Cost Accounting: Problems and Solutions 9789389633412

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This book is complementary to the main book ‘Cost Accounting: Theory and Practice’ and all exercises which are given at the end of each chapter are solved in this book. Hence, readers are advised to refer both the books to develop confidence and mastery of the subject. This book will be useful for the students pursuing the courses of B.Com., B.C.S., B.B.A., M.Com., M.C.S., M.B.A., M.C.A., P.G.D.M., P.G.D.F.M., C.A., I.C.W.A. and A.C.S. since problems asked in various universities and professional courses are included. Highlights: • Simple and lucid style of presentation • Self-explanatory notes at appropriate places • Step-by-step approach in solving problems It contains 469 problems and solutions with explanatory notes and hints at appropriate places. By the same authors: – Cost Accounting: Theory & Practice – Cost Accounting: Fundamentals & Elements – Cost Accounting: Methods & Techniques. R. Palaniappan, formerly Head, Department of Commerce, Government Arts College, Salem, has more than 33 years of experience in teaching Financial Accounting, Cost Accounting and Management Accounting both at undergraduate and postgraduate levels. He is a visiting faculty at the Southern Chapter of Cost and Works Accountants of India, and Salem Chapter of the Institute of Company Secretaries of India. He has a wide experience in coaching students for C.A., I.C.W.A. and ACS courses. He is member, board of studies/examiner in various institutes/ autonomous colleges and professional bodies. Dr. N. Hariharan is Senior Fellow – Faculty of Accounting and Finance, Botho University, Gaborone, Botswana. He is the Founder Chairman and Hon. Director of CEAT – Centre for Excellence in Accounting and Taxation. [www.ce-at.in], Pune. He is also Director CIMA Programme, Chartered Institute of Management Accountants, London; and CEAT Study Centre, Pune. He is into academics for more than 18 years, serving in various capacities at various reputed institutes teaching Core Finance and Commerce subjects at undergraduate, postgraduate and professional course levels. He has attended and presented papers at various state-, national- and international-level seminars. He has presented a proposed research paper to Cambridge University, UK. He is a Visiting Faculty at the Institute of Company Secretaries of India, Southern India Regional Council, Chennai, and in various B-Schools in Pune, Maharashtra. He is member, board of studies/examiner in various institutes/autonomous colleges and professional bodies. He is part of the Editorial Committee of various Management Journals published from India and the USA. He specialises in the field of Taxation, Accountancy and Finance. He has also authored two books on Income Tax. 978-93-89633-41-2

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COST ACCOUNTING PROBLEMS AND SOLUTIONS

COST ACCOUNTING

PROBLEMS AND SOLUTIONS

R. Palaniappan Former - Head Department of Commerce Government Arts College, Salem Visiting Faculty, Institute of Cost and Works Accountants of India and Institute of Company Secretaries of India [Salem Chapter]

Dr. N. Hariharan (M. Com., M. Phil., Ph.D.) Senior Fellow – Faculty of Accounting and Finance Botho University, Gaborone, Botswana & Founder Chairman and Hon. Director CEAT – Centre for Excellence in Accounting and Taxation, Pune www.ce-at.in Director CIMA Programme, CEAT – Listed Learning Partner, Pune (Chartered Institute of Management Accountants, London) Former Vice-Principal Shree Chandraprabhu Jain College, Chennai Visiting Faculty Institute of Company Secretaries of India Southern India Regional Council, Chennai

©Copyright 2020 I.K. International Pvt. Ltd., New Delhi-110002. This book may not be duplicated in any way without the express written consent of the publisher, except in the form of brief excerpts or quotations for the purposes of review. The information contained herein is for the personal use of the reader and may not be incorporated in any commercial programs, other books, databases, or any kind of software without written consent of the publisher. Making copies of this book or any portion for any purpose other than your own is a violation of copyright laws. Limits of Liability/disclaimer of Warranty: The author and publisher have used their best efforts in preparing this book. The author make no representation or warranties with respect to the accuracy or completeness of the contents of this book, and specifically disclaim any implied warranties of merchantability or fitness of any particular purpose. There are no warranties which extend beyond the descriptions contained in this paragraph. No warranty may be created or extended by sales representatives or written sales materials. The accuracy and completeness of the information provided herein and the opinions stated herein are not guaranteed or warranted to produce any particulars results, and the advice and strategies contained herein may not be suitable for every individual. Neither Dreamtech Press nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Trademarks: All brand names and product names used in this book are trademarks, registered trademarks, or trade names of their respective holders. Dreamtech Press is not associated with any product or vendor mentioned in this book. ISBN: 978-93-89633-41-2 EISBN: 978-93-89795-35-6

Edition: 2020

Preface Cost Accounting: Problems and Solutions has been brought out especially for students and teachers who want to glance as “how?” solutions are carried for various models of problems which are usually worked at undergraduate, postgraduate and professional courses. This book is complementary to the main book “Cost Accounting: Theory and Practice”. Hence, students are advised to refer both the books to develop confidence and mastery of the subject. All exercises which are given at the end of each chapter in the main book “Cost Accounting – Theory and Practice” are solved in this book. This book has a total of 20 chapters with 457 problems with solutions with explanatory notes and hints at appropriate places. The following are the highlights of the book: • Simple and lucid style of presentation • Self-explanatory notes at appropriate places • Step-by-step approach in solving problems This book will be useful for the students pursuing the courses of B.Com, B.C.S, B.B.A, M.Com, MCS, MBA, MCA, PGDM, PGDFM, CA, ICWA and ACS since problems asked in various universities and professional courses are included. To have good understanding of theoretical concepts readers are requested to go through the book “Cost Accounting: Theory and Practice”. R. Palaniappan Dr. N. Hariharan

Acknowledgements Special thanks to our PGDIIBM (Finance) students Ms. Meghna Kumari and Ms. Sabita for helping towards proofreading in this edition. We also thank all other students who have helped us to bring out this edition successfully. We thank our family members for cooperating with us to make this attempt a success. Finally, we wish to thank all others who were helpful to us in some way or the other to complete this project successfully. WE WELCOME YOUR COMMENTS AND SUGGESTIONS FOR FURTHER IMPROVEMENT OF THE BOOK R. Palaniappan Mobile: +91 9442140387 Mail: [email protected] Dr. N. Hariharan Mobile: +91 9405115574/+91 9960522279 Mail: [email protected]/[email protected]/ [email protected]

Contents Preface Acknowledgements 1. Cost Analysis: Cost Classification and Cost Sheet

v vii 1

2. Materials Cost Control

20

3. Materials Costing

39

4. Labour Cost Control

59

5. Methods of Wage Payment

74

6. Overheads–Nature and Classification

98

7. Accounting for Overheads and Control

106

8. Administration, Selling and Distribution Overheads

152

9. Cost Ledger

156

10. Reconcitiation of Cost and Financial Accounts

172

11. Integral Accounting

180

12. Output Costing/Unit Costing/ Single Costing

192

13. Job Costing and Batch Costing

225

14. Contract Costing/Terminal Costing

245

15. Process Costing

295

16. Joint Products, By-products and Main Products Costing

344

17. Service Costing or Operating Costing

366

18. Marginal Costing

404

19. Budget and Budgetary Control

446

20. Standard Costing and Variance Analysis

473

1

Chapter

Cost Analysis: Cost Classification and Cost Sheet

A. Short Answer Type Questions: 1. Compute materials consumed from the following:

Opening stock of materials Purchase of materials Carriage on purchases Sale of materials scrap Closing stock of materials Solution:

20,000 1,25,000 15,000 7,000 18,000

Computation of materials consumed:

Opening stock materials Add: Purchase of materials Carriage on purchase Less: Closing stock of materials Sale of materials scrap Materials consumed

20,000 1,25,000 15,000 1,60,000 18,000 7,000

25,000 1,35,000

2. Compute materials consumed from the following:

Purchase of direct materials Carriage inward Carriage outward Sale of factory scrap Sale of direct materials scrap

3,50,000 27,000 18,000 10,000 15,000 Contd...

2 Cost Accounting Contd...

Materials returned to supplier Indirect materials Opening stock of direct materials Closing stock of direct materials Solution:

30,000 25,000 50,000 40,000

Computation of materials consumed:

Purchase of direct materials Add: Opening stock of direct materials Carriage inward Less: Closing stock of direct materials Sales of direct materials scrap Materials returned to supplier Materials consumed

3,50,000 50,000 27,000 4,27,000 40,000 15,000 30,000

85,000 3,42,000

3. Compute prime cost:

Opening stock of materials Purchase of materials Import duty and clearing charges Other purchase expenses Closing stock of materials Factory wages Factory overheads Royalty paid on production Hire charges for special machinery Solution:

35,000 4,10,000 1,50,000 25,000 30,000 2,40,000 1,60,000 1,20,000 40,000

Computation of prime cost:

Purchase of materials Add: Opening stock of materials Import duty and clearing charges Other purchase expenses

4,10,000 35,000 1,50,000 25,000 6,20,000

Contd...

Cost Analysis: Cost Classification and Cost Sheet

3

Contd...

Less: Closing stock of materials Factory wages Direct Expenses: Royalty paid Hire charge for special machinery Prime cost

30,000 –

5,90,000 2,40,000

1,20,000 40,000 –

1,60,000 9,90,000

4. Find the gross cost of goods processed during the period:

Prime cost Factory overheads Opening stock of work-in-progress Closing stock of work-in-progress Office overheads Solution:

80,000 45,000 30,000 25,000 70,000

Gross cost of goods processed

Prime cost Factory overheads Add: Opening stock of work-in-progress Gross cost of goods processed

80,000 45,000 1,25,000 30,000 1,55,000

5. Find the net works cost:

Prime cost Production overheads Opening stock of work-in-progress Closing stock of work-in-progress Administration overheads Solution:

1,50,000 60,000 27,000 30,000 40,000

Net works cost

Prime cost Production overheads

1,50,000 60,000

Contd...

4 Cost Accounting Contd...

2,10,000 Add: Opening stock of work-in-progress

27,000

Gross works cost

2,37,000

Less: Closing stock of work-in-progress

30,000

Net work cost

2,07,000

6. Prepare a cost sheet from the following:

Raw materials consumed

80,000

Wages

20,000

Works expenses charged at 100% of wages, office overheads charged at 25% on works cost and selling overheads at 10% on works cost. Solution: Cost sheet

Raw materials consumed

80,000

Wages

20,000 Prime cost

1,00,000

Works expenses: 100% of wages

20,000 Works cost

1,20,000

Office overheads: 25% on works cost

30,000 Cost of production

1,50,000

Selling overheads: 10% on works cost

12,000

Total cost/Cost of sales

1,62,000

7. Calculate profit and sales from the following:

Cost of sales Profit 20% on sales

5,00,000

Cost Analysis: Cost Classification and Cost Sheet

Solution:

5

Computation of profit and sales:

Cost of sales Profit: 20% on sales (or) 20/80 on cost of sales Sales

5,00,000 1,25,000 6,25,000

8. In a factory a standard product is manufactured. From the following particulars prepare a cost sheet showing total cost and profit made:

Raw materials consumed Labour

30,000 60,000

Works overhead is charged at 40% of works cost and office overheads is taken at 20% of total cost. The standard product sold during the period is 180 units at ` 1200 each. (B.Com., Bharathidasan University) Note: 1. Works cost = 40/60 on prime cost 2. Office overheads = 20/80 on works cost. Solution:

Cost sheet

Raw materials consumed Labour Prime Cost

30,000 60,000 90,000

Works cost

60,000 1,50,000

Works overhead: 40% of works cost (or) 40/60 on prime cost Office overheads: 20% on total cost (or) 20/80 on works cost Cost of production/Total cost Profit (bal.fig) Sales (180 × 1200)

37,500 1,87,500 28,500 2,16,000

9. The following information is taken from the records of X Ltd. for the year ending 31.3.2010: Raw materials consumed – ` 20,000 Direct wages – ` 16,000

6 Cost Accounting

Production overheads 150% of direct wages Office overheads 25% on works cost. Selling overheads is ` 2 per unit sold. Opening stock of finished goods – 500 units valued at ` 4,000 Units produced during the period – 10,000 Units sold during the period – 9,500 units at ` 10 per unit. Prepare a cost sheet. Solution: Cost sheet Units

Total Cost ( )

Cost per unit ( )

Prime cost

10,000 – 10,000

20,000 16,000 36,000

2.00 1.60 3.60

Works cost

– 10,000

24,000 60,000

2.40 6.00

– 10,000

15,000 75,000

1.50 7.50

500 10,500

4,000 79,000

8.00 7.52

1,000

7,500

7.50

9,500

71,500

7.53

–

19,000

2.00

9,500 – 9,500

90,500 4,500 95,000

9.53 0.47 10.00

Particulars

Raw materials consumed Direct wages Production overheads: 150% of Direct wages Office overheads: 25% on works cost Cost of production Add: Opening stock of finished goods Less: Closing stock of finished goods (1,000 units × ` 7.50) Cost of goods sold Selling overheads: (9,500 units × ` 2) Cost of Sales Profit (bal. Fig) Sales

Note: Closing stock (units) = Opening stock (unit) + Units produced – Units sold = 500 + 10,000 – 9,500 = 1,000

Cost Analysis: Cost Classification and Cost Sheet

7

B. Long Answer Type Questions 1. Simple cost sheet- with detailed cost elements From the following particulars taken from the books of United Engineering Ltd., prepare a cost sheet for the year ending 31.3.2010.

Stock of materials on 1.4.2009

65,700

Stock of materials on 31.3.2010

48,500

Purchase of materials

3,79,000

Productive wages

2,83,000

Hire charges and maintenance of a special equipment

46,000

Royalty paid

84,000

Carriage on purchases

21,500

Carriage outward

24,900

Indirect materials

34,000

Indirect wages

30,000

Foreman salary

20,000

Depreciation, repairs and maintenance: – Of plant and machinery

42,000

– Of office furniture and equipment

27,500

Drawing office salaries

18,000

Motive power, fuel and oil

39,000

Lubricants and cotton waste

13,400

Office salaries

52,000

Printing and stationery

11,300

Warehouse expenses

26,000

Advertisement

31,600

Travelling expenses

– General

12,700

– Sales Promotion

17,500

Samples and gifts

14,000

Bad debts written off

10,000

General manager salary

60,000

General managers salary to be apportioned in the ratio of 4:3:3 to factory, office and sales departments. Sale of finished goods amounted to ` 15,00,000.

8 Cost Accounting

Solution:

Cost sheet for the year ending 31.3.2010

Materials consumed Purchase of materials Add: Stock of materials on 1.4.2009 Carriage on purchases

3,79,000 65,700 21,500 4,66,200 48,500

Less: Stock materials on 31.3.2010 Productive wages Direct expenses: Hire charges and maintenance of equipment Royalty paid

46,000 84,000 Prime cost

Works overhead: Indirect materials Indirect wages Foreman salary Depreciation, repairs and maintenance of plant machinery Drawing office salaries Motive power, fuel and oil Lubricants and cotton waste General manager salary (60,000 × 4/10)

1,30,000 8,30,700

34,000 30,000 20,000 42,000

Work cost Office overheads: Depreciation, repairs and maintenance of office furniture and equipment Office salaries Printing and stationery Travelling expenses – General General manager’s salary (60,000 × 3/10)

18,000 39,000 13,400 24,000 –

2,20,400 10,51,100

27,500 52,000 11,300 12,700 18,000 Cost of production

Selling and distribution overheads: Carriage outward Warehouse expenses Advertisement

4,17,700 2,83,000

1,21,500 11,72,600

24,900 26,000 31,600 Contd...

Cost Analysis: Cost Classification and Cost Sheet

9

Contd...

Travelling expenses – Sales promotion Samples and gifts General manager salary (60,000 × 3/10) Bad debts written off

17,500 14,000 18,000 10,000 –

Total cost/cost of sales Profit (bal. Fig) Sales

– –

1,42,000 13,14,600 1,85,400 15,00,000

2. Simple cost sheet with opening and closing stocks From the following particulars, prepare a cost sheet for the year ending 31.3.2010: 1.4.2009

31.3.2010

Stock of materials

22,750

26,300

Stock of work-in-progress

18,200

15,700

Stock of finished goods

37,600

34,500

Purchase of raw materials

6,20,000

Carriage inward

21,400

Factory manager salary

25,000

Depreciation of plant and machinery

27,100

Office rent, rates and insurance

14,600

Salesman travelling expenses

21,900

Carriage outward

13,800

Debenture interest

16,500

Director’s fee

24,000

General manager salary

25,000

Transfer to general reserve

20,000

Wages

3,70,000

Power expenses

1,15,000

Office salaries

28,000

General expenses

17,300

Dividend paid

35,000

Warehouse expenses

29,000 Contd...

10 Cost Accounting Contd...

Income tax

41,000

Goodwill written off

10,000

Bank charges

6,000

Printing and stationery

12,500

Sales for the year Solution:

16,00,000

Cost sheet for the year ending 31.3.2010

Materials consumed: Purchase of materials

6,20,000

Add: Stock of materials on 1.4.2009

22,750

Carriage inward

21,400 6,64,150

Less: Stock materials on 31.3.2010

26,300

wages

6,37,850 3,70,000

Prime cost

10,07,850

Factory overheads: Factory manager salary

25,000

Depreciation of plant and machinery

27,100

Power expenses Add: Stock of work-in-progress 1.4.2009

1,15,000

1,67,100

–

11,74,950

–

18,200 11,93,150

Less: Stock of work-in-progress on 31.3.2010

15,700 Works cost

11,77,450

Office and administration overheads: Office rent, rates and insurance

14,600

Director’s fees

24,000

General manager’s salary

25,000

Office salaries

28,000

General expenses

17,300

Bank charges Printing and stationery

6,000 12,500

1,27,400 Contd...

Cost Analysis: Cost Classification and Cost Sheet

11

Contd...

Cost of production

–

Add: Stock of finished goods on 1.4.2009

13,04,850 37,600 13,42,450

Less: Stock of finished goods on 31.3.2010

34,500 Cost of goods sold

–

13,07,950

Selling and distribution overheads: Salesman travelling expenses

21,900

Carriage outward

13,800

Warehouse expenses

29,000 Cost of sales

–

Profit (bal. fig)

64,700 13,72,650 2,27,350

Sales

–

16,00,000

3. Dev Ltd. provides the following particulars for the month of August, 2009. Prepare a cost sheet: 1.8.2009

31.8.2009

Stock of raw materials

75,000

60,000

Stock of work-in-progress

27,000

36,500

Stock of finished goods

50,000

62,000

Transactions during the month of August 2009:

Purchase of raw materials

2,50,000

Factory expenses

82,000

Depreciation of plant and machinery

41,000

Selling and distribution overheads

27,500

Direct labour

1,70,000

Sale of factory scrap

16,000

Office overheads

34,500

Sales

6,00,000

12 Cost Accounting

Solution:

Cost sheet for the month of August 2009

Materials consumed: Purchase of materials

2,50,000

Add: Stock of raw materials on 1.8.2009

75,000 3,25,000

Less: Stock of raw materials on 31.8.2009

60,000

Direct labour

2,65,000 1,70,000

Prime cost

4,35,000

Factory overheads: Factory expenses

82,000

Depreciation of plant and machinery

41,000 1,23,000

Less: Sale of factory scrap

16,000

1,07,000 5,42,000

Add: Stock of work-in-progress on 1.8.2009

27,000 5,69,000

Less: Stock of work-in-progress on 31.8.2009

36,500 Work cost

Office overheads

5,32,500 34,500

Cost of production Add: Stock of finished goods on 1.8.2009

5,67,000 50,000 6,17,000

Less: Stock finished goods on 31.8.2009

62,000 Cost of goods sold

Selling and distribution overheads

5,55,000 27,500

Cost of sales Profit (bal. fig)

5,82,500 17,500

Sales

6,00,000

4. Apportionment of common expenses TV Ltd. produces TV sets in two models – Deluxe and Premium. The following information was taken from their records for the year ending 31.3.2010.

Cost Analysis: Cost Classification and Cost Sheet

1.4.2009

Stock of work-in-progress Stock of finished goods

Deluxe 70,000 1,65,000

13

31.3.2010

Premium 40,000 1,10,000

Deluxe 90,000 2,10,000

Premium 80,000 1,70,000

Purchase of materials – ` 12,00,000; Direct labour – ` 7,50,000. Materials consumed were in proportion of 5:7 and wages incurred were in the ratio of 2:3 for the two models. Factory overheads is charged at 80% of direct labour, Administration overheads charged at 25% on works cost and selling and distribution overheads estimated at 15% on works cost. The company wants to earn a profit of 25% on sales. Find the profit of each model for the year 2009. Solution:

Cost sheet for the year ending 31.3.2010 Particulars

Total

Purchase of materials Direct labour Prime cost

Ratio

Deluxe

Premium

12,00,000 5:7

5,00,000

7,00,000

7,50,000 2:3

3,00,000 8,00,000

4,50,000 11,50,000

2,40,000 10,40,000 70,000

3,60,000 15,10,000 40,000

11,10,000 90,000

15,50,000 80,000

10,20,000

14,70,000

2,55,000

3,67,500

12,75,000

18,37,500

1,65,000

1,10,000

14,40,000 2,10,000

19,47,500 1,70,000

12,30,000

17,77,500

Factory overheads: 80% of direct labour Add: Stock of work-in-progress on1.4.2009 Less: Stock of work-in-progress on 31.3.2010 Works cost Administration overheads: 25% on works cost Cost of production Add: Stock of finished goods on 1.4.2009 Less: Stock of finished goods on 31.3.2010 Cost of goods sold

Contd...

14 Cost Accounting Contd...

Selling and distribution overheads: 15% on work cost Cost of sales

1,53,000

2,20,500

13,83,000

19,98,000

4,61,000

6,66,000

18,44,000

26,64,000

Profit: 25% on sales (or) 25/75 on cost Sales

5. Valuation of closing stock Sri Ram Ltd. produces a standard product. It furnished the following cost information for 6 months ending 30.9.09:

Materials consumed

80,000

Direct labour

55,000

Factory overheads

33,000

Selling overheads at ` 2 per unit Number of units produced 4,200 Number of units sold – 4,000 at ` 45 per unit You are required to prepare a cost sheet from the above showing (a) Cost of production for the period, (b) Cost per unit; (c) Profit for the period; (d) Profit per unit. Solution:

Cost sheet for the 6 months ending 30.9.2009 Particulars

Units

Materials consumed: Direct labour Prime cost Factory overheads Works cost Office overheads: Cost of production Less: Closing stock of finished goods (4,200 – 4,000) Cost of goods sold

Cost per unit ( ) 19.048 13.095 32.143

4,200 – 4,200

Total cost ( ) 80,000 55,000 1,35,000

– 4,200 – 4,200 200

33,000 1,68,000 – 1,68,000 8,000

7.857 40.000 – 40.000 40.000

4,000

1,60,000

40.000 Contd...

Cost Analysis: Cost Classification and Cost Sheet

15

Contd...

Selling overheads:

–

–

8,000

2,000

(` 2 × 4,000 units) Cost of sales Profit Sales

4,000 – 4,000

1,68,000 12,000 1,80,000

42.000 3.000 45.000

6. Valuation of closing stock The following data relates to the manufacture of a standard product during the four weeks ended 26th March, 1991: Raw materials consumed Direct wages Machine hours worked Machine hour rate Office on cost Selling on cost

` 15,000 ` 9,800 2,300 hours ` 0.50 10% of works cost ` 0.10 per unit

Units produced – 19,030 Units sold – 11,418 at ` 2 each. You are required to prepare a cost sheet in respect of the above showing the cost of production and profit per unit. (B.Com., Madras University) th Solution: Cost sheet for four weeks ending 28 March 1991 Particulars

Units

Total cost ( )

Prime cost

19,030 – 19,030

15,000 9,800 24,800

Works cost

– 19,030

1,150 25,950

– 19,030 7,612 11,418

2,595 28,545 11,418 17,127

Raw materials consumed Direct wages

Factory overheads: 2,300 M.hrs × Re. 0.50 Office on cost: 10% on works cost Cost of production Less: Closing stock Cost of goods sold

Contd...

16 Cost Accounting

Selling overheads: (11,418 units × 0.10) Cost of sales Profit (bal. fig) Sales

–

1,141.8

11,418

18,268.8

–

4,567.2

11,418

22,836.0

Cost of production per unit

= 28,545/19,030 = ` 1.50

Closing stock (units)

= 19,030 – 11,418 = 7,612 units

Value of closing stock

= 7,612 × 1.50 = ` 11,418

Profit per unit

= 4,567.2/11,418 = Re. 0.40

7. Finding missing information The books and records of the Anand Manufacturing Company present the following data for the month of August, 2007: Direct labour cost – ` 16,000 (160% of factory overhead) Cost of goods sold ` 56,000

Raw materials Work-in-progress Finished goods

August 1

August 31

8,000 8,000 14,000

8,600 12,000 18,000

Other data:

General and administration expenses Selling expenses Sales for the month

2,600 3,400 75,000

You are required to prepare a statement showing cost of goods manufactured and sold and profit earned.

Cost Analysis: Cost Classification and Cost Sheet

Solution:

17

Cost sheet for the month of August 2007

Materials consumed: Purchase of raw materials

36,000

Add: Stock of raw materials on 1.8.2007

8,000

Less: Stock

44,000

Raw materials consumed

8,600

Less: Stock of raw materials on 31.8.2007

35,400

Direct labour cost

16,000 Prime cost

51,400

Factory overheads – (16,000 × 100/160)

10,000 61,400

Add: Stock of work-in-progress on 1.8.2007

8,000 69,400

Less: Stock of work-in-progress on 31.8.2007

12,000 Work cost

57,400

General and administration expenses

2,600 Cost of production

60,000

Add: Stock of finished goods on 1.8.2007

14,000 74,000

Less: Stock of finished goods on 31.8.2007

18,000

Cost of goods sold

56,000

Selling expenses

3,400

Cost of sales

59,400

Profit (bal. fig)

15,600

Sales

75,000

Workings:

Calculation of purchase of materials:

Cost of goods sold

56,000

Add: Closing stocks: Raw materials Work-in-progress

8,600 12,000 Contd...

18 Cost Accounting Contd...

Finished goods

18,000 94,600

Less: General and administration expenses

2,600

Less: Factory overheads (16,000 × 100/160)

10,000

Less: Direct labour

16,000

Less: Opening stocks Raw materials

8,000

Work-in-progress

8,000 14,000

Finished goods Purchase of raw materials

30,000 36,000

8. Finding missing information On June 30, 2006 a flash flood damaged the warehouse and factory of ABC Corporation completely destroying the work-in-progress inventory. There was no damage to either raw materials or finished goods inventories. A physical verification taken after the flood revealed the following valuations:

Raw materials

62,000

Work-in-progress Finished goods

? 1,19,000

The inventory on January 1, 2006 consisted of the following:

Raw materials

30,000

Work-in-progress

1,00,000

Finished goods

1,40,000

A review of the books and records disclosed that the gross profit margin historically approximated 25% of sales. The sales for the first six months of 2006 were ` 3,40,000. Raw material purchases were ` 1,15,000. Direct labour cost for this period was ` 80,000 and manufacturing overheads has historically been 50% of direct labour. Compute the cost of work-in-progress inventory lost at June 30, 2006 by preparing a statement of cost and profit. (B.Com. (Hons.), Delhi University)

Cost Analysis: Cost Classification and Cost Sheet

Solution:

Computation of gross cost of goods manufactured (processed)

Materials consumed Purchase of raw materials

1,15,000

Add: Stock of raw materials on 1.1.2006

30,000 1,45,000

Less: Stock of raw materials on 30.06.06

62,000

Direct labour

83,000 80,000

Prime cost

1,63,000

Manufacturing overheads: 50% of direct labour

40,000 2,03,000

Add: Stock of work-in-progress on 1.6.2006

1,00,000

Gross cost of goods manufactured

3,03,000

Computation of profit and works cost:

Sales

3,40,000

Less: Gross profit – 25% on sales

85,000 Cost of goods sold

Add: Stock of finished goods on 30.06.06

2,55,000 1,19,000 3,74,000

Less: Stock of finished goods on 1.1.06

1,40,000 Cost of production

Less: Office ovherheads

2,34,000 Nil

Works cost

2,34,000

Computation of closing work-in-progress Gross cost of goods manufactured

3,03,000

Less: Works cost

2,34,000

Cost of work-in-progress on 30.06.06 destroyed in flood

69,000

19

2

Materials Cost Control

Chapter

III. Practical Problems A. Short Answer Type Questions: 1. From the following figures, calculate the economic order quantity and number of orders to be placed in a year. Annual consumption of materials: 4,000 units. Cost of buying per order: ` 5 Cost per unit: ` 2 per unit. Storage and carrying cost: 8% of inventory value (B.Com., Madras) Solution: EOQ =

2AO C

2 ¥ 4,000 ¥ 5 = 500 units. 0.16

Number of orders per year = =

Annual consumption EOQ 4,000 = 8 orders 500

Note: C = ` 2 × 8% = 0.16 2. Find out the reorder level from the following: Maximum consumption of materials – 250 units per week, minimum delivery time 4 weeks and maximum re-order period 6 weeks. Solution: Reorder level = Maximum consumption × maximum delivery time = 250 × 6 = 1,500 units.

Materials Cost Control 21

3. Compute the minimum stock level: Normal usage of materials 250 units per week Normal reorder period 4 weeks Maximum reorder period 6 weeks Minimum reorder period 2 weeks Re-order level 2,000 units. Solution: Minimum stock level = Reorder level – (normal usage × normal reorder period) = 2,000 – (250 × 4) = 1,000 units. 4. Calculate inventory carrying cost per unit from the following: Cost of raw materials per unit ` 60. Average rate of return on investment 10% Buying cost per order ` 75 Solution: Inventory carrying cost per unit = Cost of raw material per unit × rate of return. = 60 × 10% = ` 6. 5. Calculate maximum stock level: Reorder level 2,500 units, reorder quantity 1,500 units, minimum reorder period 3 weeks, minimum usage per week 200 units. Solution: Maximum stock level = Reorder Level + Reorder quantity – (minimum consumption × minimum reorder period) = 2,500 + 1,500 – (200 × 3) = 3,400 units. 6. Find out the carrying cost of inventory: Cost materials per unit ` 80 Average rate of return on investment 10% Rent, taxes, insurance, etc. ` 2 per unit p.a. Solution:

Carrying cost per unit:

Loss of interest on investment (80 × 10%)

= ` 8.00

Rent, taxes, insurance, etc.

= ` 2.00

Carrying cost per unit

= ` 10.00

22 Cost Accounting

7. Total of ordering cost and carrying cost at EOQ is ` 5,000. What is ordering cost and carrying cost? Total ordering cost and carrying cost = ` 5,000 Solution: In EOQ policy ordering cost and carrying cost will be equal. Hence, Ordering cost =

5,000 = ` 2,500 2

Carrying cost =

5,000 = ` 2,500 2

8. Find the EOQ from the following: Purchase price of a materials ` 50 per units. Annual cost of carrying one unit 10% of purchase price. Total cost of carrying and ordering per annum ` 5,000. The company is following EOQ policy. Solution: \

Total cost of carrying and ordering per annum under EOQ policy = ` 5,000

5,000 = ` 2,500 2 10 = `5 Carrying cost per unit = ` = ` 50 × 100

Annual carrying cost =

EOQ =

\

=

Annual carrying cost Carrying cost p/u 2,500 = 500 units 5

9. Find the economic order quantity and frequency of orders from the following information. Monthly consumption 3,000 units. Cost per unit ` 54 Ordering cost ` 150 per order Inventory carrying cost 20% of average inventory. Solution: EOQ =

=

2AO C 2 ¥ 36,000 ¥ 150 10.8

= 1,000 units.

Materials Cost Control 23

Frequency of orders = =

No. of days in a year No. of orders per year 360 = 10 days 36

Note: No. of orders per year = =

Annual consumption EOQ 3,000 ¥ 12 36,000 = 1,000 1,000

= 36 orders. 10. From the following information compute EOQ Consumption of materials per annum ` 1,600 Buying cost per order ` 20. Storage and carrying cost per annum 10% of inventory value. Solution: EOQ = =

2AO C 2 ¥ 1,600 ¥ 20 0.1

= ` 800.

B. Long Answer Type Questions: 1. Computation of landed cost of materials In a truck load, the following materials were received: Code No.

Materials

M 2010

Carbon black

3050

4.00

P 5025

S.H. Phosphate

2060

3.00

Sales tax was charged at 5% Railway freight ` 1,050 Transport charges ` 100 Loading and unloading ` 50

Quantity (kg)

Rate per kg

24 Cost Accounting

The goods received note from the storekeeper showed the following quantity: M 2010 – 3,000 kg P 5025 – 2,000 kg From the above figures you are required to calculate the purchase rate per kg of carbon black and S.H. phosphate. (M.Com., Madras University) Solution:

Computation of purchase cost of materials Carbon Black

S.H. Phosphate

Qty (kg) Amount ( ) Qty (kg) Amount ( ) Purchase cost

3,050

12,200

Sales tax 5% Railway freight

` 1,050

Transportation charges

`

100

Loading and unloading

`

50

Total

` 1,200

Apportioned in quantity received ratio: 3000: 2000 3,050 Less: Normal loss

50

Total cost Materials cost per kg

2,060

6,180

610

309

720

480

13,530 –

3,000

13,530

13,530 3,000

` 4.51

2,060 60 2,000 6,969 2,000

6,969 – 6,969 ` 3.48

2. Choosing a supplier The following quotations were received from two different suppliers: Supplier M – ` 15 per unit Supplier N – ` 14.75 per unit plus ` 5,000 fixed charges irrespective of units ordered. Calculate: (i) Purchase quantity at which materials cost will be same from both suppliers (ii) When purchase quantity is 18,000 units, with whom order should be placed. (iii) When order quantity is 25,000 units, whom will you select. Solution: (i) Purchase quantity at which materials cost will be same from both suppliers. =

Fixed charges Difference in price per unit

Materials Cost Control 25

=

5,000 15 - 14.75

=

5,000 0.25

= 20,000 units. Verification:

Invoice price Fixed charges Total cost

Supplier ‘M’

Supplier ‘N’

(20,000 15) 3,00,000 – 3,00,000

(20,000 14.75) 2,95,000 5,000 3,00,000

(ii) When purchase quantity is 18,000 units, supplier ‘M’ should be selected. Verification:

Invoice price Fixed charges Total cost

Supplier ‘M’

Supplier ‘N’

(18,000 15) 2,70,000 – 2,70,000

(18,000 14.75) 2,65,500 5,000 2,70,500

(iii) When order quantity is 25,000 units, supplier ‘N’ should be selected: Verification:

Invoice price Fixed charges Total cost

Supplier ‘M’

Supplier ‘N’

(25,000 × 15) 3,75,000 – 3,75,000

(25,000 × 14.75) 3,68,750 5,000 3,73,750

3. Joint purchase cost Materials of different grades were purchased at a total cost of ` 4,00,000. These materials were sorted into three grades, the details of which are given below:

26 Cost Accounting

Grades

Quantity (units) 40,000 25,000 10,000

Grade ‘A’ Grade ‘B’ Grade ‘C’

Selling Price p/u 7.00 5.00 9.50

Calculate purchase cost per unit of each grade materials Solution:

Sales value of materials purchased: = No. of units × Selling price p/u. ` Grade ‘A’ = 40,000 × 7 2,80,000 Grade ‘B’ = 25,000 × 5 1,25,000 Grade ‘C’ = 10,000 × 9.50 95,000 Total sales value

5,00,000

Cost of materials

4,00,000

Gross profit

1,00,000

% of Gross profit on sales value = =

Gross profit p/u ¥ 100 Sales value 1,00,000 ¥ 100 5,00,000

= 20% Statement showing cost p/u of each grade. Materials Grade ‘A’ Grade ‘B’ Grade ‘C’

Selling price p/u G.P. % 7.00 5.00 9.50

20% 20% 20%

Gross profit p/u 7 × 20% = 1.40 5 × 20% = 1.00 9.50 × 20% = 1.90

4. Stock levels The following information is obtained relating to material ‘A’: Maximum consumption – 600 units per week Minimum consumption – 400 units per week Average consumption – 450 units per week Lead time 2 to 6 weeks. Reorder quantity – 1,500 units.

