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COST & MANAGEMENT

ACCOUNTING

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 TABLE OF CONTENTS

SN NAME OF THE CHAPTER PAGE NOS

2 MATERIAL COST 1-17

3 EMPLOYEE COST 18-28

4 OVERHEADS: ABSORPTION COSTING METHOD 29-47

5 ACTIVITY BASED COSTING 48-59

6 COST SHEET 60-69

7 COST ACCOUNTING SYSTEM 70-84

8 UNIT & BATCH COSTING 85-88

9A JOB COSTING 89-91

9B CONTRACT COSTING 92-99

10 PROCESS & OPERATION COSTING 100-114

11 JOINT PRODUCTS & BY PRODUCTS 115-124

12 SERVICE COSTING 125-134

13 STANDARD COSTING 135-149

14 MARGINAL COSTING 150-168

15 BUDGET AND BUDGETARY CONTROL 169-178

 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
Answer 10
As procurement time is given in days, consumption should also be calculated in days:

350
Maximum Consumption per Day: = 50 Kgs
7
210
Minimum Consumption per Day: = 30 Kgs.
7
(50+30)
Average Consumption per Day: = 30 Kgs.
2

(a) Calculation of Economic Order Quantity (EOQ)

Annual consumption of Raw Materials (A): 40 Kgs x 365 days = 14,600 Kgs
Storage or Carrying Cost per unit per annum (C):(` 100 x 1% x 12 months) + ` 2 = ` 14
Ordering Cost (O): ` 200 per Order

EOQ =

=
(b) Re-Order Level (ROL) = (Maximum consumption Rate × Maximum
Procurement Time)
= 50 kgs per day × 9 days
= 450 kgs
(c) Maximum Stock Level = Recorder Level + Recorder Quantity – (Minimum
Consumption Rate × Minimum Procurement Time)
= 450 kgs + 646 kgs - (30 kgs X 5 days)
= 946 kgs
(d) Minimum Stock Level = Recorder Level – (Average consumption Rate ×
Average Procurement Time)
= 450 kgs – (40 kgs X 7 days)
= 170 kgs
(e) Average Stock Level = Maximum Stock Level + Minimum Stock Level
2
946 kgs + 170 kgs
=
2

= 558 kgs

(f) Number of Orders to be placed per year

MATERIAL COST 10
 = Annual Consumption of Raw Materials
EOQ
14600 kgs
=
646 kgs

= 22.60 Orders or 23 Orders

(g) Total Inventory Cost

Cost of Materials (A x Purchase Price) (14600 kgs x ` 100) =  ` 14,60,000
Total Ordering Cost (No. of Orders x O) (23 Orders x 200) =  ` 4,600
Total Carrying Cost (EOQ / 2 x C) (646 kgs / 2 x ` 14) =  ` 4,522
Total Inventory Cost  ` 14,69,122
(h) If the supplier is willing to offer 1% discount on purchase of total annual quantity in
two orders:
Offer Price = ` 100 x 99% = ` 99
Revised Carrying Cost = (` 99 x 1% x 12 months) + `2 = ` 13.88
Revised Order Quantity = 14600 kgs / 2 Orders = 7300 kgs
Total Inventory Cost at Offer Price
Cost of Materials (A x Purchase Price) (14600 kgs x ` 99) = ` 14,45,400
Total Ordering Cost (No. of Orders x O) (2 Orders x 200) =  ` 400
Total Carrying Cost (EOQ / 2 x C) (7300 kgs / 2 x `13.88) =  ` 50,662
Total Inventory Cost  ` 14,96,462
Advice: As total inventory cost at offer price is ` 27,340 (14,96,462 – 14,69,122) higher,
offer should not be accepted.
(i) Counter-offer:
Let Discount Rate = z%
Counter-Offer Price = ` 100 – z% = ` 100 – z
Revised Carrying Cost = [(` 100 – z) x 1% x 12 months] + ` 2 = ` 12 -0.12z + ` 2
= ` 14 – 0.12z
Total Inventory Cost at Counter-Offer Price
Cost of Materials (A x Purchase Price) [14600 kgs x (` 100 – z)] =  ` 14,60,000 – 14,600z
Total Ordering Cost (No. of Orders x O) (2 Orders x 200) = ` 400
Total Carrying Cost (EOQ / 2 x C) [7300 kgs / 2 x (` 14 – 0.12z)] =  ` 51,100 – 438z
Total Inventory Cost ` 15,11,500 – 15038z
` 14,69,122 = ` 15,11,500 – 15038z
Or 15038z = 42,378
Or z = 2.82
Therefore, discount should be at least 2.82% in offer price.

11 MATERIAL COST
Answer 11
Working Notes:
Annual requirement (A) = 27,000 units
Cost per order (O) = ` 240
Inventory carrying cost (i) = 12.5%
Cost per unit of spare (c) = ` 50
Carrying cost per unit (i × c) = ` 50 × 12.5% = ` 6.25

Economic Order Quantity (EOQ) =

(i) Calculation of saving by opting EOQ:

Existing Order policy EOQ Model
No. of orders

A. Ordering Cost (`)

B. Carrying cost (`)

Total cost (A+B) (`) 11,535 9,000

Savings of Cost by opting EOQ Model = ` 11,535 – ` 9,000 = ` 2,535

(ii) Re-order point under EOQ:

Re-order point/ Re-order level = Maximum consumption × Maximum lead time

27,000units
Consumption per day = = 75 units
360days

Re-order point/ Re-order level = 75 units × 12 days = 900 units

(iii) Frequency of Orders (in days):

360days 360 days

= = 18.95 days or 19 days
No.of orders a year 19

MATERIAL COST 12
Answer 12
(i) Calculation of most Economical Production Run

(ii) Calculation of Extra Cost due to processing of 15,000 vaccines in a batch

When run size is When run size is

2,000 vaccines 15,000 vaccines
Total set up cost

Total Carrying cost ½ × 2,000 × ` 144 ½ × 15,000 × ` 144

= ` 1,44,000 = ` 10,80,000
Total Cost ` 2,88,000 ` 10,99,200
Thus, extra cost = ` 10,99,200 – ` 2,88,000 = ` 8,11,200

13 MATERIAL COST
 SOLUTIONS
CLASS TEST

Solution 2.
(i) Calculation of Economic Order Quantity

(ii) Evaluation of Profitability of Different Options of Order Quantity

When EOQ is ordered
(`)
Purchase Cost (12,000 units x ` 640) 76,80,000

Ordering Cost (12,000 units/ 600 units) x ` 1,800] 36,000

Carrying Cost 600 units x ` 640 x ½ x 18.75/100)

36,000

Total Cost 77,52,000

Solution 3.
Annual consumption 250 kg × 52 weeks = 13,000 kg.

(i) Re-order Quantity or EOQ =

A = Annual Consumption = 13,000 kg

O = Ordering Cost = `. 1,500
C = Cost per kg = `. 100
i = carrying cost rate = 9.75%
Carrying cost per kg per annum (c× i) = 100 × 9.75% = `. 9.75

MATERIAL COST 14
(ii) Re-order level = Max. re-order period × Max, Consumption
= 7 weeks × 300 kg = 2,100 kg
(iii) Maximum level = Re-order level + Re-order Qty – (Min re-order Period × Min. Consumption)
= 2100 kg + 2000 kg – (5 × 200) kg = 3100 kg.
(iv) Minimum level = Re-order level – (Avg. re-order period × Avg. Consumption)
= 2,100 kg – (6 × 250) kg = 600 kg.
(v) Avg. stock level = (Max. level +Min.level)

Solution 4.
(i) Optimum batch size or Economic Batch Quantity (EBQ):

(ii) Number of Optimum runs = 48,000 ÷ 5,060 = 9.49 or 10 runs

Interval between 2 runs (in days) = 365 days ÷ 10 = 36.5 days
(iii) Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per unit per
annum Average Inventory = 5,060 units ÷ 2 = 2,530 units
Carrying Cost per unit per annum = Rs.1 × 12 months = Rs.12
Minimum Inventory Holding Costs = 2,530 units × Rs. 12 = Rs.30,360

Solution 5.
(a) Total Annual Cost in Existing Inventory Policy
(`)
Ordering cost (6 orders @ ` 25) 150
Carrying cost of average inventory (36,000 ÷ 6) = 6,000 units per order
Average inventory = 3,000 units
Carrying cost = 20% of ` 1 x 3,000 = 3,000 x 0.20 600
Total cost A 750

(b) Total Annual Cost in E.O.Q

15 MATERIAL COST
 (`)
No. of orders = 36,000 ÷3,000 units = 12 orders
Ordering cost (12 × `Rs 25) = 300
Carrying cost of average inventory (3,000 × 0.20) ÷ 2 = 300
Total Cost B 600
Savings due to E.O.Q ` (750 – 600) 150
(A – B)
Note: As the units purchase cost of ` 1 does not change in both the computation, the
same has not been considered to arrive at total cost of inventory for the purpose of
savings.

Solution 6.

Where,
A = Annual Demand
O = Ordering cost per order
C = Inventory carrying cost per unit per annum
(i) Calculation of EOQ
Super Grow Nature’s Own

(ii) Total annual relevant cost = Total annual relevant ordering costs + Total annual relevant
carrying cost
Super Grow Nature’s Own
Number of Orders = = 2,000/100 =1,280/80
Annual Requirement =20 orders =16 orders
÷EOQ
Ordering Cost 20 × 1200 = ` 24000 16 × 1400 = `22,400
Carrying Cost ½ × 100 × 480 = `24,000 ½ × 80 × 560 = `22,400
Total of Ordering and =` 24,000+ ` 24,000 ` 22,400 + ` 22,400 =
Carrying Cost = ` 48,000 ` 44,800

MATERIAL COST 16
(iii) Number of deliveries for Super Grow and Nature’s own fertilizer per

Super Grow Nature’s Own

Solution 7.
Basic Data:
A (Number of units to be purchased annually) = 5,00,000 units
O (Ordering cost per order) = ` 4,000
C (Annual cost of storage per unit) = ` 10
Purchase price per unit inclusive of transportation cost = ` 50

Computations:
(i) Re-ordering level (ROL)
= Maximum usage per period × Maximum lead time
= 2,000 units per day × 15 days = 30,000 units
(ii) Maximum level = ROL + ROQ – [Min. rate of consumption ×
Min. lead time] (Refer to working notes 1 and 2)
= 30,000 units + 20,000 units – [1,000 units per
day×5 days] = 45,000 units
(iii) Minimum level = ROL–Average rate of consumption×
Average re-order-period
= 30,000 units – (1,500 units per day × 10
days) = 15,000 units
(iv) Danger level = Average consumption × Lead time for
emergency purchases
= 1,500 units per day × 4 days = 6,000 units

Working Notes:
1. Minimum rate of consumption per day

2.

17 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 18
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

19 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 20
(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

21 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 22
- 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

23 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 24
Answer 13
(a)
Particulars Nasik Satara
Hours worked 32 hr. 30 hr.
Conversion Costs `5,408 `4,950
Less: Overheads `800 (`25×32 hr.) `750 (`25×30 hr.)
Labour Cost `4,608 `4,200
(i) Finding of Normal wage rate:
Let Wage rate be `R per hour, this is same for both the Nasik and Satara factory. Normal
wage rate can be found out taking total cost of either factory.
Nasik: Rowan Plan
Total Labour Cost = Wages for hours worked + Bonus as per Rowan plan

` 4,608 = Hours worked × Rate per hour +

Or, ` 4,608 = 32 hr. × R +

Or, ` 4,608 = 32R + 6.4R

R = ` 120
Normal wage = 32 hrs × ` 120 = ` 3,840
OR
Satara: Halsey Plan
Total Labour Cost = Wages for hours worked + Bonus as per Halsey plan
` 4,200 = Hours worked × Rate per hour + (50% ×Hours saved×Rate per hour)
` 4,200 = 30 hr. × R + 50% × (40 hr. – 30 hr.) × R
` 4,200 = 35 R
Or R = ` 120
Normal Wage = 30 hrs × ` 120 = ` 3,600

(ii) Comparison of conversion costs:

Particulars Nasik (`) Satara (`)
Normal Wages (32 x 120) 3,840
(30x120) 3,600
Bonus (6.4 x 120) 768
(5 x 120) 600
Overhead 800 750
5,408 4,950

25 EMPLOYEE COST
 SOLUTIONS
CLASS TEST
Solution 1.
Let x be the cost of material and y be the normal rate of wage/hour
Worker A (`) Worker B (`)
Material cost x x
Labour wages 90 y 100 y
Bonus Rowan system Halsey system
Hours saved x 50% x rate

Overheads 90x` 50 = 4,500 100x` 50 = 5,000

Factory cost x + 112.5y + 4,500 = 80,200 x + 110y + 5,000 = 79,400
∴ x + 112.5y = 75,700……... (1) ∴ x + 110y = 74,400…. (2)

Solving (1) and (2) we get x = `17,200 and y = ` 520

(i) Normal rate of wages is ` 520 per hour.
(ii) Cost of materials = ` 17,200.
(iii) Comparative Statement of factory cost
Worker A (` ) Worker B (` )
Material cost 17,200 17,200
Wages 46,800 52,000
(90 x ` 520) (100 x ` 520)
Bonus 11,700 5,200

Overheads 4,500 5,000

(90 x ` 50) (100 x ` 50)
Factory cost 80,200 79,400

EMPLOYEE COST 26
Solution 2.
(a) Labour turnover rate:
It comprises of computation of labour turnover by using following methods:
(i) Replacement Method:

(ii) Separation Method:

(iii) Flux Method:

OR
(iii) Flux Method:

27 EMPLOYEE COST
Answer 3
Working Note:
(i) Average number of workers on roll (for the quarter):
Employee Turnover rate using Replacement method
No. of replacements
= Average number of workers on roll ×100
8 72
Or, =
100 Average number of workers on roll
72×100
Or, Average number of workers on roll = = 900
8

(ii) Number of workers left and discharged:

Employee turnover rate (Separation method)
No. of Separations(S) 5 S
= Average number of workers on roll × 100 = = Or, S = 45
100 900

Hence, number of workers left and discharged comes to 45

(iii) Number of workers recruited and joined:

Employee turnover rate (Flux method)
No. of Separations*(S)+No. of Accessions(A)
= Average number of workers on roll

No. of workers recruited and joined 99

(iv) Calculation of Equivalent employee turnover rates:

EmployeeTurnove rate for the quarter(s)
= Number of quarter(s) × 4 quarters

16%
Using Flux method = x 4 = 64%
1
8%
Using Replacement method = x 4 = 32%
1
5%
Using Separation method = x 4 = 20%
1

