89,300
** Alternatively Depreciation on machine can be shown debit side of Contract Account.

Working notes:
1. Written down value of Machine:

7,85,270 185 days
Depreciation= x = ` 40,000
9years 365 days

Hence the value of machine after the period of 185 days = ` 7,85,270 – ` 40,000 = `
7,45,270

2. The cost of 2/3rd of the contract is ` 23,57,200

`23,57,200
Cost of 100% “ “ “ x3=`35,35,800
2

Cost of 50% of the contract which has been certified by the architect is `. 17,67,900.

55 CONTRACT COSTING
 Also, the cost of 1/3rd of the contract, which has been completed but not certified by
the architect is `. 5,89,300.

Solution 2.
Contract No. 999 Account for the year ended 31st March, 20X8
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Work in progress b/d: By Material returned to store 30,000
- Work certified 12,00,000 By Material returned tosuppliers 20,000
- Work uncertified 20,000 By Stock (Material) c/d 30,000
To Stock (Materials) b/d 15,000 By Work in progress c/d:
To Material purchased 1,60,000 - Work certifie 35,00,000
To Material issued 5,00,000 - Work uncertified 40,000
To Wages paid 7,00,000
Less: Opening O/s (10,000)
Add: Closing O/s 20,000 7,10,000
To Drawing and maps* 60,000
To Sundry expenses 15,000
To Electricity charges 25,000
To Plant hire expenses 60,000
To Sub- contract cost 20,000
To Notional profit c/d
(balancing figure) 8,35,000 -
36,20,000 36,20,000
*Assumed that expenses incurred for drawing and maps are used exclusively for this contract
only.
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Balance c/d
(Rs. 35,00,000 × 75%) 26,25,000 By Balance b/d
(75% of Rs. 12,00,000) 9,00,000
By Bank A/c 17,25,000
26,25,000 26,25,000

CONTRACT COSTING 56
Solution 3.
GVL Ltd.
Contract A/c
(April 1, 2018 to March 31, 2019)
Particulars Amount Particulars Amount
(`) (`)
To Materials Issued 18,24,000 By Plant returned to Stores 2,40,000
(Working Note 1)
To Labour 12,20,000 By Materials at Site 1,20,000
Add: Outstanding 96,000 13,16,000 By W.I.P.
To Plant Purchased 9,00,000 Certified 51,00,000 52,60,000
To Expenses 4,00,000 Uncertified 1,60,000 52,60,000
Less: Prepaid 90,000 3,10,000 By Plant at Site 4,80,000
(Working Note 2)
To Notional Profit 17,50,000
61,00,000 61,00,000

GVL Ltd.
Contract A/c
(April 1, 2018 to September 30, 2019)
(For Computing estimated profit)
Particulars Amount Particulars Amount
(`) (`)
To Materials Issued 50,80,000 By Material at Site 3,00,000
(` 18,24,000 + `32,56,000)
To Labour Cost 28,90,000 By Plant returned to Stores 2,40,000
(`12,20,000 + `96,000 + on 31.03.2019.
`14,24,000* + `1,50,000)
To Plant purchased 9,00,000 By Plant returned to Stores 4,32,000
on 30.09.2019 (Working Note 3)
To Expenses 12,00,000 By Contractee A/c 1,08,50,000
(`3,10,000 + `7,90,000 +
`1,00,000)
To Estimated profit 17,52,000
1,18,22,000 1,18,22,000
* Labour paid in 2019-20: `15,20,000 – `96,000 = `14,24,000

57 CONTRACT COSTING
Working Notes
(`)
1. Value of the Plant returned to Stores on 31.03.2019
Historical Cost of the Plant returned 3,00,000
Less: Depreciation @ 20% of WDV for one year (60,000)
2,40,000
2. Value of Plant at Site 31.03.2019
Historical Cost of Plant at Site (`9,00,000 – `3,00,000) 6,00,000
Less: Depreciation @ 20% on WDV for one year (1,20,000)
4,80,000
3. Value of Plant returned to Stores on 30.09.2019
Value of Plant (WDV) on 31.3.2019 4,80,000
Less: Depreciation @ 20% of WDV for a period of 6 months (48,000)
4,32,000
4. Expenses Paid for the year 2018-19
Total expenses paid 4,00,000
Less: Pre-paid at the end (90,000)
3,10,000

Solution 4.
School Contract Account
Particulars Amount Particulars Amount
(`) (`)
To Plant 2,40,000 By Material returned 47,000
To Hire of plant 77,000 By Plant c/d 1,65,000
To Materials 6,62,000 By Materials c/d 50,000
To Direct wages 9,60,000 By WIP c/d:
Add: Accrued 40,000 10,00,000 Value of work certified 24,00,000
To Wages related costs 1,32,000 Cost of work not certified 1,80,000
To Direct expenses 34,000
To Supervisory staff:
Direct 90,000
Indirect 20,000 1,10,000
To Regional office expenses 50,000
To Head office expenses 30,000
T o Surveyors’ fees 27,000
To Notional profit c/d 4,80,000
28,42,000 28,42,000

CONTRACT COSTING 58
 PROCESS & OPERATION
10 COSTING
SOLUTIONS
HOMEWORK SECTION

Solution 1.
(i) Statement of Equivalent Production (Average cost method)
Input Particulars Output Equivalent Production
(Units Units
Materials Labour Overheads
(%*) Units** (%)* Units** (%)* Units**
20,000 Completed 14,000 100 14,000 100 14,000 100 14,000
WIP 6,000 100 6,000 33-1/3 2,000 33-1/3 2,000
20,000 20,000 20,000 16,000 16,000
*Percentage of completion ** Equivalent units

(ii) Statement showing Cost for each element

Particulars Materials Labour Overhead Total
Cost of opening work-in- 6,00,000 1,00,000 1,00,000 8,00,000
progress (`)
Cost incurred during the month (`) 25,60,000 15,00,000 15,00,000 55,60,000
otal cost (`) : (A) 31,60,000 16,00,000 16,00,000 63,60,000
Equivalent units : (B) 20,000 16,000 16,000
ost per equivalent unit (`) : C= (A ÷ B) 158 100 100 358

(iii) Statement of Apportionment of cost

(`) (`)
alue of output transferred: (A) (14,000 units × ` 358) 50,12,000
Value of closing work-in-progress: (B)
Material (6,000 units × `158) 9,48,000
Labour (2,000 units × ` 100) 2,00,000
Overhead (2,000 units × ` 100) 2,00,000 13,48,000
Total cost : (A + B) 63,60,000

(iv) Process- A Account

Particulars Units (`) Particulars Units (`)
To Opening WIP 4,000 8,00,000 By Completed units 14,000 50,12,000

59 PROCESS & OPERATION COSTING

 To Materials 16,000 25,60,000 By Closing WIP 6,000 13,48,000
To Labour 15,00,000
To Overhead 15,00,000
20,000 63,60,000 20,000 63,60,000

Solution 2.
(i) Statement of Equivalent Production
Particulars Input Particulars Output Equivalent Production
Units Units Material Conversion cost
% Units % Units
Opening WIP 1,000 Completed and
transfer red to
Process-2 35,000 100 35,000 100 35,000
Units intro
duced 40,000 Normal Loss
(10% of 40,000) 4,000 — — — —
Abnormal loss
(Balancing
figure) 500 100 500 60 300
Closing WIP 1,500 100 1,500 60 900
41,000 41,000 37,000 36,200