Cost price p/u 5.60 4.00 7.60

Materials Cost Control 27

Maximum lead time for emergency purchase 1 week calculate. (a) Reorder level (b) Maximum level (c) Minimum level (d) Average level. (e) Danger level. Solution: (a) Reorder level = maximum consumption × maximum reorder period = 600 × 6 = 3,600 units. (b) Maximum level = Reorder level + Reorder quantity – (Minimum usage × Minimum reorder period) = 3,600 + 1,500 – 400 × 2 = 4,300 units. (c) Minimum level = Reorder level – (Normal consumption × Normal reorder period) = 3,600 – 450 × 4 = 1,800 units. (d) Average level = =

Minimum level + Maximum level 2 4,300 + 1,800 = 3,050 units 2

(or)

Minimum level + 1/2 of Reorder quantity = 1800 + 1/2 1,500 = 2,550 units. (e) Danger level = Average consumption × maximum reorder period for emergency purchase. = 450 × 1 = 450 units. 5. Stock level – two materials Two materials ‘A’ and ‘B’ are used as follows: Reorder quantity – A 1,200 units, B – 1,000 units. Reorder period –A – 2 to 4 months, B– 3 to 6 months. Normal usage – 300 units per month each Minimum usage – 150 units per month each. Maximum usage – 450 units per month each. You are required to calculate the following for each of the materials: (a) Reorder level, (b) Maximum level (c) Minimum level (d) Average stock level. Solution: (a) Reorder level = Maximum consumption × Maximum reorder period.

28 Cost Accounting

Material ‘A’ = 450 × 4 = 1,800 units. Material ‘B’ = 450 × 6 = 2,700 units. (b) Maximum level = Reorder level + Reorder quantity – (Minimum usage × Minimum reorder period) A = 1,800 + 1,200 – 150 × 2 = 2,700 units B = 2,700 + 1,000 – 150 × 3 = 3,250 units. (c) Minimum level = Reorder level – (Normal consumption × Normal reorder period) A = 1,800 – 300 × 3 = 900 units. B = 2,700 – 300 × 4.5 = 1,350 units. Minimum level + Maximum level 2 900 + 2,700 A = = 1,800 units 2

(d) Average level =

B =

1,350 + 3, 250 = 2,300 units 2

6. Stock levels Two components X and Y are used as follows: Minimum usage – 50 units per week each Maximum usage – 150 units per week each Normal usage – 100 units per week each Ordering quantities – x – 600 units y – 1,000 units Delivery period x – 4 to 6 weeks y – 2 to 4 weeks Maximum reorder period for emergency purchases X-2 weeks, Y-2 weeks. Calculate for each component: (a) Reorder level, (b) Maximum level, (c) Minimum level (d) Danger level (CA, Inter)

Materials Cost Control 29

(a) Reorder level = Maximum consumption × Maximum reorder period Material ‘x’ = 150 × 6 = 900 units Materials ‘y’ = 150 × 4 = 600 units. (b) Maximum level = Reorder level + Reorder quantity – (Minimum usage × Minimum reorder period) Material ‘x’ = 900 + 600 – 50 × 4 = 1,300 units Materials ‘y’ = 600 + 1000 – 50 × 2 = 1,500 units. (c) Minimum level = Reorder level – (Normal usage × Normal reorder period) Material ‘x’ = 900 – 100 × 5 = 400 units Materials ‘y’ = 600 – 100 × 3 = 300 units. (d) Danger level = Normal usage × Maximum reorder period for emergency purchase Material ‘x’ = 100 × 2 = 200 units Materials ‘y’ = 100 × 2 = 200 units. 7. EOQ - with discount offer RST Limited has received an offer of quantity discount on its orders of materials as under: Price per tonne – Tonnes number ` 9,600 – Less than 50 ` 9,360 – 50 and less than 100 ` 9,120 – 100 and less than 200 ` 8,880 – 200 and less than 300 ` 8,640 – 300 and above The annual requirement for the material is 500 tonnes. The ordering cost per order is ` 12,500 and the stock holding cost is estimated at 25% of the materials cost per annum. Required: (i) Compute the most economical purchase level (ii) Compute EOQ if there are no quantity discounts and the price per tonne is ` 10,500. (CA (PEII), Nov. 2004)

30 Cost Accounting

Solution:

Statement of materials cost

Order quantity

25 tonnes

50 tonnes

100 tonnes

200 tonnes

300 tonnes

No. of orders

500 = 20 25

500 = 10 50

500 =5 100

500 = 2.5 200

500 = 1.67 300

Ordering cost (A)

20 × 12,500

10 × 12,500

5 × 12,500

2.5 × 12,500

1.67 × 12,500

= ` 2,50,000

= ` 1,25,000

= ` 62,500

= ` 31,250

= ` 20,875

Storage cost (B)

25 50 × 9,600 × × 9,360 × 2 2

100 × 9,120 × 2

200 × 8,880 × 2

300 × 8,640 × 2

25 25 25 25 25 = `3,24,000 = `30,000 = `58,500 = `2,22,000 = `1,14,000 100 100 100 100 100

Invoice price (C)

500 × 9,600

500 × 9,360

500 × 9,120

500 × 8,880

500 × 8,640

` 48,00,000

` 46,80,000

` 45,60,000

` 44,40,000

` 43,20,000

Total Cost ` 50,80,000 (A + B + C)

` 48,63,500

` 47,36,500

` 46,93,250

` 46,64,875

(i) Most economical purchase quantity is 300 tonnes because total materials cost is lower. (ii) EOQ = =

2A0 C 2 ¥ 500 ¥ 12,500 2,625

= 69.01 tonnes Note:

Carrying cost per tonne (c) = 10,500 ×

25 = ` 2,625 100

8. Stock level and EOQ A company manufactures 5,000 units of a product per month. The cost of placing an order is ` 100. The purchase price of raw materials is ` 10 per kg. The reorder period is 4 to 8 weeks. The consumption of raw materials varies from 100 kg to 450 kg per week, the average consumption being 275 kg. The carrying cost of inventory is 20% per annum. You are required to calculate: (i) Reorder quantity, (ii) Reorder level, (iii) Maximum level, (iv) Minimum level (v) Average stock level. (CA (PE) II)

Materials Cost Control 31

Solution: (i) Reorder quantity =

2A0 C 2 ¥ 60,000 ¥ 100 2

=

= 2,449.49 kg. (ii) Reorder level = Maximum consumption × Maximum reorder period. = 450 × 8 = 3,600 kg. (iii) Maximum level = Reorder level + Reorder quantity – (Minimum consumption × Minimum reorder period) = 3,600 + 2,449.49 kg – (100 × 4) = 5,649.49 kg. (iv) Minimum level = Reorder level – (Average consumption × Average reorder period.) = 3,600 – 275 × 6 = 1,950 kg. (v) Average stock level = =

Minimum level + Maximum level 2

1,950 + 5,649.49 2

= 3,799.75 kg. (or) = minimum level + 1/2 of reorder quantity = 1,950 + 1/2 × 2,449.49 = 1,950 + 1,224.75 = 3,174.75 kg. 9. Stock levels For the manufacture of a certain product two components A and B are used. The following particulars about these components are available: A B Normal usage (per week) 60 nos. 60 nos. Maximum usage ( ” ) 80 nos. 80 nos. Minimum usage ( ” ) 30 nos. 30 nos. Reorder quantity 400 nos. 600 nos. Reorder period 4 to 6 weeks 2 to 4 weeks

32 Cost Accounting

You are required to calculate for each component: (i) Reordering level, (ii) Minimum level, (iii) Maximum level and (iv) Average stock level. (ICWA (Inter), June 2004) Solution: (i) Reorder level = Maximum consumption × Maximum reorder period A = 80 × 6 = 480 units. B = 80 × 4 = 320 units. (ii) Minimum level = Reorder level – (Normal consumption × Normal reorder period) A = 480 – 60 × 5 = 180 units. B = 320 – 60 × 3 = 140 units. (iii) Maximum level = Reorder level + Reorder quantity – (Minimum consumption × Minimum reorder period) A = 480 + 400 – 30 × 4 = 760 units. B = 320 + 600 – 30 × 2 = 860 units. Minimum level + Maximum level 2 180 + 760 A= 2

(iv) Average stock level =

= 470 units. B=

140 + 860 2

= 500 units. 10. Stock levels Two components A and B are used as follows : Normal usage – 50 units per week each. Minimum usage – 25 ≤ Maximum usage – 75 ≤ Reorder quantity A – 300 units, B 500 units. Reorder period – A – 4 to 6 weeks, B-2 to 4 weeks.

Materials Cost Control 33

Calculate for each component: (i) Re-ordering level, (ii) Minimum level, (iii) Maximum level and (iv) Average stock level. (B.Com., Madras University) Solution: (i) Reorder level = Maximum usage × maximum reorder period A = 75 × 6 = 450 units. B = 75 × 4 = 300 units. (ii) Minimum level = Reorder level – (normal usage × normal reorder period) A = 450 – (50 × 5) = 200 units. B = 300 – (50 × 3) = 150 units. (iii) Maximum level = Reorder level + Reorder quantity – (minimum usage × minimum reorder period) A = 450 + 300 – 25 × 4 = 650 units. B = 300 + 500 – 25 × 2 = 750 units. Minimum level + Maximum level 2 200 + 650 A= 2 = 425 units.

(iv) Average stock level =

150 + 750 2 = 450 units.

B=

11. Stock levels From the following information calculate, reorder minimum and maximum stock levels: Minimum consumption – 100 units per day Maximum consumption – 150 units per day Normal consumption – 120 units per day Reorder period – 10 to 15 days Normal reorder period – 12 days Reorder quantity – 1500 units. (B.Com., Madras University)

34 Cost Accounting

Solution: Reorder level = Maximum consumption × maximum reorder period = 150 × 15 = 2,250 units. Minimum level = Reorder level – (normal consumption × normal reorder period) = 2,250 – (120 × 12.5) = 750 units. B = 300 – (50 × 3) = 150 units. Maximum level = Reorder level + Reorder quantity – (minimum consumption × minimum reorder period) = 2,250 + 1,500 – (100 × 10) = 2,750 units. 12. Stock levels From the following information calculate (1) Maximum level, (2) Minimum level, (3) Reorder level, (4) Average stock level. Normal consumption – 800 units per week Minimum consumption – 400 units per week Maximum consumption – 1,200 units per week Reorder quantity – 4,800 units. Time required for delivery: Minimum – 4 weeks and Maximum – 6 weeks. (B.Com. (Bangalore University), April 2003) Solution: Reorder level = Maximum consumption × Maximum reorder period = 1,200 × 6 = 7,200 units. Maximum level = Reorder level + Reorder quantity – (Minimum usage × Minimum reorder period) = 7,200 + 4,800 – 400 × 4 = 10,400 units. Minimum level = Reorder level – (normal consumption × normal reorder period) = 7,200 – (800 × 5) = 3,200 units.

Materials Cost Control 35

Average level

=

Minimum level + Maximum level 2

=

3, 200 + 10, 400 2

= 6,800 units. 13. Bin card Following are the transactions relating to material X, code No.456m, prepare Bin card Bin card No. X 456: 2009 June 1 – opening balance 300 units 2 – Purchased 500 units. 5 – Issued 500 units. 9 – Purchased 900 units. 12 – Issued 800 units. 15 – Purchased 600 units. 19 – Issued 400 units 22 – Issued 300 units 26 – Purchased 500 units 29 – Issued 600 units 30 – Purchased 400 units. Solution: Date

Bin Card No. × 456 Receipt G.R.N No. Units

Balance M.R. No. Units

Balance Units

2009 June 1

–

–

–

–

300

2

–

500

–

–

800

5

–

–

–

500

300

9

–

900

–

–

1200

12

–

–

–

800

400

15

–

600

–

–

1000

19

–

–

–

400

600

22

–

–

–

300

300

26

–

500

–

–

800

29

–

–

–

600

200

30

–

400

–

–

600

36 Cost Accounting

14. EOQ and discount offer A manufacturer requires 9,600 units of a certain component annually. This is currently purchased from a regular supplier at ` 50 per unit. The cost of placing an order is ` 60 per order and annual carrying cost is ` 5 per piece. What is economic order quantity for placing an order? Recently, the supplier has expressed his willingness to reduce the price to ` 48, if the total requirements are obtained from him in two equal orders and to ` 47, if the entire quantity required is purchased in one lot. Analyse the costs of the three options and recommend the best course. What other factors should also be considered before the decision is taken? (ICWA (Inter), Dec. 2003) Solution: EOQ =

=

2AO C 2 ¥ 9,600 ¥ 60 5

= 480 units. Statements showing materials cost: Order quantity

480 units

No. of orders

9,600 = 20 480

Ordering cost (A)

20 × 60 = ` 1,200

2 × 60 = ` 120

1 × 60 = ` 60

Carrying cost (B)

480 × 5 = ` 1,200 2

4,800 × 5 = ` 12,000 2

9,600 × 5 = ` 24,000 2

Invoice price (C)

9,600 × 50 ` 4,80,000

9,600 × 48 ` 4,60,800

9,600 × 47 ` 4,51,200

` 4,72,920

` 4,75,260

Total cost (A + B + C) ` 4,82,400

4800 units 9,600 =2 4,800

9600 units 9,600 =1 9,600

Conclusion: The management should opt for 2 orders for purchasing annual requirements. Total materials cost is lower in this option. Other factors to be considered are: 1. Availability of working capital 2. Chances of deterioration in quality of materials. 3. Storage space available. 4. Reliability of supplier.

Materials Cost Control 37

15. ABC analysis Categorise the following items of materials on the basis of ABC analysis: Material No.

Quantity (nos)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

300 200 2,000 150 300 250 400 1,400 400 2,100 600 300 1,400 1,500 700

Price p/u ( ) 100 400 13.00 150 800 50 500 15 75 10 140 600 10 12 30

Solution: Category ‘A’ Material No. 2 5 7 12 Total

Quantity (No.) 200 300 400 300 1,200

Price p/u ( ) 400 800 500 600 –

Value 80,000 2,40,000 2,00,000 1,80,000 7,00,000

Category ‘B’ Material No. 1 4 6 9 11 15 Total

Quantity (No.) 300 150 250 400 600 700 2,400

Price p/u ( ) 100 150 50 75 140 30 –

Value 30,000 22,500 12,500 30,000 84,000 21,000 2,00,000

38 Cost Accounting

Category ‘C’0 Material No.

Quantity (No.)

3 8 10 13 14 Total

2,000 1,400 2,100 1,400 1,500 8,400

Category A

Price p/u ( ) 13.00 15.00 10.00 10.00 12.00 –

% in Quantity

Value 26,000 21,000 21,000 14,000 18,000 1,00,000 % in Value

1, 200 × 100 = 10% 12,000

7,00,000 × 100 = 70% 10,00,000

B

2, 400 × 100 = 20% 12,000

2,00,000 × 100 = 20% 10,00,000

C

8, 400 × 100 = 70% 12,000

1,00,000 × 100 = 10% 10,00,000

3

Materials Costing

Chapter

Practical Problems A. Short Answer Type Questions: 1. Ascertain the value of closing stock under FIFO method. Opening stock 1000 units at ` 15 per unit. Purchases 2000 units at ` 16 per unit. Issues 2600 units. Solution:

Computation of closing stock (units):

Opening stock

1,000 units

Add: Purchases

2,000 units

Total materials available for issue

3,000 units.

Less: Materials issued

2,600 units

Closing stock Value of closing stock

400 units = 400 × 16 = ` 6,400.

Note: Under FIFO method opening stock of materials is exhausted first. So material in hand will be from current purchases, hence closing stock is valued at current purchase price of ` 16 per unit. 2. Find the value of closing stock under FIFO method. Opening stock – 500 units at ` 12 per unit. Purchases – 1800 units at ` 13 per unit. Issues – 1600 units. Solution: Opening stock Add: Purchases Total materials available for issue Less: Issued Closing stock

500 units 1,800 units 2,300 units. 1,600 units 700 units

40 Cost Accounting

Value of closing stock:

`

(i) 500 units at ` 12 p/u

6,000

(ii) 200 units at ` 13 p/u

2,600 8,600

Note: Under LIFO method, materials from latest purchases are issued first. Hence, closing stock includes 200 units from current purchase and 500 units from opening stock. 3. Find the value of materials issued under FIFO method. 1.7.2009 Opening stock – 800 units at ` 20 per unit. 10.7.2009 Purchases – 1500 units at ` 21 per unit. 12.7.2009 Issues – 1500 units. Solution: ` = 16,000 = 14,700 = 30,700

(i) Issued from opening stock (800 × 20) (ii) Issued from current purchases (700 × 21) Value of materials issued 4. Find the value of materials issued under LIFO method: 1.10.09 opening stock of materials 500 units at ` 8 per unit. 7.10.09 purchases – 800 units at ` 9 per unit. 10.10.09 issues – 1000 units. Solution:

` = 7,200 = 1,600 = 8,800

(i) Issued from purchases (800 × 9) (ii) Issued from opening stock (200 × 8) Value of materials issued

5. Calculate the closing stock under simple average price method: 1.5.09 opening stock – 750 units at ` 16 per unit. 10.5.09 purchases – 1000 units at ` 18 per unit. 15.5.09 Issues – 1250 units Solution: Opening stock

–

750 units

Add: Purchases

–

1,000 units

–

1,750 units

–

1,250 units

–

500 units

Less: Issues Closing stock

Value of closing stock – 500 units × 17 ` 8,500

Materials Costing 41

Note:

Issue price =

16 + 18 = ` 17 2

6. Calculate materials turnover ratio and the number of days the average stock is held: ` Opening stock

–

25,000

Purchases

–

2,72,000

Closing stock

–

21,000

Solution:

Materials consumed: `

Opening stock materials

25,000

Add: Purchases

2,72,000 2,97,000

Less: Closing stock

21,000

Materials consumed

2,76,000

Materials turnover ratio = = Average inventory =

Materials consumed Average inventory 2,76,000 = 12 times 23,000 25,000 + 21,000 = 23,000. 2

No. of days average stock is held = = Note:

Average inventory × No. of days in year Materials consumed

23,000 × 360 = 30 days 2,76,000

360 days a year is assumed - Alternatively 365 days may be used.

7. Calculate materials turnover ratio and the number of days average stock is held: Opening stock

–

13,000 units

Purchases

–

1,44,000 units

Closing stock

–

7,000 units

Note: Assume 360 days a year. Solution:

Materials consumed (units):

42 Cost Accounting

Opening stock materials Add: Purchases

13,000 units 1,44,000 units

Less: Closing stock

1,57,000 units 7,000 units

Materials consumed

1,50,000 units

Average inventory =

Opening stock + Closing stock 2 13,000 + 7,000 2

=

= 10,000 units. Materials turnover ratio

=

1,50,000 10,000

= 15 times. No. of days average stock is held =

10,000 × 360 1,50,000

= 24 days 8. Calculate yield ratio and input out ratio Opening stock

–

12,000 kg

Purchases

–

60,000 kg

Closing stock of materials

–

10,000 kg

Output obtained

–

55,000 kg

Solution: Yield ratio = =

Output obtained × 100 Materials consumed 55,000 × 100 62,000

= 88.71% Input-output ratio = =

Materials consumed × 100 Output obtained 62,000 × 100 55,000

= 112.73%

Materials Costing 43

Note: Materials consumed: Opening stock Add: Purchases

12,000 kg 60,000 kg 72,000 kg 10,000 kg

Less: Closing stock Materials consumed

62,000 kg

B. Long Answer Type Questions: 1. FIFO and LIFO Methods From the following information, prepare stores ledger accounts under each of the following method – FIFO and LIFO. January 1 Opening balance 300 units at ` 5 per unit. ” 5 Purchased 500 units at ` 6 per unit. ” 17 Issued 300 units. ” 24 Purchased 400 units at ` 5.50 per unit. ” 27 Issued 500 units. ” 31 Purchased 600 units at ` 6.50 per unit. Solution: (i) Stores Ledger – FIFO Method Receipts Date

Qty. (units)

Price (p/u)

Jan. 1

–

–

5

500

17

Issues Qty. (units)

Price (p/u)

–

–

–

6.00

3,000

–

–

–

–

24

400

5.50

27

–

31

600

Balance Qty. (units)

Price (p/u)

–

300

5.00

1,500

–

–

300 500

5.00 6.00

1,500 3,000

300

5.00

1,500

500

6.00

3,000

2,200

–

–

–

500 400

6.00 5.50

3,000 2,200

–

–

500

6.00

3,000

400

5.50

2,200

6.50

3,900

–

–

–

400 600

5.50 6.50

2,200 3,900

–

6,100

Value

Closing stock

Value

1,000

Value

44 Cost Accounting

(ii) Stores Ledger – LIFO Method Receipts Date

Qty. (units)

Price (p/u)

Jan. 1

–

–

5

500

17

Issues

Balance

Qty. (units)

Price (p/u)

–

–

–

–

300

5.00

1,500

6.00

3,000

–

–

–

300 500

5.00 6.00

1,500 3,000

–

–

–

300

6.00

1,800

300 200

5.00 6.00

1,500 1,200

24

400

5.50

2,200

–

–

–

300 200 400

5.00 6.00 5.50

1,500 1,200 2,200

27

–

–

–

400 100

5.50 6.00

2,200 600

300 100

5.00 6.00

1,500 600

31

600

6.50

3,900

–

–

–

300 100 600

5.00 6.00 6.50

1,500 600 3,900

–

6,000

Value

Closing stock

Value

Qty. (units)

Price (p/u)

1,000

2. FIFO and LIFO methods The following transactions occur in the purchase and issue of a material. October 1 Purchased 4,000 units at ` 4.00 per unit. ” 15 Purchased 500 units at ` 5.00 per unit. ” 23 Issued 2,000 units. November 5 Purchased 6,000 units at ` 6.00 per unit. ” 11 Issued 4,000 units. ” 21 Issued 1,000 ” 29 Issued 2,000 December 15 Purchased 4,500 units at ` 5.50 per unit. ” 25 Issued 3,000 units. Prepare stores ledger under FIFO and LIFO Methods. Solution: (i) Stores Ledger – FIFO Method

Value

Materials Costing 45

Date Oct. 1 15

Receipts Qty. Price Value (units) (p/u) 4,000 4.00 16,000 500 5.00 2,500

Qty. (units) – –

Issues Price (p/u) – –

Value – –

23

–

–

–

2,000

4.00

8,000

Nov. 5

6,000

6.00

36,000

–

–

–

11

–

–

–

21 29 Dec. 15

– – 4,500

– – 5.50

– – 24,750

2,000 500 1,500 1,000 2,000 –

4.00 5.00 6.00 6.00 6.00 –

8,000 2,500 9,000 6,000 12,000 –

25

–

–

–

1,500 1,500

6.00 5.50

9,000 8,250

Closing stock

Balance Qty. Price (units) (p/u) 4,000 4.00 4,000 4.00 500 5.00 2,000 4.00 500 5.00 2,000 4.00 500 5.00 6,000 6.00 4,500 6.00

Value 16,000 16,000 2,500 8,000 2,500 8,000 2,500 36,000 27,000

3,500 1,500 1,500 4,500 3,000

6.00 6.00 6.00 5.50 5.50

21,000 9,000 9,000 24,750 16,500

3,000

–

16,500

(ii) Stores Ledger – LIFO Method Date

Oct. 1 15

Receipts Qty. Price Value (units) (p/u) 4,000 4.00 16,000 500 5.00 2,500

Qty. (units) – –

Issues Price (p/u) – – 5.00 4.00 –

2,500 6,000 –

Value – –

23

–

–

–

Nov. 5

6,000

6.00

36,000

500 1,500 –

11

–

–

–

4,000

6.00

24,000

21

–

–

–

1,000

6.00

6,000

Balance Qty. Price (units) (p/u) 4,000 4.00 4,000 4.00 500 5.00 2,500 4.00 2,500 6,000 2,500 2,000 2,500 1,000

4.00 6.00 4.00 6.00 4.00 6.00

Value 16,000 16,000 2,500 10,000 10,000 36,000 10,000 12,000 10,000 6,000 Contd...

46 Cost Accounting Contd...

29

–

–

– 24,750

1,000 1,000 –

6.00 4.00 –

6,000 4,000 –

Dec. 15

4,500

5.50

25

–

–

–

3,000

5.50

16,500

Closing stock

1,500

4.00

6,000

1,500 4,500 1,500 1,500 3,000

4.00 5.50 4.00 5.50 –

6,000 24,750 6,000 8,250 14,250

3. Selecting a suitable method of pricing issues The following transactions took place during the month of November 2009 relating to materials ‘EXE’: 2009 January 1 Opening balance 2000 units at ` 20 per unit. ” 2 Issued 1,100 units. ” 5 Purchased 1,600 units at ` 21 per unit. ” 8 Issued 1,300 units ” 10 Purchased 1,000 units at ` 21.50 per unit. ” 12 Issued 1,500 units. ” 14 Received back 200 units from production, originally issued on 8th January ” 17 Purchased 500 units at ` 22 per unit ” 20 Stock verification revealed a loss of 50 units. ” 24 Issued 900 units. ” 27 Purchased 500 units at ` 23 per unit. ” 31 Issued 400 units. Prepare stores ledger selecting a suitable method of pricing issues. Solution: (i) Stores Ledger – LIFO Method Date 2009 Jan. 1 2 5 8

Receipts Qty. Price Value (units) (p/u) – – –

Qty. (units) –

Issues Price (p/u) –

Value –

– 1,600

– 21.00

– 33,600

1,100 –

20.00 –

22,000 –

–

–

–

1,300

21.00

27,300

Balance Qty. Price Value (units) (p/u) 2,000 20.00 40,000 900 900 1,600 900 300

20.00 20.00 21.00 20.00 21.00

18,000 18,000 33,600 18,000 6,300 Contd...

Materials Costing 47 Contd...

10

1,000

21.50

12

–

14

200

21.00

17

500

20

21,500

–

–

–

4,200

1,000 300 200 –

21.50 21.00 20.00 –

21,500 6,300 4,000 –

22.00

11,000

–

–

–

–

–

–

50

22.00

1,100

24

–

–

–

27

500

23.00

11,500

450 200 250 –

22.00 21.00 20.00 –

9,900 4,200 5,000 –

31

–

–

–

400

23.00

9,200

–

–

Closing stock

900 300 1,000 700

20.00 21.00 21.50 20.00

18,000 6,300 21,500 14,000

700 200 700 200 500 700 200 450 450

20.00 21.00 20.00 21.00 22.00 20.00 21.00 22.00 20.00

14,000 4,200 14,000 4,200 11,000 14,000 4,200 9,900 9,000

450 500 450 100 550

20.00 23.00 20.00 23.00 –

9,000 11,500 9,000 2,300 11,300

Note: (1) Since materials prices are increasing, LIFO method has been selected. (2) Materials received back from production is treated as a new purchase. 4. Weighted average price method From the following receipts and issues of materials ‘EXE’ in a manufacturing unit, prepare stores ledger using weighted average method of valuing the issues: November 1 Opening balance 2000 units at ` 5.00 each. ” 3 Issued 1,500 units to production. ” 4 Received 4,500 units at ` 6.00 each ” 8 Issued 1,600 units to production. ” 9 Returned to stores 100 units by production department (from the issue of Nov. 3) ” 16 Received 2400 units at ` 6.50 each ” 19 Returned to supplier 200 units out of the quantity received on November 4

48 Cost Accounting

” ” ” ”

20 Received 1,000 units at ` 7.00 each 24 Issued to production 2,100 units. 27 Received 1,200 units at ` 7.50 each. 29 Issued to production 2,800 units. (Use rates upto two decimal places) (ICWA, Inter)

Solution: (i) Stores Ledger – Weighted Average Method Date Nov 1 3 4 8 9 16 19 20 24 27 29

Receipts Qty. Qty. Rate Total (units) (units) (p/u) – – – – – – – 1,500 4,500 6.00 27,000 – – – – 1,600 100 5.00 500 – 2,400 6.50 15,600 – – – – 200 1,000 7.00 7,000 – – – – 2,100 1,200 7.50 9,000 – – – – 2,800 Closing stock

Issues Rate (p/u) – 5.00 – 5.90 – – 6.00 – 6.26 – 6.52

Total – 7,500 – 9,440 – – 1,200 – 13,146 – 18,256

Balance Qty. Rate Total (units) (p/u) 2,000 5.00 10,000 500 5.00 2,500 5,000 5.90 29,500 3,400 5.90 20,060 3,500 5.87 20,560 5,900 6.13 36,160 5,700 6.13 34,960 6,700 6.26 41,960 4,600 6.26 28,814 5,800 6.52 37,814 3,000 6.52 19,558 3,000 – 19,558

5. Simple Average price method and LIFO method 1987 January 5 Purchased 4,000 units at ` 4 per unit. ” 20 Purchased 500 units at ` 5 per unit. February 5 Issued 2,000 unit ” 10 Purchased 6,000 units at ` 6 per unit. ” 15 Issued 4,000 units ” 18 Issued 1,000 units March 4 Issued 2,000 units ” 12 Purchased 4,500 units at ` 5.50 per unit. ” 24 Issued 3,000 units From the above particulars prepare stores ledger account uinder (i) LIFO Method, (ii) Simple average method. (B.Com, Madras University)

Materials Costing 49

Solution: Date 1987 Jan 5 20

Stores Ledger - (i) LIFO Method Receipts Total v Qty. Rate (units) (p/u) 4,000 4 16,000

Qty. (units) –

Issues Rate (p/u) –

Total –

500

5

2,500

–

–

–

Feb 5

–

–

–

10

6,000

6

36,000

500 1,500 –

5.00 4.00 –

2,500 6,000 –

15

–

–

–

4,000

6.00

24,000

18

–

–

–

1,000

6.00

6,000

Mar 4

–

–

–

12

4,500

5.50

24,750

1,000 1,000 –

6.00 4.00 –

6,000 4,000 –

24

–

–

–

3,000

5.50

16,500

Closing stock

Balance Qty. Rate Total (units) (p/u) 4,000 4.00 16,000 4,000 500 2,500

4.00 5.00 4.00

16,000 2,500 10,000

2,500 6,000 2,500 2,000 2,500 1,000 1,500

4.00 6.00 4.00 6.00 4.00 6.00 4.00

10,000 36,000 10,000 12,000 10,000 6,000 6,000

1,500 4,500 1,500 1,500 3,000

4.00 5.50 4.00 5.50 –

6,000 24,750 6,000 8,250 14,250

Stores Ledger – (ii) Simple Average Price Method Date 1987 Jan 5 20 Feb 5 10 15 18 Mar 4

Qty. (units) 4,000 500 – 6,000 – – –

Receipts Rate Total (p/u) 4 16,000 5 – 6 – – –

2,500 – 36,000 – – –

Qty. (units) –

Issues Rate (p/u) –

– 2,000 – 4,000 1,000 2,000

– 4.50 – 5 6 6

–

Qty. (units) 4,000

– 9,000 – 20,000 6,000 12,000

4,500 2,500 8,500 4,500 3,500 1,500

Total

Balance Rate Total (p/u) 4.00 16,000 – – – – – –

18,500 9,500 45,500 25,500 19,500 7,500 Contd...

50 Cost Accounting Contd...

12 24

4,500 –

5.50 –

24,750 – – 3,000 Closing stock

– 5.75

– 17,250

6,000 3,000 3,000

– 2 –

32,250 15,000 15,000

Note: Issue prices: February

5

4 + 5 = ` 4.50 2

”

15

4 + 5 + 6 = ` 5.00 3

”

18

= ` 6.00

March

4

= ` 6.00

”

24

6 + 5.50 = ` 5.75 2

6. Standard price method The following transactions relating to material ‘M’ took place during the month of August 2009. August 2 Purchased 500 units at ` 9.00. ” 5 Issued 300 units. ” 7 Purchased 700 units at ` 9.25 per unit. ” 10 Issued 500 units ” 12 Purchased 700 units at ` 8.80 per unit. ” 15 Issued 400 units. ” 19 Purchased 300 units at ` 9.50 per unit. ” 23 Issued 500 units ” 28 Purchased 600 units at ` 9.10 per unit. The management decided to follow standard price method for pricing material issues. The standard price fixed for the month of August is ` 9.00. Determine the value of closing stock by preparing stores ledger. Also determine the purchasing efficiency of materials department. Solution: Date

August 2 5 7

Stores Ledger – Standard Price Method Receipts Qty. Rate Total (units) (p/u) 500 9.00 4,500 – 700

– 9.25

– 6,475

Qty. (units) –

Issues Rate (p/u) –

300 –

9 –

Total – 2,700 –

Balance Qty. Rate Total (units) (p/u) 500 9 4,500 200 900

– –

1,800 8,275 Contd...

Materials Costing 51 Contd...

10 12 15 19 23 28

– 700 – 300 – 600

– 8.80 – 9.50 – 9.10

– 500 6,160 – – 400 2,850 – – 500 5,460 – Closing stock

9 – 9 – 9 –

4,500 – 3,600 – 4,500 –

400 1,100 700 1,000 500 1,100 1,100

– – – – – – –

3,775 9,935 6,335 9,185 4,685 10,145 10,145

Note: Material price variance = Actual quantity × Std price – Actual cost of purchase = 2,800 × 9 – 25,445 = (–) 225 Since actual cost of materials purchased is more, it is adverse variance. 7. Replacement price method The following is a summary of the receipts and issue of materials in a factory during the month of April: April 1 Opening balance 700 units at ` 25 per unit ” 3 Issued 400 units (Market price ` 26) ” 6 Purchased 1200 units at ` 27 per unit ” 9 Issued 800 units (Market price ` 25) ” 12 Purchased 1000 units at ` 26 per unit. ” 14 Issued 500 units (Market price ` 28) ” 20 Purchased 700 units at ` 27 per unit. ” 24 Issued 1000 units (Market price ` 28.50) ” 27 Purchased 500 units at ` 29 per unit. ” 29 Issued 900 units (Market price ` 30) Prepare stores ledger account. Stores Ledger – Replacement Price Method Date

April 1 3 6 9

Receipts Qty. Rate Total (units) (p/u) – – 1,200 –

– – 27 –

– – 32,400 –

Qty. (units) – 400 – 800

Issues Rate (p/u) – 26 – 25

Total

– 10,400 – 20,000

Balance Qty. Rate Total (units) (p/u) 700 300 1,500 700

25 – – –

17,500 7,100 39,500 19,500 Contd...

52 Cost Accounting Contd...

12 14 20 24 27 29

1,000 – 700 – 500 –

26 – 27 – 29 –

26,000 – – 500 18,900 – – 1,000 14,500 – – 900 Closing stock

– 28 – 28.50 – 30

– 14,000 – 28,500 – 27,000

1,700 1,200 1,900 900 1,400 500 500

– – – – – – –

45,500 31,500 50,400 21,900 36,400 9,400 9,400

8. FIFO Method The following is a summary of receipts and issues of materials in a factory during a month. Opening balance 500 units at ` 25 per unit 1st rd Issue 70 units 3 th Issue 100 units 4 Issue 80 units 8th th Received from supplier 200 units at ` 24.50 per unit. 13 th Returned to stores 15 units at ` 24 per unit. 14 Issue 180 units. 16th th Received from supplier 240 units at ` 24.75 per unit. 20 th Issue 304 units 24 Received from supplier 320 units at ` 24 per unit. 25th th Issue 112 units. 26 th Returned to stores 12 units at ` 24.50 per unit. 27 Received from supplier 100 units at ` 25.00 per unit. 28th Prepare stores ledger on the basis of first-in-first-out’. Stock verification revealed that on 15th there was a shortage of 5 units and another on 27th of 8 units. (CA, Inter) Stores Ledger – FIFO Date 1 3 4 8 13

Receipts Qty. Rate Total (units) (p/u) – – – – – – – – – – – – 200 24.50 4,900

Qty. (units) – 70 100 80 –

Issues Rate (p/u) – 25.00 25.00 25.00 –

Method Total – 1,750 2,500 2,000 –

Balance Qty. Rate Total (units) (p/u) 500 25.00 12,500 430 25.00 10,750 330 25.00 8,250 250 25.00 6,250 250 25.00 6,250 200 24.50 4,900 Contd...

Materials Costing 53 Contd...