EMPLOYEE COST 28
 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

29 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 30

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

31 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 32

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)

33 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 34

 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

35 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 36

 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:

37 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 38

 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)

39 OVERHEADS : ABSORPTION COSTING

Answer 11
(i) Schedule Showing the Distribution of Expenses of Service Departments using Step
ladder method.
Main Department Service Department
Purchase Packing (`) Distribution Maintenance Personnel
(`) (`) (`) (`)
Expenses 5,00,000 8,00,000 3,50,000 6,40,000 3,20,000
Distribution of
Maintenance
Department
(12:15:7:-:6) 1,92,000 2,40,000 1,12,000 (6,40,000) 96,000
Distribution
of Personnel
Department
(800:1700:700:-:-) 1,04,000 2,21,000 91,000 - (4,16,000)
Total 7,96,000 12,61,000 5,53,000 - -

(ii) Calculation of Expenses rate per hour of Main Department

Purchase Packing Distribution

Total apportioned expenses (`) 7,96,000 12,61,000 5,53,000
Total Hours worked 4,380 8,760 2,920
(12 x 365) (24 x 365) (8 x 365)
Expenses rate per hour (`) 181.74 143.95 189.38

OVERHEADS : ABSORPTION COSTING 40

Answer 12
(1) Statement of Cost
For first 6 For further 3 For remaining Total
months months 3 months
6,00,000 x 6,00,000 x 6,00,000 x 4,12,500
6/12 x 50% 3/12 x 75% 3/12 units
= 1,50,000 = 1,12,500 = 1,50,000
units units units
Direct Material 90,00,000 67,50,000 90,00,000 2,47,50,000
Direct labour 45,00,000 33,75,000 45,00,000 1,23,75,000
Indirect – Variable 22,50,000 16,87,500 22,50,000 61,87,500
Expenses
Indirect – Fixed Expenses 32,75,000 16,37,500 16,37,500 65,50,000
Indirect Semi-variable
expenses
- For first six months 2,50,000
@ 5,00,000 per
annum
- For further three 1,62,500
months @ 6,50,000*
per annum
- For further three 2,12,500 6,25,000
months @ 8,50,000**
per annum
Total Cost 1,92,75,000 1,36,12,500 1,76,00,000 5,04,87,500
Desired Profit 25,00,000
Sales value 5,29,87,500
Average Sales price per Toy 128.45

* ` 5,00,000+ [3 times (from 60% to 75%) x 50,000] = ` 6,50,000

** ` 6,50,000+ [1 time (from 75% to 80%) x 50,000] + [2 times (from 80% to 100%)
× 75,000] = ` 8,50,000

(2) (a) Company Should accept the offer as it is above its targeted sales price of
` 128.45 per toy.
(b) Company Should accept the offer as it is above its targeted sales price of
` 128.45 per toy.

41 OVERHEADS : ABSORPTION COSTING

 SOLUTIONS
CLASS TEST
Solution 1.
(i) Amount of under absorption of production overheads:
Particular Amount (`) Amount (`)
Total production overheads actually incurred 8,80,000
Less: Amount paid to worker as per court order 50,000
Wages paid for the strike period under an award 38,000
Stores written off 22,000
Expenses of previous year booked in the current 18,500 1,28,500
year
7,51,500
Less: Production overheads absorbed as per machine hour
rate (45,000 hours × `11.50*) 5,17,500
Amount of under- absorbed production overheads 2,34,000

` 10,35,000
*Budgeted Machine hour rate (Blanket rate) = = ` 11.50 per hour
90,000

(ii) Accounting treatment of under absorbed production overheads:

(a) As 1/3rd of the under absorbed overheads were due to defective production
planning, this being abnormal, hence should be debited to Costing Profit and Loss
Account.
Amount to be debited to Costing Profit and Loss Account
= ` 2,34,000 × 1/3 = ` 78,000.
(b) Balance of under absorbed production overheads should be distributed over Finished
goods and Cost of sales by applying supplementary rate*.
Amount to be distributed = ` 2,34,000 × 2/3 = `1,56,000

` 1,56,000
*Supplementary rate = = ` 5.20 per unit
30,000 units

OVERHEADS : ABSORPTION COSTING 42

(iii) Apportionment of under absorbed production overheads over Finished goods and Cost of
sales:
Particular Units Amount (`)
Finished goods (3,000 units × `5.20) 3,000 15,600
Cost of sales (27,000 units × `5.20) 27,000 1,40,400
Total 30,000 1,56,000

Solution 2.
(1) Overheads distribution Sheet
Item Basis Total Production Service
Amount Departments Departments
(`) A (`) B (`) X (`) Y (`)
Variable overheads Horse Power 8,40,000 2,40,000 3,00,000 1,80,000 1,20,000
(` 12.60 lakhs - hours used
` 4.20 lakhs)
Fixed Overheads Horse power 4,20,000 1,20,000 1,50,000 90,000 60,000
for Capacity
production
Total Overheads 12,60,000 3,60,000 4,50,000 2,70,000 1,80,000
Service dept X As per the (2,70,000) 1,35,000 90,000 45,000
allocated to A, B ratio given
&Y 6:4:2
Service dept Y As per the (1,80,000+4 1,80,000 45,000
allocated to A & B ratio of 4:1 5000 =
2,25,000)
Total Overheads of 6,75,000 5,85,000
Production
departments

(2) Calculation of Factory overhead per labour hour

Item Production Departments
A (`) B (`)
Total overheads 6,75,000 5, 85,000
Direct labour hours 67,500 48,750
Factory overheads per hour 10 12

43 OVERHEADS : ABSORPTION COSTING

Solution 3.
(i) Table of Primary Distribution of Overheads
Particulars Basis of Total Production Department Service Departments
Apportionment Amount Fabrication Assembly Stores Maintenance
Overheads 27,28,000 15,52,000 7,44,000 2,36,000 1,96,000
Allocated
Direct Costs Actual 86,36,000 71,88,000 14,48,000 --- ---
Other
Overheads:
Factory rent Floor Area 15,28,000 9,16,800 3,82,000 95,500 1,33,700
(48:20:5:7)
Factory Floor Area 1,72,000 1,03,200 43,000 10,750 15,050
building (48:20:5:7)
insurance
Plant & Value of Plant 1,96,000 1,22,038 55,472 5,547 12,943
Machinery & Machinery
insurance (66:30:3:7)
Plant & Value of Plant 2,65,000 1,65,000 75,000 7,500 17,500
Machinery & Machinery
Depreciation (66:30:3:7)
Canteen No. of 4,48,000 2,15,040 1,43,360 68,096 21,504
Subsidy employees
(60:40:19:6)
1,39,73,000 1,02,62,078 28,90,832 4,23,393 3,96,697

Re-distribution of Service Departments’ Expenses:

Particulars Basis of Production Service
Apportionment Department Departments
Fabrication Assembly Stores Maintenance
Overheads as per As per Primary 1,02,62,078 28,90,832 4,23,393 3,96,697
Primary distribution distribution
Maintenance Maintenance Hours 2,01,955 1,65,891 28,851 (3,96,697)
Department Cost (28:23:4:-)
1,04,64,033 30,56,723 4,52,244 ---
Stores Department No. of Stores 3,25,616 1,26,628 (4,52,244)
Requisition
(18:7:-:-)
1,07,89,649 31,83,351 --- ---

OVERHEADS : ABSORPTION COSTING 44

(ii) Overhead Recovery Rate
Department Apportioned Basis of Overhead Overhead Recovery
Overhead (Rs.) Recovery Rate Rate (Rs.)
(I) (II) [(I) ÷ (II)]
Fabrication 1,07,89,649 30,00,000 Machine Hours 3.60 per Machine Hour
Assembly 31,83,351 26,00,000 Labour Hours 1.22 per Labour Hour

(iii) Calculation of full production costs of Job no. IGI2019.

Particulars Amount (Rs.)
Direct Materials 2,30,400
Direct Labour:
Fabrication Deptt. (240 hours × Rs.50) 12,000
Assembly Deptt. (180 hours × Rs.50) 9,000
Production Overheads:
Fabrication Deptt. (210 hours × Rs. 3.60) 756
Assembly Deptt. (180 hours × Rs. 1.22) 220
Total Production Cost 2,52,376

Solution 4.
Statement Showing Distribution of Overheads of Modern Manufactures Ltd.
Particulars Basis Total Production Departments Service Departments
P₁ P₂ P₃ S₁ S₂
(`) (`) (`) (`) (`) (`)
Direct wages Actual 1,695 - - - 1,500 195
Rent & rates Area 5,000 1,000 1,250 1,500 1,000 250
General lighting Light points 600 100 150 200 100 50
Indirect wages Direct wages 1,939 600 400 600 300 39
Power H.P. 1,500 600 300 500 100 -
Depreciation of Value of 10,000 2,400 3,200 4,000 200 200
machines machines
Sundries Direct wages 9,695 3,000 2,000 3,000 1,500 195
30,429 7,700 7,300 9,800 4,700 929

Redistribution of Service Department’s Expenses over Production Departments

P₁ (`) P₂(`) P₃(`) S₁(`) S₂(`)
Total overhead 7,700 7,300 9,800 4,700 929
distributed as above
Dept. S1 Overheads 940 1,410 1,880 -4,700 470
apportioned
(20:30:40:—:10)

45 OVERHEADS : ABSORPTION COSTING

 Dept. S2 559.6 279.8 419.7 139.9 -1,399
overheads apportioned
(40:20:30:10:—)
Dept. S1 28 42 56 -139.9 13.9
Overheads apportioned
(20:30:40:—:10)
Dept. S2 6.2 3.1 4.6 - -13.9
overheads apportioned
(40:20:30:10:—)
9,233.8 9,034.9 12,160.3
Working hours 3070 4475 2419
Rate per hour 3.00 2.02 5.03

Determination of total cost of Product ‘X’

(`)
Direct material cost 50.00
Direct labour cost 30.00
Overhead cost (See working note) 37.19
117.19

Working Note:
Overhead cost:
(` 3 × 4 hrs.) + (` 2.02 × 5 hrs.) + (` 5.03 × 3 hrs.)
= ` 12 + ` 10.10 + ` 15.09 = ` 37.19

Solution 5.
Calculation of under/ over- absorption of overhead
Amount (`)
Actual factory overhead expenses incurred 4,46,380
Overheads absorbed (2,93,104 hours × ` 1.25) 3,66,380
Under-absorption of overhead 80,000

Reasons for unabsorbed overheads

(i) 50% of the unabsorbed overhead was on account of increase in the cost of indirect
material and indirect labour.
(ii) 50% of the unabsorbed overhead was due to factory inefficiency.

OVERHEADS : ABSORPTION COSTING 46

Treatment of unabsorbed overheads in Cost Accounting
1. Unabsorbed overhead amounting to ` 40,000, which were due to increase in the cost of
indirect material and labour should be charged to units produced by using a supplementary
rate.
` 40,000
Supplementary rate = = ` 5 per unit
(7,800 + 200) units

The sum of ` 40,000 (unabsorbed overhead) should be distributed by using a supplementary

rate among cost of sales, finished goods and work-in progress A/cs. The amount to be
debited is calculated as below:
Amount (`)
Stock of finished goods [(7,800-7,000) × ` 5] 4,000
Work-in progress (200 units × ` 5) 1,000
Cost of sales (7,000 units × ` 5) 35,000
Total 40,000

1. The use of cost of sales figure, would reduce the profit for the period by ` 35,000
and will increase the value of stock of finished goods and work- in-progress by `
4,000 and ` 1,000 respectively.
2. The balance amount of unabsorbed overheads of ` 40,000 due to factory inefficiency
should be debited to Costing Profit & Loss Account, as this is an abnormal loss.

47 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 48

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)

49 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 50

 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

51 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 52

(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)

53 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 54

 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

55 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

Answer 5
(i) Statement of cost allocation to each product from each activity
Product
P (`) Q (`) R (`) Total (`)
Direct Labour 1,00,000 80,000 60,000 2,40,000
hours (Refer to (10,000 Labour (8,000 Labour (6,000 Labour
working note) hours × `10) hours × `10) hours × `10)
Production 60,000 54,000 48,000 1,62,000
runs (Refer to (200 Production (180 Production (160 Production
working note) runs × ` 300) runs × ` 300) runs × ` 300)
Quality 90,000 75,000 45,000 2,10,000
Inspections (3,000 (2,500 (1,500
(Refer to Inspections × Inspections × Inspections ×
working note) `30) ` 30) ` 30)

Working note:
Rate per unit of cost driver
Direct Labour hours (` 3,00,000/30,000 ` 10 per Labour hour
Labour hours)
Production runs (` 1,80,000/600 ` 300 per Production run
Production runs)
Quality Inspection (` 2,40,000/8,000 ` 30 per Inspection
Inspections)

ACTIVITY BASED COSTING 56

(ii) Computation of cost of unused capacity for each activity
Particulars (`)
Direct Labour hours [(` 3,00,000 – ` 2,40,000) or (6,000 x ` 10)] 60,000
Production runs [(` 1,80,000 – ` 1,62,000) or (60 x ` 300)] 18,000
Quality Inspection [(` 2,40,000 – ` 2,10,000) or (1,000 x ` 30)] 30,000
Total cost of unused capacity 1,08,000

(iii) Cost sheet and Computation of Sales value per quarter of product ‘S’ using ABC
system
Particulars (`)
1500 units of product ‘S’ to be delivered per quarter
Initial design cost per quarter (` 30,000 / 8 quarters) 3,750
Direct Material Cost 18,000
Direct Labour Cost (1,500 Labour hours x ` 10) 15,000
Direct Costs (A) 36,750
Set up Cost (15 Production runs × ` 300) 4,500
Inspection Cost (250 Inspections × ` 30) 7,500
Indirect Costs (B) 12,000
Total Cost (A + B) 48,750
Add: Mark-up (20% on cost) 9,750
Sale Value 58,500
Selling Price per unit ‘S’ (` 58,500/1500 units) 39

57 ACTIVITY BASED COSTING

 SOLUTIONS
CLASS TEST
Solution 1.
Workings:
Total labour hours and overhead cost:
Particulars Product X Product Y Product Z Total
Production units 45,000 52,500 30,000 1,27,500
Hour per unit 3 5 7
Total hours 1,35,000 2,62,500 2,10,000 6,07,500
Rate per hour `80.00
Total overhead `4,86,00,000

Cost per activity and driver

Activity Machine Customer Customer Total
Set-up order complaint
processing management
Total overhead (`) 1,45,80,000 1,45,80,000 1,94,40,000 4,86,00,000
No. of drivers 600 2,400 8,000
Cost per driver (`) 24,300 6,075 2,430