(ii) Calculation of value of output transferred to Process-2 & Closing WIP

Amount (`) Amount (`)
1. Value of units completed and transferred
(35,000 units × ` 320.25) (Refer working note) 1,12,08,750
3. Value of Closing W-I-P:
- Materials (1,500 units × ` 268.51) 4,02,765
- Conversion cost (900 units × ` 51.74) 46,566 4,49,331
Workings:
Cost for each element
Particulars Materials(`) Conversion(`) Total(`)
Cost of opening work-in-process 2,55,000 31,020 2,86,020
Cost incurred during the month 96,80,000 18,42,000 1,15,22,000
Total cost: (A) 99,35,000 18,73,020 1,18,08,020
Equivalent units: (B) 37,000 36,200
Cost per equivalent unit: (C) = (A ÷ B) 268.51 51.74 320.25

PROCESS & OPERATION COSTING 60

Solution 3.
Statement of Equivalent Production
Process III
Equivalent Production
Input Units Output Units Material-A Material-B Labour &
Details Particulars Overhead
% Units % Units % Units
Opening 1,600 Work on Op. WIP 1,600 - - 20 320 40 640
WIP
Process-II 55,400 Introduced & 50,600 100 50,600 100 50,600 100 50,600
Transfer completed during
the month
Normal loss (5% 2,640
of 52,800 units)
Closing WIP 4,200 100 4,200 70 2,940 50 2,100
Abnormal Gain (2,040) 100 (2,040) 100 (2,040) 100 (2,040)
57,000 57,000 52,760 51,820 51,300

Working note:
Production units = Opening units + Units transferred from Process-II – Closing Units
= 1,600 units + 55,400 units – 4,200 units = 52,800 units

Statement of Cost
Cost (`) Equivalent Cost per
units equivalent
units (`)
Material A (Transferred from previous process) 6,23,250
Less: Scrap value of normal loss (2,640 units × ` 5) (13,200)
6,10,050 52,760 11.5627
Material B 2,12,400 51,820 4.0988
Labour 96,420 51,300 1.8795
Overheads 56,400 51,300 1.0994
9,75,270 18.6404

Statement of apportionment of Process Cost

Amount (`) Amount (`)
Opening WIP Material A 24,000
Completed opening Material B (320 units × ` 4.0988) 1311.62
WIP units-1600
Wages (640 units × ` 1.8795) 1202.88

61 PROCESS & OPERATION COSTING

 Overheads (640 units × ` 1.0994) 703.62 3,218.12
Introduced & 50,600 units × ` 18.6404 9,43,204.24
Completed-50,600 units
Total cost of 52,200 9,70,422.36
finished goods units
Closing WIP units- 4,200 Material A (4,200 units × ` 11.5627) 48,563.34
Material B (2,940 units × ` 4.0988) 12,050.47
Wages (2,100 units × ` 1.8795) 3,946.95
Overheads (2,100 units × ` 1.0994) 2,308.74
66,869.50
Abnormal gain units - 2,040 (2,040 units × ` 18.6404) 38026.42
Process III A/c
Particulars Units Amount (`) Particulars Units Amount (`)
To Balance b/d 1,600 24,000 By Normal loss 2,640 13,200
To Process II A/c 55,400 6,23,250 By Finished goods 52,200 9,70,422.36
To Direct material 2,12,400 By Closing WIP 4,200 66,874.06*
To Direct wages 96,420
To Production
overheads 56,400
To Abnormal gain 2,040 38,026.42
59,040 10,50,496.42 59,040 10,50,496.42
* Difference in figure due to rounding off has been adjusted with closing WIP.

Solution 4.
Process- P Account
Particulars Kg. Amount Particulars Kg. Amount
(`) (`)
To Input 10,000 50,000 By Normal wastage 1,000 1,000
(1,000 kg. × ` 1)
To Direct Material — 38,000 By Process- Q 9,000 1,39,500
(9,000 kg. × ` 15.50)
To Direct Labour — 30,000
To Production OH — 22,500
(` 90,000 × 3/12)
10,000 1,40,500 10,000 1,40,500

`1,40,500- `1,000
Cost per unit = =` 15.50
10,000 kg.-1,000 kg.

PROCESS & OPERATION COSTING 62

 Process- Q Account
Particulars Kg. Amount Particulars Kg. Amount
(`) (`)
To Process-P A/c 9,000 1,39,500 By Normal wastage
To Direct Material — 42,500 (900 kg. × ` 1) 900 900
By Process- Q 8,200 2,54,200
To Direct Labour — 40,000
To Production OH —
(` 90,000 × 4/12)
To Abnormal Gain 100 3,100
3,100 (100 kg. × ` 31)
9,100 2,55,100 9,100 2,55,100

`2,52,000-`900
Cost per unit =
9,000kg.-900kg.

Process- R Account
Particulars Kg. Amount Particulars Kg. Amount
(`) (`)
To Process-Q A/c 8,200 2,54,200 By Normal wastage 820 820
(820 kg. × Re.1)
To Direct Material — 42,880 By Abnormal loss 80 4,160
(80 kg. × ` 52)
To Direct Labour — 50,000 By Finished Goods 7,300 3,79,600
(7,300 kg. × `52)
To Production OH
(` 90,000 × 5/12) — 37,500
8,200 3,84,580 8,200 3,84,580

`3,84,580-`820
Cost per unit = =` 52
8,200 kg.-820 kg.

Calculation of Selling price per unit of end product:

Cost per unit ` 52.00
Add: Profit 25% on selling price i.e. 1/3rd of cost ` 17.33
Selling price per unit ` 69.33

63 PROCESS & OPERATION COSTING

Solution 5.
(1) Comparative Profitability Statements
Particulars Process- A (Rs.) Process- B (Rs.)
Selling Price per unit 20.00 20.00
Less: Variable Cost per unit 12.00 14.00
Contribution per unit 8.00 6.00
Total Contribution 32,00,000 24,00,000
(Rs. 8 × 4,00,000) (Rs. 6 × 4,00,000)
Less: Total fixed costs 30,00,000 21,00,000
Profit 2,00,000 3,00,000
*Capacity (units) 4,30,000 5,00,000
Total Contribution at full capaci ty 34,40,000 30,00,000
(Rs. 8 × 4,30,000) (Rs. 6 × 5,00,000)
Fixed Cost 30,00,000 21,00,000
Profit 4,40,000 9,00,000
Process- B should be chosen as it gives more profit as compared to Process-A.
(2)
Particulars Process- A (Rs.) Process- B (Rs.)
*Capacity (units) 6,00,000 5,00,000
Total contribution 48,00,000 30,00,000
(Rs. 8 × 6,00,000) (Rs. 6 × 5,00,000)
Fixed Cost 30,00,000 21,00,000
Profit 18,00,000 9,00,000
If the capacity of the Process A and B is 6,00,000 units and 5,00,000 units respectively
then Process-A is giving double profit than Process C. Thus Process A be chosen.
*Note: It is assumed that capacity produced equals sales.