14

15

24

360

–

–

15

–

–

–

5

25.00

125

16

–

–

–

180

25.00

4,500

20

240

24.75

5,940

–

–

–

24

–

–

–

25

320

24

7,680

65 200 15 24 –

25.00 24.50 24.00 24.75 –

1,625 4,900 360 594 –

26

–

–

–

112

24.75

2,772

27

12

24.50

294

8

24.75

198

28

100

25

2,500

–

–

Closing stock

–

–

250 200 15 245 200 15 65 200 15 65 200 15 240 216

25.00 24.50 24.00 25.00 24.50 24.00 25.00 24.50 24.00 25.00 24.50 24.00 24.75 24.75

6,250 4,900 360 6,125 4,900 360 1,625 4,900 360 1,625 4,900 360 5,940 5,346

216 320 104 320 96 320 12 96 320 12 100 528

24.75 24.00 24.75 24.00 24.75 24.00 24.50 24.75 24.00 24.50 25.00 –

5,346 7,680 2,574 7,680 2,376 7,680 294 2,376 7,680 294 2,500 12,850

9. Base stock method The stock of materials on hand on 1.4.2008 was 400 units at ` 50 per unit. The following receipts and issues were recorded. You are required to prepare the stores ledger account, showing how the value of issues would be calculated under base stock method, both through FIFO and LIFO, base being 100 units. 3.4.2008 Purchased 100 units at ` 55 per unit 8.4.2008 Issued 400 units. 11.4.2008 Purchased 600 units at ` 60 per unit

54 Cost Accounting

13.4.2008 19.4.2008 26.4.2008 8.5.2008 12.5.2008 14.5.2008 20.5.2008 25.5.2008 28.5.2008

Issued 500 units. Purchased 500 units Issued 600 units. Purchased 800 units Issued 500 units. Issued 200 units. Purchased 500 units Issued 400 units. Purchased 300 units

at ` 65 per unit at ` 70 per unit

at ` 75 per unit at ` 80 per unit

(i) Stores Ledger – FIFO Method with Base stock - 100 units. Date

Receipts Rate Total (p/u) – – 55 5,500

1.4.2008 3.4.2008

Qty. (units) – 100

8.4.2008

–

–

–

11.4.2008

600

60

13.4.2008

–

19.4.2008

Issues Qty. Rate Total (units) (p/u) – – – – – –

36,000

300 100 –

50 55 –

15,000 5,500 –

–

–

500

60

30,000

500

65

32,500

–

–

–

26.4.2008

–

–

–

8.5.2008

800

70

56,000

100 500 –

60 65 –

6,000 32,500 –

12.5.2008

–

–

–

500

70

35,000

14.5.2008

–

–

–

200

70

14,000

20.5.2008

500

75

37,500

–

–

–

Qty. (units) 400 400 100 100

Balance Rate Total (p/u) 50 20,000 50 20,000 55 5,500 50 5,000

100 600 100 100 100 100 500 100

50 60 50 60 50 60 65 50

5,000 36,000 5,000 6,000 5,000 6,000 32,500 5,000

100 800 100 300 100 100 100 100 500

50 70 50 70 50 70 50 70 75

5,000 56,000 5,000 21,000 5,000 7,000 5,000 7,000 37,500 Contd...

Materials Costing 55 Contd...

25.5.2008

–

–

–

28.5.2008

300

80

24,000

100 300 –

70 75 –

7,000 22,500 –

Closing stock

100 200 100 200 300 600

50 75 50 75 80 –

5,000 15,000 5,000 15,000 24,000 44,000

(ii) Stores Ledger – LIFO Method with Base stock – 100 units. Date 1.4.2008 3.4.2008

Receipts Qty. Rate Total (units) (p/u) – – – 100 55 5,500

Qty. (units) – –

Issues Rate (p/u) – – 55 50 –

5,500 15,000 –

Total – –

8.4.2008

–

–

–

11.4.2008

600

60

36,000

100 300 –

13.4.2008

–

–

–

500

60

30,000

19.4.2008

500

65

32,500

–

–

–

26.4.2008

–

–

–

8.5.2008

800

70

56,000

500 100 –

65 60 –

32,500 6,000 –

12.5.2008

–

–

–

500

70

35,000

14.5.2008

–

–

–

200

70

14,000

20.5.2008

500

75

37,500

–

–

–

25.5.2008

–

–

–

400

75

30,000

Balance Qty. Rate Total (units) (p/u) 400 50 20,000 400 50 20,000 100 55 5,500 100 50 5,000 100 600 100 100 100 100 500 100

50 60 50 60 50 60 65 50

5,000 36,000 5,000 6,000 5,000 6,000 32,500 5,000

100 800 100 300 100 100 100 100 500 100 100 100

50 70 50 70 50 70 50 70 75 50 70 75

5,000 56,000 5,000 21,000 5,000 7,000 5,000 7,000 37,500 5,000 7,000 7,500 Contd...

56 Cost Accounting Contd...

28.5.2008

300

80

24,000

–

–

–

Closing stock

100 100 100 300 600

50 70 75 80 –

5,000 7,000 7,500 24,000 43,500

10. Inventory turnover radio From the following particulars compute the inventory turnover ratio and number of days average stock is held: Materials ‘M’ Materials ‘N’ ` ` Opening stock of materials 2,50,000 3,00,000 Purchase of materials 34,10,000 13,60,000 Closing stock of materials

2,10,000

2,60,000

Solution: Inventory turnover ratio =

M=

Materials consumed Average stock 34,50,000 2,30,000

= 15 times N=

14,00,000 2,80,000

= 5 times. Number of days average stock is held =

M=

Average stock ¥ 360 Materials consumed 2,30,000 ¥ 360 34,50,000

= 24 days N=

2,80,000 ¥ 360 14,00,000

= 72 days.

Materials Costing 57

Note: 1. Materials consumed M

N

Opening stock of materials Add: Purchases

2,50,000 34,10,000

3,00,000 13,60,000

Less: Closing stock of materials

36,60,000 2,10,000

16,60,000 2,60,000

34,50,000

14,00,000

2. Average stock =

Opening stock + Closing stock 2

M=

2,50,000 + 2,10,000 = ` 2,30,000 2

N=

3,00,000 + 2,60,000 = ` 2,80,000 2

11. Inventory turnover ratio From the following particulars calculate materials turnover ratio and number of days average stock is held: Opening stock – 15,500 units Purchases – 1,25,500 units Closing stock – 13,500 units Solution: Materials turnover ratio = =

Materials consumed Average stock 1, 27,500 = 8.79 14,500

= 9 times (Approx). Number of days average stock is held = =

Average stock ¥ 365 Materials consumed 14,500 ¥ 365 1, 27,500

= 41.50 = 42 days (Approx.)

58 Cost Accounting

Note: (1) Materials consumed Opening stock of materials Add: Purchases Less: Closing stock of materials Materials consumed (2) Average stock =

=

15,000 units 1,28,500 units 1,44,000 units 13,500 units 1,30,500 units

Opening stock + Closing stock 2 15,500 + 13,500 2

= 14,500 units.

4

Labour Cost Control

Chapter

Practical Problems A. Short Answer Type Numerical Questions: 1. The extract from the payroll of a company gives the following information: Number of employees at the beginning of 2004 – 240 Number of employees at the end of 2004 – 310 Number of employees discharged during the year – 5 Number of employees resigned during the year – 26 Number of employees replaced due to quits and discharges – 25 Calculate net annual labour turnover rate. (B.Com., Madras University) Solution: No. of worker s replaced ¥ 100 Net annual labour turnover rate = Average no. of worker s (Replacement Method) 25 ¥ 100 × 100 = 275

= 9.1% Note: No. of worker s in the beginning + No. of workers at the end Average no. of workers = 2 240 + 310 = 2

= 275 workers. 2. Calculate labour turnover rate under separation method. Number of employees at the beginning of 2008 Number of employees at the end of 2008 Number of employees resigned Number of employees discharged

– – – –

600 800 15 55

60 Cost Accounting

Solution:

Labour turnover rate under

Separation method

No. of employees resigned + No. of employess disch arg ed = Average no. of employees

=

15 + 55 ¥ 100 700

= 10% No. of employees in the beginning + No. of employees at the end Note: Average No. of employees = 2

=

600 + 800 = 700 2

3. Calculate standard time from the following: One worker with an efficiency rating of 80% produced 20 units in a day of 8 hours. Allow 10% idle time allowance. Solution: Actual time taken per unit =

8 ¥ 60 20

= 24 minutes Actual efficiency rating = 80% Normalised time for 100% efficiency = 19.20 minutes 8 ˆ Ê ÁË Rating = 24 ¥ ˜ 100 ¯

Add: 10% allowance for idle = 1.92 minutes Standard time per unit = 21.12 minutes 4. Calculate net wages payable from the following: Basic wages ` 2000 p.m. Dearness allowance – 30% of basic pay House rent allowance – 10% of basic pay Employee and employer contribute 10% each to P.F. Employer contribution to ESI – 2% of basic pay Employee contribution to ESI – 1% of basic pay Solution:

Calculation of net wages payable

Labour Cost Control 61

Basic wages P.M. Dearness allowance – 30% of basic House rent allowance – 10% of basic Gross wages Less: Employee contribution to P.F. 10% of basic Employee contribution to ESI 1% of basic Net wages payable

200 20

2,000 600 200 2800

220 2,580

B. Comprehensive Numerical Questions: 1. Calculate labour turnover rate under various methods from the following information for the month of October, 1998: Number of employees at the beginning of the month 950 Number of employees at the end of the month 1050 Number of employees resigned during the year 10 Number of employees replaced in the vacancies 20 Number of employees discharged during the year 30 Number of employees replaced due to expansion scheme 120 (B.Com., Madras University) Solution:

Labour turnover rate:

(a) Separation method = =

No. of employees resigned + No. of employees discharged ¥ 100 Average No. of employees 10 + 30 ¥ 100 = 4% 1000

(b) Replacement method = =

No. of employees replaced in the vacancies ¥ 100 Average No. of employees 20 ¥ 100 = 2% 1000

No. of resigned + No. of discharged + No. of replaced invacancies + No. of recruited for expansion ¥ 100 (c) Accession method = Average No. of employees

=

20 + 120 ¥ 100 = 14% 1000

62 Cost Accounting

No. of resigned + No. of disch arg ed + No. replaced invacancies + No. of recruited for exp ansion ¥ 100 (d) Flux method = Average no. of employees

=

10 + 30 + 20 + 120 ¥ 100 = 18% 1,000

Note: Average No. of employees No. of employees in the beginning + No. of employees at the end 2

=

950 + 1,050 2

= 1,000. 2. From the following data provided to you, find out the labour turnover rate by applying: (a) Flux method, (b) Replacement method, (c) Separation method. Number of workers on the pay roll: At the beginning of the month

–

500

At the end of the month

–

600

During the month 5 workers left, 20 persons were discharged and 75 workers were recruited. Of these 10 workers were recruited in the vacancies of those leaving, while the rest were engaged for an expansion scheme. (ICWA, Inter) Solution: Labour turnover rate: No. of separations + No. of replacements + No. of recruits for exp ansion ¥ 100 (a) Flux method = Average No. of workers

=

25 + 10 + 65 ¥ 100 = 18.18% 550

(b) Replacement method = =

No. of worker replaced ¥ 100 Average No. of workers

10 ¥ 100 = 1.82% 550

No. of workers resigned + No. of workers discharged ¥ 100 Average No. of workers 5 + 20 ¥ 100 = 4.55% = 550

(c) Separation method =

Labour Cost Control 63

Note: No. of workers in the beginning + No. of workers at the end 2 500 + 600 = 550 = 2

Average No. of workers =

3. From the following particulars prepare a statement showing cost per manday of 8 hours and cost per hour: (a) Basic salary and dearness allowance ` 5,000 (b) Leave salary 6% of basic salary and DA. (c) Employer’s contribution to PF 8% of basic salary and DA. (d) Employee’s contribution to PF 8% of basic salary and DA. (e) Employer’s contribution to State Insurance 2% of basic salary and DA. (f) Employee’s contribution to State Insurance 1% of basic salary and DA. (g) Pro-rata expenditure on amenities to labour ` 75 per head per month. (h) Number of working hours in a month 200. Solution:

Statement showing labour cost: Particulars

Basic salary and DA Leave salary 6% of basic and DA Employer contribution to PF 8% of basic and DA Employer contribution to State Insurance 2% of basic DA Total a labour cost Pro-rata expenditure on amenities to labour Labour cost per day of 8 hours Labour cost per hour (2368)

Total (per month) 5,000 300 400 100 100 5,900 5900 ¥ 8 = ` 236 200

= ` 29.50

4. A worker is paid a basic salary of ` 6,000 and a dearness allowance of ` 900 per month. He is entitled to a bonus of 15% on basic salary and D.A. Employer’s contribution to recognized 1 provident fund is 8 % of basic salary and DA, to which employee contributes an equal 3 amount. Employer also contributes 2% of basic salary and DA towards state insurance and employee’s contribution is 1% of basic salary and DA. The company also provides canteen facility at subsidized rates at monthly subsidy of ` 9000. The number of employees using the canteen are 300. The total number of working days in a year is 300 days of 8 hours each. Workers are entitled to 20 days leave with full pay. Workers are also given 20 days additional leave with half pay. Normal idle time amounted to 20%. Compute labour cost per man hour when,

64 Cost Accounting

(a) Additional leave with half pay availed (b) Additional leave with half pay not availed Solution: Computation of cost per man hour (a) Additional leave with half pay availed: =

Total annual labour cos t (WN – 2) Effective annual labour hours (WN – 1)

=

1,01,836 = ` 61.20. 1664

(b) Additional leave with half pay not availed: =

Total annual labour cost (WN 4) Effective annual labour cost (WN 3)

=

1,04,136 = ` 58.11 1,792

Working Note: (1) Computation of effective labour hours – when additional leave with half pay is availed. Total working days per year

300 days

Less: Leave with full pay

20 days 280 days

Less: Leave with half pay

20 days

Net working days

260 days

Annual working hours for net working days

260 × 8 = 2,080 hrs

Less: Idle time – 20%

=

416 hrs

Effective working hour per annum

= 1,664 hrs

(2) Total labour cost per year when leave with half pay is availed. Basic salary per month

– ` 6,000

Dearness allowance

– ` 900

Monthly salary including DA

– ` 6,900

Annual salary including DA = 6,900 × 12 = ` 82,800 1 20 ¥ = ` 2,300 2 30 Net salary per annum = ` 80,500

Less: Half salary for 20 days leave with half pay = 6,900 ×

Labour Cost Control 65

Add: (i) Bonus 15% of basic and DA 1 (ii) Employer contribution to RPF – 8 % of basic and DA 3 (iii) Employer contribution to State Insurance 2% of basic and DA

= ` 12,420 = ` 6,900 =`

1,656

9000 ¥ 12 =` 360 300 Total annual labour cost = ` 1,01,836 (3) Computation of effective labour hours – when leave with half pay is not availed.

(iv) Canteen subsidy =

Total working days per year Less: Leave with full pay Net annual working days Annual working hours for net working days Less: Idle time – 20% Effective working hour per annum

300 days 20 days 280 days 280 × 8 = 2,240 hrs = 448 hrs = 1,792 hrs

(4) Total labour cost per year – when leave with half pay is not availed: Basic salary per month

– ` 6,000

Dearness allowance

– ` 900

Monthly salary including DA

– ` 6,900 =

` 82,800

= 1 (ii) Employer’s contribution to RPF – 8 % of basic and DA = 3 (iii) Employer’s contribution to State Insurance 2% of basic and DA =

` 12,420

Annual salary including DA = 6,900 × 12 Add: (i) Bonus 15% of basic and DA

(iv) Canteen subsidy –

9000 ¥ 12 300

Total annual labour cost

=

` 6,900 ` 1,656 ` 360

= ` 1,04,136

Note: 30 days a month assumed. (5) Calculate the standard labour hour rate for workman of grade ‘A’ from the following data: Basic pay ` 4,000 p.m. D.A. ` 1,000 p.m. Fringe benefits ` 100 p.m. Number of working days per year – 300 Leave rules:

66 Cost Accounting

30 days personal leave with full pay 20 days sick leave with half pay What would be the labour cost per hour if: (a) Sick leave is fully availed. (b) Sick leave is not availed. Solution: (a) Labour cost per hour – when sick Leave is fully availed =

Annual labour cost (WN – 2) Effective annual labour hours (WN – 1)

59,500 = ` 29.75 2,000 (b) Additional cost per hour – when sick leave is not availed.

=

=

Annual labour cost (WN – 2) Effective annual labour hours (WN – 1)

=

61, 200 = ` 28.33 2,160

Working note: (i) Computation of effective annual working hours: Sick leave availed Annual working days Less: Personal leave with full pay

Sick leave not availed

300

300

30

30

270

270

Less: Sick leave with half pay

20

–

Effective annual working days

250

Effective annual working hours

250 × 8 = 2000 hrs

270 270 × 8 = 2,160 hrs

(ii) Annual labour cost Per month 4,000 1,000 100 5,100

Basic pay DA Fringe benefits Salary when sick leave is not availed Less: Half pay 20 days sick leave = 5,100 × Salary when sick leave is availed

1 20 ¥ 2 30

Per year 48,000 12,000 1,200 61,200

–

1,700

–

59,500

Labour Cost Control 67

6. X Ltd. provides the following emoluments and benefits to worker “Pee”. (a) Basic salary ` 4,500 per month (b) Dearness allowance: On first ` 2,000 of salary – ` 1,500 On second ` 2,000 of salary – ` 750 On balance of salary – 40% (c) Employer’s contribution to: Provident fund – 8% of Salary and DA ESI – 2% of salary and DA (d) Bonus – 20% of salary and DA (e) Other allowances – ` 7,500 per annum. ‘Pee’ works for 2,250 hours per annum, out of which 300 hours are non-productive but treated as normal idle time. ‘Pee’ worked for 18 effective hours in Job No. 77, where the cost of direct materials is ` 30, overhead is charged at 200% of direct labour. The job is priced to earn a profit of 10% on sales value. You are requested to find out: (a) Effective hourly labour cost (b) Sales value of Job. 77 Solution: (a) Computation of effective hourly labour cost (a) Basic salary

Per month

Per year

4,500

54,000

2,450

29,400

556

6,672

139

1,668

1,390

16,680

(b) DA: (i) On first ` 2,000 of basic – 1,500 (ii) On second ` 2,000 of basic – 750 (iii) On balance - ` 500 × 40% – 200 (c) Employer contribution to PF – 8% of salary and DA Employer contribution to ESI – 2% of salary and DA (d) Bonus 20% of salary and DA (e) Other allowances Total annual labour cost Effective labour hours (2,250 – 300) = 1,950 hrs Effective hourly labour cost =

1,15,920 = ` 59.45. 1,950

–

7,500

–

1,15,920

68 Cost Accounting

(b) Sale value of Job No. 77

Materials

3,000.00

Labour cost (59.45 × 18)

1,070.10

Prime cost

4,070.10

Overhead: 200% of labour cost

2,140.20 Total cost

6,210.30

Profit – 10% on sale value (or) 10/90 on cost

690.03

Sales value

6,900.33

7. Normal working hours in a factory are 44 hours per week. Worker ‘X’ is paid at ` 10 per hour and overtime is paid at double the above rate. In addition, a production bonus of ` 5.00 per 100 units produced in excess of 2,000 units per week is also paid. The Time and Job Card shows the following details: Days

Morning Time

Evening Time

Output (Units)

Monday

In 8.00 am

Out 12.30 noon

In 2.00 pm

Out 5.30 pm

600

Tuesday

8.30 am

1.00 pm

2.00 pm

6.00 pm

650

Wednesday

8.00 am

12.00 noon

1.00 pm

5.30 pm

650

Thursday

8.00 am

12.00 noon

1.00 pm

6.30 pm

550

Friday

8.00 am

12.00 noon

1.00 pm

5.00 pm

450

Saturday

8.00 am

12.00 noon

1.00 pm

6.00 pm

600

Calculate earnings of worker ‘X’ for the week. Solution:

Computation of worker ‘X’ earnings

Normal time wages (44 × 10)

440.00

Overtime wages (51.5-44) × 10 × 2

150.00

Production bonus (1,500 × 5/100)

75.00 Total weekly earnings

Working Note: (1) Computation of total time worked.

665.00

Labour Cost Control 69

Days Monday Tuesday Wednesday Thursday Friday Saturday Total

Morning (Hrs) 4½ 4½ 4 4 4 4 25

Afternoon (Hrs) 3½ 4 4½ 5½ 4 5 26½

Total (Hrs) 8 8½ 8½ 8½ 8 9 51½

(2) Excess production over standard Total weekly production

3,500 units

Less: Standard production Excess production

2,000 units 1,500 units

8. The following details are available for the year 2008: Sales

50,00,000

Direct materials

17,00,000

Direct labour

11,00,000

Variable overheads

7,00,000

Fixed overheads

5,00,000

Actual hours worked during the year amounted to 1,60,000 hours. As a result of labour turnovers 10,000 hours were lost due to delay in recruitment. Actual hours worked includes 20,000 hours relating to training of new workers which is reckoned as equal to 10,000 productive hours. The following expenses were incurred relating to labour turnover: Settlement cost 25,000 Recruitment cost 10,000 Training cost 15,000 Find the effect of labour turnover on profit, assuming that all products produced can be sold at prevailing prices. Solution: 1. Actual hours worked Less: Unproductive training time Total productive hours

1,60,000 hrs 10,000 hrs 1,50,000 hrs

70 Cost Accounting

2. Contribution earned during 2008: Sales Less: Variable cost:

50,00,000

Direct materials

17,00,000

Direct labour

11,00,000

Variable overheads

7,00,000

35,00,000 15,00,000

Contribution 3. Total unproductive time: Time lost due to delay in recruitment

10,000 hrs

Unproductive training time

10,000 hrs

Total

20,000 hrs

4. Loss of contribution due to unproductive time =

15,00,000 ¥ 20,000 1,50,000

= ` 2,00,000 5. Loss due to labour turnover: ` 2,00,000

Loss of contribution due to loss of productive time Add: Expenses due to labour turnover: Settlement cost

25,000

Recruitment cost

10,000

Training cost

15,000

Loss of profit

50,000 2,50,000

9. From the following data calculate total monthly remuneration of 3 workers X, Y and Z. (i) Standard production per month per worker is 1,000 units. (ii) Actual production during a month: X – 800 units; Y – 700 units; and Z – 900 units. (iii) Piecework rate per unit of production – 15 paise. (iv) DA – ` 40 per month (fixed) (v) House rent allowance ` 20 per month (fixed). (vi) Additional production bonus at the rate of ` 5 for each percentage of actual production exceeding 75% over standard production. (ICWA, Inter)

Labour Cost Control 71

Solution:

Calculation of monthly remuneration: Particulars

Workers

Piece rate wages DA House rent allowance Additional production bonus Total earnings

X( ) (800 × 0.15) 120 40 20 25 205

Y( ) (700 × 0.15) 105 40 20 – 165

Z( ) (900 × 0.15) 135 40 20 75 270

Working note: Computation of additional production bonus X % of actual production

Y

Z

800 700 900 ¥ 100 = 80% ¥ 100 = 70% ¥ 100 = 70% 1,000 1,000 1,000

% of actual production over 75% 5% Additional production bonus 5 × 5 = 25

– –

15% 15 × 5 = 75

10. Job Card of worker ‘X’ reveals the following for a week of 44 hours: Time booked – 44 hours (including 4 hours overtime) Loss of time – 4 hours due to machine breakdown. The worker is paid at ` 15 per hour. Overtime is paid at double the normal rate. You are required to allocate total wages paid to the worker between direct and indirect labour. Also show the amount charged to costing profit and loss account. Solution: Time booked Idle time Actual time spent Less: Overtime Normal time Worker’s total earnings: Time rate wages – Time taken × Time rate Overtime premium

48 × 15

= ` 720

4 × 15

= ` 60

Total earnings = ` 780

44 4 48 4 44

hrs hrs hrs hrs hrs

72 Cost Accounting

Allocation of wages: 1. Normal time wages – 44 × 15 = ` 660 treated as direct labour 2. Overtime premium 4 × 15 = ` 60 treated as production overhead . 3. Wages for idle time due to machine breakdown (abnormal cause) - 4 × 15 = ` 60 debited to costing profit and loss account. 11. Workers X and Y are engaged on job ‘A’. The following hours were worked by workers on Job ‘A’ during a week. Days Monday Tuesday Wednesday Thursday Friday Saturday

– – – – – – –

Worker X 8 hrs. 10 hrs. 9 hrs. 11 hrs. 9 hrs. 9 hrs.

– – – – – – –

Worker Y 10 hrs. 9 hrs. 11 hrs. 8 hrs. 9 hrs. 6 hrs.

(a) Normal working hours on week days 8 hours and on Saturday 4 hours. (b) Normal daily wages – X – ` 100, Y – ` 120 (c) 4 hours work on Saturday is paid at full day wages. Work on Saturday in excess of 4 1 hours is treated as overtime and is paid at 1 times the normal wages and at double 2 the rate over 8 hours. (d) Dearness allowance paid at 50% on wages including overtime wages. Calculate the weekly earnings of workers X and Y. Also calculate the labour cost of Job ‘A’. Solution:

Computation of weekly earnings

Day

Worker - X Overtime wages ( )

Total ( )

Normal time wages ( ) 100 120

Monday

Normal time wages ( ) 100

Tuesday

100

100 ¥ 2 ¥ 2 = 50 8

150

Wednesday

100

100 ¥ 1 ¥ 2 = 25 8

125

–

Worker - Y Overtime wages ( )

Total ( )

120 ¥ 2 ¥ 2 = 60 8

180

120

120 ¥ 1 ¥ 2 = 30 8

150

120

120 ¥ 3 ¥ 2 = 90 8

210 Contd...

Labour Cost Control 73 Contd...

Thursday

100

100 ¥ 3 ¥ 2 = 75 8

175

120

–

120

Friday

100

100 ¥ 1 ¥ 2 = 25 8

125

120

120 ¥ 1 ¥ 2 = 30 8

150

Saturday

100

100 1 ¥ 4 ¥ 1 = 75 8 2

200

120

120 1 ¥ 2 ¥ 1 = 45 8 2

165

Total wages Dearness allowance = 50% of wages Total earnings

100 ¥ 1 ¥ 2 = 25 8

875

975

437.50

487.50

1,312.50

1,462.50

Labour cost of Job ‘A’ Earnings of worker ‘A’ Earnings of worker ‘B’ Total labour cost

1,312.50 1,462.50 2,775.00

5

Methods of Wage Payment

Chapter

III. Practical Problems A. Short Answer Type Questions: 1. From the following information compute the earnings of a worker under (i) Time rate system and (ii) Halsey plan: Standard time – 20 hours Time taken – 15 hours Hourly wage rate – ` 20 Solution: Computation of earnings of a worker: (i) Time rate system: Earnings = TT × TR = 15 × 20 = ` 300 (ii) Halsey plan: Time rate wages = TT × TR ` = 15 × 20 = 300 50 Bonus = TS × TR × 100 50 = 5 × 20 × = 50 100 Earnings = 350 Note: (i) Time saved: Standard time (ST) – 20 hours Time taken (TT) – 15 hours Time saved (TS) – 5 hours 2. Compute bonus under Rowan Scheme Standard time – 16 hours Time taken – 10 hours Time rate – ` 18 per hour

Methods of Wage Payment 75

Solution: Bonus under Rowan scheme = =

Time saved × Time taken × Time rate Standard time 6 ¥ 10 ¥ 18 16

= ` 67.50. Note: Time saved = Standard time – Time taken = 16 – 10 = 6 hours 3. Calculate time saved. Actual production – 75 units Standard time per unit – 10 minutes Time taken – 8 hours Solution: Standard time for actual production =

75 ¥ 10 = 12.5 hrs 60

Time taken = 8.0 hrs Time saved = 4.5 hrs 4. From the following compute the standard time: Actual production – 120 units. Time given under straight piece rate system – 15 minutes Time given is increased by 20% under incentive schemes Solution: Time given under straight piece rate system = 15 minutes Add: 20% increase under incentive schemes = 3 minutes Standard time per unit = 18 minutes 120 ¥ 18 = 36 hours Standard time for actual production = 60 5. Compute the earnings of a worker under Barth scheme: Standard time – 25 hours Time taken – 18 hours Time rate – ` 12 per hour Solution:

Earning under Barth scheme = Time rate Standard time ¥ Time taken = 12 25 ¥ 18 = ` 254.56.

76 Cost Accounting

6. From the following information calculate the share of group bonus to each worker in the group: Group bonus ` 2,000 Time wages of workers in the group are – Worker ‘A’ ` 1500, Worker ‘B’ ` 2,000, Worker ‘C’ ` 1800. Worker ‘D’ ` 2,200 and worker ‘E’ ` 2,500. Solution:

Group bonus to be apportioned in time wages ratio.

Ratio of time wages = 1,500: 2,000: 1,800: 2,200: 2,500 = 15: 20: 18: 22: 25 Share in group bonus to: 15 ¥ 2,000 = ` 300 Worker ‘A’ = 100 Worker ‘B’ =

20 ¥ 2,000 = ` 400 100

Worker ‘C’ =

18 ¥ 2,000 = ` 360 100

Worker ‘D’ =

22 ¥ 2,000 = ` 440 100

Worker ‘E’ =

25 ¥ 2,000 = ` 500 100

7. Five men work as a team. Group piece rate is ` 13,500. Time worked and their individual time rates of the workers are as follows: Worker ‘A’ – 80 hours at ` 30 per hour Worker ‘B’ – 75 hours at ` 25 per hour Worker ‘C’ – 60 hours at ` 40 per hour Worker ‘D’ – 50 hours at ` 45 per hour Worker ‘E’ – 45 hours at ` 40 per hour Compute group bonus. Solution:

Computation of group bonus:

Group piece rate wages – Less: Time wages of workers: A = 80 B = 75 C = 60 D = 50 E = 45 Group bonus

` 13,500 × × × × ×

30 25 40 45 40

= = = = =

` 2,400 ` 1,875 ` 2,400 ` 2,250 ` 1,800

10,725 2,775

Methods of Wage Payment 77

8. From the following compute the total bonus and the bonus payable to the worker and the foremen under Bedeaux point premium plan: Time allowed – 900 ‘B’s Time taken – 540 ‘B’s Time rate – ` 15 per hour. Solution: Time allowed = 900 ‘B’s (or) 15 hours Time taken = 540 ‘B’s (or) 9 hours Time saved = 360 ‘B’s (or) 6 hours Total bonus under Bedeaux point premium plan = Time saved × Time rate = 6 × 15 = ` 90. Bonus to worker = Total bonus ×

75 100

75 = ` 67.50 100 25 Bonus to foreman = Total bonus × 100 25 = ` 22.50 = 90 × 100

= 90 ×

B. Long Answer Type Questions: 1. Time Rate, Piece rate, Halsey and Rowan plans Calculate the earnings of a worker from the following information under (a) Time rate method (b) Piece rate method (c) Halsey plan and (d) Rowan plan. Standard time – 40 hours Time taken – 30 hours Hourly wage rate – ` 10 per hour Solution: Calculation of earnings of an worker: (a) Time rate method: Earnings = Time taken × Time rate = 30 × 10 = ` 300. (b) Piece rate method: Earnings = Standard time × Time rate = 40 × 10 = ` 400.

78 Cost Accounting

(c) Halsey plan: Time rate wages = Time taken × Time rate = 30 × 10 = ` 300 Bonus = Time saved × Time rate × Earnings = `350

50 50 = 10 × 10 × = ` 50 100 100

Note: Time saved = Standard time – Time taken = 40 – 30 = 10 hours (d) Rowan Plan: Time rate wages = Time taken × Time rate = 30 × 10 = ` 300 Bonus =

TS 10 × TT × TR = × 30 × 10 = ` 75 ST 40

Earnings = ` 375 2. Rowan, Halsey and Hasley-Weir plans Calculate the earnings of a worker under (a) Rowan premium bonus system, (b) Halsey premium bonus system, (c) Halsey-Weir plan (30% to workman), from the following particulars: Hourly rate of wages ` 7.50 Standard time to produce 1 dozen articles is 5 hours. Actual time taken to produce 10 dozen articles is 40 hours. Solution: Earnings of a worker: (a) Rowan premium bonus system: Time rate wages = Time taken × Time rate = 40 × 7.50 = ` 300 Bonus =

TS 10 × TT × TR = × 40 × 7.50 = ` 60 ST 50

Earnings = ` 360 (b) Halsey premium bonus system: Time rate wages = Time taken × Time rate = 40 × 7.50 = ` 300.00 50 Bonus = TS × TR × = ` 37.50 100 Earnings = ` 337.50 (c) Halsey – Weir Plan: Time rate wages = Time taken × Time rate

Methods of Wage Payment 79

= 40 × 7.50 = ` 300.00 Bonus = TS × TR ×

30 30 = 10 × 7.50 × = ` 22.50 100 100

Earnings = ` 322.50 Workings: Standard time for 1 dozen articles = 5 hours Standard time for 10 dozen articles = 5 × 10 = 50 hours Less: Time taken = 40 hours Time saved = 10 hours 3. Time rate, Piece rate with guaranteed weekly wages, Rowan and Halsey plans During one week the workman ‘X’ produced 200 articles. He received wages for guaranteed 44 hour week at the rate of ` 21 per hour. The estimated time to produce one unit is 15 minutes and under incentive scheme the time allowed is increased by 20%. Calculate his gross wages under each of the following methods of remuneration: (a) Time rate, (b) Piece work rate with guaranteed weekly wages (c) Rowan premium bonus and (d) Halsey premium bonus. Solution: Earnings of a worker: (a) Time rate method: Earnings = Time taken × Time rate = 44 × 21 = ` 924. (b) Piecework rate with guaranteed weekly wages Piecework rate wages = Output × Time allowed × Time rate = 200 ×

15 × 21 60

= ` 1,050 (c) Rowan premium bonus: Time rate wages = Time taken × Time rate = 44 × 21 = ` 924.00 Bonus =

TS 16 × TT × TR = × 44 × 21 = ` 246.40 ST 60

Earnings = ` 1,170.40 (d) Halsey premium bonus Time rate wages = Time taken × Time rate = 44 × 21 = ` 924.00

80 Cost Accounting

Bonus = TT × TR ×

50 50 = 16 × 21 × = ` 168.00 100 100

Earnings = ` 1,092.00 Workings: Time allowed for 1 unit = 15 minutes Add: 20% under incentive scheme = 3 minutes Standard time per unit = 18 minutes 200 ¥ 18 Standard time for 200 units = = 60 hrs 60 Less: Time taken = 44 hrs Time saved = 16 hrs 4. Straight piece rate and Taylor’s differential piece rate Calculate the earnings of a worker under (i) Straight piece rate system and (ii) Taylor’s differential piece rate system from the following particulars: Normal hourly rate – ` 24 Standard time per unit – 30 seconds Differentials to be applied: 90% of piece rate for below standard and 110% of piece rate at or above standard. Worker ‘A’ produces 900 units per day and Worker ‘B’ produces 1100 units per day. Solution: Earnings of workers: (a) Straight piece rate system: Earning = Normal piece rate × output Worker A = 0.20 × 900 = ` 180 Worker B = 0.20 × 1,100 = ` 220 (b) Taylor’s differential piece rate system: Earning = Output × Low piece rate/High piece rate Worker ‘A’ = Output × Low piece rate = 900 × 0.18 = ` 162. Note: Output of ‘A’ is below standard output. So he is paid at low piece rate. Worker ‘B’ = Output × High piece rate system = 1,100 × 0.22 = ` 242 Note: Output of ‘B’ is above standard. So he is paid at high piece rate. Workings: Standard output in 30 seconds = 1 unit

Methods of Wage Payment 81

1 × 60 × 60 = 120 units. 30 Standard output per day of 8 hour = 120 × 8 = 960 units.

