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Test Series: October, 2023

MOCK TEST PAPER – 2
INTERMEDIATE: GROUP – I
PAPER – 3: COST MANAGEMENT ACCOUNTING
Suggested Answers/ Hints

1. (a) Apportionment of Joint Costs

Particulars A (`) B (`)
Selling Price 16,000 8,000
Less: Estimated profit 4,000 1,600
(25% of `16,000) (20% of ` 8,000)
Cost of sales 12,000 6,400
Less: Selling & Distribution exp. 267 133
(Refer working note) (` 400 × 2/3) (` 400 × 1/3)
Less: Subsequent cost 5,000 3,000
Share of Joint cost 6,733 3,267
So, Joint cost of manufacture is to be distributed to A & B in the ratio of 6733 : 3267
Statement showing Cost of Production of A and B
Elements of cost Joint Cost Subsequent Cost Total Cost
A B A B A B
Material 3,367 1,633 3,000 1,500 6,367 3,133
Labour 2,020 980 1,400 1,000 3,420 1,980
Overheads 1,346 654 600 500 1,946 1,154
Cost of production 11,733 6,267
Working Note:
Calculation of Selling and Distribution Expenses
Particulars (`)
Total Sales Revenue (` 16,000 + ` 8,000) 24,000
Less: Estimated Profit (` 4,000 + ` 1,600) (5,600)
Cost of Sales 18,400
Less: Cost of production:
- Joint Costs (10,000)
- Subsequent costs (` 5,000 + ` 3,000) (8,000)
Selling and Distribution expenses (Balancing figure) 400
(b) Statement Showing “Operating Loss”
If Plant is Continued If Plant is Shutdown
Sales 7,60,000 ---
Less: Variable Cost 5,70,000 ---
Contribution 1,90,000 ---

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Less: Fixed Cost 3,50,000 1,30,000

Less: Additional Cost --- 15,000
Operating Loss 1,60,000 1,45,000
Decision on Shut Down
A comparison of loss figures (indicated as above) points out that loss is reduced by `15,000
(` 1,60,000 - ` 1,45,000) if plant is shut down.
→ Accordingly, plant should be Shut Down.
`3,50,000 - `1,45,000
Shut Down Point = = 1,02,500 units
`8 - `6

Capacity Level at Shut Down Point (%)

At 100% Level – Production Capacity
 95,000units 
= 1,18,750  
 0.80 

Capacity Level at Shut Down Point

 1,02,500units 
= 86.32%  
 1,18,750units 

(c) (i) Economic Order Quantity (E.O.Q)

2×Annual requirement of 'Rex' × Ordering cost per order

=
Annual carrying cost per unit per annum

2  60,000units  ` 800 9,60,00,000

= = = 8,000 units
` 10 15% `1.5

(ii) Re-order Level = Safety Stock + (Normal daily Usage × Re-order period)
60,000units
= 600 + ( × 10 days)
300days

= 600 + 2,000
= 2,600 units
(iii) Maximum Stock Level = E.O.Q (Re-order Quantity) + Safety Stock
= 8,000 units + 600 units
= 8,600 units
1
(iv) Average Stock Level = Minimum Stock level + Re-order Quantity
2

1
= 600* + 8,000 units
2

= 4,600 units

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OR
MaximumStock level + MinimumStock level
Average Stock Level =
2
8,600units + 600units
=
2
= 4,600 units
* Minimum Stock Level = Re-order level – (Normal daily usage × Re-order period)
60,000units
= 2,600 – ( × 10 days)
300days
= 2,600 – 2,000
= 600 units
OR
Minimum Stock Level = Safety Stock level = 600 units
(d) (i) Labour Turnover Rate (Separation method)
No. of workers separated
=
Average no. of workersonroll
5 40
Or, =
100 Average no. of workerson roll
Or, Average no. of workers on roll = 800
(ii) Labour Turnover Rate (Replacement method)
No. of workers replaced
=
Average no. of workerson roll