(i) Computation of Overhead cost per unit:

Particulars Product X Product Y Product Z
No. of machine set-ups 40 160 400
Cost per driver (`) 24,300 24,300 24,300
Total Machine set-up cost (`) [A] 9,72,000 38,88,000 97,20,000
No. of purchase orders 400 800 1,200
Cost per driver (`) 6,075 6,075 6,075
Total order processing cost (`) [B] 24,30,000 48,60,000 72,90,000
No. of customers 1,000 2,200 4,800
Cost per driver (`) 2,430 2,430 2,430
Total customer complaint 24,30,000 53,46,000 1,16,64,000
management cost (`) [C]
Total Overhead cost (`) [A+B+C] 58,32,000 1,40,94,000 2,86,74,000
Production units 45,000 52,500 30,000
Cost per unit (`) 129.60 268.46 955.80

ACTIVITY BASED COSTING 58

(ii) Determination of Selling price per unit
Particulars Product X (using Product Y (using Product Z (using
machine A) machine B) machine C)
Material cost per unit (`) 350.00 460.00 410.00
Wages per unit @ `80 per hour 240.00 400.00 560.00
Overhead cost per unit (`) 129.60 268.46 955.80
Total cost per unit (`) 719.60 1,128.46 1,925.80
Profit (25% profit mark-up) (`) 179.90 282.11 481.45
Selling price (`) 899.50 1,410.57 2,407.25

59 ACTIVITY BASED COSTING

 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

COST SHEET 60
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

61 COST SHEET
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

COST SHEET 62
 *(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

63 COST SHEET
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.

Answer 4
Cost Sheet
Particulars Units Amount (`)
Material
Opening stock 1,000 90,00,000
Add: Purchases 49,000 44,10,00,000
Less: Closing stock (1,750) (1,57,50,000)
48,250 43,42,50,000
Less: Normal wastage of materials realized @ ` 5,400 per (250) (13,50,000)
unit
Material consumed 43,29,00,000
Direct employee's wages and allowances 6,88,50,000
Direct expenses- Royalty paid for production 3,64,50,000
Prime cost 48,000 53,82,00,000
Factory overheads - Consumable stores, depreciation etc. 3,42,00,000
Gross Works Cost 48,000 57,24,00,000
Add: Opening WIP 2,000 1,75,50,000
Less: Closing WIP (1,000) (94,50,000)
Factory/Works Cost 49,000 58,05,00,000
Administration Overheads related to production 3,15,00,000
R&D expenses and Quality control cost 2,10,60,000
Add: Primary packaging cost @ ` 1,440 per unit 7,05,60,000
Cost of production 49,000 70,36,20,000
Selling expenses 4,84,30,800
Cost of maintaining website for online sale 60,75,000
Secondary packaging cost @ ` 225 per unit 49,000 1,10,25,000
Cost of sales 76,91,50,800
Add: Profit @ 20% on sales or 25% of cost 19,22,87,700
Sales value 96,14,38,500

COST SHEET 64
Answer 5
Cost Sheet for the Month of April 2020
Particulars (`)
Opening stock of Raw Material 20,000
Add: Purchases [Refer Working Note-2] 1,65,000
Less: Closing stock of Raw Material (25,000)
Raw material consumed 1,60,000
Add: Direct labour cost 1,20,000
Prime cost 2,80,000
Add: Factory overheads 1,00,000
Gross Works cost 3,80,000
Add: Opening work-in-progress 20,000
Less: Closing work-in-progress (30,000)
Works Cost 3,70,000
Cost of Production 3,70,000
Add: Opening stock of finished goods 50,000
Less: Closing stock of finished goods (60,000)
Cost of goods sold 3,60,000
Add: General and administration expenses* 18,000
Add: Selling expenses 22,000
Cost of sales 4,00,000
Profit {Balancing figure (` 5,00,000 – ` 4,00,000)} 1,00,000
Sales 5,00,000
*General and administration expenses have been assumed as not relating to the production
activity.
Working Note:
1. Computation of the raw material consumed
Particulars (`)
Cost of Sales 4,00,000
Less: General and administration expenses (18,000)
Less: Selling expenses (22,000)
Cost of goods sold 3,60,000
Add: Closing stock of finished goods 60,000
Less: Opening stock of finished goods (50,000)
Cost of production/Gross works cost 3,70,000
Add: Closing stock of work-in-progress 30,000
Less: Opening stock of work-in-progress (20,000)
Works cost 3,80,000

Less: Factory overheads

(1,00,000)
Prime cost 2,80,000

65 COST SHEET
 Less: Direct labour (1,20,000)
Raw material consumed 1,60,000

2. Computation of the raw material purchased

Particulars (`)
Closing stock of Raw Material 25,000
Add: Raw Material consumed 1,60,000
Less: Opening stock of Raw Material (20,000)
Raw Material purchased 1,65,000

COST SHEET 66
 SOLUTIONS
CLASS TEST

Solution 1.
1. Calculation of Sales Quantity:
Particular Units
Production units 1,00,000
Less: Defectives (4%×1,00,000 units) 4,000
Less: Closing stock of finished goods 5,000
No. of units sold 91,000

2. Calculation of Cost of Production

Particular Amount (`)
Cost of Goods sold (given) 78,26,000
Add: Value of Closing finished goods 4,30,000

Cost of Production 82,56,000

3. Calculation of Factory Cost

Particular Amount (`)
Cost of Production 82,56,000
Less: Quality Control Cost (2,00,000)
Less: Research and Development Cost (2,50,000)
Add: Credit for Recoveries/Scrap/By-Products/misc. income (1,00,000 2,44,000
units × 4% × ` 61)
Factory Cost 80,50,000

4. Calculation of Gross Factory Cost

Particular Amount (`)
Cost of Factory Cost 80,50,000
Less: Opening Work in Process (2,00,000)
Add: Closing Work in Process 5,00,000
Cost of Gross Factory Cost 83,50,000

67 COST SHEET
5. Calculation of Prime Cost
Particular Amount (`)
Cost of Gross Factory Cost 83,50,000
Less: Consumable stores & spares (3,50,000)
Less: Lease rental of production assets (2,00,000)
Prime Cost 78,00,000

6. Calculation of Cost of Materials Consumed & Labour cost Let Cost of Material Consumed
= M and Labour cost = 0.5M Prime Cost = Cost of Material Consumed + Labour Cost
78,00,000 = M + 0.5M
M = 52,00,000
Therefore, Cost of Material Consumed = ` 52,00,000 and Labour Cost = ` 26,00,000
(i) Calculation of Value of Materials Purchased
Particular Amount (`)
Cost of Material Consumed 52,00,000
Add: Value of Closing stock 2,92,000
Less: Value of Opening stock (2,42,000)
Value of Materials Purchased 52,50,000

Cost Sheet
Sl. Particulars Total Cost (`)
1. Direct materials consumed:
Opening Stock of Raw Material 2,42,000
Add: Additions/ Purchases [balancing figure as per 52,50,000
requirement (i)]
Less: Closing stock of Raw Material (2,92,000)
Material Consumed 52,00,000
2. Direct employee (labour) cost 26,00,000
3. Prime Cost (1+2) 78,00,000
4. Add: Works/ Factory Overheads
Consumable stores and spares 3,50,000
Lease rent of production asset 2,00,000
5. Gross Works Cost (3+4) 83,50,000
6. Add: Opening Work in Process 2,00,000
7. Less: Closing Work in Process (5,00,000)
8. Works/ Factory Cost (5+6-7) 80,50,000
9. Add: Quality Control Cost 2,00,000
10. Add: Research and Development Cost 2,50,000
11. Less: Credit for Recoveries/Scrap/By-Products/misc. (2,44,000)
income

COST SHEET 68
 12. Cost of Production (8+9+10-11) 82,56,000
13. Add: Opening stock of finished goods -
14. Less: Closing stock of finished goods (5000 Units) (4,30,000)
15. Cost of Goods Sold (12+13-14) 78,26,000
16. Add: Administrative Overheads (General) 2,24,000
17. Add: Secondary packing 1,82,000
18. Add: Selling Overheads& Distribution Overheads 4,13,000
19. Cost of Sales (15+16+17+18) 86,45,000
20. Profit 13,65,000
21. Sales 91,000 units@ ` 110 per unit 1,00,10,000

Solution 2.
Cost sheet for the year ended 31st March, 2018.
Units produced - 14,000 units
Units sold - 14,153 units
Particulars Amount (`)
Raw materials purchased 42,25,000
Add: Freight Inward 1,00,000
Add: Opening value of raw materials 2,28,000
Less: Closing value of raw materials (3,05,000)
42,48,000
Less: Sale of scrap of material 8,000
Materials consumed 42,40,000
Direct Wages (12,56,000 + 1,50,000) 14,06,000
Prime Cost 56,46,000
Factory overheads (20% of ` Prime Cost) 11,29,200
Add: Opening value of W-I-P 1,92,500
Less: Closing value of W-I-P (1,40,700)
Factory Cost 68,27,000
Add: Administrative overheads 1,73,000
Cost of Production 70,00,000
Add: Value of opening finished stock 6,08,500
Less: Value of closing finished stock
[` 500(70,00,000/14,000) × 1,064)
(1,217+ 14,000 – 14,153 = 1,064 units) (5,32,000)
Cost of Goods Sold 70,76,500
Distribution expenses (` 16 × 14,153 units) 2,26,448
Cost of Sales 73,02,948
Profit (Balancing figure) 14,43,606
Sales (` 618 × 14,153 units) 87,46,554

69 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 70

 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

71 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 72

 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

73 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 74

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

75 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 76

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

77 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 78
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

79 COST ACCOUNTING SYSTEM

 SOLUTIONS
CLASS TEST

Solution 1.
(a) Stores Ledger Control Account
(`) (`)
To Balance b/d 25,000 By Work in Process Control A/c 30,000
” Creditors/ Bank A/c 75,000 ” Production OH Control A/c 4,000
” Balance c/d 66,000
1,00,000 1,00,000

(b) Wages Control Account

(`) (`)
To Bank A/c (Paid to 25,000 By Work in Process Control A/c 20,000
direct workers) (Charged to batches)
” Bank A/c (Paid to 5,000 ,, Production OH Control A/c 5,000
indirect workers)
” Production OH Control A/c 5,000
(Non-productive wages)
30,000 30,000

(c) Production Overhead Control Account

(`) (`)
To Balance b/d (Prepaid 3,000 By Work-in-Process Control 30,000
amount) A/c (150% of direct wages)
” Stores Ledger Control 4,000
A/c
” Wages Control A/c 10,000
(`5,000 + `5,000)
” Bank A/c 12,000
” Costing P&L A/c 1,000
(Over-absorption,
balancing figure)
30,000 30,000

COST ACCOUNTING SYSTEM 80

(d) Work-in-Process Control Account
(`) (`)
To Balance b/d 20,000 By Finished Goods Control A/c 65,000
” Store Ledger Control 30,000 ” Balance c/d (Physical 40,000
A/c value)
” Wages Control A/c 20,000
” Production OH Control 30,000
A/c (150% of direct
wages)
” Costing P&L A/c (Stock 5,000
Gains)
1,05,000 1,05,000

(e) Finished Goods Control Account

(`) (`)
To Balance b/d 35,000 By Cost of Goods Sold* A/c 80,000
” Work-in-Process 65,000 ” Balance c/d 20,000
Control A/c
1,00,000 1,00,000
* Alternatively, Costing Profit & Loss Account

(f) Costing Profit & Loss Account

(`) (`)
To Finished goods control 80,000 By Sales A/c 1,00,000
A/c or Cost of Goods
Sold A/c
” Selling & distribution 6,000 ” Production OH Control A/c 1,000
OH A/c
” Balance c/d 20,000 ” Work-in-Process Control 5,000
A/c (Stock gain)
1,06,000 1,06,000

Notes:
(1) Materials transferred between batches will not affect the Control Accounts.
(2) Non-production time of direct workers is a production overhead and therefore will not
be charged to work-in-Process control A/c.
(3) Production overheads absorbed in work-in-Process Control A/c equals to ` 30,000 (150%
of ` 20,000).

81 COST ACCOUNTING SYSTEM

(4) In the work-in-Process Control A/c the excess physical value of stock is taken resulting
in stock gain. Stock gain is transferred to Profit & Loss A/c.

Solution 2.
Profit and Loss Account
(As per financial records)
(`) (`)
To Direct Material 50,00,000 By Sales (1,20,000 units) 1,20,00,000
To Direct Wages 30,00,000 By Closing Stock
To Factory Overheads 16,00,000 Work-in-process 2,40,000
To Gross Profit c/d 29,60,000 Finished Goods (4,000 3,20,000
units)
1,25,60,000 1,25,60,000
To General 7,00,000 By Gross Profit b/d 29,60,000
Administrative
Overheads
To Selling and Dist. OH 9,60,000 By Dividend received 1,00,000
To Bad debts 80,000 By Interest received 20,000
To Preliminary Expenses 40,000
written off
To Legal Charges 10,000
To Net Profit 12,90,000
30,80,000 30,80,000
Statement of Cost and Profit
(As per Cost Records)
Total (`)
Direct Material 56,00,000
Direct Wages 30,00,000
Prime Cost 86,00,000
Factory Overhead (20% of `86,00,000) 17,20,000
1,03,20,000
Less: Closing Stock (WIP) (2,40,000)
Works Cost or Cost of production (1,24,000 units) 1,00,80,000
Less: Finished Goods (4,000 units @ `81.29) (3,25,160)
Cost of goods sold (1,20,000 units) 97,54,840
Administrative overhead (1,20,000 units @ ` 6 p.u.) 7,20,000
Selling and Distribution Overhead (1,20,000 @ ` 8 p.u.) 9,60,000
Cost of Sales 1,14,34,840
Net profit (Balancing figure) 5,65,160
Sales Revenue 1,20,00,000

COST ACCOUNTING SYSTEM 82

Statement of Reconciliation of profit as obtained under Cost and Financial Accounts
Total (`)
Profit as per Cost Records 5,65,160
Add: Excess of Material Consumption 6,00,000
Factory Overhead 1,20,000
Administrative Overhead 20,000
Dividend Received 1,00,000
Interest Received 20,000 8,60,000
14,25,160
Less: Bad debts 80,000
Preliminary expenses written off 40,000
Legal Charges 10,000
Over-valuation of stock in cost book
(` 3,25,160 – ` 3,20,000) 5,160 (1,35,160)
Profit as per Financial Records 12,90,000

Solution 3.
(i) Costing Profit and Loss Account for the year ended 31st March 2019:
Particulars Amount (`) Particulars Amount (`)
Material consumed 14,16,000 Sales (30,000 units) 30,00,000
Direct wages 7,42,000
Prime Cost 21,58,000
Works overheads
(20% of Prime cost) 4,31,600
25,89,600
Less: Work in progress (54,000)
Factory cost 25,35,600
Administration overheads
(`5 × 32,000 units) 1,60,000
Cost of production 26,95,600
Less: Finished stock (1,68,475)
Cost of goods sold 25,27,125
Selling and d i s t r i b u t i o n 1,80,000
overheads (`6 × 30,000 unit)
Cost of sales 27,07,125
Profit (balancing figure) 2,92,875
30,00,000 30,00,000

83 COST ACCOUNTING SYSTEM

(ii) Statement reconciling the profit as per costing profit and loss account with the profit as
per financial accounts
Particulars Amount Amount
(`) (`)
Profit as per cost records 2,92,875
Add: Overheads over-absorbed:
- Works overheads (` 4,31,600 – ` 4,26,000) 5,600
- Administration OH (` 1,60,000 – ` 1,50,000) 10,000
- Selling and Distribution (` 1,80,000 – ` 1,65,000) 15,000 30,600
Less: Closing stock overvalued (` 1,68,475 – ` 1,67,500) (975)
Profit as per financial accounts 3,22,500
*It is assumed that the number of units Produced
= Number of units sold + Finished stock = 30,000 + 2,000 = 32,000 units.