Standard output in 1 hour =

Normal piece rate = =

Wages per hour Standard output per hour 24 = ` 0.20 120

Low piece rate = Normal piece rate × = 0.20 ×

90 = ` 0.18 110

High piece rate = Normal piece rate × = 0.20 ×

90 110

110 100

110 = ` 0.22 100

5. Accelerated premium scheme What will be the earnings of a worker at 55 paise per hour when he takes 140 hours to do a volume of work for which the standard time allowed is 200 hours. The plan of payment of bonus on a sliding scale is as under: (a) Within the first 10% saving in standard time, the bonus is 40% of the time saved. (b) Within the second 10% saving in standard time, the bonus is 50% of the time saved. (c) Within the third 10% saving in standard time, the bonus is 60% of the time saved. (d) Within the fourth 10% saving in standard time, the bonus is 70% of the time saved. (e) For the rest the bonus is 75% of the time saved. Solution:

Earnings of a worker Time rate wages = Time taken × Time rate = 140 × 5.50 = ` 770.00

Bonus: Time saved × Time rate × % of bonus (i) For savings within first 10% time saved 40 = ` 44.00 100 (ii) For savings within second 10% time saved

= 20 × 5.50 ×

50 = ` 55.00 100 (iii) For savings within third 10% time saved 60 = ` 66.00 = 20 × 5.50 × 100 Total earnings = ` 935.00

= 20 × 5.50 ×

82 Cost Accounting

Workings: Standard time = 200 hrs Time taken = 140 hrs Time saved = 60 hrs 6. Merrick’s multiple piece rate system On the basis of the following information, calculate the earnings of A, B, C and D under Merrick’s multiple piece rate system. Standard production per hour – 12 units. Normal rate per hour ` 7.50 In an 8-hour day: A produced 75 units, B produced 96 units. C produced 90 units, D produced 100 units. Solution:

Earnings of workers: Worker ‘A’ = Output × Normal piece rate = 75 × 0.625 = ` 46.88 Worker ‘B’ = Output × 110% of normal piece rate = 96 × 0.625 ×

110 = ` 66 100

Worker ‘C’ = Output × 110% of normal piece rate 110 = ` 61.88. = 90 × 0.625 × 100 Worker ‘D’ = Output × 120% of normal piece rate = 100 × 0.625 ×

120 = ` 75.00 100

Workings: (a) Standard production per day = 12 × 8 = 96 units. (b) Worker’s efficiency (% of production): = Worker ‘A’ =

Actual production ¥ 100 Standard production 75 × 100 = 78.13% 96

96 ¥ 100 = 100% 96 90 ¥ 100 = 93.75% Worker ‘C’ = 96

Worker ‘B’ =

Methods of Wage Payment 83

Worker ‘D’ = (c) Normal piece rate = =

100 × 100 = 104.17% 96

Wages per hour Standard production per hour 7.50 = ` 0.625. 12

7. Merrick’s multiple piece rate system Calculate the earnings of workers A, B and C under straight piece rate system and Merrick’s multiply piece rate system from the following particulars: Normal rate per hour ` 5.40 Standard time per unit 1 minute Output per day is as follows: Worker ‘A’ – 390 units Worker ‘B’ – 450 units Worker ‘C’ – 600 units Working hours per day are 8 hours. Solution: Earnings of workers: (a) Straight piece rate system: Earnings = Output × Normal piece rate Worker ‘A’ = 390 × 0.09 = ` 35.10 Worker ‘B’ = 450 × 0.09 = ` 40.50 Worker ‘C’ = 600 × 0.09 = ` 54.00 (b) Merrick’s multiple piece rate system: Worker ‘A’ = Output × Normal piece rate = 390 × 0.09 = ` 35.10. Worker ‘B’ = Output × 110% of normal piece rate 110 = ` 44.55. 110 Worker ‘C’ = Output × 120% of normal piece rate

= 450 × 0.09 ×

= 600 × 0.09 ×

120 = ` 64.80 100

Workings: (i) Normal piece rate Standard output per minute = 1 unit Standard output per hour = 60 × 1 = 60 units.

84 Cost Accounting

Normal piece rate = =

Wages per hour Standard output per hour 5.40 = ` 0.09. 60

(ii) Standard output per day of 8 hours = 60 × 8 = 480 units (iii) Worker’s efficiency (% of production) =

Actual production Standard production

Worker ‘A’ =

390 × 100 = 81.25% 480

Worker ‘B’ =

450 × 100 = 93.75% 480

Worker ‘C’ =

600 × 100 = 125% 480

8. Gantt’s task and bonus plan From the information given below, calculate the earnings of three workers X, Y and Z under Gantt’s task and bonus plan: (a) Time rate ` 15 per hour. (b) High task per day of 8 hours – 80 units. (c) High piece rate ` 2 per unit. (d) Day’s out: X – 70 units, Y – 80 units, Z – 90 units (B.Com, Karnataka) Solution: Earnings of workers: Worker ‘X’: Time rate wages = Time taken × Time rate = 8 × 15 = ` 120 Worker ‘Y’: Time rate wages = Time taken × Time rate = 8 × 15 = ` 120 Add: Bonus 20% of time rate wages = ` 24 Earnings = ` 144 Worker ‘Z’:

Methods of Wage Payment 85

Piece rate wages = output × High piece rate = 90 × 2 = ` 180. Workings: % of actual production and wage rate: 70 × 100 = 87.5% (i) Worker ‘X’ = 80 Worker ‘X’ output is below standard, he is paid time rate wages for time worked. 80 × 100 = 100% 80 His output is equal to standard. He is paid 20% bonus in addition to time rate wages.

(ii) Worker ‘Y’ =

90 × 100 = 112.5% 80 His output is above standard. He is paid at high piece rate. 9. Emerson’s efficiency plan In a manufacturing concern the daily wages guaranteed for workers is ` 40. The standard output for the month is 1000 articles representing 100% efficiency. The rate of wages is paid without bonus to those workers who show upto 66 2/3% efficiency. Beyond this, bonus is payable in a graded scale.

(iii) Worker ‘Z’ =

Efficiency – Bonus 90% – 10% 100% – 20% Further rise of 1% of bonus for every 1% further rise in efficiency. Calculate the total earnings of A, B, C and D who have worked 26 days in a month and produced as follows: A–500 units, B–900 units, C–1000 units, D–1200 units. (B.Com., Mysore) Solution:

Calculation of earnings of workers

Workers Day rate wages (26 × 40) Bonus Earnings

A ` 1,040 – 1,040

B ` 1,040 104 1,144

C ` 1,040 208 1,248

D ` 1,040 416 1,456

Workings: Worker’s % of efficiency and bonus Workers A B C D 500 900 1,000 1, 200 × 100 = 50% × 100 = 90% × 100 = 100% × 100 = 120% % of 1,000 1,000 1,000 1,000 efficiency Bonus Nil 10% 20% 40%

86 Cost Accounting

10. Bedeaux’s point premium plan Standard time for a job is 1,200 ‘B’s Time taken is 900 ‘B’s Time rate is ` 20 per hour Calculate the earnings of the worker under Bedeaux’s premium plan. Solution:

Calculation of earnings: `

Time rate wages 15 × 20

300

Bonus = Time saved × Time rate ×

75 75 = 5 × 20 × 100 100

Earnings

75 375

Workings: Standard time 1200 ‘B’s–20 hours Time taken 900 ‘B’s–15 hours Time saved – 5 hours 11. Barth, Halsey and Rowan plan Calculate the earnings of a worker under (a) Barth scheme, (b) Halsey plan and (c) Rowan plan from the following information: Standard time per unit is 30 minutes Actual output – 40 units Time taken – 15 hours Time rate – ` 12 per hour Solution: Calculation of earnings of a worker (a) Barth scheme Earnings = Time rate × = 12 ×

Standard × Time taken

20 ¥ 15 = ` 207.85.

(b) Halsey plan: Time rate wages = Time taken × Time rate

`

= 15 × 12 = 180 Bonus = Time saved × Time rate ×

50 50 ˘ È = 30 = Í5 ¥ 12 ¥ 100 100 ˙˚ Î

Earnings = 210

Methods of Wage Payment 87

(c) Rowan plan: `

Time rate wages = Time taken × Time rate

= 15 × 12 = 180 Time saved × Time taken × Time rate Bonus = Standard Time 5 × 15 × 12 = 45 = 20 Earnings = 225 Workings: Standard time for 40 units =

40 ¥ 30 = 20 hours 60

Time taken = 15 hours Time saved = 5 hours 12. Accelerated premium system The standard hours of job X is 100 hours. The job has been completed by Amar in 60 hours. Akbar in 70 hours and Anthony in 95 hours. The bonus system applicable to the job is as follows: Percentage of time saved to time allowed

–

Bonus

Savings upto 10%

–

10% of time saved

Savings from 11% to 20%

–

15% of time saved

Savings from 21% to 40%

–

20% of time saved

Savings from 41% to 100%

–

25% of time saved

The rate of pay is ` 1 per hour. Calculate the total earnings of each worker and also the rate of earnings per hour. (B.Com., Madras University) Solution:

Calculation of earnings: Amar `

Akbar `

Anthony `

(60 × 1) = 60

(70 × 1) = 70

(95 × 1) = 95

Bonus (see WN)

8

6

0.50

Earnings

68

76

95.50

68 = ` 1.13 60

76 = ` 1.09 70

95.50 = ` 1.01 95

Time rate wages (TT × TR)

Earnings per hour

88 Cost Accounting

Working note: Amar 100 60 40 40% 20%

Standard time (Hrs) Time taken (Hrs) Time saved % of time saved to standard time % of bonus Bonus amount

40 × 1 ×

Akbar 100 75 30 30% 20% 20 100

= `8

(TS × TR × Bonus%)

Anthony 100 95 5 5% 10%

20 30 × 1 × 100

= `6

10 100 = ` 0.50

5×1×

13. Emerson’s efficiency plan In a manufacturing company a daily wage rate guaranteed for a worker is ` 1.87 and the standard output fixed for the month is 1,000 articles representing 100% efficiency. The daily 2 wage rate is paid without bonus to those workers who show upto 66 % of the efficiency 3 standard. Beyond this there is a bonus payable in a graded scale in a fixed ratio to the increased output as follows: Efficiency 90% 100%

Bonus payable 10% 20%

Further increase of 1% for every 1% further increase in efficiency. Find out the earnings of A, B, C and D who have worked for 26 days in a month. Workers’ output is : A-500 articles, B-900 articles, C-1,000 articles and D-1,100 articles. Solution: Calculation of earnings of workers: Workers A ` Day rate wages (26 × 50) 1,300 Bonus (see WN) –

B ` 1,300 130

C ` 1,300 260

D ` 1,300 390

Earnings

1,300

1,430

1,560

1,690

Working Note: Workers Standard production (units) Actual production % of production % of bonus Bonus amount (`)

A 1,000 500 50% – –

B 1,000 900 90% 10% 130

C 1,000 1,000 100% 20% 260

D 1,000 1,000 110% 30% 390

Methods of Wage Payment 89

14. Emerson’s scheme modified An employee working under a bonus scheme saved 20 hours in a job for which the standard time is 80 hours. Calculate the rate per hour worked and wages payable to a worker, if incentive bonus of 15% on the hourly rate is payable when the standard time (namely, 100% efficiency) is achieved and a further incentive bonus of 1% on hourly rate for each 1% in excess of 100% efficiency is payable. The actual hours worked are 60. Assume that the normal rate of payment is ` 15 per hour. Solution:

Calculation of earnings of a worker. Time rate wages = Time taken × Time rate = 60 × 15 Bonus = 900 ×

= ` 900.00

48.33 = ` 434.97 100

` 1,334.97

Earnings = Workings: % of efficiency = =

Standard time ¥ 100 Time taken 80 × 100 = 133.33% 60

% of bonus = 15 + 33.33 = 48.33%. 15. Computation of earnings and factory cost In an engineering works the standard time for a job is 16 hours and the basic wage is ` 1 per hour. A bonus scheme is instituted so that the worker is to receive normal rate for hours actually worked and for half of hours saved. Materials for the job cost ` 20 and factory overhead is charged on the basis of ` 2 per hour. Calculate the wages and effective earnings per hour if job is completed (a) in 12 hours and (b) in 14 hours. Also ascertain factory cost of the job on the same basis. (M.Com., Kanpur, Agra) Solution: (a) Earnings of workers (a) ` Time rate wages (TT × TR) Bonus = TS × TR × 1/2 Earnings

(b) `

(12 × 1) = 12

(14 × 1) = 14

(4 × 1 × 1/2) = 2

(2 × 1 × 1/2 ) = 1

= 14

15

90 Cost Accounting

14 12

15 14

= ` 1.17

` 1.07

(b) Earnings per hour

–

(c) Factory cost

(a) ` 20 14 34 24 58

Materials Labour cost Prime cost Factory OHS: ` 2 per hour Factory cost

(b) ` 20 15 35 28 63

16. Merrick’s multiple piece rate The multiple piece rate plan is operated as follows: (a) Basic price rate below 85% efficiency level. (b) 110% of basic piece rate from 85% to below 100% efficiency level. (c) 120% of basic piece rate at 100% efficiency level or more. Minimum guaranteed day wages are equal to 70% efficiency level. Assuming that 100% of efficiency is 100 pieces per day and the piece rate is ` 1 per piece. Calculate the labour cost per piece at 20% intervals from 60% to 120% (including 100%) efficiency levels. Solution: Efficiency levels Output (units) Guaranteed day wages (`) Basic price rate (80 × 1) (`) 110% of basic piece rate (`) 120% of basic piece rate (`) Earnings Earning per unit (`)

60% 60 70 – – – 70

80% 80 – 80 – – 80

100% 100 – – 110 – 110

120% 120 – – – 144 144

70 60 ` 1.17

80 80 1.00

110 100 1.10

144 120 1.20

Note: Guaranteed day wages: Output at 70% efficiency = 70 units Basic piece rate for 70 units = 70 × 1 = ` 70 17. Group bonus scheme Ten men work as a group. When the weekly production of the group exceeds the standard 200 pieces per hour – each man in the group is paid a bonus for the excess production in addition to his wages at hourly rates.

Methods of Wage Payment 91

The bonus is computed thus: the percentage of production in excess of the standard amount is found and half of this percentage is regarded as the men’s share. Each man in the group is paid at the wage rate of ` 0.35 per hour. There is no relationship between the individual workman’s hourly rate and the bonus rate. The following is one week’s record: Day Monday Tuesday Wednesday Thursday Friday Saturday Total

Hours worked 90 88 90 84 88 40 480

Production (units) 22,100 20,600 24,200 20,100 20,400 10,200 1,17,600

(a) Compute the rate and amount of bonus for the week; (b) Ascertain the total pay of Jones, who worked 41½ hours and was paid at ` 0.25 per hour and that of Smith, who worked 44 ½ hours and was paid ` 0.30 per hour. Solution: (a) Computation of rate and amount of bonus: Actual production – 1,17,600 units Standard production (480 × 200) – 96,000 units Excess production – 21,600 units % of excess production =

21,600 ¥ 100 = 22.5% 96,000

Bonus % = 22.5 × ½ = 11.25% Bonus rate per hour = 0.35 ×

11.25 = ` 0.0394 100

Bonus for the week = 0.0394 × 480 = ` 18.91. (b) Earnings of workers: Jones `

Smith `

Time rate wages

(41.5 × 0.25) = ` 10.38

(44.5 × 0.30) = ` 13.35

Bonus

(41.5 × 0.0394) = ` 1.64

(44.5 × 0.0394) = ` 1.75

12.02

15.10

Total earnings

92 Cost Accounting

18. Allocation of labour cost to jobs A worker is paid 50 paise per hour and the 5 days working week contains 42 hours. The daily allowance for approved absence from his place of work, maintenance of machine etc. is 12 minutes and his job card shows that his time chargeable during the week to various jobs is as follows: Job No. 305 – 20 hours Job No. 310 – 10 hours Job No. 320 – 8 hours The unascertained time is caused by a power failure. Show how his wages for the week would be dealt with in cost accounts. (B.Com. (Hons.), Delhi University, 2003) Solution: Weekly earnings of worker = 42 hrs × 0.50 = ` 21 Allocation of wages: Direct wages – Job 305 = 20 × 0.50 = ` 10.00 Direct wages – Job 310 = 10 × 0.50 = ` 5.00 Direct wages – Job 320 = 8 × 0.50 = ` 4.00 Wages for normal idle time: treated as factory overhead = 1 × 0.50 = ` 0.50 Wages for time lost by power failure: transferred to costing P& L a/c. 3 × 0.50 = ` 1.50 Notes: 1. Normal idle time = 12 minutes × 5 days = 60 minutes (or) 1 hour 2. Time lost in power failure: Total time

42 hours

Less: Time spent on jobs – 38 Normal idle time – 1

39 hours

Total time lost on power failure = 3 hours 19. Productivity bonus XYZ Co. employs its workers for a single shift of 8 hours per day for 25 days in a month. The company has recently fixed the standard output of 40 units per day per worker for a mass production item and introduced an incentive scheme to boost output. Details of wages payable to the workers are as follows: (i) Basic wages: ` 3 per unit subject to a guaranteed minimum wages of ` 80 per day worked. (ii) Dearness allowance: ` 40 per day worked. (iii) Incentive bonus upto 80% efficiency: Nill (iv) For efficiency above 80%: ` 50 for every 1% increase above 80%.

Methods of Wage Payment 93

The details of performance of 2 workers for a particular month are as follows: Workers No. of days worked Output (Units) A 25 820 B 18 500 Calculate the total earnings of both the workers for the month. (B.Com. (Hons.), Delhi University, 2004) Solution:

Earnings of workers: Worker ‘A’ ` 2,460 1,000 100 3,560

(i) Basic wages (WN-i) (ii) Dearness allowance (WN ii) (iii) Incentive bonus (WN-(iii) Total earnings

‘B’ ` 1,500 720 – 2,220

Working note: (1) Basic wages: Piece rate wages

Worker ‘A’ Worker ‘B’

Time wages

No. of Units

Piece rate ( )

Total ( )

No. of days

820 500

3 3

2,460 1,500

25 18

(ii) Dearness allowance No. of days × Rate per day. Worker ‘A’ – 25 × 40 – 1,000 units Worker ‘B’ – 18 × 40 – 720 units (iii) Incentive bonus: Standard production = No. of days × 40 units Worker ‘A’ – 25 × 40 – 1,000 Worker ‘B’ – 18 × 40 – 720 % of efficiency 820 Worker ‘A’ – × 100 = 82% 1,000 Worker ‘B’ –

500 × 100 = 69.44% 720

Day wages ( ) 80 80

Wages payable Total ( ) 2,000 1,440

2,460 1,500

94 Cost Accounting

Amount of bonus: Worker ‘A’ = 2 × 50 = ` 100 Worker ‘B’ = Nil. 20. Computation of rate of wages and materials cost In a factory Ram and Sham produce the same product using the same input of same material and at the same normal wage rate. Bonus is paid to both of them in the form of normal time wage adjusted by the proportion which time saved bears to the standard time for the completion of the product. Time allotted to the product is 50 hours. Ram takes 30 hours and Sham takes 40 hours to produce the product. The factory cost of the product for Ram is ` 3,100 and for Sham ` 3,280. The factory overhead rate is ` 12 per man hour. Calculate (i) normal wage rate, (ii) cost of materials used for the product and, (iii) the input of material if the unit material cost is ` 16. (B.Com. (Hons.), Delhi University, 1997) Solution: Let the normal wage rate be – x Let the cost of materials be – y Computation of factory cost using the above variable. Ram Materials cost y Labour cost (WN-(i) 42x Prime cost y + 42x Factory overheads (WN-(ii)) 360 Factory cost y + 42x + 360 Factory cost (given)

3,100 y + 42x + 360

= 3,100 (i)

y + 48x + 480

= 3,280 (ii)

Subtracting (ii) – (i) 6x + 120 = 180 6x = 180 – 120 = 60 60 x = = ` 10 6 (i) Normal rate of wages = `10. Substituting value of ‘x’ in equation (i) we get: y + 42x + 360 = 3,100 y + 42x 10 + 360 = 3,100

Sham y 48x y + 48x 480 y + 48x + 480 3,280

Methods of Wage Payment 95

y + 420 + 360 = 3,100 y = 3,100 – 420 – 360 = ` 2,320 (ii) Cost of materials = ` 2,320 (iii) No. of units of materials =

2,320 = 145 units. 16

Working note: (i) Labour cost Time rate wages Bonus:

TS × TT × TR ST

Ram =

20 × 30 × X 50

Sham =

10 × 40 × X 50 Total

(ii) Factory overhead

Ram 30 × x = 30x

Sham 40 × x = 40x

12x

–

–

8x

42x

48x

30 × 12 = ` 360

40 × 12 = ` 480

21. Computation of time taken and total earnings A skilled worker in XYZ Ltd is paid a guaranteed wage rate of ` 30 per hour. The standard time per unit for a particular product is 4 hours. P, a machine man has been paid wages under the Rowan plan and he had earned an effective hourly rate of ` 37.50 on the manufacture of that product. What could have been his total earnings and effective hourly rate, had he been put on Halsey incentive scheme (50%)? Solution: Effective earnings per hour under Rowan plan = ` 37.50 Guaranteed hourly wage rate = ` 30.00 Bonus earned per hour = ` 7.50 7.50 × 100 = 25% 30 % of bonus under Rowan plan = % of time saved. Calculation of time taken: Standard time 4 hours Less: Time saved 25% 1 hour Time taken 3 hours

% of bonus earned on hourly wage rate =

96 Cost Accounting

Computation of earnings under Halsey plan: Time rate wages = Time taken × Time rate = 3 × 30 = ` 90 50 Bonus = Time saved × Time rate × 100 = 1 × 30 ×

50 = ` 15 100

Earnings = ` 105 105 = ` 35. 3 22. Bonus on the basis of cost reduction Calculate the earnings of workers x and y from the following information: Output by each worker : 300 units. Standard conversion cost per unit : ` 50. Overhead charged at 200% of wage rate hour. Time rate for A ` 25 per hour and for ‘B’ ` 30 per hour. Time taken to complete the jobs: Worker ‘A’ 150 hours and ‘B’ 140 hours. There is an incentive system based on the reduction of conversion cost in the following scale:

Effective hourly rate =

Savings in conversion cost

Solution:

Bonus %

Upto 10%

-

5% of wages

Upto 20%

-

10% of wages

Upto 40%

-

20% of wages.

Calculation of earnings of workers:

Time rate wages (WN (i) Bonus (WN-(viii)

x ` 3,750 750

y ` 1,200 420

Total earnings

4,500

4,620

Working Note: Computation of bonus x`

y`

(150 × 25) = 3,750

(140 × 30) = 4,200

(ii) Overheads - 200% of wages

7,500

8,400

(iii) Conversion cost (i) + (ii)

11,250

12,600

(i) Time rate wages

Methods of Wage Payment 97

(iv) Standard conversion cost (300 × 50)

15,000

15,000

(v) Savings in conversion cost (iv – iii)

3,750

2,400

3,750 × 100 = 25% 15,000

24,000 × 100 = 16% 15,000

20%

10%

(vi) % of savings in conversion cost (vii) % of bonus on time wages (viii) Bonus amount

3,750 ×

20 = ` 750 100

4,200 ×

110 = ` 420 100

6

Overheads-Nature and Classification

Chapter

I. Practical Problems 1. B& Co., has recorded the following data in the most recent periods: Total cost of production Volume of production ` (units) 14,600 800 19,400 1,200 What is the best estimate of firms variable costs per unit and fixed cost? Solution: Production (Units) Low level High level

800 1,200

Difference

400

Variable cost p/u = =

Total Cost ( ) 14,600 19,400 4,800

Difference in total cost Difference in Production (units) 4,800 = ` 12 p/u. 400

Fixed Cost: Total Cost for 800 units (–) Variable cost for 800 units (800 × 12) Fixed cost

= 14,600 = 9,600 = 5,000

2. Firm X manufactures surgical goods, its normal production is 2,600 units per month at a total cost of ` 32,000. At full capacity it can manufacture 3,400 units per month at a total cost of ` 38,000. Calulate: (i) Average cost per instrument under normal operating conditions, (ii) Average variable cost per instrument, (iii) Total fixed cost, and (iv) Average fixed cost per unit under normal operating conditions. (C.S. (Inter), June 1985)

Overheads–Nature and Classification 99

Solution: (i) Average cost per instrument under normal operating conditions =

Normal production cost Normal production (units)

=

32,000 = ` 12.31 2,600

(ii) Production (Units) Normal level Full capacity

2,600 3,400

Total Cost ( ) 32,000 38,000

800

6,000

Difference Variable cost p/u = =

Difference in total cost Difference in Production (units) 6,000 = ` 7.50 800

(iii) Total cost for production of 2,600 units (–) Variable cost for 2,600 units (2,600 × 7.50) Fixed cost

= 32,000 = 19,500 = 12,500

(iv) Average fixed cost per unit under normal operating conditions =

Total fixed cost Normal production

=

12,500 = ` 4.81 2,600

3. The following informations is extracted from the books of XY Ltd for 6 months ending Dec. 31. 2007: Month

Volume (Units)

July Aug Sep Oct Nov Dec

150 300 450 750 1,050 1,350

Semi-variable cost 2,700 3,900 5,100 7,500 9,900 12,300

100 Cost Accounting

Find the fixed and variable costs under a) high and low points method and b) least square method. Solution: (a) High low points method: Production (Units) 1,350 150 1,200

High level (December) Low level (July) Difference Variable cost p/u =

=

Total cost ( ) 12,300 2,700 9,600

Difference in semi-variable cost Difference in volume (units) 9,600 = `8 1, 200

(b) Least square method:

July

150

2,700

Deviation of output from the mean (x) –525

August

300

3,900

–375

–3,000

1,40,625

11,25,000

September

450

5,100

–225

–1,800

50,625

4,05,000

October

750

7,500

+75

+600

5,625

45,000

November

1,050

9,900

+375

+3,000

1,40,625

11,25,000

December

1,350

12,300

+675

+5,400

4,55,625

36,45,000

Total

4,050

41,400

0

0

10,68,750

85,50,000

–

–

Month

Mean

Output (Units)

Semivariable cost ( )

4,050 6

41, 400 6

= 675

= 6,900

Variable cost per unit =

=

Total of xy Total of x 2 85,50,000 10,68,750

= ` 8.

–

Deviation of cost from the mean (y) –4,200

x2

xy

2,75,625

22,05,000

–

Overheads–Nature and Classification 101

Fixed cost: Total semi-variable cost for a month (say, July)

= 2,700

(–) Variable cost (150 × 8)

= 1,200 Fixed cost

= 1,500

4. The following are the maintenance costs incurred in a machine shop per six months with corresponding machine hours. Month

Machine hour

January February March April May June

2,000 2,200 1,700 2,400 1,800 1,900 12,000

Maintenance Costs 300 320 270 340 280 290 1,800

Analyse the maintenance cost which is semi-variable into fixed and variable elements. Solution: Least square method Month Jan Feb Mar April May June Total Mean

Output (hours) 2,000 2,200 1,700 2,400 1,800 1,900 12,000

Cost ( )

Deviation of cost from the mean (y) – + 20 – 30 + 40 – 20 – 10 0

x2

xy

300 320 270 340 280 290 1,800

Deviation of output from the mean (x) – + 200 – 300 + 400 – 200 – 100 0

– 40,000 90,000 1,60,000 40,000 10,000 3,40,000

– 4,000 9,000 16,000 4,000 1,000 34,000

12,000 6

1,800 6

–

–

–

–

= 2,000

= 300

Variable cost per hour = =

Total of xy Total of x 2 34,000 3, 40,000

= ` 0.10

102 Cost Accounting

Fixed Cost: Total semi-variable cost for a month (say, June) (–) Variable cost (1,900 × 0.10) Fixed cost

= 290 = 190 = 100

5. XY Ltd supplies the following information for two succeeding periods: Period-I Period-II No. of units produced 40,000 15,000 Semi variable overheads (`) 5,20,000 3,20,000 Segregate the semi-variable overheads into fixed and variable overheads. Also determine the total overheads for producing 50,000 units. Solution: Production (units) Period - I Period - II

40,000 15,000

Semi-variable overheads ( ) 5,20,000 3,20,000

Difference

25,000

2,00,000

Variable cost p/u = =

Difference in semi-variable cos t Difference in volume (units) 2,00,000 = `8 25,000

Fixed Cost: Total semi-variable cost for Period II

= 3,20,000

(–) Variable cost (15,000 × 8)

= 1,20,000

Fixed cost

= 2,00,000

Cost Sheet for Production of 50,000 units Variable cost (50,000 × 8)

= 4,00,000

Fixed overheads

= 2,00,000 Total cost

Cost per unit = =

Total cost Production (units) 6,00,000 = ` 12. 50,000

= 6,00,000

Overheads–Nature and Classification 103

6. From the data given below segregate the semi-variable overheads into fixed cost and variable costs by using (i) High and low point method and (ii) Simultaneous equation method. Capacity (%) 75% 90%

January February

Machine hours

Semi-variable ( ) 19,500 22,000

750 1,000

Solution: (i) High and low point method: Machine hours 90% capacity 75% capacity Difference

Semi-variable overheads ( ) 22,000 19,500 2,500

1,000 750 250

Difference in semi-variable cost Difference in volume (M. hrs)

Variable cost p/u = =

2,500 = ` 10 per hour 250

Fixed overheads: Total semi-variable cost for 90% quantity

= 22,000

(–) Variable cost (1,000 × 10)

= 10,000

Fixed cost

= 12,000

(ii) Simultaneous equation method: y = mX + C y = Total semi-variable cost m = Variable cost p/u X = Output C = Fixed at 75% capacity

– 19,500 = m × 750 + C

--- equation (i)

at 90% capacity

– 22,000 = m × 1,000 + C

--- equation (ii)

Subtracting (i) from (ii)

– 2,500 = – 250m

m=

2,500 = `10 250

Variable cost per machine hour = ` 10

104 Cost Accounting

Fixed Cost: Total semi-variable cost for 75% quantity (–) Variable cost (750 × 10) Fixed cost

= 19,500 = 7,500 = 12,000

7. AB Ltd supplies you the following information for three successive months: Unit produced 3600 4200 5400

Direct material ( ) 7,200 8,400 10,800

Direct labour ( ) 9,000 10,500 13,500

Total factory overheads ( ) 55,800 57,600 61,200

You are requested to determine the sales volume for an activity level of 4,000 units and assuming a profit of 25% on selling price, also determine the selling price p/u. Solution:

Segregate total factory overheads into fixed and variable overheads: Production (units) High point Low Point Difference

Factory overheads ( ) 61,200 55,800 5,400

5,400 3,600 1,800

Variable cost p/u =

=

Difference in factory overheads Difference in production (units) 5, 400 = ` 3 per hour 1,800

Fixed overheads: Total semi-variable cost for 5,400 units (–) Variable factory overheads (5,400 × 3) Fixed factory overheads

= 61,200 = 16,200 = 45,000

Statement of cost for 4,000 units Direct materials at ` 2 per unit

8,000

Direct labour at ` 2.50 per unit Prime cost Factory overheads:

10,000

– Variable overheads at ` 3 per unit – Fixed overheads

18,000 12,000 45,000

57,000

Contd...

Overheads–Nature and Classification 105 Contd...

Total cost 25 ˆ Ê Profit - 25% on selling price Á 75,000 ¥ ˜ Ë 75 ¯

Sales Selling price per unit =

75,000 25,000 1,00,000

1,00,000 = ` 25. 4,000

7

Accounting for Overheads and Control

Chapter

I. Practical Problems 1. Primary overhead distribution Sri Ram Ltd., an engineering company has three production departments A, B and C two service departments D and E. The following expenses were incurred during six months ended 30th September 2008: Rent and rates Supervision Lighting Power Depreciation Labour welfare expenses Repairs and maintenance Fire insurance of stock General expenses Indirect wages

15,000 8,000 13,500 36,000 27,000 24,000 22,500 19,500 18,000 17,100

Following additional information was available:

Area occupied (sq. ft) Number of employees Number of light and fan points Value of assets (` in lakhs)

Production departments A B C 2,000 3,000 4,000 300 250 200 12 10 15 5 4 6

Service departments D E 2,000 1,000 150 100 4 4 2 1

Direct wages (`)

20,000

30,000

25,000

8,000

7,000

Value of stock (`) H.P. of machines

20,000

30,000

50,000

15,000

10,000

30

35

25

5

5

Prepare primary overhead distribution summary, showing clearly the basis of apportionment of various expenses.

Accounting for Overheads and Control

107

Solution: Primary Overhead Distribution Summary Particulars

Total

Basis of apportionment

` Rent and rates

A

B

C

`

`

`

Service departments D E `

`

2,500

3,750

5,000

2,500

1,250

8,000 No. of employees 6:5:4:3:2

2,400

2,000

1,600

1,200

800

Lighting

13,500 No. of light and fan points 12:10:15:4:4

3,600

3,000

4,500

1,200

1,200

Power

36,000 H.P. of machines 6:7:5:1:1

10,800

12,600

9,000

1,800

1,800

Depreciation

27,000 Value of assets 5:4:6:2:1

7,500

6,000

9,000

3,000

1,500

Labour welfare expenses

24,000 No. of employees 6:5:4:3:2

7,200

6,000

4,800

3,600

2,400

Repairs and maintenance

22,500 Value of assets 5:4:6:2:1

6,250

5,000

7,500

2,500

1,250

Fire insurance of stock

19,500 Value of stock 4:6:10:3:2

3,120

4,680

7,800

2,340

1,560

General expenses

18,000 Direct Wages 20:30:25:8:7

4,000

6,000

5,000

1,600

1,400

Indirect wages

17,100 Direct Wages 20:30:25:8:7

3,800

5,700

4,750

1,520

1,330

Direct wages

15,000 Given

Supervision

Departmental overheads

15,000 Area 2:3:4:2:1

Production departments

2,15,600

–

–

–

–

8,000

7,000

51,170

54,730

58,950

29,260

21,490

Note: Direct wages of production departments will form part of prime cost of production. Hence, not included in overhead distribution summary.

2. Primary overhead distribution The following details were extracted from the books of Nanda Ltd, a manufacturing company for the year ended 31st March, 2008:

108 Cost Accounting

Direct materials (`) Direct labour (`) No. of employees No. of light points Power (kWh) Plant value (`) Floor space (sq. ft)

Production departments P Q R 20,000 25,000 30,000

Service departments X Y 15,000 15,000

17,000

19,000

20,000

6,000

5,000

400 15 10,000 2,00,000

500 15 6,000 1,50,000

300 10 8,000 1,00,000

200 8 3,000 50,000

150 7 2,000 50,000

1,250

500

500

250

250

The following are the expenses for the year: Indirect materials ` l0,500, indirect labour ` l3,400, supervision ` 6,200, lighting expenses ` l,650, labour welfare expenses ` 9,300, power ` 29,000, depreciation of plant and machinery ` 22,000, rent and rates ` 11,000, other expenses-` 10,050 and repairs and maintenance ` 16,500. You are required to prepare primary overhead distribution summary. Solution: Primary Overhead Distribution Summary Particulars

Direct materials Direct labour Indirect materials Indirect labour Supervision Lighting expenses Labour welfare expenses Power Depreciation of plant and machinery

Total

Basis of apportionment

` 30,000 Given 11,000 Given 10,500 D. Materials 4:5:6:3:3 13,400 D. Labour 17:19:20:6:5 6,200 No. of employees 8:10:6:4:3 1,650 No. of light points 15:15:10:8:7 9,300 No. of employees 8:10:6:4:3 29,000 KWH 10:6:8:3:2 22,000 Plant value 4:3:2:1:1

Production departments P Q R

Service departments X Y

` – – 2,000

` – – 2,500

` – – 3,000

` 15,000 6,000 1,500

` 15,000 5,000 1,500

3,400

3,800

4,000

1,200

1,000

1,600

2,000

1,200

800

600

450

450

300

240

210

2,400

3,000

1,800

1,200

900

10,000

6,000

8,000

3,000

2,000

8,000

6,000

4,000

2,000

2,000 Contd...

Accounting for Overheads and Control

109

Contd...

Rent and rates Other expenses Repairs and maintenance Departmental overheads

11,000 Floor space 5:2:2:1:1 10,050 Direct Labour 17:19:20:6:5 16,500 Plant Value 4:3:2:1:1 1,70,600 –

5,000

2,000

2,000

1,000

1,000

2,550

2,850

3,000

900

750

6,000

4,500

3,000

1,500

1,500

41,400 33,100 30,300

34,340

31,460

Note: Direct materials and direct labour form part of prime cost of production, hence not included in overhead distribution summary.

3. Secondary distribution – Step method RST Ltd has two production departments: machining and finishing. There are three service departments: human resource (HR), maintenance and design. The budgeted costs in these service departments are as follows: HR

Maintenance

Design

Variable

1,00,000

1,60,000

1,00,000

Fixed

4,00,000

3,00,000

6,00,000

5,00,000

4,60,000

7,00,000

The usage of these department’s output during the year completed is a follows : Providers of Service User of service HR Maintenance HR – – Maintenance 500 – Design 500 500 Machining 4,000 3,500 Finishing 5,000 4,000 10,000 8,000

Design – – – 4,500 1,500 6,000

Requested: (i) Use the direct method to reapportion RST Ltd’s service department cost to its production departments, (ii) Determine the proper sequence to use in reapportioning the firm’s service department cost by step-down method.