8 No. of workers replaced

Or, =
100 800
Or, No. of workers replaced = 64
(iii) Labour Turnover Rate (Flux Method)
No. of Separations + No. of accessions (newrecruitments)
=
Average No. of workerson roll
13 40 + No. of accessions (New recruitments)
Or, =
100 800
Or, 100 (40 + No. of Accessions) = 10,400
Or, No. of new accessions = 64
(iv) No. of workers at the beginning of the year
Let workers at the beginning of the year were ‘X’
Workersat thebegining + Workersat the end
Average no. of workers on roll =
2
X + ( X + New accessions − Separations)
800 =
2
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X + ( X + 64 − 40)
800 =
2
X + ( X + 24)
800 =
2
2X = 1,600 – 24 or, X = 788 workers
2. (a) Statement Showing “Budgeted Cost per unit of the Product”
Activity Activity Cost Activity Driver No. of Units of Activity Deposits Loans Credit
(Budgeted) Activity Driver Rate Cards
(`) (Budget) (`)
ATM Services 8,00,000 No. of ATM 2,00,000 4.00 6,00,000 --- 2,00,000
Transaction
Computer 10,00,000 No. of Computer 20,00,000 0.50 7,50,000 1,00,000 1,50,000
Processing processing
Transaction
Issuing 20,00,000 No. of Statements 5,00,000 4.00 14,00,000 2,00,000 4,00,000
Statements
Customer 3,60,000 Telephone 7,20,000 0.50 1,80,000 90,000 90,000
Inquiries Minutes
Budgeted 41,60,000 29,30,000 3,90,000 8,40,000
Cost
Units of Product (as estimated in the budget period) 58,600 13,000 14,000
Budgeted Cost per unit of the product 50 30 60

Working Note
Activity Budgeted Remark
Cost (`)
ATM Services:
(a) Machine Maintenance 4,00,000 − All fixed, no change.
(b) Rents 2,00,000 − Fully fixed, no change.
(c) Currency Replenishment Cost 2,00,000 − Doubled during budget period.
Total 8,00,000
Computer Processing 2,50,000 − ` 2,50,000 (half of `5,00,000) is
fixed and no change is expected.
7,50,000 − ` 2,50,000 (variable portion) is
expected to increase to three
Total 10,00,000 times the current level.
Issuing Statements 18,00,000 − Existing.
2,00,000 − 2 lakh statements are expected to
Total 20,00,000 be increased in budgeted period.
For every increase of one lakh
statement, one lakh rupees is the
budgeted increase.

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Computer Inquiries 3,60,000 − Estimated to increase by 80%

during the budget period.
Total 3,60,000 (` 2,00,000 x 180%)

(b) (i) Process- A Account

Particulars Units Amount Particulars Units Amount
(`) (`)
To Inputs 40,000 3,60,000 By Normal wastage 2,000 30,000
(2,000 units × `15)
To Material --- 2,42,000 By Abnormal loss A/c 1,000 27,000
(1,000 units × `27)
To Direct wages --- 2,58,000 By Process- B 29,600 7,99,200
(29,600 units × `27)
To Manufacturing Exp. --- 1,96,000 By Profit & Loss A/c 7,400 1,99,800
(7,400 units × `27)
40,000 10,56,000 40,000 10,56,000
`10,56,000 - `30,000
Cost per unit = = ` 27 per unit
40,000units - 2,000units
Normal wastage = 40,000 units × 5% = 2,000 units
Abnormal loss = 40,000 units – (37,000 units + 2,000 units) = 1,000 units
Transfer to Process- B = 37,000 units × 80% = 29,600 units
Sale = 37,000 units × 20% = 7,400 units
Process- B Account
Particulars Units Amount Particulars Units Amount
(`) (`)
To Process- A A/c 29,600 7,99,200 By Normal wastage 2,960 59,200
(2,960 units × ` 20)
To Material --- 2,25,000 By Profit & Loss A/c 27,000 12,96,000
(27,000 units × ` 48)
To Direct Wages --- 1,90,000
To Manufacturing Exp. --- 1,23,720
To Abnormal Gain A/c 360 17,280
(360 units × ` 48)
29,960 13,55,200 29,960 13,55,200
`13,37,920 - `59,200
Cost per unit = = ` 48 per unit
29,600units - 2,960units
Normal wastage = 29,600 units × 10% = 2,960 units
Abnormal gain = (27,000 units + 2,960 units) – 29,600 units = 360 units

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(ii) Costing Profit & Loss Account

Particulars Amount Particulars Amount
(`) (`)
To Process- A A/c 1,99,800 By Sales:
To Process- B A/c 12,96,000 - Process-A 2,73,800
(7,400 units × ` 37)
To Abnormal loss A/c 12,000 - Process- B 16,47,000
(27,000 units × ` 61)
To Indirect Expenses 4,48,080 By Abnormal gain 10,080
By Net loss 25,000
19,55,880 19,55,880
Working Notes:
Normal wastage (Loss) Account
Particulars Units Amount (`) Particulars Units Amount (`)
To Process- A A/c 2,000 30,000 By Abnormal Gain A/c 360 7,200
(360 units × ` 20)
To Process- B A/c 2,960 59,200 By Bank (Sales) 4,600 82,000