PROCESS & OPERATION COSTING 64

 11 JOINT PRODUCTS
& BY PRODUCTS

SOLUTIONS
HOMEWORK SECTION
Solution 1.
Working Notes:
(i) Computation of Allocation Ratio for Joint Costs
Products
X Y Z.
Rs. Rs. Rs.
Selling Price 13.75 8.75 7.50
Less: Anticipated margin@ 25% on cost or 20% on sales 2.75 1.75 1.50
Cost of sales 11.00 7.00 6.00
Less: Post split off cost 5.00 4.00 2.50
Joint cost per unit 6.00 3.00 3.50
Output (units) 8,000 6,000 4,000
Total output cost 48,000 18,000 14,000
Allocation ratio for joint costs 24 9 7

(ii) Computation of net allocable joint costs

Rs. Rs.
Joint input cost including material cost 90,800
Less: Credit for realization from by-product B:
Sales revenue (1,000 × Re. 1) 1,000
Less: profit @ 25% on cost or 20% on sales 200 800
Net joint costs to be allocated 90,000

Determination of joint cost per unit of each product

Product Net joint costs allocation Output(units) Joint cost per unit
Rs. Rs. Rs.
X 54,000 (Note : 1) 8,000 6.75
Y 20,250 6,000 3.38
Z 15,750 4,000 3.94
90,000

65 JOINT PRODUCTS & BY PRODUCTS

 Profit margin available on each product as a percentage on cost
Product Joint Cost Post spilt Total Selling Margin Margin % on
Rs. off cost Cost Price Rs. cost
Rs. Rs. Rs. Rs.
X 6.75 5.00 11.75 13.75 2.00 17.02
Y 3.38 4.00 7.38 8.75 1.37 18.56
Z 3.94 2.50 6.44 7.50 1.06 16.46

Note: 1
24
X= x 90,000 = 54,000
40
9
Y= x 90,000 = 20,250
40
7
Z=
x 90,000 = 15,750
40
90,000

Solution 2.
Statement of profitability of an Oil Mill (after carrying out further processing) for the quarter
ending 31st March 2019.
Products Sales Value Share of Additional Total cost Profit (loss)
after further Joint cost processing after
processing cosT processing
A 25,87,500 14,80,000 6,45,000 21,25,000 4,62,500
B 2,25,000 2,96,000 1,35,000 4,31,000 (2,06,000)
C 90,000 74,000 - 74,000 16,000
D 6,75,000 3,70,000 22,500 3,92,500 2,82,500
35,77,500 22,20,000 8,02,500 30,22,500 5,55,000

(ii) Statement of profitability at the split off point

Products Selling price Output in Sales value at Share of Profit at
of split off units split off point joint cost split off point
A 225.00 8,000 18,00,000 14,80,000 3,20,000
B 90.00 4,000 3,60,000 2,96,000 64,000
C 45.00 2,000 90,000 74,000 16,000
D 112.50 4,000 4,50,000 3,70,000 80,000
- - 27,00,000 22,20,000 4,80,000
Note: Share of Joint Cost has been arrived at by considering the sales value at split off point.

JOINT PRODUCTS & BY PRODUCTS 66

Solution 3.
Working Notes:
Input output ratio of material processed in Department X = 100 : 90
Particulars Quantity (Kg)
Material input 9,00,000
Less: Loss of material in process @ 10% of 9,00,000 kgs 90,000
Output 8,10,000
Output of department X is product ‘P1’ and ‘P2’ in the ratio of 60 : 40.

60 x 8,10,000
Output ‘P1’ = = 4,86,000 kgs.
100
40 x 8,10,000
Output ‘P2’ = = 3,24,000 kgs.
100

Statement showing ratio of net sales

Product P1 P2 Total
Quantity (kgs) 4,86,000 3,24,000 8,10,000
Selling price per kg (`) 110.00 325.00
Sales Value (` Lakhs) 534.60 1,053.00 1,587.60
Less: Selling Expenses 28.38 25.00 53.38
Net Sales 506.22 1,028.00 1,534.22
Ratio 33% 67% 100.00

Computation of Joint Costs

Particulars Amount (`Lakhs)
Raw Material input 9,00,000 kgs @ ` 95 per kg 855.00
Direct Materials 95.00
Direct Wages 80.00
Variable Overheads 100.00
Fixed Overheads 75.00
Total 1,205.00

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

67 JOINT PRODUCTS & BY PRODUCTS

(ii) Statement showing profitability at split off point
Product P1 P2 Total
Net Sales Value (` in lakhs) – [A] 506.22 1028.00 1534.22
Less: Joint costs (` in lakhs) 397.65 807.35 1205.00
Profit (` in lakhs) [A] – [B] 108.57 220.65 329.22

(iii) Statement of profitability of product ‘YP1’

Product YP1
Sales Value (` in lakhs) [A] 629.55
Less: Cost of P1 397.65 807.35
Cost of Department Y 128.00
Selling Expenses of Product ‘YP1’ 19.00
Total Costs [B] 544.65
Profit (` in lakhs) [A] – [B] 147.90
Working Note: Computation of product ‘YP1’
Quantity of product P1 input used =- 4,86,000 kgs
Input output ratio of material processed in Department Y = 100 : 95
Particulars Quantity (Kg)
Material input 4,86,000
Less: Loss of material in process @ 5% of 4,86,000 24,300
Output 4,61,700
Sales Value of YP1 = 4,61,700 kgs @ ` 150 per kg = `692.55 lakhs

(iv) Further processing of product P1 and converting to product YP1 is beneficial as the profit
of the company increases by `39.33 lakhs.
Working Note:
Profit of Product ‘YP1’ `147.90L
Increase in profit after further processing `108.57L
` 39.33 L

JOINT PRODUCTS & BY PRODUCTS 68

 12 SERVICE COSTING

SOLUTIONS
HOMEWORK SECTION
Solution 1.
(i) Calculation of total cost for ‘Professionals Protection Plus’ policy
Particulars Amount (`) Amount (`)
1. Marketing and Sales support:
- Policy development cost 11,25,000
- Cost of marketing 45,20,000
- Sales support expenses 11,45,000 67,90,000
2. Operations:
- Policy issuance cost 10,05,900
- Policy servicing cost 35,20,700
- Claims management cost 1,25,600 46,52,200
3. IT Cost 74,32,000
4. Support functions
- Postage and logistics 10,25,000
- Facilities cost 15,24,000
- Employees cost 5,60,000
- Office administration cost 16,20,400 47,29,400
Total Cost 2,36,03,600