110 Cost Accounting

(iii) Use the step-down method to reapportion the firm’s service department cost. (CA (Inter), Nov 2006) Solution: (i) Direct Method: Apportionment of service department cost to production departments Service department

HR Maintenance Design Total

Total

Ratio

5,00,000 4,60,000 7,00,000 16,60,000

4:5 7:8 9:3 –

Production departments Machinery Finishing 2,22,222 2,14,667 5,25,000 9,61,889

2,77,778 2,45,333 1,75,000 6,98,111

(ii) Step-Down Method: Apportionment of service department overheads to production departments Department HR Maintenance Design Machinery Finishing

Overheads 5,00,000 4,60,000 7,00,000 – –

– (–) 5,00,000 25,000 25,000 2,00,000 2,50,000

– – (–) 4,85,000.0 30,312.5 2,12,187.5 2,42,500.0

– – – (–) 7,55,312.50 5,66,484.37 1,88,828.13

Total – – – 9,78,671.87 6,81,328.13

Note: Ratio of apportionment HR department

= 1 : 1 : 8 : 10

Maintenance

=1:7:8

Design

=9:3

4. Primary and secondary distribution A company has three production departments and two service departments. Department overheads as per primary distribution is as follows: Production departments: A ` 13,600 B ` 14,700 C ` 12,800 Service departments: X ` 9,000 Y ` 3,000 The expenses of service departments are charged on a percentage basis which is as follows:

X department Y department

A 40% 30%

B 30% 30%

C 20% 20%

X – 20%

Y 10% –

Accounting for Overheads and Control

111

Apportion the cost of service departments using (a) Repeated distribution method, (b) Simultaneous equation method, and (c) Trial and error method (ICWA (Inter), 1998) Solution: Secondary Distribution of Overheads (Repeated Distribution Method) Particulars

Production Departments B C A

Departmental overheads. Service dept X. “”Y “”X “”Y “”X “”Y

13,600 3,600 1,170 312 23.40 6.24 0.59

14,700 2,700 1,170 234 23.40 4.68 0.59

12,800 1,800 780 156 15.60 3.12 0.38

Total OHS

18,712.23

18,832.67

15,555.10

Service Departments X Y 9,000 (–) 9,000 780 (–) 780 15.60 (–) 15.60 – –

3,000 900 (–) 3,900 78 (–) 78 1.56 (–) 1.56 –

(b) Simultaneous Equation Method First apportionment among service department is completed by using simultaneous equation. Let the total overheads of service department X be – x. Let the total overheads of service department Y be – y. x = 9,000 + 20%y = 9,000 + 0.2y equation (i) y = 3,000 + 10%x = 3,000 + 0.1x equation (ii) Substitute the value of y in first equation, x = 9,000 + 0.2 (3,000 + 0.1x) x = 9,000 + 600 + 0.02x x-0.02x = 9,600 0.98x = 9,600 9,600 0.98 x = 9,796

x=

Total overheads of service department X = ` 9,796/Substituting value of x in equation (ii), y = 3,000 + 0.1 (9,796)

112 Cost Accounting

= 3,000 + 980 = 3,980 Total overheads of service department Y = ` 3,980/-. Overhead Distribution Summary Particulars Departmental OHs Service dept. X Service dept. Y Total

Production departments A B C

Total

Basis

41,100 9,796 3,980 –

Given 40%, 30%, 20% 30%, 30%, 20% –

13,600.00 3,918.40 1,194.00 18,712.40

14,700.00 2,938.80 1,194.00 18,832.80

12,800.00 1,959.20 796.00 15,555.20

(c) Trial and Error Method First distribution among service department is completed using given percentages: Service departments Particulars

X

Departmental overheads From X to Y – 10%

9,000 –

From From From From From From

780 – 15.60 – 0.31 –

Y X Y X Y X

to to to to to to

X Y X Y X Y

– – – – – –

20% 10% 20% 10% 20% 10%

Total overheads

Y 3,000 900 3,900 – 78 – 1.56 – 0.03 3,979.87

9,795.91 Overhead Distribution Summary

Particulars Departmental OHS Service dept. X Service dept. Y Total

Total

Basis

41,100.00 Given 9,799.91 40%, 30%, 20% 3,979.59 30%, 30%, 20% – –

Production departments A B C 13,600.00 3,918.36 1,193.88 18,712.24

14,700.00 2,938.77 1,193.88 18,832.65

12,800.00 1,959.18 795.92 15,555.10

Accounting for Overheads and Control

113

5. Primary distribution, secondary distribution and absorption of overheads Primer Ltd. has three production departments A, B and C and two service departments D and E. The following figures are extracted from the records of the company: Rent and rates General lighting Indirect wages Power Depreciation Sundries

5,000 600 1,500 1,500 10,000 10,000

Following additional information is available: Total 10,000 60 10,000

A 2,000 10 3,000

B 2,500 15 2,000

C 3,000 20 3,000

D 2,000 10 1,500

E 500 5 500

150 2,50,000

60 60,000

30 80,000

50 1,00,000

10 5,000

– 5,000

–

6,225

4.027

4,066

–

–

Floor Area (sq.ft) Light Points (nos.) Direct wages (`) Horsepower of Machine Value of Machinery (`) Working hours

The expenses of service departments D and E are allocated using repeated distribution method as follows: A 20% 40%

D E

B 30% 20%

C 40% 30%

D – 10%

E 10% –

What is the cost of an article if its raw material cost is ` 50, labour cost ` 30 and it passes through departments A, B and C for 4, 5 and 3 hours respectively? (CA (Inter), May 2002) Solution: Overhead Distribution Summary Particulars

Rent and rates

Total ( ) 5,000

Basis of apportionment Floor space 4:5:6:4:1

Production departments A B C 1,000

1,250

1,500

Service departments D E 1,000

250 Contd...

114 Cost Accounting Contd...

General lighting

600

Light points 2:3:4:2:1 Indirect 1,500 D. wages wages 6:4:6:3:1 Power 1,500 H.P. of machines 6:3:5:1 Depreciation 10,000 Value of machinery 12:16:20:1:1 Sundries 10,000 D. wages 6:4:6:3:1 Departmental overheads Service department ‘D’ (2:3:4:1) Service department ‘E’ (4:2:3:1) Service department ‘D’ Service department ‘E’ Service department ‘D’ Total overheads of production departments Working hours Overhead rate per hour

100

150

200

100

50

450

300

450

225

75

600

300

500

100

2,400

3,200

4,000

200

200

3,000

2,000

3,000

1,500

500

7,550.00 625.00 555.00 27.75 5.55 0.31 8,763.61 6,225 1.41

7,200.00 937.50 277.50 41.62 2.78 0.46 8,459.86 4,027 2.10

9,650.00 1,250.00 416.25 55.50 4.16 0.62 11,376.53 4,066 2.80

1,075.00 3,125.00 312.50 (–)3,125.00 138.75 (–)1,387.50 (–)138.75 13.88 1.39 (–)13.88 (–)1.39 – – – – – – – – – –

–

Cost sheet of an article Raw materials

50

Labour cost

30 Prime cost

80

Overheads: Department – A = 4 × 1.41 = 5.64 Department – B = 5 × 2.10 = 10.50 Department – C = 3 × 2.80 = 8.40

24.54 .

Total cost 104.54 6. Secondary distribution – Step method Excellent Manufacturing Works have two production departments: Mixing and curing and three service departments: Time office, store and maintenance. The following details are available from the departmental distribution summary for the month of July 2001:

Accounting for Overheads and Control

Production departments:

Mixing Curing Time office Stores Maintenance

Service departments:

1,44,000 96,000 48,000 60,000 36,000

115

2,40,000

1,44,000

The following data are also available: Production departments No. of employees No. of stores Requisition processed Machine hours

Mixing 20 120

Curing 15 100

3,600

Service departments Time office 10

Stores 8

Maintenance 5 30

2,400

The company consistently follows the method of secondary distribution on non-reciprocal basis. Show the apportionment of the cost of service departments to production departments stating the basis of computation in the form of a note at the end of the exercise. (ICWA (Inter), Dec 2001) Solution: Overhead Distribution Summary – Step Down Method Departments

Time office Stores Maintenance Mixing Curing

Departmental overheads 48,000 60,000 36,000 1,44,000 96,000

Ratio 8:5:20:15

Ratio 30:120:100

Ratio 36:24

(–) 48,000 8,000 5,000 20,000 15,000

– (–) 68,000 8,160 32,640 27,200

– – (–) 49,160 29,496 19,664

Note: 1. Sequencing of service departments. (i) Time office helps four other departments it is taken first. (ii) Stores department helps three departments it is taken second. (iii) Maintenance helps two department it is taken third. 2. Ratio of apportionment (i) Time office – Ratio of no. of employees = 8 : 5 : 20 :15 (ii) Stores – Ratio of no. of requisitions = 30:120:100 (iii) Maintenance – Ratio of machine hours = 36:24

Total

– – – 2,26,136 1,57,864

116 Cost Accounting

7. Secondary distribution – simultaneous equation method A factory has three production departments A, B and C and also two service departments ‘x’ and ‘y’. The primary distribution of the estimated overheads in the factory has just been completed. These details and the quantum of service rendered by the service departments, to the other departments are given below:

Primary distribution (`) Service rendered by: Dept ‘x’ Dept ‘y’

A 2,40,000

B 2,10,000

Departments C 2,50,000

30% 25%

20% 40%

35% 25%

X 1,40,000

Y 96,000

– 10%

15% –

Prepare a statement showing the distribution of service department overheads to the production departments, by the simultaneous equation method. (ICWA (Inter), Dec. 2004) Solution: Let the total overheads of service department x after receiving its share of overheads from y be Let the total overheads of service department y after receiving its share of overheads from x be

=

x

=

y

x = 1,40,000 + 10% y = 1,40,000 + .1y

equation (i)

y = 96,000 + 15% x = 96,000 + .15x

equation (ii)

x = 1,40,000 + .1 (96,000 + .15x) = 1,40,000 + 9,600 + 0.015x x – 0.015x 0.985x x

= 1,49,600 = 1,49,600 =

1, 49,600 = 1,51,878 0.985

Total overheads of service department ‘x’ = ` 1,51,878 Substituting value of x in equation (ii) we get. y = 96,000 + .15 × 1,51,878 = 96,000 + 22,782 = 1,18,782 Total overheads of service department ‘y’ = ` 1,18,782

Accounting for Overheads and Control

117

Overhead Distribution Summary Particulars

Departmental overheads Service dept x Service dept y Total overheads

Basis

Total ( )

7,00,000 1,51,878 1,18,782 –

Production Department

given 30%, 20%, 35% 25%, 40%, 25% –

A

B

C

2,40,000 45,563 29,696 3,15,259

2,10,000 30,376 47,513 2,87,889

2,50,000 53,157 29,696 3,32,853

8. A company has three production departments P, Q, R and two service departments M and C. The following details in respect of indirect expenses incurred are furnished for a typical month. Item of Expenses Indirect labour Lighting Rent & rates Power Depreciation Sundry expenses

Amount ( ) 9,000 1,200 12,000 6,000 24,000 7,800

Following data are also available for the distribution of overheads. Particulars Value of machinery (’000 of `) H.P. of machines Light points (Nos.) Floor space (Sq. meters) Direct wages (’000 of `) Machine hrs worked

P 60

Q 50

Departments R 40

40 20 150 30

45 30 200 20

60 40 250 40

15 20 100 4

– 10 50 6

2,940

2,060

2,150

–

–

M 10

C –

The service department costs are apportioned as follow: Departments M C

P 20% 40%

Q 30% 20%

R 40% 30%

M – 10%

(a) Overhead recovery rates showing the basis of apportionment. (b) Total cost of job no. 234, the job card of which has the following data:

C 10% –

118 Cost Accounting

P

Departments Q R 136 100

Materials consumed (`)

228

Direct wages (`) Machine hrs worked

162

144

256

10

8

12

(ICWA (Inter), Dec. 2006) Solution: Overhead Distribution Summary Particulars

Total

Indirect labour

9,000

Basis of apportionment

Production departments Q R P

Service departments M C

D.Wages 2,700 1,800 3,600 360 540 15:10:20:2:3 Lighting 1,200 Light points 200 300 400 200 100 2:3:4:2:1 Rent and 12,000 Floor space 2,400 3,200 4,000 1,600 800 rates 3:4:5:2:1 Power 6,000 H.P. of machines 1,500 1,687.50 2,250 562.50 – 8:9:12:3 Depreciation 24,000 Value of 9,000 7,500 6,000 1,500 – machinery 6:5:4:1 Sundry 7,800 D.Wages 2,340 1,560 3,120 312 468 expenses 15:10:20:2:3 Direct wages 10,000 Given – – – 4,000 6,000 8,534.50 7,908.00 18,140.00 16,047.50 19,370.00 Departmental overheads 1,706.90 2,560.35 3,413.80 (–) 8,534.50 853.45 Service department ‘M’ (2:3:4:1) 876.15 (–) 3,504.58 1,752.29 2,628.44 Service department ‘C’ (4:2:3:1) 8,761.45 350.45 (–) 262.84 175.23 87.62 Service department ‘M’ 876.15 26.29 17.52 8.76 35.05 (–) Service department ‘C’ 87.62 Contd...

Accounting for Overheads and Control

119

Contd...

Service department ‘M’ 1.95 2.92 3.89 Total overheads of production 23,563.71 20,643.42 25,792.87 departments 2,940 2,060 2,150 No. of machine hours 8.01 10.02 12.00 Machine hour rate (Total overheads ÷ No. of machine hours)

(–) 8.76 – – –

– – – –

Job Cost Sheet of Job No. 234

Materials consumed (228 + 136 + 100) Direct wages (162 + 144 + 256) Prime cost Overheads: Department – P = 10 × 8.01 = 80.10 Department – Q = 8 × 10.02 = 80.16 Department – R = 12 × 12 = 144.00 Total cost

464 562 1,026

304.26. 1,330.26

9. Secondary distribution - Simultaneous equation method ABC Ltd budgets the following amounts for its two service departments (legal and personnel) in supporting each other and the two production divisions, the Micro Computer Division (MCD) and the Peripheral Equipment Division (PED). Budgeted capacity To be supplied by

MCD

PED

Legal

Personal

Total

Legal (hours)

3,000

1,500

–

500

5,000

Legal (%)

60%

30%

–

10%

100%

Personnel (hours)

45,000

50,000

5,000

–

1,00,000

Personnel (%)

45%

50%

5%

–

100%

Details on actual usage are as follow: Actual capacity To be supplied by

MCD

PED

Legal

Personal

Total

Legal (hours)

800

2,400

–

800

4,000

Legal (%)

20%

60%

–

20%

100%

Personnel (hours)

53,200

22,800

4,000

–

80,000

Personnel (%)

66.5%

28.5%

5%

–

100%

120 Cost Accounting

The actual expenses were: Fixed

Variable

Legal

` 7,20,000

` 4,00,000

Personnel

` 9,50,000

` 12,00,000

Fixed expenses are allocated on the basis of budgeted capacity. Variable expenses are allocated on the basis of actual usage. Required: Prepare a statement showing apportionment of expenses of service department (legal and personnel) to production divisions MCD and PED by using simultaneous equation method. (CA (Inter), May 2003) Solution: Apportionment among service departments: I. Fixed overheads: Let the total fixed overheads of Legal department be – x Let the total fixed overheads of Personnel department be – y x = 7,20,000 + 5%y

= 7,20,000 + 0.05y

y = 9,50,000 + 10%x = 9,50,000 + 0.1x

equation (i) equation (ii)

x = 7,20,000 + 0.05 (9,50,000 + 0.1x) = 7,20,000 + 47,500 + 0.005x x – 0.005x = 7,67,500 0.995x = 7,67,500 x= = 7,71,357. Total fixed overheads of legal department = ` 7,71,357 Substituting value of x in equation (ii), we get y = 9,50,000 + 0.1 (7,71,357) = 9,50,000 + 77,136 = 10,27,136 Total fixed overheads of personnel department = ` 10,27,136 II. Variable Overheads Let the total variable overheads of Legal department be – a Let the total variable overheads of Personnel department be – b a = 4,00,000 + 5%b = 4,00,000 + 0.05b b = 12,00,000 + 20%a = 12,00,000 + 0.2a a = 4,00,000 + 0.05 (12,00,000 + 0.2a) = 4,00,000 + 60,000 + 0.01a

equation (i) equation (ii)

Accounting for Overheads and Control

121

a – 0.01a = 4,60,000 0.99a = 4,60,000 4,60,000 0.99 = 4,64,646

a=

Total variable overheads of legal department = ` 4,64,646 Substituting value of ‘a’ in equation (ii), we get, b = 12,00,000 + 0.2 (4,64,646) b = 12,00,000 + 92,929 b = 12,92,929 Total variable overheads of personnel department = ` 12,92,929. Overhead Distribution Summary Particulars Legal Department Overheads

Micro-Computer Division

Peripheral Computer Division

4,62,814

2,31,407

92,929

2,78,788

Fixed – ` 10,27,136 – full Capacity Basis – 45%, 50%

4,62,211

5,13,568

Variable – ` 12,92,929 – actual Capacity basis – 66.5%, 28.5% Total overheads

8,59,798

3,68,485

18,77,752

13,92,248

Fixed – ` 7,71,357 - Budeted Capacity Basis – 60%, 30% Variable – ` 4,64,646 - actual Capacity used basis – 20%, 60% Personnel department overheads

10. Primary distribution, secondary distribution and absorption ABC Ltd has three production departments P1, P2, and P3 and two service departments S1 and S2. The following data are extracted from the records of the company for the month of October 2007: Rent and rates General lighting Indirect wages Power Depreciation on machinery Insurance of machinery

62,500 7,500 18,750 25,000 50,000 20,000

122 Cost Accounting

Other information: Direct wages (`) Horsepower of machines used Costs of machinery (`) Floor space (sq. ft) Number of light points Production hours worked

P1 37,500

P2 25,000

P3 37,500

S1 18,750

S2 6,250

60 3,00,000

30 4,00,000

50 5,00,000

10 25,000

– 25,000

2,000 10 6,225

2,500 15 4,050

3,000 20 4,100

2,000 10 –

500 5 –

Expenses of the service departments S1 and S2 are reapportioned as below:

S1 S2

P1 20% 40%

P2 30% 20%

P3 40% 30%

S1 – 10%

S2 10% –

Required: (i) Compute overheads absorption rate per production hour of each production department. (ii) Determine the total cost of product x which was processed for manufacture in department P1, P2 and P3 for 5 hours, 3 hours and 4 hours respectively, given that its direct materials cost is ` 625 and direct labour cost is ` 375. (CA (Inter), Nov. 2007) Solution: Overhead Distribution Summary Particulars

Total

Direct wages 25,000 Rent and rates 62,500 General lighting

7,500

Indirect wages

18,750

Power

25,000

Depreciation

50,000

Basis of apportionment

Given Floor space 4:5:6:4:1 No. of light points 2:3:4:2:1 Direct wages 6:4:6:3:1 Horsepower 6:3:5:1 Cost of machinery 12:16:20:1:1

Production departments

Service departments S1 S2

P1

P2

P3

– 12,500

– 15,625

– 18,750

18,750 12,500

6,250 3,125

1,250

1,875

2,500

1,250

625

5,625

3,750

5,625

2,813

937

10,000

5,000

8,333

1,667

–

12,000

16,000

20,000

1,000

1,000 Contd...

Accounting for Overheads and Control

123

Contd...

Insurance of 20,000 machinery

Cost of machinery 12:16:20:1:1 Total departmental overheads Service department S1 (2:3:4:1)

4,800

6,400

8,000

46,175 7,676

48,600 11,514

63,208 15,352

400

400

38,380 3,838 (–) 3,838 33,380 Service department S2 (4:2:3:1) 6,470 3,235 4,852 1,618 (–) 16,175 Service department S1 (2:3:4:1) 324 485 647 (–) 162 1,618 Service department S2 (4:2:3:1) 65 32 49 16 (–) 162 Service department S1 (2:3:4:1) 4 5 7 (–) 16 – Total overheads of production departments 60,714 63,921 84,115 – – No. of production hours 6,225 4,050 4,100 – – Production overhead rate per hour (Total overheads 9.75 15.78 20.52 – – ÷ No. of production hours) Cost of Product X Materials Direct labour

625 375 1,000

Prime Cost Overheads:

Department P1 = 5 × 9.75 = 48.75 Department P2 = 3 × 15.78 = 47.34 Department P3 = 4 × 20.52 = 82.08 178.17 Total cost 1,178.17 11. Primary and Secondary distribution – Various methods The following cost information for a period is available for a Small Engineering unit. (a) Allocated expenditure: Total

Production department Machine shop

Service department

Assembling General plant service

Stores & maintenance

Indirect wages

29,300

8,000

6,000

4,000

11,300

Store consumed

6,700

2,200

1.700

1,100

1,700

14,000

–

–

14,000

Supervisory salaries

–

124 Cost Accounting

(b) Other expenses to be apportioned Power and fuel Rent

15,000 15,000

Insurance Depreciation

3,000 1,00,000

(c) Additional information available Floor sq. ft

H.P. hours No. of employees Investment in asset ( )

Machine shop

2,000

3,500

30

6,40,000

Assembling

1,000

500

15

2,00,000

–

5

10,000

10

1,50,000

General plant

500

Stores & maintenance

1,500

1,000

(d) Basis of apportionment of service department costs: Machine shop Assembling General plant service Store & maintenance Store & maintenance 50% 20% 30% – General plant service in proportion to the number of employees. You are required to prepare to an overhead distribution statement in detail. Service department costs are to be distributing by a) continued distribution method and b) simultaneous equation method. Calculations are to be shown to the nearest rupee. Solution: Primary Overhead Distribution Summary Particulars

Indirect wages Stores consumed Supervisor salaries Power and fuel

Total

Basis of apportionment

Production Service departments departments General Stores and Machine Assembling plant service maintenance shop

29,300

Given

8,000

6,000

4,000

11,300

6,700

Given

2,200

1,700

1,100

1,700

14,000

Given

–

14,000

15,000

H.P. of machines 7:1:0:2

1,500

–

– 10,500

– 3,000

Contd...

Accounting for Overheads and Control

125

Contd...

Rent

15,000

Floor area 20:10:5:15 Insurance 3,000 Investment in assets 64:20:1:15 Depreciation 1,00,000 H.P. of machines 7:1:0:2 Departmental 1,83,000 – overheads

6,000

3,000

1,500

4,500

1,920

600

30

450

70,000

10,000

–

20,000

98,620

22,800

20,630

40,950

Reapportionment of service department overheads to production departments: (a) Continued distribution method: Particulars

Departmental overheads General plant service – No. of employees ratio (30: 15: 10) Stores and maintenance (50%:20%:30%) General plant service – No. of employees ratio (30: 15: 10) Stores and maintenance (50%:20%:30%) General plant service – No. of employees ratio (30:15: 10) Stores and maintenance (50%:20%:30%) General plant service – No. of employees ratio (30:15:10) Stores and maintenance (50%:20%:30%) Total overheads of production departments

Production departments

Service departments

Machine shop

Assembling

98,620 11,253

22,800 5,626

20,630 (–) 20,630

40,950 3,751

22,351

8,940

13,410

(–) 44,701

7,314

3,658

(–) 13,410

2,438

1,219

488

731

(–) 2,438

399

199

(–) 731

133

66

27

40

(–) 133

22

11

(–) 40

7

5

2

–

1,41,249

41,751

–

General Stores and plant service maintenance

(–) 7 –

126 Cost Accounting

(b) Simultaneous Equation Method: Overhead Distribution Summary Particulars

Production departments Assembly Machine shop

Departmental overheads Ê 30 15 ˆ General plant service (` 34,812) Á , Ë 55 55 ˜¯

Stores and maintenance (` 47,280) (50%, 20%) Total overheads

98,620 18,988

22,800 9,494

23,640

9,456

1,41,248

41,750

Workings: Let the total overheads of General plant be = x Let the total overheads of stores and maintenance be = y x = 20,630 + 30% y = 20,630 + 0.3y 10 2 x = 40,950 + x y = 40,950 + 55 11 x = 20,630 + 0.3 (40,950 + x)

equation (i) equation (ii)

= 20,630 + 12,285 + 0.0545x x – 0.0545x = 32,915 0.9455x = 32,915 32,915 = 34,812 0.9455 Total overheads of general plant service department = ` 34,812 Substituting the value of x in equation (ii) we get:

x=

y = 40,950 +

2 (34,812) 11

= 40,950 + 6,330 = 47,280 Total overheads of stores and maintenance department = ` 47,280 12. Secondary distribution and absorption RST Ltd produces machine parts on job order basis. Most of the business is obtained through bidding. Most of the firms competing with RST Ltd. bid full cost plus a 20% mark-up. Recently, with the expectation of gaining more sales, RST Ltd, reduced its mark-up from 25 % to 20%. The company operates two service departments and two producing departments. The budgeted costs and the normal service levels of activity for each department are given below:

Accounting for Overheads and Control

Machine shops Overheads costs (`) Maintenance hours

Production departments

A

B

5,00,000

10,00,000

5,00,000

7,50,000

40

35

150

150

10,000

1,000

32,000

8,000

Number of employees

127

C

D

Machine hours

–

–

50,000

5,000

Labour hours

–

–

5,000

5,000

The direct costs of department A are allocated on the basis of employees. Those of department B are allocated on the basis of maintenance hours. Department overhead rates are used to assign costs to products. Department C uses machine hours, and department D uses labour hours. The firm is preparing to bid on a job (job Z) that requires three machine hours per unit produced in department C and no time in department D. The expected prime costs per unit are ` 85. Required: (i) Allocate the service costs to the production departments using the direct method. (ii) What will be the bid for job Z, if the direct method of allocation is used? (iii) Allocate the service costs to the producing departments using the sequential method. (iv) What will be the bid for job Z, if the sequential method is used? (v) Allocate the service department costs to the production departments using the reciprocal method. (vi) What will be the bid for job Z, if the reciprocal method is used? (CA (Inter), Nov. 2002) Solution: (i) Direct distribution method of service department costs to production departments: Overhead Reapportionment Summary Particulars

Total ( )

Departmental OHs

12,50,000

Machine shop ‘A’

5,00,000

Machine shop ‘B’

10,00,000

Total

27,50,000

Basis of apportionment

Production departments D C

Given

5,00,000

7,50,000

No. of employees 150 : 150 Maintenance hours 4:1 –

2,50,000

2,50,000

8,00,000

2,00,000

15,50,000

12,00,000

128 Cost Accounting

Overhead recovery rates: Department ‘C’– Machine hour rate =

15,50,000 50,000

= ` 31 Department ‘D’– Labour hour rate =

12,00,000 5,000

= ` 240 (ii) Job cost sheet – Job Z Prime cost Overheads – Department C (3 × 31) Total cost Mark up – 20% on cost Bid for Job Z

85 91 176 35.20 211.20

(iii) Sequential method of apportionment of service department overheads. Overhead reapportionment Summary Particulars

Basis of apportionment

Service department A

Departmental overheads – 5,00,000 Service department ‘A’ No. of employees (–) 5,00,000 35:150:150 Service department ‘B’ Maintenance hours – 32:8 Total overheads – –

Production departments C D

B 10,00,000 52,239

5,00,000 2,23,881

7,50,000 2,23,880

(–) 10,52,239

8,41,791

2,10,448

–

15,65,672 11,84,328

Overhead recovery rates: Department C (Machine hour rate)

=

15,65,672 50,000

Department D (Labour hour rate)

=

11,84,328 5,000

(iv) Job cost sheet: Job Z Prime cost Overheads Department C (3 × 31.31) Total cost

85 93.93 178.93

Accounting for Overheads and Control

Mark-up 20% on cost Bid for job Z

129

35.79 214.72

(v) Reciprocal method of apportionment of service department overheads Statement showing basis of apportionment of service department overheads to production department Particulars

Basis of apportionment

Production department C

D

Service departments A

B

Department ‘A’

No. of employees

150

150

–

35

Department ‘B’

Maintenance hours

32

8

10

–

Let the total overheads of department ‘A’ be = x Let the total overheads of department ‘B’ be = y x = 5,00,000 + y = 10,00,000 +

10 y = 5,00,000 + 0.27 50

equation (i)

35 x = 10,00,000 + x 335

equation (ii)

7 ˆ Ê x˜ x = 5,00,000 + 0.2 Á10,00,000 + Ë 67 ¯

x = 5,00,000 + 2,00,000 + 0.021x x – 0.021x = 7,00,000 x=

7,00,000 = 7,15,015 0.979

Total overheads of service department ‘A’ = ` 7,15,015 Substituting the value of ‘x’ in equation (ii), we get y = 10,00,000 +

7 (7, 15, 015) 67

y = 10,00,000 + 74,703 y = 10,74,703. Total overheads of service department ‘D’ = ` 10,74,703.

130 Cost Accounting

Overhead Distribution Summary Particulars

Department overhead Department ‘A’

Basis of apportionment

Total

15,00,000 7,15,015

Production department D C

given No. of employees

5,00,000 3,20,156

7,50,000 3,20,156

6,87,810

1,71,952

15,07,966

12,42,108

150 150 , 335 335

Department ‘B’

10,74,703

Total overheads

–

Maintenance hours 32 8 , 50 50

Overhead recovery rates: Department A (Machine hour rate)

=

15,07,966 = ` 30.16 50,000

Department B (Labour hour rate)

=

12, 42,108 = ` 248.42 5,000

(iv) Job cost sheet of job Z Prime cost 85 Overheads – Department C (3 × 30.16) 90.48 Total cost 175.48 Mark-up – 20% on cost 35.10 Bid price 210.58 13. PQR Ltd. has its own power plant, which has two users, cutting department and welding department. When the plans were prepared for the power plant, top management decided that its practical capacity should be 1,50,000 machine hours. Budgeted practical fixed costs are ` 9,00,000 and budgeted variable costs are ` 4 per machine hour. The following data are available: Overheads costs (` ) Actual usage In 2002-03 (machine hours) Practical capacity for each department (machine hours)

Cutting Department 5,00,000

Welding Department 10,00,000

Total 5,00,000

60,000

40,000

1,00,000

90,000

60,000

1,50,000

Accounting for Overheads and Control

131

Required: (i) Allocate the power plant’s cost to the cutting and welding department using the single rate method in which the budgeted rate is calculated on the practical capacity and costs are allocated on the actual usage. (ii) Allocate the power plant’s cost to the cutting and welding departments, using the dual-rate method in which fixed cost are allocated on the practical capacity and variable costs are allocated on the actual usage. (iii) Allocate the power plant’s cost to the cutting and welding departments, using the dual-rate method in which fixed cost rate is calculated on the practical capacity, but fixed costs are allocated to cutting and welding department on the actual usage. Variable costs are allocated on the actual usage. Comment on your results in requirements (i), (ii) and (iii). Solution: (i) Budgeted fixed cost per Budgeted practical capacity fixed cost Budgeted practical capacity machine hours

Machine hour =

9,00,000 = `6 1,50,000

=

Variable cost per machine hour = ` 4 (given) Budgeted single rate (` 6 + 4) = ` 10. Statement showing allocation of costs Actual usage (machine hours) Budgeted single cost rate (`)

Cutting department 60,000 10

Welding department 40,000 10

6,00,000

4,00,000

Allocated cost (`) (ii) Statement showing allocation of costs.

Cutting department

Welding department

Fixed cost (practical capacity basis)

90,000 × 6 = ` 5,40,000

60,000 × 6 = ` 3,60,000

Variable cost (actual usage basis)

60,000 × 4 = ` 2,40,000

40,000 × 4 = ` 1,60,000

Allocated cost (` )

` 7,80,000

` 5,20,000

(iii) Statement showing allocation of costs: Cutting department

Welding department

Fixed cost (actual usage basis)

60,000 × 6 = ` 3,60,000

40,000 × 6 = ` 2,40,000

Variable cost (actual usage basis)

60,000 × 4 = ` 2,40,000

40,000 × 4 = ` 1,60,000

Allocated cost (` )

` 6,00,000

` 4,00,000

132 Cost Accounting

(iv) Comment: under (i) and (iii) above allocated costs are same. Total allocated costs are less than the cost allocated in (ii) above. 14. Labour hour rate Prabhu Limited, a manufacturer of furniture, mainly on job order basis, manufactures furniture with the help of labourers. The company works all the 52 weeks in a year at 6 days a week. There are 7 paid holidays in a year. Official leave permitted is 12 days per annum. Normal idle time is 40 minutes per day. On the basis of past experience it is found that absenteeism per worker is 5 days. The company employs 50 workers. The company follows the policy of recovery of overheads on predetermined labor hour rate basis. The annual budgeted overheads of the company is estimated at ` 7,92,000. You are required to work out labour hour rate. Solution: Computation of budgeted labour hours: Annual working days = (52 × 6) = 312 days Less: Annual holidays – 7 days Official leave 12 days Absenteesm 5 days 24 days Net working days

288 days

Total labour hours for networking days: (50 workers × 288 days × 8 hours per day) 40 ˆ Ê Less: Idle time = Á 50 ¥ 288 ¥ ˜ Ë 60 ¯

Productive labour hours

1,15,200 hrs 9,600 hrs 1,05,600 hrs.

Budgeted labour hour rate = =

Budgeted overhead Budgeted productive labour hours 7,92,000 1,05,600

= ` 7.50 15. Overhead rate - Different methods The following information relates to the activities of a production department of a factory for a certain period: Direct material used ` 4,000 Direct wages ` 6,000 Direct labour hours worked 2,400 hrs (including 2,000 hrs of machine operation) Overheads chargeable to the department ` 5,000 For order No. 156 carried out in the department the relevant figures are: Direct material used ` 200 Direct wages ` 165 Direct labour hour 820 hrs (including 80 machine hours)

Accounting for Overheads and Control

133

You are requested to calculate the overheads chargeable to order no. 156 and works cost by four different cost rates. Solution:

Overhead recovery rates:

(i) % on materials cost basis = =

5,000 ¥ 100 = 125% 4,000

Overheads ¥ 100 Labour cost

(ii) % on labour cost basis =

5,000 ¥ 100 = 83.33% = 83.33% 6,000

=

Overheads Labour hours

(iii) Labour hour rate basis = =

Overheads ¥ 100 Materials cost

5,000 24,000

= Re. 0.208 (iv) Machine hour rate basis = =

Overheads Machine hours 5,000 2,000

= ` 2.50 Cost Sheet of Order No. 156 Particulars Direct materials Direct wages Prime cost Overheads Works cost

(i) Materials cost basis ( ) 200 165 365 (200 × 125%) 250 615

(ii) Labour cost basis ( ) 200 165 365 (165 × 83.33%) 137.50 502.50

(iii) Labour hour rate ( ) 200 165 365 (820 × 0.208) 170.56 535.56

(iv) Machine hour rate ( ) 200 165 365 (80 × 2.50) 200 565

16. Dual machine hour rate X Ltd having fifteen different machines, furnish the information as under for 2006-07. (i) Overheads expenses: Factory rent ` 96,000 Floor area 80,000 sq. ft., heat and gas ` 45,000 and supervision ` 1,20,000

134 Cost Accounting

(ii) Wages of the operator are ` 48 per day of 8 hours. He attached to one machine when it is under setup and two machines while they are under operation. In respect of machine ‘B’ (one of the above machines) the following particulars are furnished: (i) Cost of machine ` 45,000, life of machine 10 years and scrap value at the end of its life ` 5,000 (ii) Annual expenses on special equipment attached to the machine are estimated at ` 3,000 (iii) Estimated operation time of the machine is 3,600 hours and setup time is 400 hours per annum. (iv) The machine occupies 5,000 sq.ft of floor area. (v) Power costs ` 2 per hour while machine is in operation. Find out the comprehensive machine hour rate of machine ‘B’. Also find out the machine costs to be absorbed in respect of use of machine ‘B’ on the following two work orders:

Solution:

Work order no. 31

Work order no. 32

Machine setup time (hrs)

10

20

Machine operation time (hrs)

90

180

Computation of comprehensive machine hour rate for Machine ‘B’ Particulars

Total p.a.

