SUGGESTED SOLUTION

CA INTERMEDIATE
SUBJECT- COST & MANAGEMENT ACCOUNTING

Test Code – ISP 2410

BRANCH - () (Date :)

Head Office : Shraddha, 3rd Floor, Near Chinai College, Andheri (E), Mumbai – 69.
Tel : (022) 26836666

1|Page
MULTIPLE CHOICE QUESTIONS :

No. ANSWER
1. (i) D Rs. 7,87,10,000
(ii) C Rs. 7,87,28,000 and Rs. 1,682.22 respectively
(iii) A Rs. 92,400
(iv) B Rs. 56,000 & Rs. 7,88,76,400 respectively
(v) A Rs. 1,504.70 & 5 tonnes respectively
2. (i) D Rs. 840
(ii) A Rs. 25,20,000
(iii) A 1,18,000 over – absorbed
(iv) B Rs. 0.472 per unit
(v) C Rs. 18,880
3. C It is probably the least time consuming and least costly approach to
budgeting
4. B Fixed overheads
5. A Cost control seeks to attain lowest possible cost under best conditions
6. A Job cost sheet may be used for estimating profit of jobs
7. B Bill of material
(15 * 2 MARKS = 30)

ANSWER : 1(A)
Sales Profit
Year 2021 – 22 Rs. 1,20,000 8,000
Year 2022 – 23 Rs. 1,40,000 13,000
Difference Rs. 20,000 5,000

(i) P/V Ratio =

= = = 25%

Contribution in 2019 – 20 (1,20,000  25%) 30,000

Less : Profit 8,000
Fixed Cost* 22,000
Contribution = Fixed Cost + Profit
 Fixed cost = Contribution – Profit

(ii) Break – even point

= = Rs. 88,000
⁄
(iii) profit when sales are Rs. 1,80,000

Rs.
Contribution (Rs. 1,80,000  25%) 45,000
Less : Fixed cost 22,000
Profit 23,000

2|Page
(iv) Sales to earn a profit of Rs. 12,000

=
⁄

= Rs. 1,36,000

(v) Margin of safety in 2022 – 23

Margin of safety = Actual sales – Break – even sales
= 1,40,000 – 88,000 = Rs. 52,000
(5 MARKS)

ANSWER : 1(B)
Apportionment of Joint Costs

Particulars A (Rs.) B (Rs.)

Selling Price 16,000 8,000
Less: Estimated profit 4,000 1,600
(25% of Rs.16,000) (20% of Rs. 8,000)
Cost of sales 12,000 6,400
Less: Selling & Distribution exp. 267 133
(Refer working note) (Rs. 400 × 2/3) (Rs. 400 × 1/3)
Less: Subsequent cost 5,000 3,000
Share of Joint cost 6,733 3,267
So, Joint cost of manufacture is to be distributed to A & B in the ratio of 6733 : 3267

Statement showing Cost of Production of A and B

Elements of cost Joint Cost Subsequent Cost Total Cost

A B A B A B
Material 3,367 1,633 3,000 1,500 6,367 3,133
Labour 2,020 980 1,400 1,000 3,420 1,980
Overheads 1,346 654 600 500 1,946 1,154
Cost of production 11,733 6,267

Working Note:
Calculation of Selling and Distribution Expenses

Particulars (Rs.)
Total Sales Revenue (Rs. 16,000 + Rs. 8,000) 24,000
Less: Estimated Profit (Rs. 4,000 + Rs. 1,600) (5,600)
Cost of Sales 18,400
Less: Cost of production:
- Joint Costs (10,000)
- Subsequent costs (Rs. 5,000 + Rs. 3,000) (8,000)
Selling and Distribution expenses (Balancing figure) 400
(5 MARKS)

3|Page
ANSWER : 1(C)

(i) Effective hourly rate of earnings under Rowan Incentive Plan

Earnings under Rowan Incentive plan =

(Actual time taken  wage rate) + Time taken  Wage rate

= (5 hours  Rs. 120) + ( )

= Rs. 600 + Rs. 100 = Rs. 700

(ii) Let time taken = x

Effective hourly rate =

Or, Effective hourly rate under Halsey Incentive Plan =

( ) ( )

( ) ( )
Or, Rs. 140 =

Or, 140X = 120X + 360 – 60X

Or, 80X = 360

Or, X = = 4.5 hours

Therefore, to earn effective hourly rate of Rs. 140 under Halsey Incentive Scheme worker has to
complete the work in 4.5 hours.