Solution 4.
Journal entries are as follows:
Dr. Cr.
(`) (`)
(i) Stores Ledger Control A/c................... Dr. 27,000
To Cost Ledger Control A/c 27,000
(ii) Work-in-Process Control A/c................... Dr. 6,000
To Manufacturing Overhead Control A/c 6,000
(iii) Cost of Sales A/c……………………………… Dr. 4,000
To Selling & Dist. Overhead Control A/c 4,000
(iv) (1) Wage Control A/c…………………… Dr. 8,000
To Cost Ledger Control A/c 8,000
(2) Manufacturing Overhead Control A/c……… Dr. 8,000
To Wages Control A/c 8,000
OR
Manufacturing Overhead Control A/c……………. Dr. 8,000
8,000
(v) Stores Ledger Control A/c ……………………… Dr. 9,000
To Work-in-Process Control A/c 9,000
*Cost Ledger Control A/c is also known as General Ledger Control A/c

COST ACCOUNTING SYSTEM 84

 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

85 UNIT & BATCH COSTING

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

UNIT & BATCH COSTING 86

 SOLUTIONS
CLASS TEST

Solution 1.
Statement of Cost and Selling price for 2,000 units of output
Particulars Cost per unit Total Cost
(`) (`)
Direct Materials 7.50 15,000
Direct Labour 3.00 6,000
Prime cost 10.50 21,000
Add: Factory Overheads (Refer working note-2) 17.50 35,000
Total cost 28.00 56,000
Add: Profit (20% of Sales is equivalent to 25% of Cost) 7.00 14,000
Sales 35.00 70,000
Working Notes:
(1) Direct Material and Direct Labour cost is varying directly in proportion to units produced
and shall remain same per unit of output. Thus, direct material cost is equal to ` 9000
÷ 1200 units = ` 7.50 per unit and labour cost is equal to ` 3600 ÷ 1200 units = ` 3 per
unit.
(2) Calculation of Factory Overheads- An observation of cost related to different output
levels for factory overheads shall reveal 2 things

a. Total cost increases from `31,000 to `34,000 along with increase in output from
1,200 units to 1,800 units but cost per unit is not constant. Thus, it is not a variable
cost. Cost per unit is reducing along with increase in output from ` 25.83 (` 31,000
÷ 1,200 units) to ` 18.89 (`34,000 ÷ 1,800 units)
b. Since the cost is varying with the output, it is also not a fixed cost.
Hence, we can see that the cost is a semi- variable cost and has to be calculated for
2,000 units by analysing its fixed and variable components
Week Number Units Manufactured Factory Overheads
1 1,200 31,000
2 1,600 33,000
Difference 400 2,000

87 UNIT & BATCH COSTING

Therefore, Variable Cost per unit = Change in Factory Overheads ÷ Change in output
= `2,000 ÷ 400 = `5
Now total factory overheads for week 2 = `33,000
Out of this, Variable Overheads = 1,600 units × `5 = ` 8,000
Thus, fixed component = ` 33,000 – ` 8,000 = ` 25,000
Therefore, Variable Cost for 2,000 units = 2,000 units × `5 = ` 10,000
Fixed Cost will not change and hence will be = `25,000
Therefore, Total Factory Cost = Variable Overheads + Fixed Overheads
Overheads for 2,000 units = `10,000 + `25,000 = ` 35,000

Solution 2.
1. Statement of Cost and Total Sales  Amount (`)
Particulars First 3 months Next 9 months Total
Capacity Utilisation (No 120,000x3/12x50% 120,000x9/12x50% 87,000
of units) =15,000 =72,000
Direct Material 13,50,000 64,80,000 78,30,000
Direct Labour 9,00,000 43,20,000 52,20,000
Add: Overheads:
- Fixed (1:3) 7,50,000 22,50,000 30,00,000
- Variable 15,00,000 72,00,000 87,00,000
Semi Variable 5,00,000 (For first 3 21,00,000 (at the 26,00,000
months at the rate rate of ` 28,00,000
of ` 20,00,000) for 9 months)
Total cost 50,00,000 2,23,50,000 2,73,50,000
Add: Profit 20,00,000
Sales 2,93,50,000
Average Selling Price = `2,93,50,000 ÷ 87,000 units = ` 337.356

UNIT & BATCH COSTING 88

 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%

89 JOB COSTING
 SOLUTIONS
CLASS TEST

Solution 1.
Production Statement
For the year ended 31st March, 2018
Amount (`)
Direct materials 9,00,000
Direct wages 7,50,000
Prime Cost 16,50,000
Factory overheads 4,50,000
Cost of Production 21,00,000
Administration overheads 4,20,000
Selling and distribution overheads 5,25,000
Cost of Sales 30,45,000
Profit 6,09,000
Sales value 36,54,000

Calculation of Rates:
`4,50,000
1. Percentage of factory overheads to direct wages = = x 100 = 60%
`7,50,000

2. Percentage of administration overheads to Cost of production

`4,20,000
= = x 100 = 20%
`21,00,000

3. Selling and distribution overheads = ` 5,25,000 × 115% = ` 6,03,750

Selling and distribution overhead % to Cost of production

`6,03,750
= = x 100 = 28.75%
`21,00,000
`6,09,000
4. Percentage of profit to sales = = x 100 = 16.67%
`36,54,000

JOB COSTING 90
(ii) Calculation of price for the job received in 2018-19
Amount (`)
Direct materials 2,40,000
Direct wages 1,50,000
Prime Cost 3,90,000
Factory overheads (60% of `1,50,000) 90,000
Cost of Production 4,80,000
Administration overheads (20% of `4,80,000) 96,000
Selling and distribution overheads (28.75% of `4,80,000) 1,38,000
Cost of Sales 7,14,000
Profit (20% of `7,14,000) 1,42,800
Sales value 8,56,800

91 JOB COSTING
 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.

CONTRACT COSTING 92
 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

93 CONTRACT COSTING
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

CONTRACT COSTING 94
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

95 CONTRACT COSTING
Answer 5
Contract Account
Particulars (`) Particulars (`)
To Material issued 12,55,000 By Machine (Working note 1) 12,30,000
” Wages 28,28,000 ” Material (in hand)
” Foreman’s salary 4,06,500 ” Works cost (balancing 52,45,000
figure)
” Machine 13,00,000
” Supervisor’s salary 1,80,000
(` 40,000 × 9)/2
” Administrative charges 6,82,500
66,52,000 66,52,000
” Works cost 52,45,000 ” Value of work certified 50,00,000
” Costing P&L A/c 10,66,250 ” Value of work certified 50,00,000
Cost of work uncertified 13,11,250
(Working Note 2)
63,11,250 63,11,250

Working notes:
1. Written down value of Machine:

` 13,00,000 - 75,000 4.8 months

Depreciation = x = ` 70,000
7 years 12 months

Hence the value of machine after the period of 4.8 months = ` 13,00,000 – ` 70,000
= ` 12,30,000
2. The cost of 2/3rd of the contract is ` 52,45,000

` 52,45,000
∴ Cost of 100% of the contract is x 3 = ` 78,67,500
2
∴ Cost of 50% of the contract which has been certified by the architect is ` 39,33,750.
Also, the cost of 1/3rd of the contract, which has been completed but not certified by
the architect is ` 13,11,250.

CONTRACT COSTING 96
 SOLUTIONS
CLASS TEST

Solution 1. 
Contract Account as on 31-03-2019
Particulars (`) Particulars (`)
To Materials sent to site 18,75,000 By Material returned to 15,000
Supplier
To Wages paid 9,28,500 By Material sold 11,200
Add: Outstanding 84,800 10,13,300 By Plant transferred to 23,750
other contract
To Plant purchased 3,75,000 By Plant returned to stores 30,000
To Sundry Expenses 33,825 By Plant at site c/d 2,90,175
To Salary of Supervisor 35,000 By Material at site c/d 2,16,800
{1/3rd (`15,000 × 7
month)}
To Costing P & L A/c 1,200 By Works Cost 27,46,400
(’11,200-10,000)
33,33,325 33,33,325
To Works Cost 27,46,400 By Work-in-progress c/d 22,50,000
Work certified
By Work uncertified 6,86,600
To Notional profit (Profit for 1,90,200
the year)
29,36,600 29,36,600

Working Notes:
1. Value of plant transferred to other contract:
` 25,000 less Depreciation for 4 months
= ` 25,000-(` 25,000×15%×4/12) = ` 23,750
2. Value of plant returned to stores:
` 32,000 less Depreciation for 5 months
= ` 32,000-(` 32,000×15%×5/12) = ` 30,000

97 CONTRACT COSTING
3. Value for work uncertified:
The cost of 2/3rd of the contract is `27,46,400

` 27,46,400
∴ Cost of 100% “ “ “ “ x 3 = `41,19,600
2

∴ Cost of 50% of the contract which has been certified by the architect is ` 41,19,600
/2 = ` 20,59,800. Also, the cost of 1/3rd of the contract, which has been completed but
not ertified by the architect is ` (27,46,400- 20,59,800) = ` 6,86,600/-

Solution 2. 
In case of escalation clause in a contract, a contractor is paid for the any increase in price of
materials and rate of labours which are beyond the control of the contractor. Any increase in
the cost due to inefficiencies in usage of the materials and labours are not admissible. Thus
any increase in cost due to usage in excess of standard quantity or hours are not paid.

(i) Statement showing Additional claim due to Escalation clause.

Standard Qty Std. Rate Actual Rate Variation in Escalation
/Hours (Rs.) (Rs.) Rate (Rs.) claim (Rs.)
(a) (b) (c) (d) = (c-b) (e) = (a × d)
Material:
A 3,000 1,000 1,100 +100 +3,00,000
B 2,400 800 700 -100 -2,40,000
C 500 4,000 3,900 -100 -50,000
D 100 30,000 31,500 +1,500 +1,50,000
Material escalation claim 1,60,000
Labour:
L1 60,000 15 18 +3 +1,80,000
L2 40,000 30 35 +5 +2,00,000
Labour escalation claim 3,80,000

Statement showing Final Contract Price

(Rs.) (Rs.)
Agreed contract price 1,50,00,000
Add: Agreed escalation claim:
Material Cost 1,60,000
Labour Cost 3,80,000 5,40,000
Final Contract Price 1,55,40,000

CONTRACT COSTING 98
(ii) Contract Account
Dr Cr.
Particulars (Rs.) Particulars (Rs.)
To Material: By Contractee’s A/c 1,55,40,000
A – (3,400 × Rs. 1,100) 37,40,000
B – (2,300 × Rs. 700) 16,10,000
C – (600 × Rs. 3,900) 23,40,000
D – (90 × Rs. 31,500) 28,35,000 1,05,25,000
To Labour:
L1 – (56,000 × Rs.18) 10,08,000
L2 – (38,000 × Rs.35) 13,30,000 23,38,000
To Other expenses 13,45,000
To Estimated Profit 13,32,000
1,55,40,000 1,55,40,000

99 CONTRACT COSTING
 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

PROCESS & OPERATION COSTING 100

 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

101 PROCESS & OPERATION COSTING

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

PROCESS & OPERATION COSTING 102

 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.

103 PROCESS & OPERATION COSTING

 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

PROCESS & OPERATION COSTING 104

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.

Answer 6
Process A Account
Particulars Tones Amount (`) Particulars Tones Amount (`)
To Materials 1,000 20,000 By Weight Loss 20 ---
To Wages 4,000 By Scrap 80 160
To Direct Expenses 3,160 By Process B 540 16,200
By Warehouse 360 10,800
Total 1,000 27,160 Total 1,000 27,160

27,160 – 160
Cost per Tonne =
1,000 – 20 – 80
27,000
=
900

= ` 30 per ton

105 PROCESS & OPERATION COSTING

 Process B Account
Particulars Tones Amount (`) Particulars Tones Amount (`)
To Process A 540 16,200 By Weight Loss 16 ---
To Materials 260 3,900 By Scrap 64 256
To Wages 3,000 By Process C 360 12,600
To Direct Expenses 2,356 By Warehouse 360 12,600
Total 800 25,456 Total 800 25,456

25,456 – 256
Cost per Tonne =
800 – 16 – 64
25,200
=
720

= `35 per ton

Process C Account
Particulars Tones Amount (`) Particulars Tones Amount (`)
To Process B 360 12,600 By Weight Loss 10 ---
To Materials 140 1,400 By Scrap 40 240
To Wages 2,000 By Warehouse 450 17,100
To Direct Expenses 1,340
Total 500 17,340 Total 500 17,340

17,340 – 240
Cost per Tonne =
500 – 10 – 40
17,100
=
450

= ` 38 per ton

PROCESS & OPERATION COSTING 106

Answer 7
(i) Statement of Equivalent Production
Particulars Input Particulars Total Material Processing Cost
quantity
% Units % Units
Opening 9,500 Units 83,000 100% 83,000 100% 83,000
WIP completed
Material 1,05,000 Normal loss 10,500 - - - -
Input (10% of
1,05,000)
Abnormal loss 4,500 100% 4,500 100% 4,500
(Bal. fig.)
Closing WIP 16,500 100% 16,500 60% 9,900
1,14,500 1,14,500 1,04,000 97,400

Statement of Cost for each element

Particulars Material Processing Total cost
(`) (`) (`)
Cost of opening WIP 29,500 14,750 44,250
Cost incurred during the month 3,34,500 2,53,100 5,87,600
Total cost (A) 3,64,000 2,67,850 6,31,850
Equivalent production (B) 1,04,000 97,400
Cost per kg of Chemical ‘G’ (A/B) 3.5 2.75 6.25
Alternative Presentation
Statement showing cost per kg of each statement
(`) (`)
Material 29,500 + 3,34,500 3.5
1,04,000
Processing cost 14,750 + 2,53,100 2.75
97,400
Total Cost per kg 6.25
(ii) Statement showing cost of Chemical ‘G’ transferred to Process II, cost of abnormal
loss and cost of closing work-in- progress
(`)
Units transferred (60,000 × 6.25) 3,75,000
Abnormal loss (4,500 × 6.25) 28,125
Closing work in progress:
Material (16,500 × 3.5) 57,750
Processing cost (9,900 × 2.75) 27,225
84,975

107 PROCESS & OPERATION COSTING

(iii) Calculation of Incremental Profit / Loss after further processing
Particulars (`) (`)
Sales if further processed (A) (60,000 x 1.20 x ` 10) 7,20,000
Calculation of cost in Process II
Chemical transferred from Process I 3,75,000
Add: Material cost 85,000
Add: Process cost 50,000
Total cost of finished stock (B) 5,10,000
Profit, if further processed (C = A – B) 2,10,000
If sold without further processing then,
Sales (60,000 x ` 9) 5,40,000
Less: Cost of input without further processing 3,75,000
Profit without further processing (D) 1,65,000
Incremental Profit after further processing (C – D) 45,000
Additional net profit on further processing in Process II is 45,000.
Therefore, it is advisable to process further chemical ‘G’.