Total cost `2,36,03,600

(ii) Calculation of cost per policy = =
No.of policies 528

= ` 44,703.79

Total cost ` 2.36 crore

(iii) Cost per rupee of insured value = =
Total insured value ` 1,320 crore

= ` 0.0018

69 SERVICE COSTING
Solution 2.
(i) Total equivalent single room suites
Nature of suite Occupancy Equivalent single room suites
(Room-days) (Room-days)
Single room suites 36,000 36,000
(100 rooms x 360 days x (36,000 x 1)
100%)
Double rooms suites 14,400 36,000
(50 rooms x 360 days x 80%) (14,400 x 2.5)
Triple rooms suites 6,480 32,400
(30 rooms x 360 days x 60%) (6,480 x 5)
1,04,400
(ii) Statement of total cost:
(`)
Staff salaries 14,25,00,000
Room attendant’s wages 4,50,00,000
Lighting, heating and power 2,15,00,000
Repairs and renovation 1,23,50,000
Laundry charges 80,50,000
Interior decoration 74,00,000
Sundries 1,53,00,000
25,21,00,000
Building rent {(`10,00,000 x 12 months) + 1,20,00,000+ 5% on total takings
5% on total taking}
Total cost 26,41,00,000 + 5% on total takings
Profit is 20% of total takings
Total takings = ` 26,41,00,000 + 25% (5% +20%) of total takings
Let x be rent for single room suite
Then 1,04,400 x = 26,41,00,000 + 0.25 × 1,04,400 x
Or, 1,04,400 x = 26,41,00,000 + 26,100 x
Or, 78,300 x = 26,41,00,000
Or, x = 3,373
(iii) Rent to be charged for single room suite = ` 3,373
Rent for double rooms suites ` 3,373 x 2.5 = ` 8,432.5
Rent for triple rooms suites ` 3,373 x 5 = ` 16,865.

SERVICE COSTING 70
 13 STANDARD COSTING

SOLUTIONS
HOMEWORK SECTION

Solution 1.
Material Standard for 10 units Actual for 10 units
Qty. Units Rate (`) Amount (`) Qty. units Rate (`) Amount (`)
X 600 15 9,000 640 17.50 11,200
Y 800 20 16,000 950 18.00 17,100
Z 1,000 25 25,000 870 27.50 23,925
Total 2,400 50,000 2,460 52,225
1. Material Cost Variance = Standard cost – Actual cost
= ` 50,000 – ` 52,225
MCV = ` 2,225 (A)

2. Material Price Variance = (Std. Price – Actual Price) × Actual Qty.

Material X = (15 – 17.50) × 640 = ` 1,600 (A)
Material Y = (20 – 18) × 950 = ` 1,900 (F)
Material Z = (25 – 27.50) × 870 = ` 2,175 (A)
MPV = ` 1,875 (A)

3. Material Usage Variance = (Std. Qty. – Actual Qty.) × Std. Price

Material X = (600 – 640) × 15 = ` 600 (A)
Material Y = (800 – 950) × 20 = ` 3,000 (A)
Material Z = (1,000 – 870) × 25 = ` 3,250 (F)
MUV = ` 350 (A)
Check MCV = MPV + MUV
`2,225 (A) = `1,875 (A) + `350 (A)

4. Material Mix Variance = (Revised Std. Qty. – Actual Qty.) × Std. Price
Material X = (615* – 640) × 15 = ` 375 (A)
Material Y = (820* – 950) × 20 = `2,600 (A)
Material Z = (1,025 – 870) × 25 = `3,875 (F)
MMV = ` 900 (F)

71 STANDARD COSTING
 *Revised Standard Quantity (RSQ) is calculated as follows:

2460
Material X = × 600 = 615 units
2400
2460
Material Y = × 800 = 820 units
2400
2460
Material Z = × 1,000 = 1,025 units
2400

5. Material Yield Variance= (Std. Qty - Revised Std. Qty.) × Std. Price
Material X = (600 - 615) × 15 = `225 (A)
Material Y = (800 - 820) × 20 = `400 (A)
Material Z = (1,000 - 1,025) × 25 = `625 (A)
MYV = `1,250 (A)
Check
MUV = MMV + MYV (Or MRUV)
`350 (A) = `900 (F) + `1,250 (A)
or
MCV = MPV + MMV + MYV (Or MRUV)
`2,225 (A) = `1,875 (A) + `900 (F) + `1,250 (A)

Solution 2.
Working Notes:
Budget Actual
1. Working hours per month 24,000 20,160
2. Production units per month 6,000 5,305
= (Budget 24,000 ÷ 4 hrs, Actual given)
3. Standard fixed overhead rate per unit
= ` 1,44,000 ÷ 6,000 = ` 24
4. Standard fixed overhead rate per hour
= `1,44,000 ÷ 24,000 = ` 6
5. Standard fixed overhead rate per day
= ` 1,44,000 ÷ 25 = ` 5,760
Fixed Overhead Variances:
Actual Fixed overhead incurred = ` 1,42,000 (given)
Budgeted fixed overhead for the period = ` 1,44,000.
Standard fixed overhead for actual production
= (Standard output for actual time × Standard Fixed Overhead per unit)
= 5,305 × `24 = `1,27,320.

STANDARD COSTING 72
Variances:
(i) F.O. Expenditure Variance = (Budgeted fixed overhead – Actual fixed
overhead)
= 1,44,000 – 1,42,000 = ` 2,000 (F)
(ii) Total Volume Variance = (Standard fixed overhead – Budgeted
fixed overhead)
= 1,27,320 – 1,44,000 = `16,680 (A)
(iii) Fixed overhead variance = (Standard fixed overhead – Actual Fixed
overhead)
= 1,27,320 – 1,42,000 = `14,680 (A)
Alternatively:
Expenditure Variance + Volume Variance = 2,000 (F) + 16,680 (A) = `14, 680 (A)

Solution 3.
For fixed overhead variances:
Actual F.O. incurred (given)  `12,000
Budgeted F.O. for the period  `10,000
Standard F.O. for production (Standard output for
actual time × Standard Fixed Overhead per unit)
2,100 units × {`10,000 ÷ 2,000 units}  `10,500
(i) Fixed Overhead Variance = Standard F.O. – Actual F.O.
= ` 10,500 – `12,000
= `1,500 (A)
(ii) F.O. Expenditure Variance = Budgeted F.O – Actual F.O.
= `10,000 – `12,000
= `2,000 (A)
(iii) F.O. Volume Variance = Standard F.O – Budgeted F.O.
= `10,500 – ` 10,000 = ` 500 (F)

Solution 4.
Basic Calculation
Material Actual for 680 kg. output Actual for 680 kg. output
Qty Kg Rate (`) Amount (`) Qty Kg Rate (`) Amount
A 480 50 24,000 540 60 32,400
B 320 60 19,200 260 50 13,000
Total 800 43,200 800 45,400
Less: Loss 160 - - 120 - -

73 STANDARD COSTING
 640 43,200 680 45,400
Std. cost of actual output = ` 43,200 × 680/640 = ` 45,900
Calculation of Variances

(i) Material Cost Variance = (Std. cost of actual output – Actual cost)
= (45,900– 45,400)
= ` 500 (F)
(ii) Material Price Variance = (SP – AP) × AQ
Material A = (50 – 60) × 540 = ` 5400 (A)
Material B = (60 – 50)) × 260 = ` 2600 (F)
MPV = ` 2800 (A)

(iii) Material Usage Variance (MUV) = (Std. Quantity for actual output – Actual Quantity) ×
Std. Price

480x680
Material A = - 540 x 50 ` 1,500 (A)
640
320x680
Material B = - 260 x 60 ` 4,800 (F)
640

MUV = ` 3,300 (F)