(4 MARKS)

ANSWER : 2(A)

Working note:
Computation of revenues (at listed price), discount, cost of goods sold and customer level operating
activities costs:

Customers
A B C D E
Units sold: (a) 4,500 6,000 9,500 7,500 12,750
Revenues (at listed price) 2,91,60,000 3,88,80,000 6,15,60,000 4,86,00,000 8,26,20,000
(Rs.): (b) {(a) × Rs.6,480)}
Revenues (at listed price) 2,91,60,000 3,82,32,000 5,64,30,000 4,69,80,000 7,43,58,000
(Rs.): (c)
(4,500 × 6,480) (6,000 × 6,372) (9,500 × 5,940) (7,500 × 6,264) (12,750 ×
{(a) ×Actual sellingprice)} 5,832)

4|Page
Discount (Rs.) (d) {(b) – (c)} 0 6,48,000 51,30,000 16,20,000 82,62,000

Cost of goods sold (Rs.) : 2,43,00,000 3,24,00,000 5,13,00,000 4,05,00,000 6,88,50,000

(d) {(a) x Rs.5,400}

Customer level operating activities costs

Order taking costs(Rs.): 67,500 1,12,500 1,35,000 1,12,500 1,35,000

(No. of purchase orders ×
Rs. 4,500)

Customer visitscosts (Rs.) 7,200 10,800 21,600 7,200 10,800

(No. of customer visits x Rs.
3,600)

Delivery vehiclestravel 1,500 1,350 2,250 3,000 4,500

costs (Rs.) (Kms travelled by
delivery vehicles x Rs. 7.50
per km.)
Product handlingcosts (Rs.) 1,01,250 1,35,000 2,13,750 1,68,750 2,86,875
{(a) x Rs. 22.50}
Cost of expediting deliveries - - - - 13,500
(Rs.) {No. of expedited
deliveries x Rs. 13,500}

Total cost of customer level 1,77,450 2,59,650 3,72,600 2,91,450 4,50,675

operating activities(Rs.)

(i) Computation of Customer level operating income

Customers
A B C D E
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Revenues (At list price) 2,91,60,000 3,82,32,000 5,64,30,000 4,69,80,000 7,43,58,000
(Refer to workingnote)
Less: Cost of goods sold (2,43,00,000) (3,24,00,000) (5,13,00,000) (4,05,00,000) (6,88,50,000)
(Refer to workingnote)
Gross margin 48,60,000 58,32,000 51,30,000 64,80,000 55,08,000
Less: Customer level
operatingactivities costs
(Refer to workingnote) (1,77,450) (2,59,650) (3,72,600) (2,91,450) (4,50,675)
Customer level 46,82,550 55,72,350 47,57,400 61,88,550 50,57,325
operating income
(ii) Factors to be considered for dropping a customer:
Dropping customers should be the last resort to be taken by an entity. Factors to be
consideredshould include:
- What is the expected future profitability of each customer?
- Are the currently least profitable or low profitable customers are likely to be highly
profitable in the future?
- What costs are avoidable if one or more customers are dropped?

5|Page
 - Can the relationship with the “problem” customers be restructured so that there is at
“win- win” situation
(10 MARKS)

ANSWER : 3(A)

Statement of Cost of R Ltd. for the year ended 31st March, 2020 :

S. No. Particulars Amount (Rs.) Amount (Rs.

(i) Material Consumed
- Raw materials purchased 84,00,000
- Carriage inward 1,72,600
Add : Opening stock of raw materials 6,20,000
Less : Closing stock of raw materials (4,60,000) 87,32,600
(ii) Direct employee (labour) cost :
- Direct wages 60,00,000
- Employer’s contribution towards PF & ESIS 7,20,000 67,20,000
(iii) Direct expenses :
- Consumable materials 4,80,000
- Cost of power & fuel 28,00,000 32,80,000
Prime Cost 1,87,32,600
(iv) Works / Factory overheads :
- Wages to foreman and store keeper 8,40,000
- Other indirect wages to factory staffs 1,35,000 9,75,000
Gross factory cost 1,97,07,600
Add : Opening value of W – I – P 7,84,000
Less : Closing value of W – I – P (6,64,000)
Factory Cost 1,98,27,600
(v) Research & development cost paid for improvement in 9,60,000
production process
(vi) Production planning office expenses 12,60,000
Cost of production 2,20,47,600
Add : Opening stock of finished goods 14,40,000
Less : closing stock of finished goods (9,80,000)
Cost of Goods sold 2,25,07,600
(vii) Administrative overheads :
- Salary to accountants 7,20,000
- Fees to statutory auditor 1,80,000
- Fees to cost auditor 80,000
- Fee paid to independent directors 9,40,000 19,20,000
(viii) Selling overheads & Distribution overheads :
- Salary to delivery staffs 14,30,000
Cost of Sales 2,58,57,600
Profit (balancing figure) 24,02,400
Sales 2,82,60,000
Note : Income tax and Donation to PM National Relief Fund is avoided in the cost sheet.