Alternative Presentation
Calculation of Incremental Profit / Loss after further processing
(`)
If 60,000 units are sold @ ` 9 5,40,000
If 60,000 units are processed in process II (60,000 × 1.2 × ` 10) 7,20,000
Incremental Revenue (A) 1,80,000
Incremental Cost: (B)
Material Cost 85,000
Processing Cost 50,000
1,35,000
Incremental Profit (A-B) 45,000
Additional net profit on further processing in Process II is 45,000. Therefore, it is advisable
to process further chemical ‘G’.

PROCESS & OPERATION COSTING 108

Answer 8
(i) Statement of Equivalent Production (Using FIFO method)
Particulars Input Particulars Output Equivalent Production
Units Units Material Labour & O.H.
% Units % Units
Opening WIP 10,000 Completed and
transferred to
Process-II
Units 55,000 - From opening 10,000 - 30 3,000
introduced WIP
- From fresh 33,500 100 33,500 100 33,500
inputs
43,500 33,500 36,500
Normal Loss 3,250 - -
{5% (10,000 +
55,000 units)}
Abnormal loss 6,250 100 6,250 60 3,750
(9,500 – 3,250)
Closing WIP 12,000 100 12,000 90 10,800
65,000 65,000 51,750 51,050

(ii) Abnormal Loss A/c

Particulars Units (`) Particulars Units (`)
To Process-I A/c 6,250 29,698 By Cost Ledger Control A/c 6,250 53,125
(Refer Working (6,250 units × ` 8.5)
Note-2)
To Costing Profit - 23,427
& Loss A/c
6,250 53,125 6,250 53,125

Working Notes:
1. Computation of Cost per unit
Particulars Materials Labour Overhead
(`) (`) (`)
Input costs 2,20,000 26,500 61,500
Less: Realisable value of normal (27,625) -- --
scrap (3,250 units x ` 8.5)
Net cost 1,92,375 26,500 61,500
Equivalent Units 51,750 51,050 51,050
Cost Per Unit 3.7174 0.5191 1.2047
Total cost per unit = ` (3.7174 + 0.5191 + 1.2047) = ` 5.4412

109 PROCESS & OPERATION COSTING

2. Valuation of Abnormal Loss
(`)
Materials (6,250 units × ` 3.7174) 23,233.75
Labour (3,750 units × ` 0.5191) 1,946.63
Overheads (3,750 units × ` 1.2047) 4,517.62
29,698

PROCESS & OPERATION COSTING 110

 SOLUTIONS
CLASS TEST

Solution 1.
(i)
Dr. Process-1 Account Cr.
Particulars Units Total (`) Particulars Units Total (`)
To Raw Material 10,000 7,50,000 By Normal Loss A/c 500 6,750
Consumed @ 13.5
” Direct Wages -- 3,00,000 ” Process 2 @ 9,000 12,01,500
133.5
” Direct -- 1,50,000 ” By Abnormal 500 66,750
Expenses Loss @ 133.5
“ Manufacturing 75,000
Overheads
10,000 12,75,000 10,000 12,75,000
Cost per unit of completed units and abnormal loss:
`12,75,000 - ` 6,750
= = ` 133.5
10,000units- 500units

(ii)
Dr. Process-2 Account Cr.
Particulars Units Total (`) Particulars Units Total (`)
To Process-I A/c 9,000 12,01500 By Normal Loss A/c 900 1,30,500
@ 145
” To Direct Wages -- 5,60,000 ” By Finished 8,200 21,04,667
Stock A/c [bal
fig]
” Direct -- 3,64,000
Expenses
” Manufacturing -- 84,000
Overheads
” To Abnormal 100 25,667
gain

111 PROCESS & OPERATION COSTING

 (` 256.67 × 100 100 25,667
units)
9,100 22,35,167 9,100 22,35,167

Cost per unit of completed units and abnormal gain:

` 22,09,500 - `130500
= = ` 256.67
8,100units

Dr. Finished Goods A/c Cr.

Particulars Units Total (`) Particulars Units Total (`)
To Process II A/c 8,200 21,04,667 By By Cost of Sales 8,000 20,53,333
” By Balance c/d 200 51,334
8,200 21,04,667 8,200 21,04,667

(iii) Normal Loss A/c

Dr.  Cr.
Particulars Units Total (`) Particulars Units Total (`)
To Process I 500 6,750 By By abnormal Gain II 100 14,500
Process II 900 1,30,500 By Cash 500 6,750
By Cash 800 1,16,000
1400 1,37,250 1400 1,37,250

(iv) Abnormal Loss A/c

Dr.  Cr.
Particulars Units Total (`) Particulars Units Total (`)
To Process I 500 66,750 By By Cost Ledger 500 6,750
Control A/c
By Costing P& L A/C 60,000
(Abnormal Loss)
66,750 66,750

(v) Abnormal Gain A/c

Dr.  Cr.
Particulars Units Total (`) Particulars Units Total (`)
To Normal Loss 100 14,500 By Process II 100 25,667
A/c @ 145
To Costing P & 11,167
L A/C
100 25,667 100 25,667

PROCESS & OPERATION COSTING 112

Solution 2.
Statement of Equivalent Production Units (Under FIFO Method)
Particulars Input Particulars Output Equivalent Production
units units (%) Equivalent
units
Opening W-I-P 3,000 From opening W-I-P 3,000 30 900
Units introduced 17,000 From fresh inputs 12,000 100 12,000
Units completed 15,000
(Transferred to next
process)
Normal Loss 2,400 -- --
{12% (3,000 + 17,000
units)}
Closing W-I-P 2,200 80 1760
Abnormal loss (Balancing 400 100 400
figure)
20,000 11,000 15,060

Computation of cost per equivalent production unit :

Cost of the Process (for the period) ` 33,12,720
Less: Scrap value of normal loss (` 50 × 2,400 units) (` 1,20,000)
Total process cost ` 31,92,720

Solution 3.
(i) Statement of Equivalent Production (FIFO Method)
Input Output Equivalent Production
Materials Labour Production
Overhead
Details Units Details Units % Units % Units % Units
Opening 600 From 600 - - 40 240 40 240
Stock opening
stock
- From 8,300 100 8,300 100 8,300 100 8,300
fresh
materials
Closing 700 100 700 70 490 70 490
W-I-P
Fresh inputs 9,200 Normal loss 392 - - - - - -

113 PROCESS & OPERATION COSTING

 9,992 9,000 9,030 9,030
Less:
Abnormal (192) 100 (192) 100 (192) 100 (192)
Gain
9,800 9,800 8,808 8,838 8,838

(ii) Statement of Cost per equivalent units

Elements (Rs.) Cost Equivalent units Cost per
(EU) EU
(Rs.) (Rs.)
Material Cost 55,20,000
Less: Scrap realisation (2,3520) 54,96,480 8,808 624.03
392 units @ Rs. 60/- p.u.
Labour cost 18,60,000 8,838 210.45
Production OH Cost 8,63,000 8,838 97.65
Total Cost 82,19,480 932.13

(iii) Cost of Abnormal Gain – 192 Units

(Rs.) (Rs.)
Material cost of 192 units @ Rs. 624.03 p.u. 1,19,813.76
Labour cost of 192 units @ Rs. 210.45 p.u. 40,406.40
Production OH cost of 192 units @ Rs. 97.65 p.u. 18,748.80 1,78,968.96
Cost of closing WIP – 700 Units
Material cost of 700 equivalent units @ Rs. 624.03 p.u. 4,36,821.00
Labour cost of 490 equivalent units @ Rs. 210.45 p.u. 1,03,120.50
Production OH cost of 490 equivalent @ Rs. 97.65 p.u. 47,848.50 5,87,790.00
Cost of 8,900 units transferred to next process
(i) Cost of opening W-I-P Stock b/f – 600 units  4,20,000.00
(ii) Cost incurred on opening W-I-P stock
Material cost  —
Labour cost 240 equivalent units @ Rs. 210.45 p.u.  50,508.00
Production OH cost 240 equivalent units @ Rs 97.65 p.u.  23,436.00
 4,93,944.00
(iii) Cost of 8,300 completed units
8,300 units @ Rs. 932.13 p.u.  77,36,679.00
Total cost [(i) + (ii) + (iii))]  86,50,623.00

PROCESS & OPERATION COSTING 114

 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

115 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 116

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

117 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 118

Answer 4
(i) Statement of Joint Cost allocation of inventories of X, Y and Z
Products Total (`)
X (`) Y (`) Z (`)
Final sales value of total 4,50,000 9,60,000 15,00,000 29,10,000
production (Working (15,000 x ` (15,000 x ` (30,000 x `
Note 1) 30) 64) 50)

Less: Additional cost -- 6,60,000 11,00,000 17,60,000

Net realisable value (at 4,50,000 3,00,000 4,00,000 11,50,000
split-off point)
Joint cost allocated 2,34,000 1,56,000 2,08,000 5,98,000
(Working Note 2)

(ii) Calculation of Cost of goods sold and Closing inventory

Products Total (`)
X (`) Y (`) Z (`)
Allocated joint cost 2,34,000 1,56,000 2,08,000 5,98,000
Add: Additional costs -- 6,60,000 11,00,000 17,60,000
Cost of goods sold 2,34,000 8,16,000 13,08,000 23,58,000
(COGS)
Less: Cost of closing 78,000 (COGS -- 3,27,000 4,05,000
inventory × 100/3%) (COGS × 25%)
(Working Note 1)
Cost of goods sold 1,56,000 8,16,000 9,81,000 19,53,000

(iii) Comparative Statement of Gross Profit

Products Total (`)
X (`) Y (`) Z (`)
Sales revenue 3,00,000 9,60,000 11,25,000 23,85,000
(10,000 x ` 30) (15,000 x ` 64) (22,500 x ` 50)
Less: Cost of goods sold 1,56,000 8,16,000 9,81,000 19,53,000
Gross Profit 1,44,000 1,44,000 1,44,000 4,32,000

119 JOINT PRODUCTS & BY PRODUCTS

 Working Notes:
1. Total production of three products for the year 2019-2020
Products Quantity sold Quantity of closing Total Closing inventory
in litres inventory in litres production percentage (%)
(1) (2) (3) (4) = [(2) + (3)} (5) = (3)/ (4)
X 10,000 5,000 15,000 100/3
Y 15,000 -- 15,000 --
Z 22,500 7,500 30,000 25

2. Joint cost apportioned to each product:

Total Joint cost

= X NetRealisableValueof each product
Total Net Realisable Value
`5,98,000
Joint cost of product X = x ` 4,50,000 = ` 2,34,000
` 11,50,000
` 5,98,000
Joint cost of product Y = x ` 3,00,000 = ` 1,56,000
`11,50,000
` 5,98,000
Joint cost of product Z = x ` 4,00,000 = ` 2,08,000
` 11,50,000

Answer 5
Statement of Comparison of Profits before and after further processing
S (`) P (`) N (`) A (`) Total (`)
A. Sales at split off point 20,000 12,000 28,000 20,000 80,000
B. Apportioned Joint 10,000 6,000 14,000 10,000 40,000
Costs (Refer Working
Note)
C. Profit at split-off point 10,000 6,000 14,000 10,000 40,000
D. Sales after further 1,20,000 40,000 48,000 - 2,08,000
processing
E. Further processing cost 80,000 32,000 36,000 - 1,48,000
F. Apportioned Joint 10,000 6,000 14,000 - -
Costs (Refer Working
Note)
G. Profit if further 30000 2,000 (-) 2,000 - -
processing (D – E + F)

JOINT PRODUCTS & BY PRODUCTS 120

H. Increase/ decrease 20,000 - 4000 - 16,000 - -
in profit after further
processing (G- C)
Suggested Product to be further processed for maximising profits:
On comparing the figures of “Profit if no further processing” and “Profits if further processing”,
one observes that OPR Ltd. is earning more after further processing of Product S only i.e.
` 20,000. Hence, for maximizing profits, only Product S should be further processed and
Product P, N and A should be sold at split-off point.

Working Note:
Apportionment of joint costs on the basis of Sales Value at split -off point

Total joint cost

Apportioned joint cost = × Sales value of each product
Total Sales value at split-off point

Where,
Total Joint cost = ` 40,000
Total sales at split off point (S, P, N and A) = 20,000 + 12,000 + 28,000 + 20,000
= ` 80,000

`40,000
Share of S in joint cost = x ` 20,000 = ` 10,000
`80,000
`40,000
Share of P in joint cost = x ` 12,000 = ` 6,000
`80,000
`40,000
Share of N in joint cost = x ` 28,000 = ` 14,000
`80,000
`40,000
Share of A in joint cost = x ` 20,000 = ` 10,000
`80,000

Alternative Solution
Decision for further processing of Product S, P and N
Products S (`) P (`) N (`)
Sales revenue after further processing 1,20,000 40,000 48,000
Less: sales value at split-off point 20,000 12,000 28,000
Incremental Sales Revenue 1,00,000 28,000 20,000
Less: Further Processing cost 80,000 32,000 36,000
Profit/ loss arising due to further processing 20,000 (-)4,000 (-)16,000

121 JOINT PRODUCTS & BY PRODUCTS

Suggested Product to be further processed for maximising profits:
On comparing the figures of “Profit if no further processing” and “Profits if further processing”,
one observes that OPR Ltd. is earning more after further processing of Product S only i.e.
` 20,000. Hence, for maximizing profits, only Product S should be further processed and
Product P, N and A should be sold at split-off point.