(iv) Material Mix Variance = SP × (RAQ – AQ)
A = ` 50× (480 Kg – 540 Kg) = ` 3,000 (A)
B = ` 60 × (320 Kg. – 260 Kg.) = ` 3,600 (F)
Total = ` 3,000 (A) + `3,600 (F) = ` 600 (F)
(v) Material Yield Variance = SP × (SQ – RAQ)
A = ` 50 × (510 Kg. – 480 Kg) = ` 1,500 (F)
B = ` 60 × (340 Kg. – 320 Kg.) = ` 1,200 (F)
Total = ` 1,500 (F) + ` 1,200 (F) = ` 2,700 (F)

Solution 5.
Calculation of Variances :
(i) Fixed Overhead Variance: Standard fixed overhead – Actual fixed overhead = ` [
(5,00,000÷5000) ×4800] – ` 4,90,000 = ` 10,000 (A)
(ii) Fixed Overhead Expenditure Variances: Budgeted fixed overhead – Actual fixed overhead
= ` 5,00, 000 – ` 4,90, 000 = ` 10,000 (F)
(iii) Fixed Overhead Volume Variance: Standard fixed overhead – Budgeted fixed overhead =

STANDARD COSTING 74
 ` 4,80, 000 – ` 5,00, 000 = ` 20,000 (A)
(iv) Fixed Overhead efficiency Variance: Standard fixed overhead – Budgeted fixed overhead
for Actual days = ` 4,80, 000 – [(` 5,00, 000÷25) ×23] = ` 20,000 (F)

Solution 6.
Ans.
COMPUTATION OF VARIANCES
(i) Overhead Cost Variance = Absorbed Overheads – Actual Overheads
= (Rs.87,200 + Rs.44,800) – (Rs.1,21,520 + Rs.55,680)
= Rs. 45,200 (A)
(ii) Fixed Overhead Cost = Absorbed Fixed Overheads – Actual Fixed
Overheads Variance = Rs. 87,200 – Rs.1,21,520
= Rs.34,320 (A)
(iii) Variable Overhead Cost = Standard Variable Overheads for Production–
Actual Variance Variable Overheads
= Rs. 44,800 – Rs. 55,680
= Rs. 10,880 (A)
(iv) Fixed Overhead Volume = Absorbed Fixed Overheads – Budgeted Fixed
Variance Overheads
= Rs. 87,200 – Rs.1,09,000
= Rs. 21,800 (A)
(v) Fixed Overhead Expenditure = Budgeted Fixed Overheads – Actual Fixed
Overheads Variance
= Rs.10.90 × 10,000 units – Rs.1,21,520
= Rs.12,520 (A)
(vi) Calendar Variance = Possible Fixed Overheads – Budgeted Fixed
Overheads
= Rs.1,03,550 – Rs.1,09,000
= Rs. 5,450 (A)

WORKING NOTE
Budgeted Fixed Overheads Rs.12,00,000
Fixed Overheads per Unit = = Rs. 10
Budgeted Output 1,20,000units
Fixed Overheads element in Semi-Variable Overheads i.e. 60% of Rs.1,80,000 Rs. 1,08,000
Budgeted Fixed Overheads Rs.1,08,000
Fixed Overheads per Unit = = Rs. 0.09
Budgeted Output 1,20,000units

75 STANDARD COSTING
 Standard Rate of Absorption of Fixed Overheads per unit (Rs.10 + Rs.0.90) Rs.10.90
Fixed Overheads Absorbed on 8,000 units @ Rs10.90 Rs. 87,200
Budgeted Variable Overheads Rs. 6,00,000
Add : Variable element in Semi-Variable Overheads 40% of Rs. 1,80,000 Rs. 72,000
Total Budgeted Variable Overheads Rs. 6,72,000
Budgeted Fixed Overheads Rs.6,72,000
Standard Variable Cost per unit = = Rs. 5.60
Budgeted Output 1,20,000units
Standard Variable Overheads for 8,000 units @ Rs.5.60 Rs. 44,800
Budgeted Annual Fixed Overheads (Rs. 12,00,000 + 60% of Rs. 1,80,000) Rs.13,08,000
Budgeted Fixed Overheads
Possible Fixed Overheads = x Actual Days Rs.1,03,550
Budgeted Days
Rs.1,09,000
x 19Days
20 Days
Actual Fixed Overheads (Rs.1,10,000 + 60% of Rs. 19,200) Rs.1,21,520
Actual Variable Overheads (Rs.48,000 + 40% of Rs.19,200) Rs. 55,680

Solution 7.
The variances may be calculated as under:
(a) Standard cost = Std. Qty × Std. price = 50 units ×`1.00 = `50
(b) Actual cost = Actual qty. × Actual price = 45 units ×`0.80 = ` 36
Variances:
(i) Price variance = Actual qty (Std. price – Actual price)
= 45 units (`1.00 – `0.80) = ` 9 (F)
(ii) Usage variance = Std. price (Std. qty – Actual qty.)
= `1 (50 units – 45 units) = ` 5 (F)
(iii) Material cost variance = Standard cost – Actual cost
(Total variance) = ` 50 – ` 36 = ` 14 (F)

Solution 8.
100 kg
Standard Quantity of input for actual output (SQ) = 2,10,000 kg ×
70 kg
= 3, 00,000 kg.
Actual Price (AP) = (`2,52,000 ÷ 2, 80,000 kg) = `0.90 per kg.
(a) Material Usage Variance = (SQ – AQ) × SP
= (3,00,000 – 2,80,000) × 1= ` 20,000 (F)
(b) Material Price Variance = (SP – AP) × AQ
= (1 – 0.90) × 2,80,000= ` 28, 000 (F)

STANDARD COSTING 76
(c) Material Cost Variance = (SQ × SP) – (AQ × AP)
= (3, 00,000 × 1) – (2, 80,000 × 0.90)
= ` 48, 000 (F)
Check MCV = MPV + MUV
` 48, 000 (F) = ` 28, 000 (F) + `20, 000 (F)

Solution 9.
(a) Std. labour cost  (`)
(1,000 hours × `50)  50,000
(b) Actual wages paid  36,000
(c) Actual rate per hour: ` 36,000/900 hours =  `40

Variances
(i) Labour Rate variance = Actual time (Std. rate – Actual rate)
= 900 hours (`50 – `40) = `9,000 (F)
(ii) Efficiency variance = Std. rate per hr. (Std. time – Actual time)
= `50 (1,000 hrs. – 900 hrs.) = `5,000 (F)
(iii) Total labour cost variance = Std. labour cost – Actual labour cost
= {(`50 × 1,000 hours) – `36,000}
= (`50,000 – `36,000) = `14,000 (F)

Solution 10.
For Fixed Overhead Variances
Actual fixed overhead incurred  ` 31,000
Budgeted fixed overhead for the period  `30,000
Standard fixed overhead for production (Standard output
for actual time × Standard Fixed Overhead per unit)  `33,000
(` 30,000 ÷ 20,000 units) × 22,000

Computation of Variances:
(i) Fixed overhead expenditure variance:
= Budgeted fixed overhead – Actual fixed overhead
= `30,000 – `31,000 = ` 1,000 (A)
(ii) Fixed overhead volume variance:
= Standard fixed overhead – Budgeted fixed overhead
= `33,000 – ` 30,000 = ` 3,000 (F)