4,960 89,200 4,960 89,200

Abnormal Loss Account

Particulars Units Amount Particulars Units Amount
(`) (`)
To Process- A A/c 1,000 27,000 By Bank A/c 1,000 15,000
(1,000 units × ` 15)
By Profit & Loss A/c --- 12,000
1,000 27,000 1,000 27,000

Abnormal Gain Account

Particulars Units Amount Particulars Units Amount
(`) (`)
To Normal loss A/c 360 7,200 By Process- B A/c 360 17,280
(360 units × ` 20)
To Profit & Loss A/c 10,080
360 17,280 360 17,280
3. (a) Cost Sheet of M/s A&R Brothers for the month ended March 2023:
Particulars Amount (`) Amount (`)
(i) Materials consumed:
- Opening stock 6,06,000
- Add: Purchases 28,57,000
34,63,000

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- Less: Closing stock (7,50,000) 27,13,000

Direct wages 37,50,000
(ii) Prime cost 64,63,000
Factory expenses 21,25,000
85,88,000
Add: Opening W-I-P 12,56,000
Less: Closing W-I-P (14,22,000)
Factory cost 84,22,000
Less: Sale of scrap (26,000)
(iii) Cost of Production 83,96,000
Add: Opening stock of finished goods 3,59,000
Less: Closing stock of finished goods (3,09,000)
(iv) Cost of Goods Sold 84,46,000
Office and administration expenses 10,34,000
Selling and distribution expenses 7,50,000
(v) Cost of Sales 1,02,30,000
(vi) Profit (balancing figure) 31,70,000
Sales 1,34,00,000
(b) Working Notes:
(1) Calculation of number of patient days
35 Beds × 150 days = 5,250
25 Beds × 80 days = 2,000
Extra beds = 750
Total = 8,000
Statement of Profitability
Particulars Amount Amount
Income for the year (` 2,000 per patient per day × 8,000 1,60,00,000
patient days)
Variable Costs:
Doctor Fees (` 2,50,000 per month × 12) 30,00,000
Food to Patients (Variable) 8,80,000
Other services to patients (Variable) 3,00,000
Laundry charges (Variable) – (`) 6,00,000
Medicines (Variable) – (`) 7,50,000
Bed Hire Charges (`100 × 750 Beds) 75,000
Total Variable costs 56,05,000
Contribution 1,03,95,000
Fixed Costs:
Rent (` 75,000 per month × 12) 9,00,000
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Supervisor (2 persons × `25,000 × 12) 6,00,000

Nurses (4 persons × ` 20,000 × 12) 9,60,000
Ward Boys (4 persons × ` 5,000 × 12) 2,40,000
Repairs (Fixed) 81,000
Other fixed expenses – (`) 10,80,000
Administration expenses allocated – (`) 10,00,000
Total Fixed Costs 48,61,000
Profit 55,34,000
(i) Calculation of Contribution per Patient- day
Total Contribution – ` 1,03,95,000
Total Patient days – 8,000
Contribution per Patient -day – ` 1,03,95,000 / 8,000 = ` 1,299.375
(ii) Breakeven Point = Fixed Cost / Contribution per Patient- day
= ` 48,61,000 / `1,299.375
= 3,741 patient days
4. (a) (i) Statement Showing Cost Elements Equivalent Units of Performance and the Actual
Cost per Equivalent Unit
Detail of Detail Details Equivalent Units
Returns of Input Output Labour Overheads
Units Units Units % Units %
Returns in 200 Returns 900 900 100 900 100
Process at Completed in
Start July
Returns 825 Returns in 125 100 80 100 80
Started in July Process at the
end of July

1,025 1,025 1,000 1,000

Costs: Labour (`) Overhead (`)

From previous month 12,000 5,000
During the month 1,78,000 90,000
Total Cost 1,90,000 95,000
Cost per Equivalent Unit 190.00 95.00
(ii) Actual cost of returns in process on July 31:
Numbers Stage of Rate per Return Total
Completion (`) (`)
Labour 125 returns 0.80 190.00 19,000
Overhead 125 returns 0.80 95.00 9,500
28,500
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(iii) Standard Cost per Return:

Labour 5 Hrs × ` 40 per hour = `200
Overhead 5 Hrs × ` 20 per hour = `100
` 300
Budgeted volume for July = ` 98,000 / 1000 = 980 Returns
Actual labour rate = ` 178000 / 4000 = `44.50
(iv) Computation of Variances:
Statement Showing Output (July only) Element Wise Labour Overhead
Actual performance in July in terms of equivalent units as
Calculated above 1,000 1,000
Less: Returns in process at the beginning of July in
terms of equivalent units i.e. 25% of returns (200) 50 50
950 950
Variance Analysis:
Labour Rate Variance
= Actual Time × (Standard Rate – Actual Rate)
= Standard Rate × Actual Time – Actual Rate × Actual Time
= ` 40 × 4,000 hrs. – ` 1,78,000 = ` 18,000(A)
Labour Efficiency Variance
= Standard Rate × (Standard Time – Actual Time)
= Standard Rate × Standard Time – Standard Rate × Actual Time
= ` 40 × (950 units × 5 hrs.) – ` 40 × 4,000 hrs.
= ` 30,000(F)
Overhead Expenditure or Budgeted Variance
= Budgeted Overhead – Actual Overhead
= ` 98,000 – ` 90,000
= ` 8,000(F)
Overhead Volume Variance
= Recovered/Absorbed Overhead – Budgeted Overhead
= 950 Units × 5 hrs. × `20 – ` 98,000 = ` 3,000(A)
(b) (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

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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)
- - - - -
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:
Selling price
Total Cost =
(100% + Percentage of profit)
`1,66,650
*For Job 101= = ` 1,51,500
(100% + 10%)

`1,28,250
**For Job 102= = ` 1,06,875
(100% + 20%)
(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

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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
(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
 Total Cost 
Selling price  
 87.5%  80,000
5. (a) (i) Preparation of Production Budget (in units)
October November December January
Demand for the month (Nos.) 40,000 35,000 45,000 60,000
Add: 20% of next month’s demand 7,000 9,000 12,000 13,000
Less: Opening Stock (9,500) (7,000) (9,000) (12,000)
Vehicles to be produced 37,500 37,000 48,000 61,000
(ii) Preparation of Purchase budget for Part-X
October November December
Production for the month (Nos.) 37,500 37,000 48,000
Add: 40% of next month’s 14,800 19,200 24,400
production (40% of 37,000) (40% of 48,000) (40% of 61,000)
52,300 56,200 72,400
No. of units required for production 2,09,200 2,24,800 2,89,600
(52300 × 4 units) (56200 × 4 units) (72,400 × 4 units)
Less: Opening Stock (48,000) (59,200) (76,800)
(14800 × 4 units) (19200 × 4 units)
No. of units to be purchased 1,61,200 1,65,600 2,12,800

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

October November December Total
Sales in nos. 40,000 35,000 45,000 1,20,000
Net Selling Price per unit* 7,28,535 7,28,535 7,28,535
Sales Revenue (` in lakh) 2,91,414 2,54,987.25 3,27,840.75 8,74,242
Less: Cost of Sales (` in lakh) 2,28,560 1,99,990.00 2,57,130.00 6,85,680
(Sales unit × Cost per unit)
Gross Profit (` in lakh) 62,854 54,997.25 70,710.75 1,88,562

* Net Selling price unit = ` 8,57,100 – 15% commission on ` 8,57,100 = `7,28,535.

(b) (i) Statement Showing “Calculation of Contribution/ unit”
P Q R S
(`) (`) (`) (`)
Selling Price …(A) 23.88 28.68 55.08 47.88
Variable Cost
Direct Material 10.08 13.20 30.48 24.96
Direct Labour 4.08 4.08 6.72 6.36
Variable Overheads 1.44 1.44 2.40 2.16
Total Variable Cost …(B) 15.60 18.72 39.60 33.48
Contribution per unit …(A) - (B) 8.28 9.96 15.48 14.40
(ii) Calculation of Machine Hours/ unit
Machine Hours per unit 1.20 1.20 2.00 1.80
(iii) Machine Hours Required
Machine Hours per unit 1,44,000* 2,23,200 % 3,42,000 @ 1,78,200#
Total 8,87,400
* - (1,20,000 × 1.2); % - (1,86,000 × 1.2); @ - (1,71,000 × 2); # - (99,000 × 1.8)
(iv) Total Machine Hours Available 8,15,000. Hence, it is a key factor. Product ‘S’ is to be
manufactured, since it is not available with sub-contractor/ market.
(v) Statement Showing “Make or Buy for Products P, Q, R”
P Q R
(`) (`) (`)
Sub-Contractor/ Buy Price 21.36 24.00 48.00
Less: Variable Manufacturing Cost 15.60 18.72 39.60
Saving in Cost 5.76 5.28 8.40
Saving in Cost per machine hour 4.8 4.4 4.20
Ranking I II III