JOINT PRODUCTS & BY PRODUCTS 122

 SOLUTIONS
CLASS TEST

Solution 1.
Total Joint Cost
Amount (`)
Direct Material 30,000
Direct Labour 9,600
Variable Overheads 12,000
Total Variable Cost 51,600
Fixed Overheads 32,000
Total joint cost 83,600

Apportionment of Joint Costs:

Product-A Product-B
I. (i) Apportionment of Joint
Cost on the basis of
‘Physical Quantity’
(ii) Apportionment of Joint
Cost on the basis of
‘Contribution Margin
Method’:
- Variable Costs (on
basis of physical
units)
Contribution Margin 36,545 -4,145
(`600×100 – 23,455) (`200×120 – 28,145)
Fixed Costs* ` 32,000
Total apportioned cost ` 55,455 ` 28,145
II. (iii) Profit or Loss:
When Joint cost apportioned on basis of physical units
A. Sales Value ` 60,000 ` 24,000
B. Apportioned joint cost on ` 38,000 ` 45,600
basis of ‘Physical
Quantity’:
A-B Profit or (Loss) 22,000 (21,600)

123 JOINT PRODUCTS & BY PRODUCTS

 When Joint cost apportioned on basis of ‘Contribution Margin Method’
C Apportioned joint cost on ` 55,455 ` 28,145
basis of ‘Contribution
Margin Method’
A-C Profit or (Loss) ` 4,545 ` (4,145)
* The fixed cost of ` 32,000 is to be apportioned over the joint products A and B in the ratio of
their contribution margin but contribution margin of Product B is Negative so fixed cost will
be charged to Product A only.

JOINT PRODUCTS & BY PRODUCTS 124

 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

125 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 126

 SOLUTIONS
CLASS TEST

Solution 1.
(i) Calculation of total project cost per day of concession period:
Activities Amount
(` in lakh)
Site clearance 170.70
Land development and filling work 9,080.35
Sub base and base courses 10,260.70
Bituminous work 35,070.80
Bridge, flyovers, underpasses, Pedestrian subway, footbridge, etc. 29,055.60
Drainage and protection work 9,040.50
Traffic sign, marking and road appurtenance 8,405.00
Maintenance, repairing and rehabilitation 12,429.60
Environmental management 982.00
Total Project cost 114,495.25
Administration and toll plaza operation cost 1,120.00
Total Cost 115,615.25
Concession period in days (25 years × 365 days) 9,125
Cost per day of concession period (` in lakh) 12.67

(ii) Computation of toll fee:

Cost to be recovered per day = Cost per day of concession period + 15% profit on cost
= `12,67,000 + `1,90,050 = `14,57,050
`14,57,050
Cost per equivalent vehicle =
76,444 units (Refer working note)

= `19.06 per equivalent vehicle

Vehicle type-wise toll fee:
Sl. Type of vehicle Equivalent Weight Toll fee per
No. cost [B] vehicle
[A] [A×B]
1. Two wheelers ` 19.06 1 19.06
2. Car and SUVs ` 19.06 4 76.24
3. Bus and LCV ` 19.06 6 114.36
4. Heavy commercial vehicles ` 19.06 9 171.54

127 SERVICE COSTING

 Working Note:
The cost per day has to be recovered from the daily traffic. The each type of vehicle is
to be converted into equivalent unit. Let’s convert all vehicle types equivalent to Two-
wheelers..
Sl. Type of vehicle Daily traffic Weight Ratio Equivalent
No. volume [B] Two- wheeler
[A] [A×B]
1. Two wheelers 44,500 0.05 1 44,500
2. Car and SUVs 3,450 0.20 4 13,800
3. Bus and LCV 1,800 0.30 6 10,800
4. Heavy commercial vehicles 816 0.45 9 7,344
Total 76,444

Solution 2.
(a) Working Notes:
Particulars For 4 weeks For 1 week
(by dividing by 4)
Total distance travelled (40 k.m × 2 3,200 km 800 km
× 2 trips × 5 days × 4 weeks)
Total tonne km (40 k.m × 10 tonnes × 2 16,000 tonne km 4,000 tonne km
× 5 days × 4 weeks)

(i) Statement showing Operating Cost

 Amount (`)
Particulars For 4 For 1 week
weeks (by dividing
by 4)
A. Fixed Charges:
Drivers’ wages (`2,500 x 4 weeks) 10,000 2,500
Garage rent (`800 × 4 weeks) 3,200 800
Insurance {(`18,200 ÷ 52 weeks) × 4 weeks} 1,400 350
Vehicle license {(`7,800 ÷ 52 weeks) × 4 weeks} 600 150
Other overheads cost {(`41,600 ÷ 52 weeks) × 4 3,200 800
weeks}
Total (A) 18,400 4,600
B. Running Cost:
Cost of diesel {(3,200 ÷ 8 kms) × `60} 24,000 6,000
Engine Oil (`200 × 4 weeks)* 800 200

SERVICE COSTING 128

 Repairs (`600 × 4 weeks)* 2,400 600
Depreciation on vehicle 16,000 4,000

6,720 1,680
Depreciation on tyres

Total (B) 49,920 12,480

C. Total Cost (A + B) 68,320 17,080
*Cost of engine oil & repairs may also be treated as fixed cost, as the question relates
these with time i.e. in weeks instead of running of vehicle.

(ii) Calculation of vehicle operating cost:

Solution 3.
Working Notes:
(i) Total equivalent single room suites
Nature of suite Occupancy (Room-days) Equivalent single room
suites (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 14,25,000
Room attendant’s wages 4,50,000
Lighting, heating and power 2,15,000
Repairs and renovation 1,23,500

129 SERVICE COSTING

Laundry charges 80,500
Interior decoration 74,000
Sundries 1,53,000
25,21,000
Building rent {(`10,000 x 12 months) + 5% on total 1,20,000+ 5% on total takings
taking}
Total cost 26,41,000 + 5% on total
takings
Profit is 20% of total takings
∴ Total takings = ` 26,41,000 + 25% (5% +20%) of total takings
Let R be rent for single room suite
Then 1,04,400 R = 26,41,000 + (0.25 × 1,04,400 R)
Or, 1,04,400 R = 26,41,000 + 26,100 R
Or, 78,300 R = 26,41,000
Or, R = `33.73

Alternatively
Let total takings be x
∴ X= 26,41,000 + .25X ( 5% + 20% )
∴ X = 35,21,333
Let the rent of single room be R
Then 1,04,400 R = 35,21,333
Or, R = `33.73
Rent to be charged:
Rent to be charged for single room suite = `33.73
Rent for double rooms suites ` 33.73 x 2.5 = `84.33
Rent for triple rooms suites `33.73 x 5 = `168.65

SERVICE COSTING 130

Answer 4 :
(i) Statement showing the expenses of operating a single bus and the fleet of 25 buses for
a year
Particulars Per bus Fleet of 25
per annum buses
(`) per annum
(`)
Running costs : (A)
Diesel (Refer to working note 1) 2,21,056 55,26,400
Repairs & maintenance costs: (B) 20,500 5,12,500
Fixed charges:
Driver’s salary 1,44,000 36,00,000
(` 12,000 × 12 months)
Cleaners salary 96,000 24,00,000
(` 8,000 × 12 months)
Licence fee, taxes etc. 8,400 2,10,000
Insurance 15,600 3,90,000
`20,00,000 - `1,60,000 1,15,000 28,75,000
Depreciation
16 years
Total fixed charges: (C) 3,79,000 94,75,000
Total expenses: (A+B+C) 6,20,556 1,55,13,900

(ii) Average cost per student per month in respect of students coming from a distance of:
(a) 2 km. from the school {` 6,20,556 / (236 students × 12 months)} ` 219.12
(Refer to Working Note 2)
(b) 4 km. from the school (` 219.12 × 2) ` 438.24
(c) 8 km. from the school (` 219.12 × 4) ` 876.48

(iii) Calculation of minimum bus fare to be recovered from the students during the year
2020:
Statement showing the expenses of operating a single bus in year 2020
Particulars Per bus
per annum
(`)
Running costs : (A)
Diesel (Refer to working note 3) 66,316.80
Repairs & maintenance costs: (B) 15,375
(` 20,500 x 0.75)

131 SERVICE COSTING

Fixed charges:
Driver’s salary 1,17,000
{` 12,000 × 3 months + (75% of ` 12,000 × 9 months)}
Cleaners salary 78,000
{` 8,000 × 3 months + (75% of ` 8,000 × 9 months)}
Licence fee, taxes etc. 8,400
`20,00,000 - `1,60,000 15,600
Depreciation
16 years

Total fixed charges: (C) 3,34,000

Total expenses: (A+B+C) 4,15,691.80

Minimum bus fare to be recovered:

(a) 2 km. from the school {` 4,15,691.8 / (236 students × 12 ` 146.78
months)} (Refer to Working Note 2)
(b) 4 km. from the school (` 146.78 × 2) ` 293.56
(c) 8 km. from the school (`146.78 × 4) ` 587.12

Working Notes:
1. Calculation of diesel cost per bus:
No. of trips made by a bus each day 4
Distance travelled in one trip both ways (8 km. × 2 trips) 16 km.
Distance travelled per day by a bus (16 km. × 4 shifts) 64 km.
Distance travelled during a month (64 km. × 22 days) 1,408 km.
Distance travelled per year (1,408 × 10 months) 14,080 km.
No. of litres of diesel required per bus per year 2,816 litres
(14,080 km. ÷ 5 km.)
Cost of diesel per bus per year (2,816 litres × ` 78.50) ` 2,21,056

2. Calculation of equivalent number of students per bus:

Bus capacity of 2 trips (40 students × 2 trips) 80 students
1/4th fare students (15% × 80 students) 12 students
½ fare students (30% × 80 students × 2) (equivalent to 1/4th
fare students) 48 students
Full fare students (55% × 80 students × 4) (equivalent to 1/4th 176 students
fare students)
Total students equivalent to 1/4th fare students 236 students

SERVICE COSTING 132

 3. Calculation of diesel cost per bus in Year 2020:
Distance travelled during a month (64 km. × 22 days) 1,408 km.
Distance travelled during the year 2020 (1,408 × 3 months) 4,224 km.
No. of litres of diesel required per bus per year 844.8 litres
(4,224 km. ÷ 5 km.)
Cost of diesel per bus per year (844.8 litres × ` 78.50) ` 66,316.80

Answer 5
Operating Cost Sheet
Particulars Amount (`) Amount (`)
Standing Charges:
Depreciation (` 24,00,000 X 10% X 1/12 X 25) 5,00,000
Garage Rent 1,00,000
Insurance 25,000
Road Tax 20,000
Manager’s Salary 60,000
Assistant’s Salary (` 32,000 X 2) 64,000
Supervisor’s Salary (` 24,000 X 3) 72,000
Driver’s Salary (` 20,000 X 25) 5,00,000
Cleaner’s Salary (` 5,000 X 20) 1,00,000
Office Staff’s Salary 1,00,000
Consumables 1,20,000
Repairs & Maintenance 90,000
Other Fixed Expenses 72,000 18,23,000
Running Charges
Diesel (49,600 Kms / 10 Kms X ` 80 per unit) 3,96,800
Oils & Lubricants 1,45,000
Tyres and tubes 35,000 5,76,800
Total Operating Cost 23,99,800

Total Operating Cost

Cost per passenger-km =
Passenger –kms
23,99,800
=
27,18,080

= 0.883

133 SERVICE COSTING

Working Note:
Calculation of Total Kilometers and Passenger Kilometers
Specification Total Km. Passenger–Km.
12 Buses (60 Passengers) 29,760 Kms 14,28,480
(10 Kms × 4 X 2 trips × 31 (29760 Kms x 60 Pass. x
days x 12 Buses) 80%)
13 Buses (50 Passengers) 32,240 Kms 12,89,600
(10 Kms × 4 X 2 trips × 31 (32240 Kms x 50 Pass. x
days x 13 Buses) 80%)
Total 62,000 27,18,080
Since 5 buses out of 25 buses are kept for repairs every day
Actual total Km. 62,000 × 20/25 = 49,600

SERVICE COSTING 134

 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)

135 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 136

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 - -

137 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 138

 ` 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

139 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 140

(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)

141 STANDARD COSTING

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

Solution 11
(1) Fixed Overhead Expenditure Variance
= Budgeted Fixed Overheads – Actual Fixed Overheads
= ` 12,000 – ` 12,800 (as calculated below) = ` 800 (A)
(2) Fixed Overhead Cost Variance= Absorbed Fixed Overheads – Actual Fixed Overheads
2,800 (A) = ` 10,000 – Actual Overheads
Actual Overheads = ` 12,800
(3) Actual Hours for Actual Production = ` 12,800/ `8 = 1,600 hrs.
(4) Fixed Overhead capacity Variance
= Budgeted Fixed Overheads for Actual Hours– Budgeted Fixed Overheads
= ` 5 x 1600 hrs. – ` 12,000 = ` 4,000 (A)
(5) Standard Hours for Actual Production
= Absorbed Overheads/ Std. Rate
= ` 10,000/ ` 5 = 2,000 hrs.
(6) Fixed Overhead Efficiency Variance
= Absorbed Fixed Overheads – Budgeted Fixed Overheads for Actual Hours
= ` 10,000 – ` 5 x 1,600 hrs. = ` 2,000 (F)
Working Note:
(i) Fixed Overhead Volume Variance = Absorbed Fixed Overheads – Budgeted Fixed
Overheads
2,000 (A) = Absorbed Fixed Overheads – `12,000
Absorbed Fixed Overheads = ` 10,000
(ii) Standard Rate/ Hour = ` 5 (` 12,000/2,400 hrs.)

Solution 12
Working Notes:
1. Calculation of standard man hours
When 120 worker works for 1 hr., then the std. output is 20 units.