77 STANDARD COSTING
(iii) Fixed overhead variance:
= Standard fixed overhead – Actual fixed overhead
= `33,000 – ` 31,000 = ` 2,000 (F)

STANDARD COSTING 78
 14 MARGINAL COSTING

SOLUTIONS

HOMEWORK SECTION
Solution 1.
(a) Fixed production costs absorbed:  (`)
Budgeted fixed production costs  1,60,000
Budgeted output (normal level of activity 800 units)
Therefore, the absorption rate: 1,60,000/800 = ` 200 per unit
During the first quarter, the fixed production
cost absorbed by ZEST would be (220 units × ` 200)  44,000

(b) Under /over-recovery of overheads during the period:  (`)

Actual fixed production overhead  40,000
(1/4 of ` 1,60,000)
Absorbed fixed production overhead  44,000
Over-recovery of overheads  4,000

(c) Profit for the Quarter (Absorption Costing)

(`) (`)
Sales revenue (160 units × ` 2,000): (A) 3,20,000
Less: Production costs:
- Variable cost (220 units × ` 800) 1,76,000
- Fixed overheads absorbed (220 units × ` 200) 44,000 2,20,000
Add: Opening stock --
(60,000)
Less: Closing Stock
Cost of Goods sold 1,60,000
Less: Adjustment for over-absorption of fixed production (4,000)
overheads
Add: Selling & Distribution Overheads:
- Variable (160 units × `400) 64,000
- Fixed (1/4th of ` 2,40,000) 60,000 1,24,000
Cost of Sales (B) 2,80,000
Profit {(A) – (B)} 40,000

79 MARGINAL COSTING
(d) Profit for the Quarter (Marginal Costing)
(`) (`)
Sales revenue (160 units × ` 2,000): (A) 3,20,000
Less: Production costs:
- Variable cost (220 units × ` 800) 1,76,000
Add: Opening stock --
(48,000)
Less: Closing Stock

Variable cost of goods sold 1,28,000

Add: Selling & Distribution Overheads:
- Variable (160 units × `400) 64,000
Cost of Sales (B) 1,92,000
Contribution {(C) = (A) – (B)} 1,28,000
Less: Fixed Costs:
- Production cost (40,000)
- Selling & distribution cost (60,000) (1,00,000)
Profit 28,000

Solution 2.
Variable Cost = 100 – P/V Ratio
= 100 – 60 = 40
If Variable cost is 40, then selling price = 100
If Variable cost is 20, then selling price = (100/40) × 20 = ` 50

Solution 3.
Margin of Safety (%) =
= 75%
Total Sales =
Profit = Total Sales – Total Cost
=
` 2,50,000 – ` 1,93,750
=
` 56,250
P/V Ratio =

=

=
30%
Break-even Sales = Total Sales × [100 – Margin of Safety %]
=
` 2,50,000 × 0.25
=
` 62,500

MARGINAL COSTING 80
Fixed Cost = Sales × P/V Ratio – Profit
=
` 2,50,000 × 0.30 – ` 56,250
=
` 18,750

Solution 4.
(i) We know that: B.E. Sales  P/V Ratio = Fixed Cost
or ` 1,60,000 x P/V ratio = ` 40,000
P/V ratio = 25%
We also know that Sales  P/V Ratio = Fixed Cost + Profit
or ` 2,00,000  0.25 = ` 40,000 + Profit
or Profit = ` 10,000
(ii) Again B.E. Sales x P/V ratio = Fixed Cost
or ` 40,000 x P/V Ratio = ` 20,000
or P/V ratio = 50%
We also know that: Sales x P/V ratio = Fixed Cost + Profit
or Sales x 0.50 = ` 20,000 + ` 10,000
or Sales = ` 60,000.

Solution 5.
Contribution
P/V Ratio = × 100
Sales

= [(15 – 12)/15] × 100

= (3/15) x 100 = 20%
Marginal of Safety = Profit ÷ P/V Ratio
= 50,000 ÷ 20% = ` 2,50,000

Solution 6.
Margin of Safety (%) =
= 75%
Total Sales =
Profit = Total Sales – Total Cost
=
` 2,50,000 – ` 1,93,750
=
` 56,250
P/V Ratio =

81 MARGINAL COSTING
 =
30%
Break-even Sales = Total Sales × [100 – Margin of Safety %]
=
` 2,50,000 × 0.25
=
` 62,500
Fixed Cost = Sales × P/V Ratio – Profit
=
` 2,50,000 × 0.30 – ` 56,250
=
` 18,750

Solution 7.
Sales (`) Profit (`)
Year 2016 4,00,000 15,000 (loss)
Year 2017 5,00,000 15,000 (profit)
Difference 1,00,000 30,000

Difference in profit 30,000

(i) P/V Ratio = x 100 = x 100 = 30%
Difference in sales 1,00,000

(ii)
(`)
Contribution in 2016 (4,00,000 x 30% 1,20,000
Add: Loss 15,000
Fixed Cost* 1,35,000
*Contribution = Fixed cost + Profit
Fixed cost = Contribution – Profit

Fixed Cost 1,35,000

(iii) Break-even point = = = `4,50,000
P / V ratio 30%

(iv) Sales to earn a profit of ` 45,000

Fixed Cost + Desired profit 1,35,000 + 45,000

= `6,00,000
P/ V ratio 30%

(v) Margin of safety in 2017 –18

Margin of safety = Actual sales – Break-even sales
= 5,00,000 – 4,50,000 = ` 50,000.

MARGINAL COSTING 82
Solution 8.
Working notes:
1. (i) Number of units sold at 80% capacity
Turnover Rs.8,00,000
=
Selling price p.u. Rs.25

(ii) Number of units sold at 100% capacity

Rs.32,000 units
x 100 = 40,000 units
80

2. Component of fixed cost included in semi -variable cost of 32,000 units. Fixed cost =
{Total semi-variable cost – Total variable cost }
= Rs.1,80,000 – 32,000 units × Rs.3.75
= Rs.1,80,000 – Rs.1,20,000
= Rs.60,000

3. (i) Total fixed cost at 80% capacity

= Fixed cost + Component of fixed cost included in semi —variable cost
(Refer to working note 2)
= Rs.90,000 + Rs.60,000 = Rs.1,50,000

(ii) Total fixed cost beyond 80% capacity

= Total fixed cost at 80% capacity + Additional fixed cost to be incurred
= Rs.1,50,000 + Rs.20,000 = Rs.1,70,000

4. Variable cost and contribution per unit

Variable cost per unit = Material cost + Labour cost + Variable cost component in
semi variable cost = Rs.7.50 + Rs.6.25 + Rs.3.75 = Rs.17.50
Contribution per unit = Selling price per unit – Variable cost per unit
= Rs.25 – Rs.17.50 = Rs.7.50

5. Profit at 80% capacity level

= Sales revenue – Variable cost – Fixed cost
= Rs.8,00,000 – Rs.5,60,000 (32,000 units × Rs.17.50) – Rs.1,50,000
= Rs.90,000 (i) Activity level at Break–Even Point
(i) Activity level at Break–Even Point

83 MARGINAL COSTING

Fixed cost Rs. 1,50,000
Break-even point (units) = = = 20,000 units
Contribution per unit Rs. 7.50

(Refer to working notes 3 & 4)

Break - Even point (units)

Activity level at BEP = x 100
No. of units at 100% capacity level

(Refer to working note 1(ii))

20,000 units
= x 100=50%
40,000 units

(ii) Number of units to be sold to earn a net income of 8% of sales

Let S be the number of units sold to earn a net income of 8% of sales.
Mathematically it means that : (Sales revenue of S units)
= Variable cost of S units + Fixed cost + Net income

8
Or, Rs.25S = Rs.17.5S + Rs.1,50,000 + x (Rs.225)
100

Or, Rs.25S = Rs.17.5S + Rs.1,50,000 + Rs.2S
Or, S = (Rs.1,50,000/Rs.5.5) units
Or, S = 27,273 units.