Standing charges: Ê 96,000 ˆ ¥ 5,000˜ Factory rent Á Ë 80,000 ¯

6,000

Heat and gas (45,000

15)

3,000

Supervision (1,20,000

15)

8,000

Ê 45,000 - 5,000 ˆ Depreciation Á ˜¯ Ë 10

4,000

Cost of special equipment

3,000

Total fixed expenses Ê 24,000 ˆ Standing charges per hour Á Ë 4.000 ˜¯

24,000 6

Accounting for Overheads and Control

135

Machine Hour Rate For Set up time 6

Standing charges per hour Variable expenses: Power Operator wages Comprehensive machine hour rate

– 6 12

For operation time 6 2 3 11

Cost Sheet of Work Orders Particulars Setup time cost Operation time cost Total cost

Work order No. 31 (10 × 12) 120 (90 × 11) 990 1,110

Work order No. 32 (20 × 12) 240 (180 × 11) 1,980 2,220

Note: Fixed expenses is divided by total machine hours (operation time and setup time) = 4,000 hrs

17. Machine hour rate A machine was purchased on 1st September, 2007, for ` 5 lakh. The total cost of all machineries inclusive of the new machinery was ` 75 lakh. The following further particulars are available: Expected life of the machine 10 years Scrap value at the end of ten years ` 5,000. Repairs and maintenance of the machine for the year ` 2,000. Expected number of working hours of the machine per year 4,000 hours. Insurance premium annually for all the machines ` 4,500. Electricity consumption for the machine per hour 25 units (@ 75 paise per unit). Area occupied by the machine 100 sq. ft. Area occupied by other machines 1,500 sq. ft. Rent per month of the department ` 600. Lighting charges for 20 points for the whole department out of which three points are for the machine ` 120 per month. Compute the machine hour rate for the new machine on the basis of the data given above. (B.Com. (Hons.) Delhi) Solution: Computation of machine hour rate: Particulars Fixed expenses Ê 4,500 ˆ ¥ 5˜ Insurance premium Á Ë 75 ¯

Total per year

Per hour

300 Contd...

136 Cost Accounting Contd...

100 ˆ Ê Rent Á 600 ¥ 12 ¥ ˜ Ë 1600 ¯

450

3ˆ Ê Lighting charges Á120 ¥ 12 ¥ ˜ Ë 20 ¯

216

Total fixed charges

966 –

0.24

49,500

12.38

2,000

0.50

– –

18.75 31.87

Fixed charges per hours (966 ÷ 4,000) Variable expenses: Depreciation =

5,00,000 - 5,000 10

Repairs and maintenance Electricity (0.75 × 25) Machine hour rate

18. Machine hour rate Compute machine hour rate from the following data: Cost of the machine 1,00,000 Installation charges 10,000 Scrap value after 15 years of life 5,000 Rent and rates for shop per month 200 General lighting for shop per month 300 Insurance for the machine pre annum 960 Repairs and maintenance per annum 1,000 Power consumption 10 units per hour – Rate of power per 100 units 20 Estimated working hours per annum 2,000 hours Supervisors salary per month 600 1 of the total area of the shop. The supervisor is expected to devote The machine occupies 4 1 of his time on this machine. 5 (B.Com., Madras, 1992) Solution: Computation of machine hour rate Particulars

Total p.a.

Per hour

Fixed expenses 1ˆ Ê Rent and rates Á 200 ¥ 12 ¥ ˜ Ë 4¯

600 Contd...

Accounting for Overheads and Control

137

Contd...

1ˆ Ê General lighting Á 300 ¥ 12 ¥ ˜ Ë 4¯ Insurance 1ˆ Ê Supervisor’s salary Á 600 ¥ 12 ¥ ˜ Ë 4¯

Total fixed expenses

900 960 1,400 3,903 –

1.95

Depreciation

7,000

3.50

Repairs and maintenance

1,000

0.50

Power

–

2.00

Machine hour rate

–

7.95

Fixed expenses per hours (3,900 ÷ 2,000)

19. Comprehensive machine hour rate From the details provided below you are requested to compute the comprehensive machine hour rate: (i) Original purchase price of the machine (subject to depreciation of 10% per annum on original cost) ` 21,600 (ii) Normal working hours for the month (the machine works to only 75% of capacity) 200 hours (iii) Wages of machine man

` 4 (per day of 8 hours)

(iv) Wages of a helper (machine attendant)

` 2 (per day of 8 hours)

(v) Power consumption estimated at ` 150 per mensem for the time worked, (vi) Supervision charges apportioned for the machine centre

` 300/month

(vii) Electricity and lighting

` 75/month

(viii) Repairs and maintenance (machine) including consumable ` 150

stores per mensem (ix) Other general expenses (overhead) per annum

` 1,000

(x) Insurance of plant and building ` 2,160 per annum. (xi) Production bonus payable to workers 331/3% in terms of an award of basic wages and dearness allowance (xii) Workers are also paid a fixed dearness allowance of ` 75 per month (xiii) Add 10% of the wages and dearness allowance against leave wages and holidays with pay to arrive at a comprehensive labour cost for debit to production. (B. Com., Madras University April, 1998)

138 Cost Accounting

Solution:

Computation of Comprehensive Machine Hour Rate: Particulars

Total per month

Per hour

Fixed expenses Supervision charges Electricity and lighting Insurance of plant and building (2,160 ÷ 12) General expenses (1000 ÷ 12) Total fixed expenses Fixed expenses per hours (638 ÷ 150) Variable expenses: Depreciation = 21,600 × 10% ÷ 12 Wages of machine man Wages of helper Power Repairs and maintenance Machine hour rate Workings: (1) No. of days = (2) Wages of machine man and helper: Wages for 25 days Fixed dearness allowance

300 75 180 83 638 –

4.25

180 251 180 150 150

1.20 1.67 1.20 1.00 1.00

–

Machine Man ` (25 × 4) 100 75

Wages and DA 1 % of wages and DA Production bonus = 33 33 Leave wages 10% of wages and DA Total

10.32

Helper ` (25 × 2) 50 75

175

125

58

42

18 251

13 180

(3) (i) Normal working hours 200/month 75 ˆ Ê (ii) Actual hours worked = Á 200 ¥ ˜ = 150 hours. Ë 100 ¯

20. Composite machine hour rate From the following details, compute the composite machine hour rate: (i) Cost of the machine ` 1,00,000, estimated life 15 years, residual value ` 10,000. (ii) Machine running hours: 2040 hours per machine per annum including idle time of 40 hours due to routine repairs and maintenance and 20 hours due to breakdown,

Accounting for Overheads and Control

139

(iii) Power consumption of the machine per hour: 20 units. Rate of power per 100 units ` 80. (iv) There are two operators in the shop and wages, workmen’s compensation, insurance, etc. of an operator who is in charge of two machines is ` 12,000 p.a. (v) Rent, rates and taxes of the shop ` 4,800.p.a. (vi) Insurance premium for the machine-` 400 per quarter (vii) General lighting of the shop per month ` 600. (viii) Repairs and maintenance expenses for the machine per month ` 400 per month, (ix) Shop supervisor salary per month ` 1,500. (x) Other factory overheads allocated for the shop ` 6,000. p.a. (xi) There are four identical machines in the machine shop. The supervisor devotes 1/5 of his time for supervising the machine. (B.Com. (Hons.), Calcutta) Solution:

Computation of comprehensive machine hour rate Particulars

Total per annum

Fixed expenses Operator wages (12,000 ÷ 2) Rent, rates and taxes (4,800 ÷ 4)

6,000 1,200

Insurance premium (400 × 4) General lighting 600 × 12 ÷ 4 Supervisor salary (1,500 × 12 ÷ 5) Other factory overheads (6,000 ÷ 4) Total Fixed expenses per hour (15,700 ÷ 1,980) Variable expenses: Depreciation

1,00,000 - 10,000 15

80 ˆ Ê Power Á 20 ¥ ˜ Ë 100 ¯

Repairs and maintenance (400 × 12 ÷ 4) Comprehensive machine hour rate Note: Total machine hours Less: Idle time Machine breakdown Effective machine hours

Per hour

1,600 1,800 3,600 1,500 15,700 –

7.93

6,000

3.03

–

16.00

1,200 –

0.60 27.57

– 2,040 hrs – 40 hours – 20 hour

– 60 hrs – 1,980 hrs

140 Cost Accounting

Note: (1) Machine breakdown is considered normal. (2) If machine breakdown is considered abnormal the machine hour rate will be ` 27.45. Effective machine hours will be 2,000 hours. 21. Dual machine hour rate A manufacturing unit has purchased and installed a new machine of ` 12,70,000 to its fleet of 7 existing machines. The new machine has an estimated life of 12 years and is expected to realize ` 70,000 as scrap at the end of its working life. Other relevant data are as follows: (i) Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This includes 300 hours for plant maintenance and 92 hours for setting up of plant. (ii) Estimated cost of maintenance of the machine is ` 25,000 (p.a). (iii) The machine requires a special chemical solution, which is replaced at the end of each week (6 days in a week) at a cost of ` 400 each time. (iv) Four operators control the operations of 8 machines and the average wages per person amounts to ` 420 per week plus 15% fringe benefits. (v) Electricity used by the machine during the production is 16 units per hour at a costs of ` 3 per unit. No current is taken during maintenance and setting up. (vi) Department and general works overheads allocated to the operation during last year was ` 50,000. During the current year it is estimated to increase 10% of this amount. Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is productive. (CA (Inter), May 2005) Solution: Particulars

Total per annum

Fixed expenses 110 1 ˆ Ê ¥ ˜ Department and general OHs Á 50,000 ¥ Ë 100 8 ¯ Operator wages Variable expenses: 12,70,000 - 70,000 12 Cost of maintenance

6,875 13,041 1,00,000

Depreciation =

25,000

324 ˆ Ê Special chemical Á 400 ¥ ˜ Ë 6 ¯

21,600

Electricity (16 × 3 × 2,200)

1,05,600 Total expenses

2,72,116

Accounting for Overheads and Control

141

Workings: (1) Operator wages

420 ¥ 4 324 = 11,340 ¥ 8 6

Add: 15% for fringe benefits

= 1,701

Total

= 13,041

Machine hour rate: (a) Setting up time is unproductive (b) Setting up time is productive

2,72,116 2, 200

2,72,116 2, 292

` 123.69 ` 118.72

22. Dual machine hour rate In a factory a machine is supposed to work for 208 hours in a month. It includes maintenance time of 8 hours and setting up time of 20 hours. The expenses data relating to the machine are as under: (i) Cost of the machine is ` 5,00,000, life 10 years. Estimated scrap value at the end of life is ` 20,000 (ii) Repairs and maintenance per annum ` 60,480 (iii) Consumable stores per annum ` 47,520 (iv) Rent of building per annum (the machine under reference occupies 1/6 of the area) ` 72,000 (v) Supervisor’s salary per month (common to three machines) ` 6,000 (vi) Wages of operator per month per machine ` 2,500 (vii) General lighting charges per month allocated to the machine ` 1,000 (viii) Power 25 units per hour at ` 2 per unit Power is required for productive purpose only. Setting up time, though productive, does not require power. The supervisor and operator are permanent. Repairs and maintenance and consumable stores vary with the running of the machine. (CA (Inter), May 2002) Computation of Machine Hour Rate Particulars Standing charges: Supervisor salary (6,000 ÷ 3) General lighting Rent

72,000 6 ¥ 12

Ê 5,00,000 - 20,000 ˆ Depreciation Á ˜¯ 10 ¥ 12 Ë

Per month

Per hour

2,000 1,000 1,000 4,000 Contd...

142 Cost Accounting Contd...

Operator wages

2,500

Total standing charges. Variable expenses: Repairs and maintenance (60,480 ÷ 12) Consumable stores (47,520 ÷ 12) Power (25 × 2 × 180) Total variable expenses

10,500

10,500 200

52.50

5,040 3,960 9,000

5,040 ÷ 180 3,960 ÷ 180 9,000 ÷ 180

28 22 50

28,500

–

100

Machine Hour Rate Setting up time Fixed expenses Variable expenses Total

Running time

52.50 –

52.50 100.00

52.50

152.50

23. Comprehensive machine hour rate Calculate the comprehensive machine hour rate of a machine from the following: (i) Cost of the machine ` 25 lakh, having a scrap value of ` 1 lakh after 10 years, (ii) The machine will be operated for three shifts of 7 hrs. each for 300 working days in a year of which 300 hrs. will be utilized for minor repairs and maintenance. (iii) Wage payable: ` 8,000 p.m for an operator and ` 3,000 p.m. for a helper for every shift. ` 16,000 p.m. to one supervisor per shift for the department accommodating four machines including the above machine, (iv) Other details: Power consumption

: 25 units (kWh) @ ` 4.80 per unit

Repairs & maintenance

: ` 30,000 per annum for the machine

General lighting and heating

: ` 4,000 p.m. for the whole department having the four machines

Insurance

: ` 18,000 per machine per annum.

Rent, rates and taxes

: ` 3,000 p.m. for the department.

Factory overheads

: ` 36,000 per annum for the department. (ICWA (Inter), June 2007)

Accounting for Overheads and Control

Solution:

143

Computation of comprehensive machine hour rate: Particulars

Per annum

Per hour

Standing charges: 16,000 ˆ Supervisor salary ÊÁ ¥ 12 ¥ 3˜ Ë 4 ¯

1,44,000

Factory overheads (36,000 ÷ 4)

9,000

Ê 4,000 ¥ 12 ˆ General lighting and heating Á ˜¯ Ë 4

12,000

Insurance 3,000 ¥ 12 ˆ Rent, rates, taxes ÊÁ ˜¯ Ë 4

18,000 9,000 Total

1,92,000 –

Standing charges per hour 1,92,000 ÷ 6,000 Variable expenses:

32

25,00,000 - 1,00,000 ˆ Depreciation ÊÁ ˜¯ Ë 10

2,40,000

40

Repairs and maintenance Power (25 × 4.80) Operator wages (8,000 × 12 × 3) Helper wages (3,000 × 12 × 3) Comprehensive machine hour rate

30,000 – 2,88,000 1,08,000 –

5 120 48 18 263

Workings: Total working hours per annum = 300 days × 7 hours × 3 shifts = 6,300 hours Less: Repairs and maintenance time Effective machine hours

= 300 hours = 6,000 hours

24. Under absorption of overheads In a factory overheads of a particular department are recovered on the basis of ` 5 per machine hour. The total expenses incurred and actual machine hours for the department for the month of August were ` 80,000 and 10,000 hours respectively. Of the amount of ` 80,000, ` 15,000 became payable due to an award of the labour court and ` 5,000 was in respect of the expenses of the previous year booked in the current month (August). Actual production was 40,000 units of which 30,000 units were sold. On analyzing the reasons, it was found that 60% of unabsorbed overhead was due to defective planning and the rest was attributed to normal cost increase. How would you treat the unabsorbed overheads in cost accounts? (CA, Inter)

144 Cost Accounting

Solution: Actual overheads: Total overheads (–) amount paid due to award of labour court (–) Expenses of previous year paid

80,000 15,000 5,000

Normal actual overheads Recovered overheads (Actual hours × Bud.machine hour rate) (10,000 × 5) Under recovery of overheads

20,000 60,000 50,000

10,000

Treatment of under recovered overheads: (i) Under recovery due to defective planning should be debited to costing profit and loss account

= 10,000 ×

60 100

= ` 6,000 (ii) Under recovery due to normal increase in cost (` 4,000) should be charged to production through supplementary overhead reate. 4,000 = 0.10 Supplementary overhead recovery rate per unit = 40,000 Amount debited to cost of goods sold account = 30,000 × 0.10

= ` 3,000

Amount debited to finished goods stock account = 10,000 × 0.10

= ` 1,000

25. Under absorption of overheads Based on the data given below compute (i) overheads absorption rate and (ii) the amount of under- or over-absorbed overheads Budgeted labour hours

8,500

Budgeted overheads

1,48,750

Actual Labour hours

7,928

Actual overheads

1,46,200

Solution: Budgeted overhead absorption rate per hour = =

Budgeted overheads Budgeted labour hours 1, 48,750 = ` 17.50 8,500

Recovered overheads = Actual hours × Budgeted overhead rate = 7,928 × 17.50 = 1,38,740

Accounting for Overheads and Control

Actual overheads

= 1,46,200

Under absorbed overheads

= 7,460

145

26. Under absorption of overheads ABC Ltd manufacturing a single product and absorbed the production overheads at a predetermined overhead rate of ` 10 per machine hour. At the end of the financial years 2007-08, it has been found that actual production overheads incurred were ` 6,00,000. It includes ` 45,000 on account of written off obsolete stores and ` 30,000 being the wage paid for the strike period under an award. The production and sales data for the year 2007-08 is as under: Production: Finished goods 20,000 units Work-in-progress (50% completed) 8,000 units Sales: Finished goods 18,000 units The actual machine hours worked during the period were 48,000. It has been found that one-third of the under-absorption of production overheads was due to lack of production planning and the rest was attributed to normal increase in costs. You are required to: (i) Calculate the amount of under-absorption of production overheads during the year 200708 and (ii) show the accounting treatment of under-absorption of production overheads Solution: Actual overheads incurred (–) paid for strike period under an award (–) Obsolete stores written off Actual overheads (normal) Recovered overheads: Actual hours × Machine hour rate 48,000 × 10 Under recovery of overheads

– 6,00,000 – 30,000 – 45,000 – 5,25,000

= 4,80,000 45,000

Accounting treatment of under-recovered overheads: (a) One-third under-recovery due to lack of planning should be debited to costing profit and loss a/c: = 45,000 ¥

1 = ` 15,000 3

(b) Balance (2/3) under recovery due to normal increase in cost should be charged to production using a supplementary overhead rate.

146 Cost Accounting

Supplementary overhead rate per unit = =

Under-recovered overheads Total production (units)

30,000 = ` 1.25 24,000

(i) amount charged to cost of sales are = 18,000 × 1.25 (ii) amount charged to finished goods control a/c = 2,000 × 1.25 (iii) amount charged to work-in-progress a/c = 4,000 × 1.25 Journal entry Work-in-progress control a/c Dr. 5,000 Finished goods control a/c Dr. 2,500 Cost of sales control a/c Dr. 22,500 Costing profit and loss a/c Dr. 15,000 To production overheads control a/c 45,000

= ` 22,500 = ` 2,500 = ` 5,000

Workings: Computation of total production: Finished goods – 20,000 units Work-in-progress - equivalent completed units (8,000 × 50%) – 4,000 units Total equivalent production – 24,000 units.

II. Practical Problems A. Short Answer Type Questions: 1. There are four production departments. The machines installed in each department are of 30HP, 40HP, 20HP and 35HP. During a period the machines operated for 100 hrs, 75 hrs, 90 hrs and 80 hrs respectively The power charges amounted to ` 26,500. Apportion the power charges to various departments on suitable basis. Solution: Power charges are apportioned in the ratio of HP × machine hours Ratio of HP × machine hours: Machines Total Machine hours Power charges apportioned

1 30 × 100 : 3000 :

2 40 × 75 : 3000 :

3 20 × 90 : 1800 :

4 35 × 80 2800

26,500 ¥ 3,000 10,600

26,500 ¥ 3,000 10,600

26,500 ¥ 1,800 10,600

26,500 ¥ 2,800 10,600

= ` 7,500

= ` 7,500

= ` 4,500

= ` 7,000

Accounting for Overheads and Control

147

2. There are four departments in a company. Number of employees working in each department are 200, 250, 400 and 350 respectively. All the employees use the company canteen. Canteen expenses amounted to ` 84,000 during a period. Direct wages paid to them in each department amounted to ` 1,50,000, ` 1,00,000, ` 1,75,000 and ` 2,25,000. Apportion the canteen expenses to various departments. Solution:

Canteen expenses are apportioned in the ratio of number of employees:

Ratio of employees = 200 : 250 : 400 : 350 =4 : 5 : 8 : Canteen expenses apportioned: 4 = ` 14,000 Dept 1 = 84,000 × 24 Dept 2 =

84,000 ×

5 = ` 17,500 24

Dept 3 =

84,000 ×

8 = ` 28,000 24

Dept 4 =

84,000 ×

7 = ` 24,500 24

7

3. There are three production departments A, B and C and two service departments P and Q. Floor space occupied by each department is A – 500 sq. ft B – 750 sq. ft C – 600 sq. ft P – 400 sq. ft Q – 450 sq. ft Rent paid during a particular period amounted to ` 21,600. Apportion the rent to each departments. Solution: Ratio of area

= 500 : 750 : 600 : 400 : 450 = 10 : 15 : 12 : 8 : 9

Rent apportioned: Dept A =

21,600 ×

10 = ` 4,000 54

Dept B =

21,600 ×

15 = ` 6,000 54

Dept C =

21,600 ×

12 = ` 4,800 54

148 Cost Accounting

Dept P =

21,600 ×

8 = ` 3,200 54

Dept Q =

21,600 ×

9 = ` 3,600 54

4. There are three production departments A, B and C. The power charges of the three departments amounted to ` 22,000. Other details are Departments A B C HP of machines 20 30 25 Working hours 40 40 40 Power consumed (kWh) 500 700 800 Apportion the power charges to production departments. Solution:

Power charges are apportioned in the number of units (kWh) consumed.

Ratio of power consumed = 500 : 700 : 800 = 5 : 7 :8 Power charges apportioned: Dept A =

22,000 ×

5 = ` 5,500 20

Dept B =

22,000 ×

7 = ` 7,700 20

Dept C =

22,000 ×

8 = ` 8,800 20

5. Direct materials consumed in three production departments are: Department x - ` 1,00,000 Department y - ` 2,00,000 Department z - ` 2,50,000 Total production overheads amounted to ` 60,500. Company follows the policy of recovering production overheads as a percentage on direct materials cost. Compute the percentage of production overheads on direct materials. Also apportion the production overheads to all the production departments. 60,500 Solution: % of production overheads on materials = ¥ 100 = 11% 5,50,000 11 Dept A = 1,00,000 × = ` 11,000 100 Dept B = 2,00,000 ×

11 = ` 22,000 100

Accounting for Overheads and Control

Dept C = 2,50,000 ×

149

11 = ` 27,500 100

6. X Ltd has 90 workers on its roll. The company works for 6 days in a week. Normal working hours per day is 8 hours on an average. Normal idle time amounted to 30 minutes per day. Calculate labour hours for a four weekly period Solution: Total labour hours

= No. of workers × No. of days in a week × No. of hours per day × No. of weeks

Less: Idle time

= 90 × 6 × 8 × 4

= 17,280 hours

= 90 × 6 × 0.5 × 4

= 1,080 hours

Effective labour hours

= 16,200 hours

7. You are required to find out direct labour hour rate from the following information: (a) Total number of operators working in the department is 200. (b) Department works for 300 days in a year and the number of hours worked in a day is 8. (c) Total departmental overheads are ` 22,800 (d) From the total number of hours 5% are to be deducted for idle time. Solution: Total hours per year = No. of operators × No. of days × No. of hours per day = 200 × 300 × 8 Less: Idle time - 5% Effective labour hours Labour hour rate =

Overheads No. of labour hours

=

22,800 = ` 0.05 4,56,000

= 4,80,000 hrs = 24,000 hrs = 4,56,000 hrs

8. Indirect labour cost for the current year in a company amounted to ` 95,000. This includes arrear wages relating to last year ` 12,000 and compensation paid to a worker as per court decree ` 7,000. Total direct labour hours for the current year is 3,80,000 hours. Compute labour hour rate. Solution: Indirect labour cost for current year Less: Arrears wages for last year Compensation paid as per court order Labour hour rate =

76,000 = ` 0.20 3,80,000

= ` 95,000 12,000

= ` 19,000

7,000

= ` 76,000

150 Cost Accounting

9. Ordinarily a machine is expected to run for 2,400 hours per annum. It is estimated that 200 hours will be lost for normal repairs and maintenance and further 600 hours will be lost due to set-up and staggering. Compute effective machine hours. Solution: Total machine hours Less: Repairs sand maintenance hours Setup and staggering hours Effective machine hours

2,400 200 600 –

800 1,600

10. A machine runs 2,200 hours in a year. Normal idle time of the machine is 5%. During the year 50 hours were lost due to power failure. Total machine expenses amounted to ` 26,125. Compute machine hour rate. Solution: Annual machine hours Less: Idle time 5% Effective machine hours Machine hour rate =

2,200 110 2,090

26,125 = ` 12.50 2,090

Note: Loss of time due to power failure is abnormal idle time. So this is not deducted from machine hours. 11. A tractor is operated for 200 hours with a sowing machine. Number of hours operated without the sowing machine 800 hrs. Other details are: Total tractor expenses ` 30,000 Sowing machine expenses ` 10,000 Compute machine hour rate without the use of sowing machine and with the use of sowing machine. Solution: Total tractor hours = 200 + 800 = 1,000 hrs Machine hour rate without use of Sowing machines = =

Total tractor expenses Total hours 30,000 = ` 30 1,000

Sewing machine expenses per hour =

10,000 = ` 50 200

Machine hour rate with the use of sewing machine

= ` 80

Accounting for Overheads and Control

151

12. A Ltd employs 150 workers. Company works 40 hours per week and 50 weeks a year. Budgeted overhead rate is ` 1.60 per hour. Actual overheads for a year amounted to ` 5,00,000. Compute under or over recovery of overheads. Solution: Recovered overheads

= Actual hours × Budgeted overhead rate = 3,00,000 × 1.60 = ` 4,80,000

Actual overheads

= ` 5,00,000

Under recovered overheads = ` 20,000 Note: Actual hours = No. of workers × No. of weeks × No. of hours per week = 150 × 50 × 40 = 3,00,000 hours 13. Factory overheads of three production departments for a year are: Department P – ` 57,500 Department Q – ` 54,750 Department R – ` 67,400 The basis of absorption of overheads are given below : Department – P – ` 6 per machine hour for 10,000 hour Department – Q – 80% of direct labour cost of ` 70,000 Department – R – ` 5 per unit for 12,600 units Solution:

Under- or over-absorbed overheads = Absorbed overheads – Actual overheads

Department P = 60,000 (10,000 × 6) – 57,500 = ` 2,500 (over-absorption) Department Q = 56,000 (70,000 × 80%) – 54,750 = ` 1,250 (over-absorption) Department R = 63,000 (12,600 × 5) – 67,400 = ` 3,400 (under-absorption) 14. Compute under- or over-absorption of overheads from the following: Machine hour rate ` 6 Actual machine hours worked – 2,300 hours Machine hours lost due to non-availability of materials – 100 hours Actual factory overheads amounted to ` 16,000 Solution: Absorbed overheads = = = Actual overheads = Underabsorbed overheads =

Actual hours × Machine hour rate 2,400 × 6 ` 14,400 ` 16,000 ` 1,600

Note: Machine hours lost due to non-availability of materials is included in the actual hours.

8

Chapter

Administration, Selling and Distribution Overheads

I. Practical problems 1. A company is making a study of the relative profitability of the two products A and B. In addition to direct costs, indirect selling and distribution costs to be allocated between the two products are as under: Insurance charges for inventory (finished)

78,000

Storage costs

1,40,000

Packing and forwarding charges

7,20,000

Salesmen salaries

8,50,000

Invoicing costs

4,50,000

Other details are: Product A

Product B

Selling price per unit (`)

500

1,000

Cost per unit (excluding selling and distribution cost) (`)

300

600

10,000

8,000

Average inventory (in units)

1,000

800

Number of invoices

2,500

2,000

Annual sales (in units)

One unit of product A requires a storage space twice as much as of product B. The cost to pack and forward one unit is same for both the products. Salesmen are paid salary plus commission at 5% on sales and equal amount of efforts are put forth on the sales of each of the products. Required: (i) Set up a schedule showing the apportionment of the indirect selling and distribution costs between the two products. (ii) Prepare a statement showing the relative profitability of the two products. (CA, Inter)

Administration, Selling and Distribution Overheads 153

Solution: (a) Schedule showing apportionment of selling and distribution overheads: Particulars

Total

Basis of apportionment

Products A

Insurance charges

78,000 Value of Finished inventory - 30:48

B

30,000

48,000

Storage cost

1,40,000 Space occupied

20 : 8

1,00,000 40,000

Salesman salary

8,50,000 Equal - 1:1

4,25,000

4,25,000

Salesman commission

6,50,000 5% on sales

2,50,000

4,00,000

Packing and forwarding

7,20,000 Sales (units)

10:8

4,00,000 3,20,000

Invoicing cost

4,50,000 Number of invoices

25:20

2,50,000 2,00,000

Total

28,88,000

–

14,55,000 14,33,000

Working Note: A( ) (1) Average inventory (units) Cost per unit (`) Average inventory value (`) (2) Average inventory (units) Space occupied per unit – weightage Ratio of space occupied (3) Selling price per unit (`) Sales value (`) Salesman commission (5% on sales)

B( )

1,000

800

300

600

3,00,000

4,80,000

1,000

800

2

1

2,000

800

500

1,000

50,00,000

80,00,000

2,50,000

4,00,000

154 Cost Accounting

(b) Statement showing profitablility of products: Particulars Sales Less: Cost of goods sold (Cost per unit × No. of units) Gross Profit Less: Selling and Distribution Overheads Profit Profit percentage on sales

Product ‘A’ 50,00,000 30,00,000

Product ‘B’ 80,00,000 48,00,000

20,00,000 14,55,000 5,45,000

32,00,000 14,33,000 17,67,000

5, 45,000 ¥ 100 50,00,000

17,67,000 ¥ 100 80,00,000

= 10.9%

= 22.09%

2. XYZ Ltd., a manufacturing company having an extensive marketing network throughout the country sells its products through four zonal sales offices viz. A,B,C and D. The budgeted expenditure for the year is given below: Sales manager’s salary Expenses relating to sales manager’s office Travelling salesmen salaries Travelling expenses Advertisement Godown rent–zone A 15,000 B 25,200 C 9,800 D 18,000 Insurance on inventories Commission on sales at 5% on sales

1,20,000 80,000 3,20,000 36,000 30,000

68,000 20,000 6,00,000

The following particulars are also available: Zone A B C D

Sales in ` lakhs 36 48 16 20

No. of salesmen 5 6 2 3

Total mileage Allocation of covered advertisement 6,000 30% 14,000 30% 4,500 20% 5,500 20%

Average stock lakh 6 8 4 2

Based on the above details, compute zone-wise selling overheads as percentage to sales. (ICWA (Inter), Dec. 1987)

Sales Managers 1,20,000 salary Sales Manager 80,000 office expenses Travelling salesman 3,20,000 salary Travelling expenses 36,000 Advertisement 30,000 Godown rent 68,000 20,000 Insurance on inventories Commission on 6,00,000 Sales Total 12,74,000 % of selling overheads on sales

Total ( )

1,00,000

Sales value 36:48:16:20 No. of salesman 5:6:2:3

–

5% on sales

100 = 10.4% 100 = 10.74% 100 = 11.3%

2, 25,933 × 20,00,000

2,25,933

1,00,000

6,600 6,000 18,000 2,000

60,000

13,333

D 20,000

100 = 10.48%

1,71,867 × 16,00,000

1,71,867

80,000

5,400 6,000 9,800 4,000

40,000

10,667

C 16,000

4,99,000 × 48,00,000

4,99,000

3,77,200

Zones

3,77, 200 × 36,00,000

2,40,000

16,800 9,000 25,200 8,000

1,20,000

32,000

B 48,000

1,80,000

7,200 9,000 15,000 6,000

24,000

Sales value 36:48:16:20

Mileage covered 12:28:9:11 30%, 30%, 20%, 20% Given Average stock value 6:8:4:2

A 36,000

Basis of apportionment

Statement showing apportionment of selling overheads over zones

Particulars

Solution:

Administration, Selling and Distribution Overheads 155

9

Cost Ledger

Chapter

I. Practical Problems 1. During the month of January, 2009, the following transactions took place in Union Ltd. Enter the following transactions in the financial and cost books: (i) Materials purchased: ` Credit purchases 50,000 Cash purchases 40,000 Cash purchases for repair work 10,000 Credit purchase for job no: 123 8,000 (ii) Materials returned to suppliers 5,000 (iii) Direct materials issued to jobs 60,000 (iv) Indirect materials issued to jobs 12,000 (v) Materials returned from jobs to stores 2,500 (vi) Materials destroyed by fire 7,500 (vii) Materials transferred from job no: 20 to job no: 25 2,000 (viii) Carriage inward 1,500 Solution:

Entries in financial books Particulars

(i)

(ii)

(iii) (iv) (v)

Purchase a/c To Cash a/c To creditors a/c (Being materials purchased) Creditors a/c To Purchase returns a/c (Being materials returned to supplier) No entry No entry No entry

Dr

Debit 1,08,000

Credit 50,000 58,000

Dr

5,000 5,000

Contd...

Cost Ledger

157

Contd...

(vi)

Loss by fire a/c To purchase a/c (Being materials destroyed by fire) (vii) No entry (viii) Carriage inward a/c To cash (Being carriage paid)

Dr

7,500 7,500

Dr

1.500

1,500

Entries in Cost Books Particulars (i)

Stores ledger control a/c Dr Production overheads ledger control Dr Work-in-progress ledger control a/c Dr To cost ledger control a/c (Being materials purchased) (ii) Cost ledger control a/c Dr To Stores ledger control a/c (Being materials returned to supplier) (iii) Work-in-progress control a/c Dr To Stores ledger control a/c (Being direct materials issued to jobs) (iv) Production overheads control a/c Dr To Stores ledger control a/c (Being indirect materials issued to production) (v) Stores ledger control a/c Dr To Work-in-progress control a/c (Being materials returned from jobs to stores) (vi) Costing profit and loss a/c Dr To Stores ledger control a/c (Being materials destroyed by fire) (vii) Work-in-progress control a/c (Job No. 25) Dr To Work-in-progress control a/c (Job No. 20) (Being materials transferred from Jog No. 20 to Job No. 25) (viii) Stores ledger control a/c Dr To Cost ledger control a/c (Being carriage inward incurred)

Debit 90,000 10,000 8,000

Credit

1,08,000 5,000 5,000 60,000 60,000 12,000 12,000 2,500 2,500 7,500 7,500 2,000 2,000 1,500 1,500

158 Cost Accounting

2. Enter the following transaction in financial and cost books: Gross wages Employee’s contribution to PF Employee’s contribution to ESI Income tax deducted at source

25,000 3,000 1,500 1,000

Employer’s contribution to PF Employer’s contribution to ESI

3,000 750

5,500

Total

3,750 34,250

Total

15,000 2,300 3,500 3,000 1,000 24,800

Wages analysis sheet gives the following details: (i) (ii) (iii) (iv) (v)

Direct labour Indirect factory labour Office salaries Salaries to sales department staff Abnormal idle time

Solution: Transaction

Financial books Cost books Dr Cr Labour cost Wages a/c Dr 34,250 Wages control a/c Dr incurred To cash a/c 25,000 To cost ledger control a/c To P.F. a/c 6,000 To ESI a/c 2,250 To TDS a/c 1,000 Labour cost No entry WIP control a/c Dr allocation Production overheads control a/c Dr Office overheads control Dr Selling overheads control a/c Dr Costing P&L a/c Dr To wages control a/c

Dr Cr 34,250 34,250

15,000

24,800

2,300 3,500 3,000 1,000 24,8000

3. Pass journal entries in financial and cost books from the following information regarding overheads. Prepare a statement of recovery of overheads and pass suitable entries for under over-recovery of overheads.

Cost Ledger

(i) Outstanding expenses Cash expenses (ii) Analysis of the above

159

2,000 10,000

Cash expenses ` Factory overheads 5,500 Administration overheads 2,200 Selling and distribution overheads 2,300 10,000

Outstanding expenses ` 1,000 700 300 2,000

Total ` 6,500 2,900 2,600 12,000

(iii) Absorption of overheads is as under: (a) Factory overheads (b) Administration overheads (c) Selling and distribution overheads

6,800 2,750 2,800 12,350

Solution: Transaction Expenses incurred

Absorption of overheads

Financial books Cost books Sundry expenses a/c Dr 12,000 Factory overheads control a/c Dr To Cash a/c 10,000 Administration overheads control Dr To O/S expense a/c 2,000 a/c Selling overheads control a/c Dr To Cost ledger control a/c Dr No Entry

(a) WIP control a/c Dr To Factory overheads control a/c To costing Profit & Loss a/c (b) Finished goods control a/c Dr Cost Profit & Loss a/c Dr To Admn overheads control a/c Dr (c) Cost of sales control a/c Dr To selling overheads control a/c To costing Profit & Loss a/c

6,500 2,900 2,600 12,000 6,800 6,500 300 2,750 150 2,900 2,800 2,600 200

4. From the following figures ascertained from the costing and financial books of a company, you are required to pass necessary entries in the cost journal under non-integral accounting system:

160 Cost Accounting

Purchases Carriage inward Stores issued for production Productive wages Unproductive labour Work overheads incurred Materials issued for repair works Cost of completed jobs Work overheads recovered

5,00,000 20,000 3,90,000 6,00,000 1,50,000 4,00,000 15,000 11,00,000 3,95,000

Entries in cost books Particulars Stores ledger control a/c To Cost ledger control a/c (Being materials purchased)

Dr

Stores Control a/c To Cost ledger control a/c (Being carriage inward incurred)

Dr

Work-in-progress control a/c To Stores ledger control a/c (Being stores issued to production)

Dr

Work-in-progress control a/c To Wages ledger control a/c (Being direct wages charged to production)

Dr

Production overhead ledger control a/c To Cost ledger control a/c (Being unproductive wages incurred)

Dr

Production overheads control a/c To Cost ledger control a/c (Being works overhead incurred)

Dr

Production overheads control a/c To Stores ledger control a/c (Being stores issued for repair works)

Dr

Debit 5,00,000

Credit 5,00,000

20,000 20,000 3,90,000 3,90,000 6,00,000 6,00,000 1,50,000 1,50,000 4,00,000 4,00,000 15,000 15,000 Contd...