120 hrs.
Std. man hour per unit = = 6 hrs.
20 units

STANDARD COSTING 142

2. Calculation of std. man hours for actual output
Total std. man hours = 1,000 units × 6 hrs. = 6,000 hrs.
Standard for actual Actual
Hours Rate Amount Actual hrs. Idle Production Rate (`) Amount
(`) (`) paid time hrs. paid (`)
hrs.
6,000 25 1,50,000 5,760 288 5,472 25.70 1,48,032
(48 hrs. x 120
workers)
(i) Labour cost variance
= Std. labour cost – Actual labour cost
= 1,50,000 – 1,48,032 = ` 1,968 F
(ii) Labour rate variance
= (SR – AR) × AHPaid
= (25 - 25.70) × 5,760 = ` 4,032 A
(iii) Labour efficiency variance
= (SH – AH) × SR
= (6,000 – 5,472) × 25 = ` 13,200 F
(iv) Labour Idle time variance
= Idle Hours × SR
= 288 × 25 = ` 7,200 A
Note: Variances can also be calculated for one worker instead of 120.

143 STANDARD COSTING

 SOLUTIONS
CLASS TEST

Solution 1.
a)(ii) Workings:
Take the good output of 195 ltr. The standard quantity of material required for 195 ltr. of
output is

195
x 100 = 243.75 ltr.
80

Statement showing computation of Standard Cost/Actual Cost/ Revised Actual Quantity

Material Standard Cost Actual for 10 units
Quantity Rate Amount Quantity Rate Amount
[SQ] [SP] [SQ × SP] [AQ] [AP] [AQ × AP]
(Kg.) (`) (`) (Kg.) (`) (`)
A (60% of 146.25 40 5,850.00 140 42 5,880
243.75 ltr.)
B (40% of. 97.50 60 5,850.00 110 56 6,160
243.75 Kg.)
243.75 11,700.00 200 12,040

Note:SQ = Standard Quantity = Expected Consumption for Actual Output

AQ = Actual Quantity of Material Consumed
SP = Standard Price Per Unit
AP = Actual Price Per Unit

Computation of Variances:
Material Cost Variance = SQ × SP – AQ × AP
A = ` 146.25 ltr. × ` 40– 140 ltr. × ` 42 = ` 30.00 (A)
B = ` 97.50 ltr. × ` 60 – 110 ltr. × ` 56 = ` 310.00 (A)
Total = ` 30.00 (A) + ` 310.00 (A)
= ` 340.00 (A)

STANDARD COSTING 144

Material Usage Variance = SP × (SQ – AQ)
A = ` 40 × (146.25 ltr. –140 ltr.) = ` 250.00 (F)
B = ` 60 × (97.50 ltr. – 110 ltr.) = ` 750.00 (A)
Total = ` 250.00 (F) + ` 750.00 (A)
= ` 500.00 (A)

Material Price Variance = AQ × (SP – AP)

A = 140 Kg. × (` 40 – ` 42) = ` 280 (A)
B = 110 Kg. × (` 60 – ` 56) = ` 440 (F)
Total = ` 280 (A) + ` 440 (F)
= ` 160 (F)

Solution 2.
Working:
Quantity of material purchased and used.
No. of units produced 1,000 units
Std. input per unit 30kg.
Std. quantity (Kg.) 30,000 kg.
Add: Excess usage 7,200 kg.
Actual Quantity 37,200 kg.
Add: Closing Stock 10,000 kg.
Less: Opening stock 5,000 kg.
Quantity of Material purchased 42,200 kg.
(i) Direct Material Price Variance:
= Actual Quantity purchased (Std. Price – Actual Price)
= 42,200 kg.(`350 – `365) = 6,33,000 (Adverse)
Direct Material Usage Variance:
= Std. Price (Std. Quantity – Actual Quantity)
= `350 (30,000 kg. – 37,200 kg.) = `25,20,000 (Adverse)
(ii) Direct Labour Rate Variance:
= Actual hours (Std. Rate – Actual Rate)
= 5,300 hours (`80 – `82) = `10,600 (Adverse)
Direct Labour Efficiency Variance:
= Std. Rate (Std. hours – Actual hours)
= `80 (1,000 units × 5 hours – 5,300 hours) = `24,000 (Adverse)

145 STANDARD COSTING

Solution 3.
(a) Material price variance:
= (Standard price – Actual Price) × Actual quantity
= (` 4 – ` 4.10) × 5,000 = ` 500 Adv.
(b) Material usage variance:
= (Std. quantity for actual output – Actual qtty.) × Std. price
= (600 × 5 – 3,500) × 4 = ` 2,000 Adv.
(c) Labour Rate Variance:
= (Standard rate – Actual rate) × Actual hours
= (`10 – `9) × 1,700 = ` 1,700 Fav.
(d) Labour Efficiency Variance:
= (Standard hours for actual output – Actual hours) × Standard rate
= (600 × 3 – 1,700) × `10
= ` 1,000 Fav.
(e) Variable Overhead Expenditure Variance
= (Actual Hours × Standard Rate) – Actual Overhead
= (1,700 ×` 1) – ` 1,900
= ` 200 Adv.
(f) Variable Overhead Efficiency Variance:
= Std. hours for actual output – Actual hours) × Std. rate
= (600 × 3 – 1,700) × `1 = `100 Fav.
(g) Fixed Overhead Expenditure Variance:
= (Budgeted overhead – Actual overhead)
= (1,800 × 0.50 – 900) = Nil
(h) Fixed Overhead Volume Variance:
= (Std. hours for actual output – Budgeted hours) × Std. rate
= (600 × 3 – 1,800) × ` 0.50 = Nil
(i) Fixed Overhead Capacity Variance:
= (Budgeted hours – Actual Hours) × Standard rate
= (1,800 – 1,700) × ` 0.50 = ` 50 Adv.
(j) Fixed Overhead Efficiency Variance:
= (Std. hours for actual output – Actual hours) × Standard rate
= (600 × 3 – 1,700) × ` 0.50 = ` 50 Fav.
Verification: (`) (`)
Overhead recovered: 600 units @ `4.50 2,700
Actual Overhead:

STANDARD COSTING 146

 Variable 1,900
Fixed 900 2,800
100 Adv.
Variable expenditure variance 200 Adv
Variable Efficiency variance 100 Fav.
Fixed expenditure variance Nil
Fixed overhead volume variance Nil
100 Adv.

Reconciliation Statement
Standard Cost: 600 units @ `54.50 32,700
Actual Cost: 38,600
Less: Material Stock at standard cost: 6,000 (32,600) 100 Fav.
(1,500 × `4)
Variances: Adv. (`) Fav. (`)
Material price 500
Material usage 2,000
Labour rate 1,700
Labour efficiency 1,000
Variable expenditure 200
Variable efficiency 100
Total 2,700 2,800 100 Fav.

Solution 4.
Material Price Variance = Actual Quantity (Std. Price – Actual Price)
X = 12,500 units (Rs.40 – Rs.44) = 50,000 (A)
Y = 18,000 units (Rs.30 – Rs.28) = 36,000 (F)
Z = 88,500 units (Rs.10 – Rs.12) = 1,77,000 (A) 1,91,000 (A)

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

X = Rs.40 (6,000 × 2 – 12,500) = 20,000 (A)
Y = Rs.30 (6,000 × 3 – 18,000) = Nil
Z = Rs.10 (6,000 × 15 – 88,500) = 15,000 (F) 5,000 (A)

Material Mix Variance = Std. Price (Revised Std. Qty. – Actual Qty.)

1,19,000x2
X = Rs.40 ( - 12,500) = 24,000 (A)
20

147 STANDARD COSTING

 1,19,000x3
Y = Rs.30 ( - 18,000) = 4,500 (A)
20
1,19,000x15
Z = Rs.10 ( - 88,500) = 7,500 (F) 21,000 (A)
20

Material Yield Variance = Std. Price (Std. Qty. – Revised Std. Qty.)

1,19,000x2
X = Rs.40 (6,000 × 2 - ) = 4,000 (F)
20
1,19,000x3
Y = Rs.30 (6,000 × 3 - ) = 4,500 (F)
20
1,19,000x15
Z = Rs.10 (6,000 × 15 - ) = 7,500 (F) 16,000 (F)
20

Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)

= 2,500 hours (Rs.55 – Rs.58) = 7,500 (A)
Labour Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)
= Rs.55 (6,000 × 3 – 17,500) = 27,500 (F)

Solution 5.
Workings:
Skilled Unskilled
Standard Rate per hour 80 60
Standard time for producing 1.5 hours 1.5 hours
one unit (Rs.120 ÷ Rs.80) (Rs.90 ÷ Rs.60)
Actual hours paid (AHPaid) 6,600 hours 5,400 hours
Standard hours required to 6,000 hours 6,000 hours
produce 4,000 units (SH) (1.5 hours× 4,000 units) (1.5 hours× 4,000 units)
Actual hours worked
(AHWorked)

Revised Std. Hours (RSH)

Idle timeAbnormal 6,600 - 6,435 = 165 hours 5,400 – 5,265 = 135 hours
(i) Labour Rate Variance = AHPaid(Std. Rate – Actual Rate)
- Skilled = 6,600 hours (Rs.80 – Rs.87.50) = Rs.49,500 (A)
- Unskilled = 5,400 hours (Rs.60 – Rs.55) = Rs.27,000 (F)
= Rs.22,500 (A)

STANDARD COSTING 148

(ii) Labour Efficiency Variance = Std. Rate (SH – AHWorked)
- Skilled = Rs.80 (6,000 hours – 6,435 hours) = Rs.34,800 (A)
- Unskilled = Rs.60 (6,000 hours – 5,265 hours) = Rs.44,100 (F)
= Rs.9,300 (F)
(iii) Labour Mix Variance = Std. Rate (RSH – AHWorked)
- Skilled = Rs.80 (5,850 hours – 6,435 hours) = Rs.46,800 (A)
- Unskilled = Rs.60 (5,850 hours – 5,265 hours) = Rs.35,100 (F)
= Rs.11,700 (A)

(iv) Labour Yield Variance = Std. Rate (SH – RSH)

- Skilled = Rs.80 (6,000 hours – 5,850 hours) = Rs.12,000 (F)
- Unskilled = Rs.60 (6,000 hours – 5,850 hours) = Rs.9,000 (F)
= Rs.21,000 (F)
(v) Labour Idle time Variance = Std. Rate × Idle timeAbnormal
- Skilled = Rs.80 × 165 hours = Rs.13,200 (A)
- Unskilled = Rs.60 × 135 hours = Rs.8,100 (A)
= Rs.21,300 (A)
(vi) Variable Overhead Expenditure Variance
= AHWorked (SR - AR)

= 11,700 hours

= 11,700 hours (Rs.25 – Rs.24.36) = Rs.7,488 (F)

(vii) Variable Overhead Efficiency Variance

= Std. Rate (SH – AHWorked)
= Rs.25 (12,000 – 11,700) = Rs.7,500 (F)

149 STANDARD COSTING

 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

MARGINAL COSTING 150

(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
151 MARGINAL COSTING
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 =

MARGINAL COSTING 152

 = 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.

153 MARGINAL COSTING

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

MARGINAL COSTING 154


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%

155 MARGINAL COSTING

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

MARGINAL COSTING 156

(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

157 MARGINAL COSTING

 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

Solution 10.
(` in ‘000)
Factory Sales Profit P/V Ratio
Actual Over / Budgeted Actual Over / Budget Change in Profit
(Under) Sales (Under) Profit Change inSales
Budget Budget
North 1,100 (400) 1,500 135 (180) 315 45%
East 1,450 150 1,300 210 90 120 60%
South 1,200 (200) 1,400 330 (110) 440 55%

(i) Computation of Fixed Costs  (` in ‘000)

Factory Actual P/V Contribution Actual Fixed Cost
Sales Ratio Profit
(1) (2) (3) = (1) × (2) (4) (5) = (3) - (4)
North 1,100 45% 495 135 360
East 1,450 60% 870 210 660
South 1,200 55% 660 330 330
Total 3,750 2,025 675 1,350

MARGINAL COSTING 158

(ii) Computation of Break-Even Sales
Factory Fixed Cost (a) P/V Ratio (b) Break-even Sales
North 360 45% 800
East 660 60% 1,100
South 330 55% 600
2,500

Fixed Cost
Break-even Sales (Company as Whole) =
Composite P / V Ratio *

= ` 13,50,000
54%
=` 25,00,000

Total Contribution 2, 025

*Composite P/V Ratio = = = 54%
Total Actual sales 3, 750

Solution 11
Selling Price = ` 500
Profit = ` 125
No of Sticks = 5,000

Particular Current Year Next Year

(`) (`)
Direct Material 150 157.50
(150 + 5%)
Direct Wages 50 60
(50+20%)
Works Overheads 62.50 62.5
(125 × 50%)
Selling Expenses 12.50 12.5
(50 × 25%)
Total Variable Cost 275 292.50
Fixed Cost (62.5 × 5,000) = 3,12,500; (37.5 × 5,00,000 5,50,000
5,000) = 1,87,500

Let: Lowest Price Quoted = K

Now, Sales = Target Profit (5,000 units × ` 125) + Variable Cost + Fixed Cost Or, = (5,000 × 500)
159 MARGINAL COSTING
+ (2,000 × K) = 6,25,000 + 20,47,500 + 5,50,000 Or, K = ` 361.25
So, Lowest Price that can be quoted to earn the profit of ` 6,25,000 (same as current year)
is ` 361.25

Solution 12
Contribution to sales ratio (P/V ratio) = 37%
Variable cost ratio = 100% - 37% = 63%
Variable cost = ` 10,00,000 x 63% = ` 6,30,000
After decrease in selling price and fixed cost, sales quantity has not changed. Thus, variable
cost is ` 6,30,000.
Revised Contribution to sales = 30%
Thus, Variable cost ratio = 100% - 30% = 70%

` 6,30,000
Thus, Revised sales = = ` 9,00,000
70%

Revised, Break-even sales ratio = 100% - 40% (revised Margin of safety) = 60%
(i) Revised fixed cost = revised breakeven sales x revised contribution to sales ratio
=
` 5,40,000 (` 9,00,000 x 60%) x 30%
=
` 1,62,000
(ii) Revised sales = ` 9,00,000 (as calculated above)
(iii) Revised Break-even point = Revised sales x Revised break-even sales ratio
=
` 9,00,000 x 60%
=
` 5,40,000

Solution 13
(i) Cost Indifference Point
Method-1 and Method-2
(`)
Differential Fixed Cost (I) ` 2,00,000
(` 3,00,000 – ` 1,00,000)
Differential Variable Costs (II) `5
(` 15 – ` 10)
Cost Indifference Point (I/II) 40,000
(Differential Fixed Cost / Differential Variable Costs
per unit)
Interpretation of Results

MARGINAL COSTING 160

 At activity level below the indifference points, the alternative with lower fixed costs
and higher variable costs should be used. At activity level above the indifference
point, alternative with higher fixed costs and lower variable costs should be used.
No. of Product Alternative to be Chosen
Product ≤ 40,000 units Method-1, Semi-Automatic
Product ≥ 40,000 units Method-2, Automatic