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(vi) Statement Showing “Best Product Mix”

Product Units Machine Hour/ Total Machine Hours
Unit
S 99,000 1.8 1,78,200
P 1,20,000 1.2 1,44,000
Q 1,86,000 1.2 2,23,200
R (Balance) 1,34,800 2.0 2,69,600
Total 8,15,000
Balance quantity of R to be purchased 36,200 units (1,71,000 – 1,34,800).
(vii) Profitability Statement
Product No of Units Contribution/unit Total Cont.
(`) (`)
P (Mfg) 1,20,000 8.28 9,93,600
Q (Mfg) 1,86,000 9.96 18,52,560
R (Mfg) 1,34,800 15.48 20,86,704
R (Buy) 36,200 7.08 2,56,296
(`55.08 - `48.00)
S (Mfg) 99,000 14.40 14,25,600
Total Contribution 66,14,760
Less: Fixed Overheads 46,84,000
Net Profit 19,30,760
6. (a) Difference between Cost Control and Cost Reduction
Cost Control Cost Reduction
1. Cost control aims at maintaining the 1. Cost reduction is concerned with reducing
costs in accordance with the costs. It challenges all standards and
established standards. endeavours to better them continuously.
2. Cost control seeks to attain lowest 2. Cost reduction recognises no condition as
possible cost under existing conditions. permanent, since a change will result in
lower cost.
3. In case of Cost Control, emphasis is on 3. In case of cost reduction, it is on present
past and present. and future.
4. Cost Control is a preventive function. 4. Cost reduction is a corrective function. It
operates even when an efficient cost
control system exists.
5. Cost control ends when targets are 5. Cost reduction has no visible end.
achieved.
(b) (i) Standard Cost Centre: Cost Centre where output is measurable and input required for the
output can be specified. Based on a well-established study, an estimate of standard units of
input to produce a unit of output is set. The actual cost for inputs is compared with the standard
cost. Any deviation (variance) in cost is measured and analysed into controllable and
uncontrollable cost. The manager of the cost centre is expected to comply with the standard
and held responsible for adverse cost variances. The input-output ratio for a standard cost
centre is clearly identifiable.
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(ii) Discretionary Cost Centre: The cost centre whose output cannot be measured in financial
terms; thus input-output ratio cannot be defined. The cost of input is compared with allocated
budget for the activity. Examples of discretionary cost centres are Research & Development
department, Advertisement department where output of these department cannot be
measured with certainty and co-related with cost incurred on inputs.
(c) The main points which distinguish job costing and process costing are as below:
Job Costing Process Costing
(i) A Job is carried out or a product is The process of producing the product has a
produced by specific orders. continuous flow and the product produced is
homogeneous.
(ii) Costs are determined for each job. Costs are compiled on time basis i.e., for production
of a given accounting period for each process or
department.
(iii) Each job is separate and independent Products lose their individual identity as they are
of other jobs. manufactured in a continuous flow.
(iv) Each job or order has a number and The unit cost of process is an average cost for the
costs are collected against the same period.
job number.
(v) Costs are computed when a job is Costs are calculated at the end of the cost period.
completed. The cost of a job may be The unit cost of a process may be computed by
determined by adding all costs against dividing the total cost for the period by the output of
the job. the process during that period.
(vi) As production is not continuous and Process of production is usually standardized and is
each job may be different, so more therefore, quite stable. Hence control here is
managerial attention is required for comparatively easier.
effective control.
(d) Cost plus contracts have the following advantages and disadvantages:
Advantages:
(i) The Contractor is assured of a fixed percentage of profit. There is no risk of incurring any loss
on the contract.
(ii) It is useful specially when the work to be done is not definitely fixed at the time of making the
estimate.
(iii) Contractee can ensure himself about ‘the cost of the contract’, as he is empowered to examine
the books and documents of the contractor to ascertain the veracity of the cost of the contract.
Disadvantages - The contractor may not have any inducement to avoid wastages and effect
economy in production to reduce cost.

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