(10 MARKS)
6|Page
ANSWER : 3(B)

Standard Quantity of input for actual output (SQ) = 2,10,000 kg  = 3,00,000 kg.

Actual price (AP) = (Rs.2,52,000  2,80,000 kg) = Rs. 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 = Rs. 28,000 (F)
(c) Material Cost Variance = (SQ  SP) – (AQ  AP)
= (3,00,000  1) – (2,80,000  0.90) = Rs. 48,000 (F)

Check MCV = MPV + MUV

Rs. 48,000 (F) = Rs. 28,000 (F) + Rs. 20,000 (F)

(4 MARKS)

ANSWER : 4(A)

Working Notes:

1. Total Distance (in km.) covered per month

Bus route Km. per Trips per Days per Km. per
trip day month month
Delhi to Hisar 160 2 9 2,880
Delhi to Aligarh 160 2 12 3,840
Delhi to Alwar 170 2 6 2,040
Total 8,760

2. Passenger- km. per month

Total seats available Capacity Km. per Passenger-

per month (at 100% utilised trip Km. per
capacity) month
(%) Seats
Delhi to Hisar & 900 90 810 160 1,29,600
Back (50 seats × 2 trips × (810 seats ×
9 days) 160 km.)
Delhi to Aligarh 1,200 95 1,140 160 1,82,400
& Back (50 seats × 2 trips × (1,140 seats
12 days) × 160 km.)
Delhi to Alwar & 600 100 600 170 1,02,000
Back (50 seats × 2 trips × (600 seats ×
6 days) 170 km.)
Total 4,14,000

7|Page
 Monthly Operating Cost Statement

Particulars (Rs.) (Rs.)

(i) Running Costs
Diesel {(8,760 km × 5 km) × Rs. 90} 1,57,680.00
Lubricant oil {(8,760 km × 100) × Rs. 30} 2,628.00 1,60,308.00
(ii) Maintenance Costs
Repairs & Maintenance 5,000.00
(iii) Standing charges
Salary to driver 30,000.00
Salary to conductor 26,000.00
Salary of part-time accountant 7,000.00
Insurance (Rs. 6,000 ÷12) 500.00
Road tax (Rs. 21,912 ÷12) 1,826.00
Permit fee 500.00
Depreciation {(Rs. 15,00,000 × 30%) × 12} 37,500.00 1,03,326.00
Total costs per month before Passenger Tax 2,68,634.00
(i)+(ii)+(iii)
Passenger Tax* 1,07,453.60

Total Cost 3,76,087.60

Add: Profit* 1,61,180.40

Total takings per month 5,37,268.00

*Let total takings be X then,
X = Total costs per month before passenger tax + 0.2 X (passenger tax) + 0.3 X
(profit) X = Rs. 2,68,634 + 0.2 X + 0.3 X
0.5 X = Rs. 2,68,634 or, X = Rs. 5,37,268
Passenger Tax = 20% of Rs. 5,37,268 = Rs. 1,07,453.60
Profit = 30% of Rs. 5,37,268 = Rs. 1,61,180.40
Calculation of Rate per passenger km. and fares to be charged for different routes

Rate per Passenger – Km =

= = 1.30 (pprox...)