(iii) Activity level needed to earn a profit of Rs. 95,000

The profit at 80% capacity level, is Rs. 90,000 which is less than the desired profit of
Rs. 95,000, therefore the needed activity level would be more than 80%. Thus the fixed
cost to be taken to determine the activity level needed should be Rs.1,70,000 (Refer
to Working Note 3 (ii))
Units to be sold to earn a profit of Rs.95,000

Fixed cost + Desired profit

=
Contribution per unit

= Rs. 1,70, 000 + Rs. 95, 000 / Rs. 7.5

= 35,333.33 units
Activity level needed to earn a profit of Rs.95,000
= 35,333.33 units / 40,000 units × 100 = 88.33%

MARGINAL COSTING 84
Solution 9.
Sales Volume 50,000 Units
Computation of existing contribution
Particulars Per unit (`) Total (` in lakhs)
Sales 3,400 1,700
Fixed Cost 1,700 850
Profit 300 150
Contribution 2,000 1,000
Variable Cost 1,400 700

Fixed cost 8,50,00,000

(i) Break even sales in units = = =42,500 Units
Contribution per unit 2,000

Break even sales in rupees = 42,500 units x ` 3,400 = ` 1,445 lakhs
OR
2,000
P/V Ratio = x 100 = 58.82%
3,400
Fixed cost 8,50,00,000
B.E.P (in rupees) = = = ` 1,445 lakhs (approx.)
P / V Ratio 58.82%

(ii) Number of units sold to achieve a target profit of ` 350 lakhs:

Desired Contribution = Fixed Cost + Target Profit
= 850 lakhs + 350 lakhs
= 1,200 lakhs

Desired Contribution 12,00,00,000

Number of units to be sold = = = 60,000 units
Contribution per unit 2,000

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

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

` 1,115 lakh
No. of units to be sold = Desired Contribution = = 42,525 units
` 2,622

Solution 10.
(i) Contribution per unit = Selling price – Variable cost
= Rs.100 – Rs.60
= Rs.40
Break-even Point = 60,000 units

Actual Sales - Break - even Sales

Percentage Margin of Safety =
Actual Sales
Actual Sales - 60,000 units
Or, 60% =
Actual Sales

Actual Sales = 1,50,000 units

(Rs.)
Sales Value (1,50,000 units × Rs.100) 1,50,00,000
Less: Variable Cost (1,50,000 units ×Rs.60) 90,00,000
Contribution 60,00,000
Less: Fixed Cost 24,00,000
Profit 36,00,000
Less: Income Tax @ 40% 14,40,000
Net Return 21,60,000

MARGINAL COSTING 86
 Rs.21,60,000
Rate of Net Return on Sales = 14.40% X 100
Rs. 1,50,00,000

(ii) Products
X (Rs.) Y (Rs.)
Selling Price per unit 100 150
Variable Cost per unit 60 100
Contribution per unit 40 50
Composite contribution will be as follows:

40 50
Contribution per unit = X5 + X3
8 8

= 25 + 18.75 = Rs.43.75

Rs.28,00,000
Break-even Sale = 64,000 units
Rs.43.75

Break-even Sales Mix:

X (64,000 units × 5/8) = 40,000 units
Y (64,000 units × 3/8) = 24,000 units

87 MARGINAL COSTING
 15 BUDGET & BUDGETARY
CONTROL

SOLUTIONS
HOMEWORK SECTION
Solution 1.
ABC Ltd.
Budget for 85% capacity level for the period 2020-21
Budgeted production (units) 85,000
Per Unit (`) Amount (`)
Direct Material (note 1) 21.60 18,36,000
Direct Labour (note 2) 10.50 8,92,500
Variable factory overhead (note 3) 2.10 1,78,500
Variable selling overhead (note 4) 4.32 3,67,200
Variable cost 38.52 32,74,200
Fixed factory overhead (note 3) 2,20,000
Fixed selling overhead (note 4) 1,15,000
Administrative overhead 1,76,000
Fixed cost 5,11,000
Total cost 37,85,200
Add: Profit 20% on sales or 25% on total cost 9,46,300
Sales 47,31,500
Contribution (Sales – Variable cost) 14,57,300

Working Notes:
1. Direct Materials:
(`) (`)
75% Capacity 15,00,000 65% Capacity 13,00,000
65% Capacity 13,00,000 55% Capacity 11,00,000
10% change in capacity 2,00,000 10% change in capacity 2,00,000
For 10% increase in capacity, i.e., for increase by 10,000 units, the total direct material
cost regularly changes by ` 2,00,000
Direct material cost (variable) = ` 2,00,000 ÷ 10,000 = ` 20
After 8% increase in price, direct material cost per unit = ` 20 × 1.08
= ` 21.60
Direct material cost for 85,000 budgeted units = 85,000 × ` 21.60
= ` 18,36,000

BUDGET & BUDGETARY CONTROL 88

2. Direct Labour :
(`) (`)
75% Capacity 7,50,000 65% Capacity 6,50,000
65% Capacity 6,50,000 55% Capacity 5,50,000
10% change in capacity 1,00,000 10% change in capacity 1,00,000
For 10% increase in capacity, direct labour cost regularly changes by ` 1,00,000.
Direct labour cost per unit = ` 1,00,000 ÷ 10,000 = ` 10
After 5% increase in price, direct labour cost per unit = ` 10 × 1.05 = ` 10.50
Direct labour for 85,000 units = 85,000 units × ` 10.50 = ` 8,92,500.

3. Factory overheads are semi-variable overheads:

(`) (`)
75% Capacity 3,50,000 65% Capacity 3,30,000
65% Capacity 3,30,000 55% Capacity 3,10,000
10% change in capacity 20,000 10% change in capacity 20,000
Variable factory overhead = ` 20,000 ÷ 10,000 = ` 2
Variable factory overhead for 75,000 units = 75,000 × ` 2 = `1,50,000
Fixed factory overhead = `3,50,000 – ` 1,50,000 = ` 2,00,000.
Variable factory overhead after 5% increase = ` 2 × 1.05 = ` 2.10
Fixed factory overhead after 10% increase = ` 2,00,000 × 1.10
= ` 2,20,000.