Cost Ledger

161

Contd...

Finished goods ledger control a/c Dr To Work-in-progress ledger control a/c (Being goods completed)

11,00,000

Work-in-progress ledger control a/c Dr To Production overheads ledger control a/c (Being works overhead recovered)

3,95,000

11,00,000 3,95,000

5. The balances in the cost ledger of a manufacturing company on January 1,2008 were: Stores ledger control account Work-in-progress ledger control account Finished goods ledger control account Cost ledger control account

7,000 12,800 2,000 21,800

You are given the following information for the year 2008: Purchase of materials Direct factory wages Manufacturing expenses Selling and distribution expenses Sales Materials issued to production Manufacturing expenses recovered Selling and distribution expenses recovered Stock of materials on 31.12.2008 Stock of finished goods on 31.12.2008 Work-in-progress on 31.12.2008

40,000 60,000 34,600 5,400 1,50,000 37,200 34,440 5,320 9,800 4,700 14,700

You are required to show the accounts in the cost ledger for the year 2008 Solution:

Cost Ledger Control a/c

To Cost of sales control a/c To Balance c/d (bf )

1,50,000 29,200

1,79,200

By By By By By By

Balance b/d Stores ledger control a/c Wages ledger control a/c Production overheads control a/c Selling overheads control a/c Costing profit and loss a/c

21,800 40,000 60,000 34,600 5,400 17,400 1,79,200

162 Cost Accounting

Stores Ledger control a/c To Balance b/d To Cost led. control a/c (purchases)

7,000 40,000 47,000

By WIP. led. control a/c By Balance c/d

37,200 9,800 47,000

Wages ledger control a/c To Cost led. control a/c

60,000 60,000

By WIP. led. control a/c

60,000 60,000

Production overheads ledger control a/c To Cost led. control a/c

34,600

By WIP. led. control a/c By Costing P&L a/c (bf ) (under recovery)

34,600

34,440 160 34,600

Work-in-progress control a/c To Balance b/d To Stores ledger control a/c To Production overheads led. control a/c To wages ledger control a/c

12,800 By Fin. goods led. control a/c (bf ) 1,29,740 37,200 By Balance c/d 14,700 34,440 60,000 1,44,440 1,44,440

Finished goods ledger control a/c To Balance b/d To WIP led. control a/c

2,000 1,29,740 1,31,740

By Cost of sales control a/c (bf ) By Balance c/d

1,27,040 4,700 1,31,740

Selling and distribution overheads ledger control a/c To Cost ledger control a/c

5,400

5,400

By Cost of sales control a/c By Costing Profit and loss a/c (under recovery)

5,320 80 5,400

Cost Ledger

163

Cost of Sales control a/c To Fin. goods led. control a/c To selling overheads led. control a/c To costing Profit & loss a/c (bf )

1,27,040 5,320 17,640 1,50,000

By cost led. control a/c (Sales)

1,50,000

1,50,000

Costing profit and loss a/c To Production OHs control a/c To Selling OHs control a/c To Cost led. control a/c (bf ) (Net Profit)

160 80 17,400

By Cost of sales control a/c

17,640

17,640

17,640

Trial Balance as on 31.12.2008 Particulars Cost ledger control a/c Stores ledger control a/c Work-in-progress ledger control a/c Finished goods ledger control a/c

Debit

Credit 29,200

9,800 14,700 4,700 29,200

29,200

6. From the following details show the necessary accounts in the cost ledger:

Work-In-Progress Materials Finished goods

Opening balance

Closing balance

5,000 8,000 10,000

9,000 11,000 12,000

Transactions during the period: Materials purchased Wages paid (including indirect wages ` 2,000) Overheads incurred Overheads recovered Sales

25,000 10,000 8,000 9,000 50,000

164 Cost Accounting

Solution: Cost Ledger Control a/c To Cost of sales control a/c To Balance c/d

50,000 32,000

By By By By By

Balance b/d Stores ledger control a/c Wages ledger control a/c Overheads ledger control a/c Costing P&L a/c

82,000

23,000 25,000 10,000 8,000 16,000 82,000

Stores Ledger control a/c To Balance b/d To Cost led. control a/c (purchases)

8,000 25,000 33,000

By WIP. led. control a/c By Balance c/d

22,000 11,000 33,000

Wages ledger control a/c To Cost ledger control a/c

10,000

By WIP. led. control a/c By Overheads Led. control a/c

10,000

8,000 2,000 10,000

Overheads ledger control a/c To Wages led. control a/c To Cost ledger control a/c

2,000 8,000

By WIP. led. control a/c By Costing Profit & Loss a/c (bf ) (Under recovery)

10,000

9,000 1,000 10,000

Work-in-progress control a/c To To To To

Balance b/d Stores ledger control a/c Wages ledger control a/c Overheads led. control a/c

5,000 22,000 8,000 9,000 44,000

By Fin. goods led. control a/c (bf ) By Balance c/d

32,000 9,000

44,000

Cost Ledger

165

Finished goods ledger control a/c To Balance b/d To WIP led. control a/c

10,000 35,000 45,000

By Cost of sales control a/c (bf ) By Balance c/d

33,000 12,000 45,000

Cost of Sales control a/c To Fin. goods Led. control a/c To Costing P&L a/c

33,000 17,000 50,000

By Cost of led. control a/c (sales)

50,000 50,000

Costing profit and loss a/c To Overheads led. control a/c To Cost led. control a/c (b.f) (Profit)

1,000 16,000 17,000

By Cost of sales control a/c

17,000 17,000

Trial Balance Particulars Work-in-progress ledger control a/c Stores ledger control a/c Finished goods ledger control a/c Cost ledger control a/c

Debit 9,000 11,000 12,000 32,000

Credit

32,000 32,000

7. From the following information gathered from the cost record of an industrial unit prepare necessary ledger accounts in the cost ledger of the company: Opening balances: Work-In-Progress 3,800 Materials 22,000 Finished stock 17,000 Materials purchased Direct labour Electricity charges Factory overhead expenses incurred Factory overhead expenses applied to production

42,800 58,000 21,000 20,000 27,000 26,000

166 Cost Accounting

Selling distribution and administration expenses Selling,distribution and admn. expenses charged to finished stock Sales Closing balances: Work-In-Progress Materials Finished stock

28,000 29,000 1,86,000

2,500 15,000 32,000

49,500

Solution: Cost Ledger Control a/c To Cost of sales control a/c To Balance c/d (b/f)

1,86,000 By Balance b/d 49,500 By Stores ledger control a/c By WIP led. contol a/c By Wages ledger control a/c By Production overheads ledger control a/c ( 27,000+20,000) By Selling, distribution and administration overheads control a/c By Costing P&L a/c 2,35,500

42,800 58,000 20,000 21,000 27,000 28,000 38,700

2,35,500

Stores Ledger control a/c To Balance b/d To Cost led. control a/c (Purchases)

22,000 58,000 80,000

By WIP. led. control a/c By Balance c/d

65,000 15,000 80,000

Wages ledger control a/c To Cost ledger control a/c

21,000 21,000

By WIP. led. control a/c

21,000 21,000

Production Overheads ledger control a/c To Cost ledger control a/c

27,000 27,000

By WIP. led. control a/c By Costing P&L a/c (bf ) (Under recovery)

26,000 1,000 27,000

Cost Ledger

167

Work-in-progress control a/c To To To To To

Balance b/d Stores ledger control a/c Wages ledger control a/c Cost led. control a/c Production overheads led. control a/c

3,800 By Fin. goods led. control a/c 65,000 (bf ) 21,000 By Balance c/d 20,000 26,000 1,35,800

1,33,300 2,500

1,35,800

Finished goods ledger control a/c To Balance b/d To WIP led. control a/c

17,000 By Cost of sales control a/c (bf ) 1,33,300 By Balance c/d

1,18,300 32,000

1,50,300

1,50,300

Selling, distribution and administration overheads ledger control a/c To Fin. goods led. control a/c To Costing Profit & loss a/c (over recovery)

28,000 By Cost of led. control a/c (Sales) 1,000

29,000

29,000

29,000

Cost of Sales control a/c To Fin. goods led. control a/c To Selling, dist. & admn. ohs led. control a/c To Costing Profit & loss a/c

1,18,300 By Cost ledger control a/c 1,86,000 29,000 38,700 1,86,000

1,86,000

Costing profit and loss a/c To Prod. overheads led. control a/c To Cost ledger control a/c (Profit)

1,000 38,700 39,700

By Cost of sales control a/c By Selling, dist and admn. ohs led. control a/c

38,700 1,000 39,700

168 Cost Accounting

Trial Balance Particulars Cost ledger control a/c Stores ledger control a/c Work-in-progress ledger control a/c Finished goods ledger control a/c

Debit 15,000 2,500 32,000 49,500

Credit 49,500

49,500

8. Acme manufacturing Co Ltd. opens the costing records, with the balances as on 1st April, as follows: Dr Cr Material control account Work-in-progress account Finished goods account Production overheads account Administration overheads account Selling and distribution overheads account General ledger adjustment account

1,24,000 62,500 1,24,000 8,400 12,000 6,250 3,25,150

3,13,150 3,25,150

The following are the transactions for the year ending 31st March: Materials purchased Materials issued to jobs Materials issued to work maintenance Materials issued to administration office Materials issued to selling departments Wages direct Wages indirect Transportation for incoming materials Production overheads Absorbed production overheads Administration overheads Administration overheads allocation to production Administration overheads allocation to sales Sales overheads Sales overhead absorbed Finished goods produced Finished goods sold Sales

4,80,100 4,77,400 41,200 3,400 7,200 1,49,300 65,000 8,400 2,42,250 3,59,100 74,000 52,900 14,800 64,200 82,000 9,58,400 9,77,300 14,43,000

Cost Ledger

169

Solution: General ledger adjustment a/c To Cost of sales control a/c 14,43,000 By Balance b/d 3,13,150 To Balance c/d (b.f) 3,37,100 By Stores ledger control a/c 4,80,100 By Wages ledger control a/c 2,14,300 By Stores ledger control a/c 8,400 By Production overheads ledger control a/c 2,42,250 By Administration overheads led. control a/c 74,000 By Selling overheads led. control a/c 64,200 By Costing Profit and loss a/c 3,83,700 17,80,100 17,80,100 Wages ledger control a/c To General ledger adj a/c

2,14,300

By WIP. led. control a/c By Production overheads led. control a/c

2,14,300

1,49,300 65,000 2,14,300

Stores ledger control a/c To Balance b/d To Cost ledger control a/c To Cost ledger control a/c

1,24,000 4,80,100 8,400

By By By By By

WIP. led. control a/c Production overheads led. control a/c Admn. overheads led. control a/c Selling overheads led. control a/c Balance c/d (bf )

6,12,500 Production overheads ledger control a/c To Balance b/d To Cost led. control a/c To Wages led. control a/c To Stores ledger control a/c To Balance c/d

8,400 2,42,250 65,000 41,200 2,250 3,59,100

By WIP. led. control a/c

3,59,100

3,59,100

4,77,400 41,200 3,400 7,200 83,300 6,12,500

170 Cost Accounting

Work-in-progress control a/c To Balance b/d To Stores ledger control a/c To Wages ledger control a/c To Production overheads led. control a/c

62,500 By Fin. goods led. control a/c 9,58,400 4,77,400 (bf ) 89,900 By Balance c/d 1,49,300 3,59,100 10,48,300 10,48,300

Administration overheads ledger control a/c To Cost ledger control a/c To Stores led. control a/c To Balance c/d

74,000 3,400 2,300 79,700

By Balance b/d By Fin. goods led. control a/c By Selling overheads led. control a/c

12,000 52,900 14,800 79,700

Selling overheads ledger control a/c To To To To

Balance c/d General ledger control a/c Admin. overheads led. control a/c Stores led. control a/c

6,250 64,200 14,800 7,200 92,450

By Cost of sales control a/c By Balance c/d

82,000 10,450

92,450

Finished goods ledger control a/c To Balance b/d To WIP. led. control a/c To Administration overheads led. control a/c

1,24,000 By Cost of sales control a/c 9,77,300 9,58,400 By Balance c/d 1,58,000 52,900 11,35,300 11,35,300

Cost of Sales control a/c To Fin. goods led. control a/c To Selling overheads led. control a/c To Costing Profit and loss a/c

9,77,300 By Cost ledger control a/c 14,43,000 82,000 3,83,700 14,43,000 14,43,000

Cost Ledger

Costing profit and loss a/c To Gen. led. adj. a/c

3,83,700 By Cost of sales control a/c 3,83,700

3,83,700 3,83,700

Trial Balance Particulars General ledger adjustment a/c Stores ledger control a/c Production overheads ledger control a/c Work-in-progress ledger control a/c Administration overheads ledger control a/c Selling overheads ledger control a/c Finished goods ledger control a/c

Debit

Credit 3,37,100

83,300 2,250 89,900 2,300 10,450 1,58,000 3,41,650

3,41,650

171

10

Chapter

Reconcitiation of Cost and Financial Accounts

Practical Problems A. Short Answer Type Questions: 1. The profits as per cost accounts was ` 1,50,000. Calculate the profit as per financial accounts on the basis of the following information. (a) Works overheads under recovered in cost accounts by ` 6,200. (b) Administration expenses under recovered in financial accounts by ` 2,750. (c) Depreciation charges over recovered in cost accounts ` 1,900. (d) Interest received on investments ` 1,000. (B.Com., Madras University) Solution: Profit Reconciliation Statement

Profit as per cost accounts Add:

–

1,50,000

Administration expenses under recovered in financial accounts

–

2,750

Depreciation over recovered in cost books

–

1,900

Interest received on investments

–

1,000

–

1,55,650

Less: Works overhead under recovered in cost accounts Profit as per financial accounts

6,200 –

6,200 1,49,450

2. The profit shown by cost ledger for the year ending 31st March 2009 is ` 18,400 but profit as per financial accounts is ` 16,600. Closing stock is over valued in financial books by ` 2,100. Works overhead under absorbed amounts to ` 3,000. Bank charges and interest on loan paid during the year was ` 250 and ` 1,200 respectively. Interest and dividends received on investment amounted to ` 550. Prepare a statement reconciling cost and financial profits.

Reconcitiation of Cost and Financial Accounts

173

Solution: Profit Reconciliation Statement

Profit as per cost accounts Add:

–

18,400

Closing stock over valued in financial accounts

–

2,100

Interest and dividend received on investments

–

550

–

21,050

Less: Works overhead under absorbed

3,000

Bank charges

250

Interest on loan Profit as per financial accounts

1,200

4,450

–

16,600

3. In a factory, works overheads are absorbed at 60% of labour cost and office overheads at 20% of works cost. Prepare (i) cost sheet, (ii) profit and loss account, (iii) Reconciliation statement if total expenditure consists of materials ` 2,00,000, wages ` 1,50,000, factory expenses ` 1,00,000 and office expenses ` 85,000. 10% of the output is in stock at the end. Sales are ` 5,20,000. (B.Com. (Hons.), Delhi University) Solution: Profit and loss account

To Materials

2,00,000

By Sales

To Wages

1,50,000

By Closing stock

To Factory expenses

1,00,000

To Office expenses

85,000

To Profit

38,500 5,73,500

5,20,000 53,500

5,73,500

Note: Value of Closing Stock: Materials Wages Factory expenses Office expenses Total cost

– 2,00,000 – 1,50,000 – 1,00,000 – 85,000 – 5,35,000

Value of Closing Stock = 5,35,000 × 10/100 = ` 53,500

174 Cost Accounting

Cost Sheet

Materials

2,00,000

Wages

1,50,000 Prime cost

Factory expenses – 60% of wages

3,50,000 90,000

Works cost Office expenses – 20% of works cost

4,40,000 88,000

Total cost Less: Closing stock – 10% of production

5,28,000 52,800

Cost of sales Profit (b.f) Sales

4,75,200 44,800 5,20,000

Profit Reconciliation Statement

Profit as per cost accounts

–

44,800

Office expenses over recovered

–

3,000

Undervaluation of closing stock

–

700

–

48,500

10,000

10,000

–

38,500

Add:

Less: Factory expenses under recovered Profit as per financial accounts

4. The following is the profit and loss account of ‘X’ Ltd for the year ended 31st March 2010. Profit and loss account

To Opening stock To Purchases To Direct wages To Factory expenses To Gross profit

2,50,000 4,00,000 2,50,000 1,25,000 75,000 11,00,000

By Sales By Closing stock

10,00,000 1,00,000

11,00,000 Contd...

Reconcitiation of Cost and Financial Accounts

175

Contd...

To To To To

Office expenses Selling expenses Interest on loan Profit

22,000 14,000 15,000 35,000 86,000

By Gross profit By Dividend received

75,000 11,000

86,000

Cost records show the following: (i) Closing stock in cost books ` 1,10,000 (ii) Direct labour ` 2,40,000 (iii) Factory expenses ` 1,40, 000 Administration expenses and selling expenses each are calculated at 2% of sales. Find the cost profit by preparing a profit reconciliation statement: Solution: Profit Reconciliation Statement

Profit as per financial accounts Add:

–

35,000

Overvaluation of closing stock in cost accounts

–

10,000

Under recovery of direct wages in cost accounts

–

10,000

Under recovery of office expenses in cost accounts

–

2,000

Interest on loan charged in financial accounts

–

15,000

–

72,000

Less: Over recovery of factory expenses in cost accounts 15,000 Over recovery of selling expenses in cost accounts Dividend received Profit as per cost accounts

6,000 11,000

32,000

–

40,000

5. Profit as per financial accounts is ` 65,000. Find the profit as per cost accounts from the following information: Cost accounts 15,000

Financial accounts 17,000

(ii) Closing stock of raw materials

21,000

19,500

(iii) Opening stock of finished goods

31,500

26,000

(iv) Closing stock of finished goods

28,000

24,500

(i) Opening stock of raw materials

176 Cost Accounting

Solution: Profit Reconciliation Statement

Profit as per financial accounts Add:

–

65,000

Over valuation of opening stock of raw materials in financial accounts

–

2,000

Under valuation of closing stock of raw materials in financial accounts

–

1,500

Under valuation of closing stock of finished goods in financial accounts

–

3,500

–

72,000

5,500

5,500

–

66,500

Less: Undervaluation of opening stock of finished goods in financial accounts Profit as per cost accounts

6. Profit as per cost books is ` 45,600. Calculate the profit as per financial books from the following information: (i) Dividend received ` 4,200 (ii) Loss on sale of machinery ` 1,600 (iii) Loss by obsolescence of assets ` 7,100 (iv) Under absorption of selling overheads ` 2,300. Solution: Profit Reconciliation Statement

Profit as per cost accounts Add:

–

45,600

Dividend received

–

4,200

–

49,800

Less: Loss on sale of machinery

1,600

Loss by obsolescence of assets

7,100

Under absorption of selling overheads

2,300

11,000

–

38,800

Profit as per financial accounts

7. The profit disclosed by financial books is ` 26,740 and by cost books is ` 25,470. On examination account books, the following differences were found:

Factory overheads Opening stock

Cost accounts Financial accounts 14,350 16,140 6,790 8,130 Contd...

Reconcitiation of Cost and Financial Accounts

Closing stock Income from investment Loss on sale of machinery Depreciation on fully depreciated machinery Prepare a reconciliation statement. Solution:

5,880 – – 2,360

177

6,270 2,750 1,100

Profit Reconciliation Statement

Profit as per cost books Add:

–

25,470

Under valuation of closing stock in cost accounts

–

390

Income from investments

–

2,750

Depreciation on fully depreciated machinery

–

2,360

–

30,970

Less: Under recovery of factory overheads

1,790

Under valuation of opening stock in cost accounts

1,340

Loss on sale of machinery

1,100

4,230

–

26,740

Profit as per financial books

8. From the following information prepare a reconciliation statement:

Profit as per financial accounts Works overhead under recovered Office overheads over recovered Interest earned Rent received Bad debts written off Preliminary expenses written off

+1,23,500 7,800 4,500 3,250 2,400 3,000 7,500

Solution: Profit Reconciliation Statement

Profit as per financial accounts Add:

–

1,23,500

Works overhead under recovered

–

7,800 Contd...

178 Cost Accounting Contd...

Bad debts written off

–

3,000

Preliminary expenses written off

–

7,500

–

1,41,800

Less: Office overheads over recovered

4,500

Interest earned

3,250

Rent received

2,400

10,150

–

1,31,650

Profit as per cost accounts

9. The following information is made available to you from the financial books of S.V. Ltd for the year ended March 31, 2007:

To To To To To To

D. Materials used 3,00,000 By Sales (2,00,000 units) 7,50,000 D.Wages 2,00,000 Factory expenses 1,20,000 office expenses 40,000 selling and distribution exp. 80,000 Net profit 10,000 7,50,000 7,50,000

Normal output of the factory is 2,50,000 units. Factory overheads are fixed upto ` 60,000 and office expenses are fixed for all practical purposes. Selling and distribution expenses are fixed to the extent of ` 50,000 and the rest are variable. Prepare a statement reconciling the profits as per cost and financial accounts assuming that indirect expenses are absorbed on the basis of normal production capacity in cost accounts. (B.Com., Delhi University) Solution:

Profit Reconciliation Statement

Profit as per financial accounts Add: Under recovery of factory overheads Under recovery of office expenses Under recovery of selling and distribution expenses Profit as per cost accounts

–

10,000

– – – –

12,000 8,000 10,000 40,000

Reconcitiation of Cost and Financial Accounts

Workings:

Cost Sheet

Direct materials

3,00,000

Direct wages

2,00,000 Prime cost

5,00,000

Factory overheads: Fixed – (60,000/2,50,000) × 2,00,000

= 48,000

Variable

= 60,000 1,08,000 Works cost

6,08,000

Office expenses Fixed – (40,000.2,50,000) × 2,00,000

32,000 Cost of production

6,40,000

Selling and distribution expenses: Fixed – (50,000/2,50,000) × 2,00,000

= 40,000

Variable

= 30,000 Cost of sales Profit (b.f.) Sales

70,000 7,10,000 40,000 7,50,000

179

11

Integral Accounting

Chapter

Practical Problems A. Long Answer Type Questions: 1. Give journal entries for entering the following transactions in an integrated accounting system.

Purchase of direct materials on credit Raw materials issued to production Maintenance materials issued Depreciation of plant and machinery Production overheads recovered Solution:

50,000 40,000 5,000 20,000 30,000

Journal entries Particulars

Stores control a/c

Dr

Debit 50,000

To Creditors a/c

Credit 50,000

(Being materials purchased on credit) Work-in-progress control a/c

Dr

40,000

To Stores control a/c

40,000

(Being raw materials issued to production) Production overheads control a/c

Dr

5,000

To Stores control a/c

5,000

(Being maintenance materials issued) Production overheads control a/c

Dr

20,000

To Plant and machinery a/c

20,000

(Being depreciation charged on plant and machinery) Work-in-progress control a/c To Production overheads control a/c (Being production overheads recovered)

Dr

30,000 30,000

Integral Accounting

181

2. Journalize the following transactions assuming cost and financial accounts are integrated:

Wages paid (40% Indirect) 75,000 Raw materials purchased on credit 1,00,000 Direct materials issued to production 70,000 Wages charged to production 45,000 Administrative expenses incurred 50,000 Administrative expenses recovered 47,000 Manufacturing overheads paid 60,000 Manufacturing expenses outstanding 20,000 Manufacturing expenses recovered 85,000 Solution:

Journal entries Particulars

Wages control a/c

Dr

Debit 75,000

To Cash a/c

Credit 75,000

(Being wages paid) Work-in-progress control a/c (Direct wages)

Dr

45,000

Production overheads control a/c (Indirect wages) To Wages control a/c

Dr

30,000 75,000

(Being wages allocated) Stores ledger control a/c

Dr

1,00,000

To Creditors a/c

1,00,000

(Being raw materials purchased on credit) Work-in-progress control a/c

Dr

70,000

To Stores control a/c

70,000

(Being direct materials issued to production) Administration overheads control a/c

Dr

50,000

To Cash a/c

50,000

(Being administration expenses incurred) Finished goods control a/c To Administration overheads control a/c

Dr

47,000 47,000

(Being administration overheads recovered) Contd...

182 Cost Accounting Contd...

Production overheads control a/c

Dr

80,000

To Cash a/c

60,000

To Outstanding production expenses a/c

20,000

(Being production expenses incurred) Work-in-progress control a/c

Dr

85,000

To Production overheads control a/c (Being manufacturing expenses recovered)

85,000

3. From the following information you are required to pass journal entries and prepare necessary accounts under the system of integrated accounts:

Materials purchased on credit Wages paid Wages productive Wages unproductive Finished goods at cost Materials issued to production Factory expenses incurred Factory expenses absorbed Office and administration expenses paid Office and administration expenses recovered Selling and distribution overheads paid Selling and distribution expenses recovered Sales (all credit) Solution:

2,50,000 1,25,000 90,000 35,000 4,50,000 2,20,000 1,55,000 1,60,000 1,40,000 1,36,000 80,000 80,000 6,00,000

Journal entries Particulars

Stores control a/c To Creditors a/c (Being materials purchased on credit) Wages control a/c To Cash a/c (Being wages paid)

Dr

Debit 2,50,000

Credit 2,50,000

Dr

1,25,000 1,25,000 Contd...

Integral Accounting Contd...

Work-in-progress control a/c Production overheads control a/c To Wages control a/c (Being wages allocated) Finished goods control a/c To Work-in-progress control a/c (Being goods finished at cost) Work-in-progress control a/c To Stores control a/c (Being materials issued to production) Production overheads control a/c To Cash a/c (Being production overheads incurred) Work-in-progress control a/c To Production overheads control a/c (Being production overheads recovered) Office and administration overheads control a/c To Cash a/c (Being office and administration expenses incurred) Finished goods ledger control a/c To Office and administration overheads Ledger control a/c (Being office & administration overheads recovered) Selling and distribution overheads control a/c To Cash a/c (Being selling and distribution expenses incurred) Cost of sales control a/c To Selling and distribution overheads control a/c (Being selling and distribution expenses recovered) Debtors a/c To Cost of sales a/c (Being goods sold on credit)

Dr Dr

90,000 35,000 1,25,000

Dr

4,50,000 4,50,000

Dr

2,20,000 2,20,000

Dr

1,55,000 1,55,000

Dr

1,60,000 1,60,000

Dr

1,40,000 1,40,000

Dr

1,36,000 1,36,000

Dr

80,000 80,000

Dr

80,000 80,000

Dr

6,00,000 6,00,000

183

184 Cost Accounting

4. BPR Ltd. keeps books on integrated accounting system: The following balances appeared in the books as on April 1, 2009: Dr

Cr

Stores control account

40,950

–

WIP control account

38,675

–

Finished goods control account

52,325

–

Bank account

–

22,750

Creditors account

–

18,200

1,47,875

–

27,300

–

Share capital account

–

1,82,000

Provision for depreciation account

–

11,375

Provision for doubtful debts account

–

3,725

Factory overheads outstanding account

–

6,250

9,975

–

–

72,800

3,17,100

3,17,100

Fixed assets account Debtors account

Prepaid administration overheads account Profit and loss account

The transaction for the year ended March 31, 2009 were as given below: Direct wages Indirect wages

1,97,925 11,375

2,09,300

Purchase of materials (on credit)

2,27,500

Materials issued to production

2,50,250

Materials issued for repairs

4,550

Goods finished during the year (at cost)

4,89,125

Credit sales

6,82,500

Cost of goods sold

5,00,500

Production overheads absorbed

1,09,200

Production overheads paid during the year Production overheads outstanding at the end of the year

91,000 7,775

Administration overheads paid during the year

27,300

Selling overheads incurred

31,850

Payment to creditors Depreciation of machinery

2,29,775 14,789 Contd...

Integral Accounting

185

Contd...

Administration overheads outstanding at the end of the year

2,225

Provision for doubtful debts at the end of the year

4,590

Receipt from debtors

6,59,750

Required: Write up accounts in the integrated ledger of BPR Ltd and prepare a trial balance. (CA, Inter) Solution:

Stores Control a/c

To Balance b/d To Creditors

40,950 By Work-in-progress control a/c 2,27,500 By Factory overheads control a/c By Balance c/d 2,68,450

2,50,250 4,550 13,650 2,68,450

Work-in-Progress Control a/c

To Balance b/d To Wages control a/c To Stores control a/c To Factory overheads control a/c

38,675 1,97,925 2,50,250 1,09,200 5,96,050

By Finished goods control a/c

4,89,125

By Balance c/d

1,06,925 5,96,050

Finished goods Control a/c To Balance b/d 52,325 By Cost of sales control a/c 5,00,500 To Work-in-progress control a/c 4,89,125 To Administration overheads control a/c 39,500 By Balance c/d 80,450 5,80,950 5,80,950 Bank a/c To Debtors

6,59,750 +

By Balance b/d By Wages By Factory overheads control a/c

22,750 2,09,300 91,000 Contd...

186 Cost Accounting Contd...

By Admn. overheads control a/c By Selling overheads control a/c By Creditors By Balance c/d 6,59,750

27,300 31,850 2,29,775 47,775 6,59,750

Creditors a/c

To Cash To Balance c/d

2,29,775 15,925 2,45,700

By Balance b/d By Stores control a/c

18,200 2,27,500 2,45,700

Fixed Assets a/c

To Balance b/d

1,47,875 By Balance c/d 1,47,875

1,47,875 1,47,875

Debtors a/c

To Balance b/d To Cost of sales control a/c

27,300 6,82,500

By Cash a/c

6,59,750

By Balance c/d

50,050 7,09,800

7,09,800 Share Capital a/c

By Balance b/d To Balance c/d

1,82,000 1,82,000

1,82,000 1,82,000

Integral Accounting

Provision for depreciation a/c

To Balance c/d 26,164 By Balance b/d 11,375 By Depreciation a/c 14,789 26,164 26,164 Provision for doubtful debts a/c

To Balance c/d 4,590 By Balance b/d 3,725 By Profit and loss % 865 4,590 4,590 Factory Overheads control a/c

To Wages control a/c To Stores control a/c To Cash To Depreciation on machinery To Balance c/d

11,375 By Balance b/d 6,250 4,550 By WIP control a/c 1,09,200 91,000 By Profit and loss a/c 14,039 14,789 (Under recovery) 7,775 1,29,489 1,29,489

Administration Overheads control a/c

To Balance b/d 9,975 By Finished goods control a/c 39,500 To Cash 27,300 To Balance c/d 2,225 39,500 39,500 Wages control a/c

To Cash

2,09,300 2,09,300

By WIP control a/c 1,97,925 By Factory overheads control a/c 11,375 2,09,300

187

188 Cost Accounting

Cost of Sales control a/c

To Finished goods control a/c To Selling overheads control a/c To Profit and loss a/c

5,00,500 31,850 1,50,150 6,82,500

By Debtors a/c

6,82,500

6,82,500

Profit and Loss a/c

To Provision for bad debts 865 By Balance b/d 72,800 To Factory overheads control a/c 14,039 By Cost of sales control a/c 1,50,150 To Balance c/d 2,08,046 2,22,950 2,22,950 Selling Overheads control a/c

To Cash

31,850 By Cost of sales control a/c 31,850

31,850 31,850

Trial Balance as on 31.03.2009 Particulars Stores control a/c Work-in-progress control a/c

Debit 13,650

Credit –

1,06,925

–

Finished goods control a/c

80,450

–

Bank a/c

47,775

–

–

15,925

1,47,875

–

50,050

–

Share capital a/c

–

1,82,000

Provision for depreciation a/c

–

26,164

Provision for doubtful debts

–

4,590

Factory overheads control a/c

–

7,775

Administration overheads control a/c

–

2,225

Profit and loss a/c

–

2,08,046

Creditors a/c Fixed assets a/c Debtors a/c

4,46,725

4,46,725

Integral Accounting

189

5. A company maintains costing system fully integrated with financial accounts. The following information is taken from its books for the year ending 31.3.2009: Balance at the beginning of the year Stores ledger control account Work-in-progress control account Finished goods control account

25,000 20,000 35,000

Prepaid production overheads brought forward from the previous month 3,000 Transaction during the year are:

Materials purchased

75,000

Materials issued: to production to factory maintenance

30,000 4,000

Materials transferred between batches

34,000 5,000

Total wages paid: to direct workers to indirect workers Direct wages charged to batches

25,000 5,000

30,000 20,000

Recorded non-productive time of direct workers

5,000

Selling and distribution overheads incurred

6,000

Other production overheads incurred Sales

12,000 1,00,000

Cost of finished goods sold

80,000

Cost of goods completed

65,000

Value of WIP at the end of the year

40,000

The production overhead absorption rate is 150% of direct wages charged to work-in-progress. Required: (a) Store control account (b) WIP control account (c) Finished goods control account (d) Production overheads control account (e) Profit and loss account

190 Cost Accounting

Solution:

Stores Control a/c

To Balance b/d To Cash a/c

25,000 By Work-in-progress control a/c 30,000 75,000 By Production overheads control a/c 4,000 By Balance c/d 66,000 1,00,000 1,00,000 Work-in-Progress Control a/c

To To To To To

Balance b/d Stores control a/c Wages control a/c Production overheads control a/c Profit and loss a/c (b.f)

20,000 By Finished goods control a/c 65,000 30,000 20,000 30,000 5,000 By Balance c/d 40,000 1,05,000 1,05,000

Finished goods Control a/c

To Balance b/d To Work-in-progress control a/c

35,000 By Cost of sales control a/c 80,000 65,000 By Balance c/d 20,000 1,00,000 1,00,000

Production overheads Control a/c

To Balance b/d 3,000 By WIP control a/c 30,000 To Wages control a/c (25,000 + 5,000 – 20,000) 10,000 To Stores overheads control a/c 4,000 To Cash a/c 12,000 To Profit and loss a/c (over absorption) 1,000 30,000

30,000

Integral Accounting

Profit and Loss a/c

To Cost of sales control a/c To Selling overheads control a/c To Balance c/d (Profit)

80,000 By Sales 1,00,000 6,000 By Production overheads control a/c 1,000 20,000 By WIP control a/c 5,000 1,06,000 1,06,000

191

12

Chapter

Output Costing/Unit Costing/ Single Costing

Practical Problems A. Short Answer Type Questions: 1. Find the works cost from the following: Materials consumed Direct wages Factory overheads

– – –

` 75,000 ` 1,00,000 75 of direct wages.

Solution: Cost Sheet

Materials consumed Direct wages Prime cost Factory overheads: 75% of Direct wages (1,00,000 × 75/100) 75,000

75,000 1,00,000 1,75,000

75,000 Works cost 2,50,000

2. Find the cost of production from the following details: Direct materials Direct labour Factory overheads Administration overheads

– – – –

` 1,50,000 ` 1,00,000 30% on prime cost 20 % of works cost.

Solution: Cost Sheet

Direct materials Direct labour

1,50,000 1,00,000 Contd...

Output Costing/Unit Costing/Single Costing 193 Contd...