Bus fare to be charged per passenger :

Delhi to Hisar = Rs. 1.30 × 160 km = Rs. 208.00

Delhi to Aligarh = Rs. 1.30 × 160 km = Rs. 208.00
Delhi to Alwar = Rs. 1.30 × 170 km = Rs. 221.00
(10 MARKS)

8|Page
ANSWER : 4(B)
Process A Account
Dr. Cr.
Rs. Rs.
To Materials 40,000 By Transfer to Process B A/c. 1,20,000
To Labour 40,000
To Overheads 16,000
96,000
To Profit (20% of transfer price, 24,000
i.e. 25% of cost)
1,20,000 1,20,000

Process B Account

Dr. Cr.
Rs. Rs.
To Process A/c. 1,20,000 By Finished Stock A/c.
(Transferred from Process A) (Transfer to finished stock) 2,88,000
To Labour 56,000
To Overhead 40,000
2,16,000
To Profit (25% of transfer price 72,000
i.e., 33.33% of cost)
2,88,000 2,88,000

Statement of Total Profit

Rs.
Profit from Process A 24,000
Profit from Process B 72,000
Profit on Sales (Rs. 4,00,000 – Rs. 2,88,000) 1,12,000
Total Profit 2,08,000
(4 MARKS)

ANSWER : 5(A)

Particulars (Rs.) (Rs.)

(i) Work-in-Progress Ledger Control A/c Dr. 5,88,000
To Stores Ledger Control A/c 5,88,000
(Being issue of direct materials to production)
(ii) Factory Overhead control A/c Dr. 7,50,000
To Wages Control A/c 7,50,000
(Being allocation of Indirect wages)
(iii) Factory Overhead Control A/c Dr. 2,25,000
To Costing Profit & Loss A/c 2,25,000
(Being transfer of over absorption of Factory

9|Page
 overhead) Dr. 1,55,000
(iv) Costing Profit & Loss A/c
To Administration Overhead Control A/c 1,55,000
(Being transfer of under absorption of
Administration overhead)
(v) Factory Overhead Control A/c Dr. 2,00,000
To Stores Ledger Control A/c 2,00,000
(Being transfer of deficiency in stock of raw material)
(Note: Costing P/&/L = P/&/L and SLC = MLC)
(5 MARKS)

ANSWER : 5(B)

Inventory Control: The Chartered Institute of Management Accountants (CIMA) defines Inventory
Control as “The function of ensuring that sufficient goods are retained in stock to meet all
requirements without carrying unnecessarily large stocks.”

The objective of inventory control is to make a balance between sufficient stock and over - stock.
The stock maintained should be sufficient to meet the production requirements so that
uninterrupted production flow can be maintained. Insufficient stock not only pause the production
but also cause a loss of revenue and goodwill. On the other hand, Inventory requires some funds
for purchase, storage, maintenance of materials with a risk of obsolescence, pilferage etc. A trade-
off between Stock-out and Over-stocking is required. The management may employ various
methods of Inventory control to have a balance.

Management may adopt the following basis for Inventory control:

Inventory Control

By Setting On the basis of Using Ratio Physical

Quantitative Relative Analysis Control
Classification

EXAMINERS’ COMMENTS ON THE PERFORMANCE OF EXAMINEES:

This was a numerical question relating to the topic ‘Material cost’ to calculate EOQ and Total
Inventory cost. Performance of the examinees was good.

(5 MARKS)
ANSWER : 5(C)
The difference between the allocation and apportionment is important to understand because
the purpose of these two methods is the identification of the items of cost to cost un its or
centers. However, the main difference between the above methods is given below.
(1) Allocation deals with the whole items of cost, which are identifiable with any one
department. For example, indirect wages of three departments are separately obtained and
hence each department will be charged by the respective amount of wages individually.
On the other hand, apportionment deals with the proportions of an item of cost for
example; the cost of the benefit of a service department will be divided between those

10 | P a g e
 departments which has availed those benefits.
(2) Allocation is a direct process of charging expenses to different cost centres whereas
apportionment is an indirect process because there is a need for the identification of the
appropriate portion of an expense to be borne by the different departments benefited.
(3) The allocation or apportionment of an expense is not dependent on its nature, but the
relationship between the expense and the cost centre decides that whether it is to be
allocated or apportioned.
(4) Allocation is a much wider term than apportionment.

(4 MARKS)
ANSWER : 6(A)
 Cost classification based on variability
(i)
Fixed Costs – These are the costs which are incurred for a period, and which, within certain
output and turnover limits, tend to be unaffected by fluctuations in the levels of activity
(output or turnover). They do not tend to increase or decrease with the changes in output.
For example, rent, insurance of factory building etc., remain the same for different levels of
production.
(ii) Variable Costs – These costs tend to vary with the volume of activity. Any increase in the
activity results in an increase in the variable cost and vice-versa. For example, cost of direct
labour, etc.
(iii) Semi-variable Costs – These costs contain both fixed and variable components and are thus
partly affected by fluctuations in the level of activity. Examples of semi variable costs are
telephone bills, gas and electricity etc.
 Cost classification based on controllability
(i) Controllable Costs - Cost that can be controlled, typically by a cost, profit or investment centre
manager is called controllable cost. Controllable costs incurred in a particular responsibility
centre can be influenced by the action of the executive heading that responsibility centre. For
example, direct costs comprising direct labour, direct material, direct expenses and some of
the overheads are generally controllable by the shop level management.