4. Selling overhead is semi-variable overhead :

(`) (`)
75% Capacity 4,00,000 65% Capacity 3,60,000
65% Capacity 3,60,000 55% Capacity 3,20,000
10% change in capacity 40,000 10% change in capacity 40,000
Variable selling overhead = ` 40,000 ÷ 10,000 units = ` 4
Variable selling overhead for 75,000 units = 75,000 × ` 4 = ` 3,00,000.
Fixed selling overhead = ` 4,00,000 – ` 3,00,000 = ` 1,00,000
Variable selling overhead after 8% increase = ` 4 × 1.08 = ` 4.32
Fixed selling overhead after 15% increase = ` 1,00,000 × 1.15
= ` 1,15,000
5. Administrative overhead is fixed:
After 10% increase = ` 1,60,000 × 1.10 = ` 1,76,000

89 BUDGET & BUDGETARY CONTROL

Solution 2.
Expense Budget of KLM Ltd.
Particulars 50,000 35,000 70,000
Units(`) Units(`) Units (`)
Direct Material 62,50,000 43,75,000 87,50,000
(50,000 x (35,000 x (70,000 x
125) 125) 125)
Direct Labour 25,00,000 17,50,000 35,00,000
(50,000 x 50) (35,000 x 50) (70,000 x 50)
Variable Overhead 20,00,000 14,00,000 28,00,000
(50,000 x 40) (35,000 x 40) (70,000 x 40
Direct Expenses 7,50,000 5,25,000 10,50,000
(50,000 x 15) (35,000 x 15) (70,000 x 15)
Selling Expenses (Variable)* 10,00,000 7,00,000 14,00,000
(50,000 x 20) (35,000 x 20) (70,000 x 20)
Selling Expenses (Fixed)*(5 x 50,000) 2,50,000 2,50,000 2,50,000
Factory Expenses (Fixed)(15 x 50,000) 7,50,000 7,50,000 7,50,000
Administration Expenses (Fixed)(8 x 50,000) 4,00,000 4,00,000 4,00,000
Distribution Expenses (Variable)** 8,50,000 5,95,000 11,90,000
(17 x 50,000) (17 x 35,000) (17 x 70,000)
Distribution Expenses (Fixed)**(3 x 50,000) 1,50,000 1,50,000 1,50,000
1,49,00,000 1,08,95,000 2,02,40,000

*Selling Expenses: Fixed cost per unit = ` 25 x 20% = ` 5

Fixed Cost = ` 5 x 50,000 units = ` 2,50,000
Variable Cost Per unit = ` 25 – ` 5 = ` 20
**Distribution Expenses: Fixed cost per unit = ` 20 x 15% = ` 3
Fixed Cost = `3 x 50,000 units = `1,50,000
Variable cost per unit = `20 – ` 3 = ` 17

Solution 3.
Ans.
(i) Preparation of Production Budget (in Units)
January February March April May
Sales 5,000 6,000 7,000 7,500 8,000
Add: Closing stock (25% of next 1,500 1,750 1,875 2,000
month’s sales)
Less: Opening Stock (1200) (1500) (1750) (1875)

BUDGET & BUDGETARY CONTROL 90

 Production of electronic Gadgets
5,300 6,250 7,125 7,625
(ii) Preparation of Purchase budget
January February March April
Consumption/production of Batteries
(@ 2 per Gadget) 10,600 12,500 14,250 15,250
Add: Closing Stock (30% of next
month’s production) 3750 4275 4575
Less: Opening Stock 3,250 3,750 4275
Purchase of Batteries 11,100 13,025 14,550

Statement Showing Profit

Jan. Feb. March Total
Sales (A) 5,000 6,000 7,000 18,000
Selling Price per unit* ` 2,000 ` 2,000 ` 2,000 ` 2,000
Less: Discount @15% of
selling price 300 300 300 300
Less: Standard cost of
Manufacturing per
gadget Cost 1500 1500 1500 1500
Profit (B) (selling Price- 200 200 200 200
discount-cost)
Total Profit (A × B) ` 10,00,000 ` 12,00,000 ` 14,00,000 ` 36,00,000

Solution 4.
Expense Budget of R Ltd. for the period ……
50% Capacity 60% Capacity
Per unit (`) 60,000 units 72,000 units
Amount (`) Amount (`)
Sales (A) 200.00 1,20,00,000 1,44,00,000
Less: Variable Costs:
- Direct Material 82.50 49,50,000 59,40,000
- Direct Wages 27.50 16,50,000 19,80,000
- Variable Overheads 27.50 16,50,000 19,80,000
- Direct Expenses 16.50 9,90,000 11,88,000
- Variable factory expenses 16.50 9,90,000 11,88,000
(75% of ` 20 p.u.)
- Variable Selling & Dist. exp. 8.80 5,28,000 6,33,600
(80% of ` 10 p.u.)

91 BUDGET & BUDGETARY CONTROL

Total Variable Cost (B) 179.30 1,07,58,000 1,29,09,600
Contribution (C) = (A – B) 20.70 12,42,000 14,90,400

Less: Fixed Costs:

- Office and Admin. exp. (100%) - 3,45,000 3,45,000
- Fixed factory exp. (25%) - 3,45,000 3,45,000
- Fixed Selling & Dist. exp. (20%) - 1,38,000 1,38,000
Total Fixed Costs (D) - 8,28,000 8,28,000
Profit (C – D) - 4,14,000 6,62,400

Solution 5.
(i) Production Budget of ‘X’ for the Second Quarter
Particulars Bags (Nos.)
Budgeted Sales 50,000
Add: Desired Closing stock 11,000
Total Requirements 61,000
Less: Opening stock 15,000
Required Production 46,000

(ii) Raw–Materials Purchase Budget in Quantity as well as in Rs. for 46,000 Bags of ‘X’
Particulars ‘Y’ Kgs. ‘Z’ Kgs. Empty Bags
Nos.
Production Requirements 2.5 7.5 1.0
Per bag of ‘X’
Requirement for Production 1,15,000 3,45,000 46,000
(46,000 × 2.5) (46,000 × 7.5) (46,000 × 1)
Add: Desired Closing Stock 26,000 47,000 28,000
Total Requirements 1,41,000 3,92,000 74,000
Less: Opening Stock 32,000 57,000 37,000
Quantity to be purchased 1,09,000 3,35,000 37,000
Cost per Kg./Bag Rs.120 Rs.20 Rs.80
Cost of Purchase (Rs.) 1,30,80,000 67,00,000 29,60,000
(iii) Computation of Budgeted Variable Cost of Production of 1 Bag of ‘X’
Particulars (Rs.)
Raw – Material
Y 2.5 Kg @120 300.00
Z 7.5 Kg. @20 150.00
Empty Bag 80.00
Direct Labour(Rs.50× 9 minutes / 60 minutes) 7.50
Variable Manufacturing Overheads 45.00
Variable Cost of Production per bag 582.50

BUDGET & BUDGETARY CONTROL 92

(iv) Budgeted Net Income for the Second Quarter
Particulars Per Bag (Rs.) Total (Rs.)
Sales Value (50,000 Bags) 900.00 4,50,00,000
Less: Variable Cost:
Production Cost 582.50 2,91,25,000
Admn. & Selling Expenses (5% of Sales Price) 45.00 22,50,000
Budgeted Contribution 272.50 1,36,25,000
Less: Fixed Expenses:
Manufacturing 30,00,000
Admn. & Selling 20,50,000
Budgeted Net Income 85,75,000

93 BUDGET & BUDGETARY CONTROL