(ii) Break Even point (in units)

Method-1 Method-2

Solution 14
Variable Cost per Unit=`16
Fixed Cost per Unit =` 4, Total Fixed Cost= 2,00,000 units x ` 4 = `8,00,000
Total Cost per Unit =`20
Selling Price per Unit=Total Cost+ Profit =` 20+` 4 =` 24
Contribution per Unit=` 24-`16=` 8
Fixed cost ` 8,00,000
(i) Present Break-even Sales (Quantity) = Contribution margin per unit = `8

= 1,00,000 units
Present Break-even Sales (`) = 1,00,000 units x ` 24 = ` 24,00,000

8
(ii) Present P/V Ratio = X 100 = 33.33%
24

(iii) Revised Selling Price per Unit = ` 24 – 10% of ` 24 = ` 21.60

Revised Contribution per Unit=` 21.60-` 16 = ` 5.60

5.60
Revised P/V Ratio = X 100 = 25.926%
21.60
Fixed cost 8,00,000
Revised Break-even point (`) = P/V ratio = 25.926% = ` 30,85,705

Or
Fixed cost 8,00,000
Revised Break-even point (units) = Contribution margin per unit = 5.60
= 1,42,857 units
Revised Break-even point (`) = 1,42,857 units x ` 21.60 = ` 30,85,711

161 MARGINAL COSTING

(iv) Present profit =` 8,00,000
Desired Profit = 120% of ` 8,00,000 =` 9,60,000
Sales to earn a profit of ` 9,60,000
Total contribution required = 8.00.000 + 9,60,000 = ` 17,60,000

Fixed cost + Desired profit 8,00,000 + 9,60,000

Contribution per unit = 5.60 = 3,14,286 units
Revised sales (in `) = 3,14,286 units x ` 21.60 = ` 67,88,578

Solution 15
Particulars Quarter ending Quarter ending
31st December, 31st March, 2022
2021 (`) (`)
Sales (No. of units sold x ` 450 per unit) 54,00,000 1,35,00,000
Profit (Loss) (4,20,000) 12,00,000
[12,000 × 35] [30,000 × 40]

Change in profit
P/V Ratio = x 100
Change in Sales

16,20,000
∴ × 100 = 20%
81,00,000

(i) Fixed Cost = Sales × P/V ratio – profit

=
` 1,35,00,000 × 20% – 12,00,000
=
` 15,00,000

Alternative Presentation for the calculation of Fixed cost

Particulars Quarter ending Quarter ending
31st December, 31st March, 2022
2021 (`) (`)
Sales (No. of units sold x ` 450 per unit) 54,00,000 1,35,00,000
Profit (Loss) (4,20,000) 12,00,000
[12,000 × 35] [30,000 × 40]
Total cost 58,20,000 1,23,00,000
VC per unit = (1,23,00,000 – 58,20,000) / (30,000 – 12,000)
= 64,80,000 / 18,000 =` 360 per unit
Fixed cost = TC – VC , 58,20,000 (360 x12,000 units) `15,00,000

MARGINAL COSTING 162

 Fixed cost
(ii) Break even sales value (in Rupees) = ×100
P/V ratio
15,00,000
=
× `75,00,000
20%

(iii) Profit, if sales reach 50,000 units for the quarter ending 30th June, 2022
(`)
Sales (50,000 × ` 450) 2,25,00,000
Less: Variable cost 1,80,00,000
Contribution 45,00,000
Less: Fixed cost 15,00,000
Profit 30,00,000

163 MARGINAL COSTING

 SOLUTIONS
CLASS TEST

Solution 1.
100
(a) Total Sales = 2,40,000 × = ` 6,00,000
40

Contribution = 6,00,000 × 30% = ` 1,80,000

Profit = M/S × P/V ratio = 2,40,000 × 30% = ` 72,000
Fixed cost = Contribution – Profit
= 1,80,000 – 72,000 = ` 1,08,000

Fixed Cost 1,08,000

(1) Break-even Sales = = = ` 3,60,000
P / V ratio 30%

(2) Profit = (Sales × P/V ratio) – Fixed cost

= (9,00,000 × 30%) – 1,08,000 = ` 1,62,000

Contribution 2,00,000
(b) P/V ratio = = = 25%
Sales 8,00,000

Profit 1,50,000
Margin of safety = = = ` 6,00,000
P/V ratio 25%

Alternatively:
Fixed cost = Contribution – Profit
=
` 2,00,000 – `1,50,000 = ` 50,000
B.E. Point = ` 50,000 ÷ 25% = ` 2,00,000
Margin of Safety = Actual sales – B.E. sales
= 8,00,000 – 2,00,000 = 6,00,000

MARGINAL COSTING 164

Solution 2.
Particulars (`)
Suppose sales 100
Variable cost 60
Contribution 40
P/V ratio 40%
Fixed cost = ` 80,000
(i) Break-even point = Fixed Cost ÷ P/V ratio =80,000 ÷ 40% or ` 2,00,000
(ii) 15% return on ` 2,00,000  30,000
Fixed Cost  80,000
Contribution required  1,10,000
Sales volume required = ` 1,10,000 ÷ 40% or ` 2,75,000
(iii) Avoidable fixed cost if business is locked up = ` 80,000 - ` 25,000
=
` 55,000
Minimum sales required to meet this cost: ` 55,000 ÷ 40%
or ` 1,37,500
Mr. X will be better off by locking his business up, if the sale is less than ` 1,37,500

Solution 3.
(i) Statement showing Break Even Sales
Particulars Black White
Sales Planned 81,00,000 54,00,000
Selling Price (`) 18 24
Number of Units to be sold 4,50,000 2,25,000
Break Even sales (in Units),70% of total sales 3,15,000 1,57,500
Or
Break Even sales (in `),70% of total sales 56,70,000 37,80,000

(ii) Statement Showing Fixed Cost Reduction

Profit to be maintained (`) 8,26,200 7,45,200
Margin of Safety (70% of Sales) (`) 24,30,000 16,20,000
PVR (Profit/ Margin of Safety) x 100 34% 46%
Contribution (Sales x 34% or 46%) (`) 27,54,000 24,84,000
Less: Profit (`) 8,26,200 7,45,200
Revised Fixed Cost (`) 19,27,800 17,38,800
Present Fixed Cost (`) 22,00,000 20,00,000
Reduction in Fixed Cost 2,72,200 2,61,200

165 MARGINAL COSTING

Solution 4.
(i) Evaluation of Option (i)
Selling Price = ` 1800 + ` 200 = ` 2,000
Sales = 2000 x 60% = 1200 Pieces
(`)
Sales (1,200 pieces @ ` 2,000) 24,00,000

Less: Direct Material 4,75,360

Direct Labour 3,54,080

Variable Overhead 5,74,560

Contribution 9,96,000
Less: Fixed cost (Rs. 11,97,000x40%) 4,78,800
Profit 5,17,200
If price has been increased by 11.11% (increases by 200 on 1,800) sales goes down by
20% (decreased by 300 on 1,500). Change in demand is greater than change in price.
Since the variable costs are still same profit has been arose to ` 5,17,200 in-spite of high
elasticity of demand. PH gems would not be able to sustain this policy on account of
change if any in variable costs.

(ii) Evaluation of Option (ii)

(`)
Sales 1,800.00

Less: Direct Material 396.13

Cost of Tie PIN 18.00

Direct Labour 295.07

478.80
Variable Overheads

Contribution 612.00
P/V Ratio (` 612/1800x100) 34.0%

MARGINAL COSTING 166

 Sales to required earn a profit of 20%

To earn profit 20% on sales of readymade suit (along with TIE PIN) company has to sold
1,900 units i.e. 95% of the full capacity. This sales level of 1,900 units is justified only
if variable cost is constant. Any upside in variable cost would impact profitability, to
achieve the desired profitability. Production has to be increased but the scope is limited
to 5% only.

Solution 5.
Rs.
Sales 50,000 units at Rs. 7 3,50,000
Variable cost 50,000 × 3 1,50,000
Contribution 50,000 × 4 2,00,000
Fixed costs 1,20,000
Profit 80,000

BEP (Value) = 30,000 Units × 7 = Rs. 2,10,000

Profit Rs. 80,000 (as calculated above)

Solution 6.
Workings:
Let us assume that the selling price before increment is Rs.100, the other relevant details are
as follows:
Particulars Before increase After increase
Selling Price 100 110
Variable Cost 60 63
Contribution 40 47
P/V Ratio 40% 42.73%

167 MARGINAL COSTING

(i) Computation of Break-even point sales:

(ii) Sales value to make a profit of Rs.4,50,000:

MARGINAL COSTING 168

 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

169 BUDGET & BUDGETARY CONTROL

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

BUDGET & BUDGETARY CONTROL 170

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)

171 BUDGET & BUDGETARY CONTROL

 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.)

BUDGET & BUDGETARY CONTROL 172

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

173 BUDGET & BUDGETARY CONTROL

(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

Solution 6
(i) Sales Budget  (in `)
Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total
Sales (in Units) 30,000 35,000 38,000 25,000 40,000 1,68,000
Selling Price per 10 12 15 15 20 -
unit (`)
Total Sales (`) 3,00,000 4,20,000 5,70,000 3,75,000 8,00,000 24,65,000

(ii) Production Budget (in units)

Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total
Sales 30,000 35,000 38,000 25,000 40,000 1,68,000
Add: Closing stock of 9,000 8,000 6,000 10,000 36,000
finished goods
Total quantity required 33,000 44,000 46,000 31,000 50,000 2,04,000
Less: Opening stock of 7,500 3,000 9,000 8,000 6,000 33,500
finished goods
Units to be produced 25,500 41,000 37,000 23,000 44,000 1,70,500

(iii) Raw material budget (in units)

For Raw material ‘A’
Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total
Units to be produced: (a) 25,500 41,000 37,000 23,000 44,000 1,70,500
Raw material consumption 2 2 2 2 2 -
p.u. (kg.): (b)
Total raw material 51,000 82,000 74,000 46,000 88,000 3,41,000
consumption (Kg.): (a × b)

BUDGET & BUDGETARY CONTROL 174

For Raw material ‘B’
Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total
Units to be produced: (a) 25,500 41,000 37,000 23,000 44,000 1,70,500
Raw material consumption 3 3 3 3 3 -
p.u. (kg.): (b)
Total raw material 76,500 1,23,000 1,11,000 69,000 1,32,000 5,11,500
consumption (Kg.): (a × b)

175 BUDGET & BUDGETARY CONTROL

 SOLUTIONS
CLASS TEST

Solution 1.
(a) Flexible Budget before marketing efforts:
Product A (`) Product B (`)
6,000 units 9,000 units
Per unit Total Per unit Total
Sales 120.00 7,20,000 78.00 7,02,000
Raw material cost 60.00 3,60,000 42.00 3,78,000
Direct labour cost per unit 30.00 1,80,000 18.00 1,62,000
Variable overhead per unit 12.00 72,000 6.00 54,000
Fixed overhead per unit 8.00 48,000 4.00 36,000
Total cost 110.00 6,60,000 70.00 6,30,000
Profit 10.00 60,000 8.00 72,000

(b) Flexible Budget after marketing efforts:

Product A (`) Product B (`)
7,500 units 9,500 units
Per unit Total Per unit Total
Sales 120.00 9,00,000 78.00 7,41,000
Raw material cost 60.00 4,50,000 42.00 3,99,000
Direct labour cost per unit 30.00 2,25,000 18.00 1,71,000
Variable overhead per unit 13.20 99,000 6.60 62,700
Fixed overhead per unit 6.72 50,400 3.98 37,800
Total cost 109.92 8,24,400 70.58 6,70,500
Profit 10.08 75,600 7.42 70,500

BUDGET & BUDGETARY CONTROL 176

Solution 2.
Actual Prodcution in terms of standard hours
(i) Efficiency Ratio = x 100
Actual hours worked
750 units × 10 hours
= x 100 = 125%
6,000

Actual Production in terms of standard hours

(ii) Activity ratio = x 100
Budgeted production in terms of standard hours
7,500
= x 100 = 85.23%
880 × 10

Actual hours worked

(iii) Capacity Ratio = x 100
Maximum hours in a budget period
6,000
= x 100 = 68.19%
8,800

Activity ratio = Efficiency Ratio × Capacity Ratio

Or, 85.23% = 125%× 68.19%

Solution 3
(i) Flexible Budget (before promotion)
Particulars Product ‘AYE’ Product ‘ZYE’ Total
Production & Sales 4,000 3,000
(units)
Amount (`) Amount (`) Amount (`)
A. Sales Value 8,00,000 5,40,000 13,40,000
(` 200×4,000) (` 180×3,000)
B. Direct Materials 3,20,000 2,10,000 5,30,000
(` 80 × 4,000) (`70 × 3,000)
C. Direct labour 1,60,000 1,05,000 2,65,000
(` 40 × 4,000) (` 35 × 3,000)
D. Variable Overheads 80,000 75,000 1,55,000
(` 20 × 4,000) (` 25 × 3,000)
E. Total Variable Cost 5,60,000 3,90,000 9,50,000
(B+C+D)
F. Contribution (A-E) 2,40,000 1,50,000 3,90,000
G. Fixed Overhead 40,000 30,000 70,000
(`10 × 4,000) (`10 × 3,000)

177 BUDGET & BUDGETARY CONTROL

 H. Profit (F-G) 2,00,000 1,20,000 3,20,000
Profit per unit 50 40

(ii) Flexible Budget (after promotion)

Particulars Product ‘AYE’ Product ‘ZYE’ Total
Production & Sales 4,200 3,150
(units) (4,000×105%) (3,000×105%)
Amount (`) Amount (`) Amount (`)
A. Sales Value 9,24,000 6,23,700 15,47,700
(` 220 × 4,200) (` 198 × 3,150)
B. Direct Materials 3,36,000 2,20,500 5,56,500
(` 80 × 4,200) (` 70 × 3,150)
C. Direct labour 1,68,000 1,10,250 2,78,250
(` 40 × 4,200) (` 35 × 3,150)
D. Variable Overheads 1,00,800 94,500 1,95,300
(` 24 × 4,200) (` 30 × 3,150)
E. Total Variable Cost 6,04,800 4,25,250 10,30,050
(B+C+D)
F. Contribution (A-E) 3,19,200 1,98,450 5,17,650
G. Fixed Overhead 42,000 31,500 73,500
(` 40,000 × (` 30,000 ×
105%) 105%)
H. Profit (F-G) 2,77,200 1,66,950 4,44,150
Profit per unit 66 53

BUDGET & BUDGETARY CONTROL 178