(ii) Uncontrollable Costs - Costs which cannot be influenced by the action of a specified member
of an undertaking are known as uncontrollable costs. For example, expenditure incurred by,
say, the tool room is controllable by the foreman in-charge of that section but the share of the
tool-room expenditure which is apportioned to a machine shop is not to be controlled by the
machine shop foreman.
(4 MARKS)
ANSWER : 6(B)
Production Budget (in units)

Particulars Hot Cold Coffee Fruit Juice Carbonated

Coffee Soft Drink

October 2023

Sales* 2,10,000 2,38,000 3,36,000 60,000

Add: Closing stock 15,000 14,000 12,000 5,500

Total Quantity Required 2,25,000 2,52,000 3,48,000 65,500

11 | P a g e
Less: Opening stock 12,000 13,000 11,000 7,500

Production 2,13,000 2,39,000 3,37,000 58,000

November 2023

Sales* 3,15,000 1,66,600 3,36,000 50,000

Add: Closing stock 13,000 15,000 10,000 6,000

Total Quantity Required 3,28,000 1,81,600 3,46,000 56,000

Less: Opening stock 15,000 14,000 12,000 5,500

Production 3,13,000 1,67,600 3,34,000 50,500

December 2023

Sales* 4,72,500 1,16,620 3,36,000 30,000

Add: Closing stock 11,000 16,000 13,000 7,000

Total Quantity Required 4,83,500 1,32,620 3,49,000 37,000

Less: Opening stock 13,000 15,000 10,000 6,000

Production 4,70,500 1,17,620 3,39,000 31,000

*sales units are taken from sales budget

Sales Budget (in Units and sales value)

Particulars Hot Coffee Cold Coffee Fruit Juice Carbonated

Soft Drink
October 2023 2,10,000 2,38,000 3,36,000 60,000
(in units) [1,40,000 [3,40,000 [420000
+ (1,40,000 -(3,40,000 -
x 50%)] x 30%)] (4,20,000x20%)]
October 2023 42,00,000 95,20,000 67,20,000 12,00,000
(Sales Value in (2,10,000 (2,38,000 (3,36,000 x (60,000
Rs.) x Rs. 20) x Rs. 40) Rs.20) x Rs. 20)
November 3,15,000 1,66,600 3,36,000 50,000
2023 (in units) [2,10,000 [2,38,000
+(2,10,000 -(2,38,000
x 50%)] x 30%)]
November 2023 63,00,000 66,64,000 67,20,000 10,00,000
(Sales Value in (3,15,000 (1,66,600 (3,36,000 x Rs. (50,000
Rs.) x Rs. 20) x Rs. 40) 20) x Rs. 20)
December 4,72,500 1,16,620 3,36,000 30,000
2023 (in units) [3,15,000 [1,66,600
+(3,15,000 -(1,66,600
x 50%)] x 30%)]

12 | P a g e
 December 2023 94,50,000 46,64,800 67,20,000 6,00,000
(Sales Value in (4,72,500 (1,16,620 (3,36,000 x Rs. (30,000
Rs.) x Rs. 20) x Rs. 40) 20) x Rs. 20)

Sales Budget can also be presented in following way:

Oct 2023 Nov 2023 Dec 2023

Quantity Amount Quantity Amount Quantity Amount
(units) (Rs.) (units) (Rs.) (units) (Rs.)
Hot Coffee @ Rs. 20 2, 10,000 42,00,000 3,15,000 63,00,000 4,72,500 94,50,000
per unit
Cold Coffee @ Rs. 40 2,38,000 95,20,000 1,66,600 66,64,000 1,16,620 46,64,800
per unit
Fruit Juice @ Rs. 20 3,36,000 67,20,000 3,36,000 67,20,000 3,36,000 67,20,000
per unit
Carbonated Soft Drink 60,000 12,00,000 50,000 10,00,000 30,000 6,00,000
@ Rs. 20 per unit
2,16,40,000 2,06,84,000 2,14,34,800

(10 MARKS)

13 | P a g e