Prime cost

2,50,000

Works cost

75,000 3,25,000

Cost of production

65,000 3,90,000

Factory overheads: 30% of prime cost (2,50,000 × 30/100) Administration overheads: 20% of works cost (3,25,000 × 20/100)

3. From the following details ascertain manufacturing cost: Direct materials Manufacturing wages Works overhead Opening work-in progress Closing work-in-progress

– – – – –

` 2,00,000 ` 80,000 50% on manufacturing wages. ` 20,000 ` 25,000

Solution: Cost Sheet

Direct materials Manufacturing wages Prime cost Works overheads: 50% of manufacturing wages (80,000 × 50/100) Add: Opening work-in-progress Less: Closing work-in-progress Manufacturing Cost (i.e. Works cost)

2,00,000 80,000 2,80,000 40,000 3,20,000 20,000 3,40,000 25,000 3,15,000

4. Factory overheads for the year 2009 is ` 50,000. Direct wages for the year 2009 amounted to ` 2,00,000. Factory overheads is recovered on direct wages basis. Find out the rate of factory overhead on direct wages. Also find out the factory overheads recovered in the year 2010, if direct wages for the year 2010 amounted to ` 3,60,000. Solution:

Rate of factory overheads on direct wages =

Factory overheads × 100 Direct wages

194 Cost Accounting

=

50,000 × 100 = 25% 2,00,000

25 = ` 90,000 100 5. The following details are extracted from the books of X Ltd for the year 2010. Cost of production for 8,000 units – ` 2,00,000 Opening stock 1,500 units valued at – ` 24 per unit Closing stock in 1,200 units Find out the closing stock value and cost of goods sold.

Factory overheads recovered in 2010 = 3,60,000 ×

Solution:

Cost of production for 8,000 units = ` 2,00,000 2,00,000 × 1, 200 = ` 30,000 Value of closing stock of 1,200 units = 8,000 Computation of cost of goods sold

Cost of production

B.

Units Rate 8,000 25

Total 2,00,000

Add: Opening stock 1,500

24

36,000

9,500

–

2,36,000

Less: Closing stock

1,200

25

30,000

Cost of goods sold

8,300

–

2,06,000

Long Answer Type Questions: 1. The following information has been taken from the books of Apollo Industries Ltd for the year ending 31.3.2009:

Stock of raw materials on 1.4.2008 Stock of raw materials on 31.3.2009 Purchase of raw of materials Carriage inward Direct labour Indirect labour Indirect materials Other direct charges Rent, rates and insurance – Factory Rent, rates and insurance – Office

– – – – – – – – – –

62,000 47,000 3,20,000 26,000 2,25,000 54,000 43,000 51,000 60,000 45,000

Output Costing/Unit Costing/Single Costing 195

Depreciation – Plant end machinery Depreciation – Office equipment Salary – Office Salary – Salesmen Loss on sale of fixed assets Other factory expenses Other office expenses Cash discount allowed to debtors Manager is salary and allowances Travelling expenses of salesmen Warehouse rent, rates and insurance Advertising expenses Carriage and freight outward Sales

– – – – – – – – – – – – – –

72,500 41,400 52,500 60,000 13,000 28,000 19,000 15,000 66,000 8,000 25,000 35,000 7,500 14,00,000

Manager salary and allowances are apportioned between factory and office as 70% and 30% respectively. From the above particulars prepare a cost sheet showing (a) prime cost (b) works cost (c) cost of production (d) cost of sales and (e) profit. Solution:

Cost sheet for the year ending 31.03.2009

Materials consumed: Purchase of raw materials

3,20,000

Add: Stock of raw materials on 1.4.2008

62,000

Add: Carriage inward

26,000 4,08,000

Less: Stock of raw materials on 31.3.2009

47,000

Direct Labour

3,61,000 2,25,000

Other direct charges

51,000

Prime cost

6,37,000

Factory overheads: Indirect labour

54,000

Indirect materials

43,000

Rent, rates and insurance – Factory

60,000

Depreciation – Plant and machinery

72,500

Other factory expenses

28,000 Contd...

196 Cost Accounting Contd...

Manager salary and allowances (66,000 × 70/100)

46,200

Works cost

3,03,700 9,40,700

Office and administration overheads: Rent, rates, tax and insurance office

45,000

Depreciation – office equipment

41,400

Salary – office

52,500

Other office expenses

19,000

Manager salary and allowances (66,000 × 30/100)

19,800

Cost of production

1,77,700 11,18,400

Selling and distribution overheads: Salary – salesmen

60,000

Travelling expenses of salesmen

8,000

Warehouse rent, rates and insurance

25,000

Advertising expenses

35,000

Carriage and freight outward

7,500

1,35,500

–

12,53,900

Profit (b.f)

–

1,46,100

Sales

–

14,00,000

Cost of sales

Notes: (1) Loss on sale of fixed assets is not a production expenses, hence not included. (2) Cash discount allowed to debtors is a pure financial expense, hence not included. 2. The following information has been taken from the records of XYZ Ltd for the year ended 31.3.2009: 1.4.2008 Stock of raw materials 65,000

31.3.2009 72,000

Work-in-progress

43,000

41,500

Stock of finished goods

76,300

81,400

Indirect wages Factory rent & rates Office salaries General expenses

13,700 16,800 24,600 17,100

Sale of scrap 6,450 Purchase of materials 1,47,000 Direct labour 1,14,000 Plant repairs 16,570 Contd...

Output Costing/Unit Costing/Single Costing 197 Contd...

Office rent Rent of showroom Salesmen salary Sales Carriage outward

5,900 4,200 21,250 5,38,500 19,320

Depreciation of plant Factory lighting Advertisement Carriage inward

19,380 13,510 28,460 16,340

Prepare a cost sheet showing (a) Prime cost (b) Factory cost (c) Cost of production (d) Cost of goods sold (e) Cost of sales (f) profit Solution:

Cost sheet for the year ending 31.03.2009

Materials consumed: Purchase of materials

1,47,000

Add: Stock of materials on 1.4.2008

65,000

Add: Carriage inward

16,340 2,28,340

Less: Stock of materials on 31.3.2009

72,000

Direct labour

1,56,340 1,14,000

Prime cost

2,70,340

Factory overheads: Indirect wages

13,700

Factory rent and rates

16,800

Plant repairs

16,570

Depreciation on plant

19,380

Factory lighting

13,510 79,960

Less: Sale of scrap

6,450

73,510 3,43,850

Add: Stock of work-in-progress on 1.4.2008

43,000 3,86,850

Less: Stock of work-in-progress on 31.3.2009

41,500

Factory cost

3,45,350

Office and administration overheads: Office salaries

24,600 Contd...

198 Cost Accounting Contd...

General expenses Office rent

17,100 5,900

Cost of production

47,600 3,92,950

Add: Stock of finished goods on 1.4.2008

76,300 4,69,250

Less: Stock of finished goods on 31.3.2009

81,400

Cost of goods sold

3,87,850

Selling and distribution overheads: Rent of showroom

4,200

Salesmen salary Carriage outward

21,250 19,320

Advertising expenses

28,460

73,230

–

4,61,080

–

77,420

–

5,38,500

Cost of sales Profit Sales

3. M/s. Indu Industries Ltd are the manufacturers of moonlight torches. The following data relate to manufacture of torches during the month of March, 2009. Raw Materials consumed – ` 20,000 Direct wages – ` 12,000 Machine hours worked – 9,500 hours Machine hour rate – `2 Office overheads – 20% on works cost Selling overheads – 50 paise per unit Units produced – 20,000 units Units sold – 18,000 units at ` 5 per unit Your are required to prepare cost sheet showing the cost and profit per unit and the total profit earned. (B.Com., Madras University) Solution: Cost sheet for the month of March, 2009 Units Raw materials consumed Direct wages Prime cost

20,000 20,000 – 12,000 20,000 32,000

Factory overheads: Contd...

Output Costing/Unit Costing/Single Costing 199 Contd...

Machine expenses (9,500 × 2)

– 19,000

Works cost

20,000 51,000

Office overheads: 20% on Works cost (51,000 × 20/100) Cost of production

10,200 20,000 61,200

Less: Closing stock of finished goods (61,200/20,000 × 2,000)

2,000

Cost of goods sold

6,120

18,000 55,080

Selling overheads: (18,000 × 0.50) Cost of sales

–

9,000

18,000 64,080

Profit

– 25,920 Sales

Cost of production per unit =

18,000 90,000 61, 200 = ` 3.06 20,000

25,920 Profit per unit = 18,000 = ` 1.44

4. The accounts of Nanda Ltd., a machine manufacturer shows the following cost data for the year ending 31.3.2009: Direct materials used – ` 7,50,000 Direct labour – ` 6,20,000 Works overhead – ` 4,65,000 Office and administration overheads – ` 3,21,125 Prepare a cost sheet showing works cost, and cost of production and percentage of office and administration overheads to works cost and factory overheads to direct labour. In April, 2009, the company received an enquiry for the supply of a machine. The machine will require direct materials costing ` 16,500 and direct labour accounting to ` 9,750. What price the company should quote for the supply of the machine when overheads are charged on above percentages. The company wants to earn a profit of 20% on selling price. Solution:

Cost Sheet for the year ending 31.03.2009

Direct materials Direct labour Prime cost

7,50,000 6,20,000 13,70,000 Contd...

200 Cost Accounting Contd...

Works overhead

4,65,000 18,35,000 Office and administration overheads 3,21,125 Cost of production 21,56,125 Works cost

Office and administration overheads × 100 Works cost 3, 21,125 × 100 = 17.50% = 18,35,000 Factory overheads × 100 % of factory overheads to direct labour: = Direct labour

% of office and administration overheads to work cost: =

=

4,65,000 × 100 = 75% 6, 20,000

Quotation for a machine

Direct materials Direct labour Prime cost Factory overheads – 75% of D.Labour (9,750 × 75/100) Works cost Office and administration overheads: 17.50% of works cost (33,562.50 × 17.50/100) Cost of production Profit – 20% on selling price (i.e. 20/80 on cost)

16,500.00 9,750.00 26,250.00 7312.50 33,562.50

5,873.43 39,435.93 9,858.98 Quotation price 49,294.91

5. The following cost data are taken from M/S. Raj Industries for the year ending 31.3.2009: Purchase of raw materials Stock of raw materials on 1.4.2008 Stock of raw materials on 31.3.2009 Manufacturing wages Factory overheads Office and general expenses Stock of finished goods on 1.4.2008 Stock of finished goods on 31.3.2009 Sale of finished goods

– – – – – – – – –

` 14,50,000 ` 1,35,000 ` 1,42,000 ` 11,70,000 ` 9,36,000 ` 3,54,900 ` 94,000 ` 86,000 ` 43,03,090

Output Costing/Unit Costing/Single Costing 201

The company is about to send a tender for a large plant. The costing department estimates that the materials required would cost ` 75,000 and wages to workmen for making the plant would cost ` 40,000. The tender is to be made to include the same percentage of profit the company earned in the year ended 31.3.2008. The company follows the policy of recovering factory overheads as a percentage on manufacturing wages and office overheads as a percentage on works cost. Calculate the selling price the company would quote for the plant. Solution:

Cost sheet for the year ending 31.03.2009

Materials consumed: Purchase of raw materials

14,50,000

Add: Stock of raw materials on 1.4.2008

1,35,000 15,85,000

Less: Stock of raw materials on 31.3.2009

1,42,000 14,43,000

Manufacturing wages

11,70,000

Prime cost

26,13,000

Factory overheads

9,36,000

Works cost

35,49,000

Office and administration overheads

3,54,900

Cost of production

39,03,900

Add: Stock of finished goods on 1.4.2008

94,000 39,97,900

Less: Stock of finished goods on 31.3.2009

86,000

Cost of sales Profit (b.f) Sales

39,11,900 –

3,91,190

– 43,03,090

Percentage of profit on cost =

3,91,190 × 100 = 10% 39,11,900

Percentage of factory overheads on direct wages =

9,36,000 × 100 = 80% 11,70,000

Percentage of office overheads on works cost =

3,54,900 × 100 = 10% 35, 49,000

202 Cost Accounting

Statement showing quotation price for the plant

Materials required Wages to workmen

75,000 40,000 Prime cost 1,15,000 Factory overheads – 80% of wages 32,000 Works cost 1,47,000 Office overheads – 10% of works cost 14,700 Cost of production 1,61,700 Profit – 10% on cost 16,170 Quotation price 1,77,870 6. Following is the information relating to the manufacture of 1,000 units of UPS produced by by Premier Industries Ltd., during the year ending 31.3.2009: Cost of materials ` 80,000 Direct wages Works overhead ` 40,000 Office salaries Rent and taxes

` 8,000

` 60,000 ` 12,000

General expense ` 16,000

Selling expenses ` 10,000 Sales

` 2,50,000

Following estimates were made by the costing department of the company for the year ending 31.3.2010. (i) The output and sales would be 1,200 UPS. (ii) The price of materials will rise by 20% on the previous year’s level. (iii) Wages will rise by 15% (iv) Manufacturing expenses will rise in proportion to combined cost of materials and wages. (v) Selling expenses per unit will remain unchanged. (vi) Other expenses will remain unaffected by the rise in output. From the above information prepare a cost statement for the year ending 31.3.2009 and estimated cost sheet for the year ending 31.3.2010, showing selling price per unit so as to show a profit of 10% on selling price. Solution:

Cost sheet for the year ending 31.03.2009

Cost of materials Direct wages Prime cost

80,000 60,000 1,40,000 Contd...

Output Costing/Unit Costing/Single Costing 203 Contd...

Works overhead Works cost Office overheads: Office salaries – 12,000 Rent and taxes – 8,000 General expenses – 16,000 Cost of production Selling expenses Cost of sales Profit (b.f) Sales

40,000 1,80,000

36,000 2,16,000 10,000 2,26,000 24,000 2,50,000

Estimated cost sheet for the year ending 31.03.2010 output – 1,200 UPS

Materials – Wages –

80,000 × 1, 200 120 × 1,000 100

60,000 × 1, 200 115 × 1,000 100

Prime cost

1,15,200 82,800 1,98,000

Works overhead – 40,000 ×

1,98,000 1, 40,000

Works cost Office overheads Cost of production Selling overheads:

10,000 = ` 10 p/u × 1,200 1,000

56,571 2,54,571 36,000 2,90,571 12,000

Cost of sales 3,02,571 Profit – 10% on selling price (i.e. 10/90 on cost) 33,619 Sales 3,36,190 Selling price per unit =

3,36,190 = ` 280.16 1, 200

7. Victory Ltd., produces emergency lamps. The production capacity is 5,000 units per month. The following are the production and cost data for the first 3 months of the year 2009.

204 Cost Accounting

Month

Production (units)

January February March

2,500 3,200 3,500

Direct Materials Direct Wages Production overheads (semi-variable) 25,000 15,000 17,000 32,000 19,200 20,500 35,000 21,000 22,000

You are asked to find out the selling price per unit when the monthly output averages at 4,000 units. The profit desired is 12 1/2% on selling price. Solution: Cost Sheet – Production 4,000 units Cost p/u 10.00

Total 40,000

6.00

24,000

16.00

64,000

Variable

5.00

20,000

Fixed

1.13

4,500

22.13

88,500

3.16

12,643

25.29

1,01,143

Direct materials Direct wages Prime cost Production overheads:

Total cost Profit – 12

1 12.50 % on selling price (i.e. on cost) 2 87.50

Selling price Workings: Month March January Difference

No. of Units Total Production Overheads 3,500 22,000 2,500 17,000 1,000 5,000

Difference in total production OHS Difference in no. of units 5,000 = ` 5 p/u. 1,000 (ii) Total production overheads for the month of January = 17,000 Less: Variable overheads (2,500 × 5) = 12,500 Fixed production overheads = 4,500

(i) Variable production overhead p/u: =

Output Costing/Unit Costing/Single Costing 205

8. An umbrella manufacturer produces two types ‘Super’ and ‘Special’. The manufacturing cost for the year ended 31.3.2009 are as follows: Raw materials ` 5,40,000, Direct wages ` 3,00,000 Factory overheads ` 2,70,000. There is no work-in-progress at the beginning or at the end of the year. It is ascertained that (i) Direct materials of type ‘Super’ is twice as much as direct materials of type ‘Special’ (ii) Direct wages for type ‘Special’ are 60% of those for type ‘Super’ (iii) Production overheads was ` 15 per unit for both types. (iv) Administration expenses are 30% of works overhead for both types. (v) selling expense is ` 3 per unit for both types. (vi) Production during the year is: Super 10,000 units and Special 8,000 (vii) Units sold are: ‘Super’ 8,000 units and 7,200 units of ‘Special’ (viii) Selling price of super is ` 100 per unit and special is ` 75 per unit. Prepare a statement showing cost per unit and profit per unit of both types of umbrellas. Solution:

Cost Sheet

Particulars

Total Cost

Raw materials 5,40,000 Direct wages 3,00,000 Prime cost 8,40,000 Factory OHS 2,70,000 Works cost 11,10,000 Administration expenses – (30% on works cost) Cost of production – (–) Closing stock – Cost of goods sold – Selling expenses – Cost of sales – Profit – Sales –

Ratio

Super Cost p/u 36.00 18.75 54.75 15.00 69.75 20.93

3,60,000 1,87,500 5,47,500 1,50,000 6,97,500 2,09,250

No. of units 8,000 – 8,000 – 8,000 –

10,000 90.68 2,000 90.68 8,000 90.68 – 3.00 8,000 93.68 – 6.32 8,000 100.00

9,06,750 1,81,350 7,25,400 24,000 7,49,400 50,600 8,00,000

8,000 800 7,200 – 7,200 – 7,200

No. of units 2:1 10,000 100:60 – – 10,000 – – – 10,000 – – – – – – – – –

Total

Special Cost Total p/u 22.50 1,80,000 14.06 1,12,500 36.56 2,92,500 15.00 1,20,000 51.56 4,12,500 15.47 1,23,750 67.03 67.03 67.03 3.00 70.03 4.97 75.00

5,36,250 53,625 4,82,625 21,600 5,04,225 35,775 5,40,000

9. The production cost of 10,000 units of a product are: Materials ` 50,000, wages ` 40,000, chargeable expenses ` 2,500, fixed overheads ` 34,000, Variable overheads ` 20,000. For manufacturing every 1,000 extra units of the commodity the cost of production increases as follows: Materials : Proportionately Wages : 6% less than proportionately

206 Cost Accounting

Chargeable expenses : ` 250 Fixed overheads : ` 400 Variable overheads : 10% less than proportionately. Calculate the estimated cost of production of 15,000 units and show how much it would differ if a flat rate of factory overheads based on wages are charged. Solution:

Statement of Cost – Production – 15,000 units Present (10,000 units)

Materials Wages Chargeable expenses Prime cost Fixed overheads Variable overheads Total cost

50,000 40,000 2,500 92,500 34,000 20,000 1,46,500

Additional Production Total (15,000 units) (5,000 units) 25,000 75,000 18,800 58,800 1,250 3,750 45,050 1,37,550 2,000 36,000 9,000 29,000 56,050 2,02,550

Percentage of overheads on wages (Present) =

54,000 = 135% 40,000

Statement of cost – if overheads is charged at a flat rate on wages

Prime cost (as above) 1,37,550 Overheads: 135% on wages (58,800 × 135/100) 79,380 Total cost 2,16,930 Difference = 2,16,930 – 2,02,550 = ` 14,380 (increase) 10. The following information has been taken from the cost records of Micro Technologies Ltd for the year ending 31.3.2009: Direct Materials

` 3,50,000

Factory overheads

1,95,000

Direct labour

` 2,60,000

Administration overheads

1,44,900

Selling expense ` 96,600 Distribution expenses ` 68,425, Profit 2,35,000 An work order has been executed in 2009-10 and the expenses incurred are – materials ` 45,000 and Direct wages ` 36,000 Assuming that in 2009-10 the rate of factory overheads went up by 15%, distribution charges went down by 10% and administration and selling expenses increased by 16%. Find the selling price if the company wants to earn a profit of 20% on selling price. Factory overheads are based on direct wages and administration, selling and distribution expenses are based on works cost.

Output Costing/Unit Costing/Single Costing 207

Solution:

Cost sheet for the year ending 31.03.2009

Direct materials 3,50,000 Direct labour 2,60,000 Prime cost 6,10,000 Factory overheads 1,95,000 Works cost 8,05,000 Administration overheads 1,44,900 Cost of production 9,49,900 Selling expenses 96,600 Distribution expenses 68,425 1,65,025 Cost of sales 11,14,925 Profit 2,35,000 Sales 13,49,925 Workings: 1,95,000 Factory overheads × 100 = 75% × 100 = 2,60,000 Wages 1, 44,900 = 18% (2) % of administration overheads on works cost = 8,05,000

(1) % of factory overheads on wages =

(3) % of selling expenses on works cost

=

96,600 = 12% 8,05,000

(4) % of distribution expenses on works cost

=

68, 425 = 8.5% 8,05,000

Cost sheet for the work order

Materials Direct wages Prime cost Factory overheads – 75% on wages 36,000 ×

45,000 36,000 81,000 75 115 × 100 100

31,050

Works cost Administration overheads – 18% on works cost 1,12,050 ×

1,12,050 18 116 × 100 100

23,396 Contd...

208 Cost Accounting Contd...

Cost of production Selling expenses – 12% on works cost 1,12,050 ×

1,35,446 12 116 × 100 100

Distribution expenses – 8.5% on works cost 1,12,050 ×

15,597

8.5 90 × 100 100

Cost of sales Profit – 20% on selling price (i.e. 20/80 on cost) 1,59,615 ×

20 80

Selling price

8,572 1,59,615 39,904

1,99,519

11. A manufacturing company has an installed capacity of 1,20,000 units per annum. The cost structure of the product manufactured is as under: (i) Variable costs per units:Materials – ` 8 Labour (Subject to a minimum of ` 56,000 per month) – ` 8 Overheads – ` 3 (ii) Fixed overheads ` 1,04,000 p.a. (iii) Semi-variable overheads ` 48,000 per annum at 60% capacity, which increase by ` 6,000 per annum for increase of every 10% of the capacity utilization or any part there of. The capacity utilization for the next year is estimated at 60% for 2 months, 75% for 6 months and 80% for the balance part of the year. If the company is planning to have a profit of 25% on the selling price, calculate the estimated selling price for each unit of production. Assume there is no opening and closing stock. Solution:

Cost sheet – Production – 89,000 units

Materials (W.N. 2) Labour (W.N. 3) Overheads: Variable (W.N. 4) Fixed Semi-variable (W.N. 5)

` 7,12,000 7,28,000 Prime cost 14,40,000

Total cost

Profit – 25% on selling price (i.e. 25/75 on cost) Sales

2,67,000 1,04,000 58,000 18,69,000 6,23,000 24,92,000

Output Costing/Unit Costing/Single Costing 209

Selling price per unit =

24,92,000 = ` 28. 89,000

Working Notes: 1. Output:

(i) 2 months = 1,20,000 ×

2 60 × = 12,000 units 12 100

6 75 × = 45,000 units 12 100 4 80 × = 32,000 units (iii) 4 months = 1,20,000 × 12 100 Annual production = 89,000 units

(ii) 6 months = 1,20,000 ×

2. Cost of materials = 89,000 × 8 = ` 7,12,000 3. Labour Actual

Minimum

(i) 2 months 12,000 × 8 = 96,000 56,000 × 2 = 1,12,000 (ii) 6 months 45,000 × 8 = 3,60,000 56,000 × 6 = 3,36,000 (iii) 4 months 32,000 × 8 = 2,56,000 56,000 × 4 = 2,24,000 Total

Payable (whichever higher) 1,12,000 3,60,000 2,56,000 7,28,000

4. Variable overheads = 89,000 × 3 = ` 2,67,000 5. Semi-variable overheads: (a) 2 months –60% of capacity

= 48,000 ×

(b) 6 months –

= 48,000 ×

(i) for 60% capacity (ii) for next 10% capacity

6 12 6 = 6,000 × 12

(iii) for balance 5% capacity = 6,000 × (c) 4 months –

(i) for 60% capacity

2 12

6 12

= ` 8,000 = ` 24,000 = ` 3,000 = ` 3,000

4 = ` 16,000 12 4 = 6,000 × × 2 = ` 4,000 12

= 48,000 ×

(ii) for next 20% capacity Total

= ` 58,000

12. A television manufacturer makes 2 models – 21 inch and 29 inch models. From the following particulars, prepare a statement showing cost and profit per unit (per model) sold. There are no opening or closing stocks.

210 Cost Accounting

Materials

21 inch 27,300

29 inch 1,08,680

15,600

62,920

Labour

Works overhead is charged at 80% on labour and office overheads is taken at 15% on works cost. The selling price of both model is ` 1,000. 78 units of 21 inch and 286 units of 29 inch models were sold. (B.Com., Madras University) Solution: Cost Sheet

Materials Labour Prime cost Works overhead: 80% on labour Works cost Office overheads – 15% on works cost Cost of production Profit (b.f) Sales Cost per unit Profit per unit

21 inch TV 27,300 15,600 42,900 12,480 55,380 8,307 63,687 14,313 78,000

29 inch TV 1,08,680 62,920 1,71,600 50,336 2,21,936 33,290 2,55,226 30,774 2,86,000

63,687 = 816.50 78

2,55, 226 = 892.40 286

14,313 = 183.50 78

30,774 107.60 286

13. Prepare a cost sheet for the year 2008 from the following showing the total cost and cost per unit. Number of units produced is 2,000. Opening stock of raw materials – ` 10,000 Purchases – ` 1,80,000 Direct wages – ` 56,000 Indirect wages – ` 48,000 Closing stock of raw materials – ` 12,000 Work-in-progress on 1.1.2008 – ` 5,000 Work-in-progress on 31.12.2008 – ` 6,000 Factory overheads – ` 26,000 Office overheads – ` 45,000 Selling overheads – ` 16,000 Opening stock of finished goods (100 units) ` 20,000

Output Costing/Unit Costing/Single Costing 211

Closing stock of finished goods – 120 units Profit 10% on sales. During the year 2009, it is decided to increase the production to 2400 units. It is anticipated that: (a) Material prices will increase by 10% (b) Wages will reduce by 20% (c) Other expenses will remain constant per unit. (d) Expected profit 20% on sales. Ascertain the selling price to be fixed per unit. (B.Com., Madras University) Solution: Cost sheet for the year 2008 Production – 2,000 units

Materials consumed: Purchases Add: Opening stock of materials Less: Closing stock of materials Direct wages Prime cost Factory overheads Add: of work-in-progress on 1.1.2008 Less: work-in-progress on 31.12.2008 Works cost Office overheads Cost of production (2,000 units) Add: Opening stock of finished goods (100 units) ⎛ 3,04,000 ⎞ Less: Closing stock of finished goods (120 units) ⎜ × 120 ⎟ ⎝ 2,000 ⎠

Cost of goods sold Selling overheads Cost of sales Profit – 10% on sales (i.e. 10/90 on cost) Sales

1,80,000 10,000 1,90,000 12,000

1,78,000 56,000 2,34,000 26,000 2,60,000 5,000 2,65,000 6,000 2,59,000 45,000 3,04,000 20,000 3,24,000 18,240 3,05,760 16,000 3,21,760 35,751 3,57,511

212 Cost Accounting

Estimate Cost sheet for the year 2009 Production – 2,400 units

Materials –

1,78,000 × 2, 400 110 × 2,000 100

56,000 × 2, 400 80 × 2,000 100 Prime cost

Direct wages –

Factory overheads –

26,000 × 2, 400 2,000

Works cost

53,760 2,88,720 31,200 3,19,920

45,000 × 2, 400 2,000 Cost of production

Office overheads –

Selling overheads:

2,34,960

16,000 × 2, 400 2,000

54,000 3,73,920 19,200

Cost of sales 3,93,120 Profit – 20% on sales (i.e. 20/80 on cost) 98,280 Sales 4,91,400 Selling price per unit =

4,91, 400 = ` 204.75 2, 400

14. A manufacturer of scooter finds that in 2008, it costs him ` 72,00,6 00 to manufacture 350 scooters, which he sold for ` 27,000 each. The cost was made up of: Materials – ` 28,20,000 Direct wages – ` 32,40,000 Factory overheads – ` 4,86,000 Office overheads – ` 6,54,600 For the next year he estimates that: (a) Each scooter will require materials of ` 8,000 and labour ` 9,000. (b) The factory overheads will bear the same relation to wages as in previous period. (c) The office overheads percentage on factory cost will be the same as in the past. Prepare a statement showing the profit he would make per unit if he reduces the price of the scooter by ` 1,000. (B.Com., Mysore University)

Output Costing/Unit Costing/Single Costing 213

Solution:

Cost sheet for the year 2008 Production – 350 Scooters

Materials Direct wages Prime cost Factory overheads Works cost Office overheads Cost of production Profit Sales (350 × 27,000)

28,20,000 32,40,000 60,60,000 4,86,000 65,46,000 6,54,600 72,00,600 22,49,400 94,50,000

Workings: (1) % of factory overheads to wages =

4,86,000 × 100 = 15% 32, 40,000

(2) % of office overheads on works cost =

6,54,600 × 100 = 10% 65, 46,000

Statement showing cost and profit per scooter

Materials Labour Prime cost Factory overheads – 15% on wages Works cost Office overheads – 10% on works cost Total cost Profit New selling price

8,000 9,000 17,000 1,350 18,350 1,835 20,185 5,815 26,000

15. ‘A’ company’s record shows the following particulars for the year 2008. Production and sales Direct Materials Direct labour Direct charges

– – – –

100 fans ` 25,000 ` 10,000 ` 1,000

214 Cost Accounting

Works overheads – ` 9,000 Office overheads – ` 5,000 Selling overheads – ` 5,000 Profit – ` 11,000 You ascertain that 80% of the works overheads fluctuates directly with production and 70% of selling over heads fluctuate with sales. It is anticipated that the company would produce 500 fans per annum for the year 2009 and direct labour charges per unit will be reduced by 10% while fixed works overhead charges will increase by ` 2,400. Office overheads and fixed selling overhead charges are expected to show an increase of 10% and 20% respectively but otherwise no changes are anticipated. Prepare a statement of cost and profit for the year 2009, assuming same percentage of profit as in 2008. Solution:

Cost sheet for the year 2008 Production – 100 Fans

Direct materials Direct labour Direct charges Prime cost Works overheads Works cost Office overheads Cost of production Selling overheads Cost of sales % of profit on cost =

25,000 10,000 1,000 36,000 9,000 45,000 5,000 50,000 5,000 55,000

11,000 × 100 = 20% 55,000

Estimate Cost sheet for the year 2009 Production – 500 fans

Direct materials – Direct labour –

25,000 × 500 100

10,000 90 × 500 × 100 100

1,25,000 45,000 Contd...

Output Costing/Unit Costing/Single Costing 215 Contd...

Direct charges (1,000 × 5) Prime cost Works overhead: Variable = 9,000 × Fixed = 9,000 ×

5,000 1,75,000

80 500 × 100 100

20 100

= 36,000 = 1,800 Add: increase = 2,400

Works cost Office overheads: Add: 10% increase Cost of production Selling overheads: Variable = 5,000 × Fixed = 5,000 ×

= 4,200 5,000 500

40,200 2,15,200 5,500 2,20,700

= 17,500

70 500 × 100 100

30 120 × 100 100

= 1,800

Cost of sales Add: profit – 20% on cost of sales Sales

19,300 2,40,000 48,000 2,88,000

16. The following budgeted cost information is available from the records of a manufacturing concern:

Direct materials Direct wages: Rolling shop (1,20,000 hrs) Milling shop (2,40,000 hrs) Works overhead (allocation on labour hours) Rolling shop Milling shop Administrative overheads Selling overheads Distribution overhead

in lakhs 61.20

14.40 9.60 28.80

6.00 20.40

38.40 24.00 28.80 14.40

216 Cost Accounting

The concern follows the absorption method of costing. On the basis of the above data, prepare a schedule of overhead rates. The sales division of the concern requires a cost estimate for a product for which following information is available: Direct materials: Materials X – 120 kg at ` 30 per kg Materials Y – 72 kg at ` 55 per kg. Direct labour:

Rolling shop – 40 hours at ` 6 per hour. Milling shop – 70 hours at ` 5 per hour.

You are required to workout the cost estimate showing cost per unit using the above information and the overhead rates so computed. (ICWA, Inter) Solution:

Budgeted Cost Sheet

Direct materials 61,20,000 Direct wages 20,40,000 Prime cost 81,60,000 Works overhead 38,40,000 Works cost 1,20,00,000 Administration overheads 24,00,000 Cost of production 1,44,00,000 Selling overheads 28,80,000 Distribution overheads 14,40,000 43,20,000 Cost of sales 1,87,20,000 Workings: Schedule of Overhead recovery rates: (i) Works overhead per direct labour hour: Rolling shop =

9,60,000 = `8 1, 20,000

Milling shop =

28,80,000 = ` 12 2, 40,000

(ii) % of administration overheads on works cost: =

24,00,000 × 100 = 20% 1, 20,00,000

(iii) % of selling and distribution overheads on works cost: =

43, 20,000 × 100 = 36% 1, 20,00,000

Output Costing/Unit Costing/Single Costing 217

Estimated cost sheet for a product

Direct materials: X – 120 kg × ` 30

3,600

Y – 72 kg × ` 55

3,960

7,560

Direct labour: Rolling Shop – 40 hrs × ` 6

240

Milling Shop – 70 hrs × ` 5

350

Prime cost

590 8,150

Works overhead: Rolling shop – 40 hrs. × ` 8

320

Milling shop – 70 hrs. × ` 12

840

1,160

Works cost

9,310

Administration overheads: 20% on works cost

1,862

Cost of production

11,172

Selling and distribution overheads: 36% on works cost

3,351.60

Cost of sales

14,523.60

17. Cool Wind Ltd., manufacturers of fans, which are sold at ` 400 per piece. The cost of sales is composed of 40% of direct materials, 30% wages and 30% overheads. An increase in material price by 25% and in wage rate by 10% is expected in the forthcoming year. As a result of which the profit at current selling price may dwindle by 39% of present gross profit. With the above information, you are required to (a) prepare a statement showing current and future cost and profit at present selling price and (b) determine the future selling price, if the present rate of gross profit is to be maintained. (C.A., Inter) Solution: Let the present cost be x Cost Structure Particulars Direct materials Wages Overheads Total

Present 0.4 x 0.3 x 0.3 x 1.0 x

Change 0.10 x 0.03 x – 0.13 x

Future 0.50 x 0.33 x 0.30 x 1.13 x

218 Cost Accounting

Increase in cost – 0.13x Profit = Sales – Cost Present profit = 400 – x Decrease in profit anticipated = Present profit × 39/100

Decrease in profit 156 – 0.39 x 156 156

= = = = = =

400 – x × 39/100 156 – 0. 39 x Increase in cost 0.13 x 0.13 x + 0.39 x 0.52 x

x =

156 = 300 0.52

Present cost = ` 300 Statement showing present cost and profit

Materials = 300 × Wages = 300 ×

40 100

120 90

30 100

Prime Cost 210 Overheads = 300 ×

30 100

90 Total Cost

Profit Sales % of profit on sales =

300 100 400

100 × 100 = 25% 400

Statement showing future cost, profit and sales

Materials = 120 × Wages = 90 ×

110 100

125 100

150 99 Contd...

Output Costing/Unit Costing/Single Costing 219 Contd...

Prime cost Overheads Total cost Profit – 25% on sales (i.e. 25/75 on cost) Sales

249 90 339 113 452

18. Rohit has a small furniture factory. He specializes in the manufacture of small dining tables of standard size of which he can make 15,000 a year. The cost per table worked out as under for the year 2007-08, when he made and sold 10,000 tables. Materials Labour Overhead (fixed) recovered at 50% of materials cost

` 30 ` 10 ` 15

Total ` 55 Price is fixed by adding a standard margin of 10% to total cost arrived at as above. In 2008-09 due to fall in cost of materials, total cost worked out as under: Materials Labour Overhead (fixed) recovered at 50% of materials cost

` 20 ` 10 ` 10

Total ` 40 Rohit maintained his standard margin of 10% on the cost of sales. Sales were at the same level as in 2007-08. You are asked to: (a) Determine profit or loss for the year 2007-08 & 2008-09 (b) Compute the price which should have been charged in 2008-09 to yield the same profit or loss as in 2007-08 (C.A. (Inter), May 2003) (ICWA, Inter) Solution:

Cost sheet for the year 2007-08 Production 10,000 Tables

Materials Labour Prime cost Overheads (10,000 × 15) Total cost Profit – 10% on cost

3,00,000 1,00,000 4,00,000 1,50,000 5,50,000 55,000 Contd...

220 Cost Accounting Contd...

Sales Selling price per unit =

6,05,000 10,000

6,05,000 60.50

Cost sheet for the year 2008-09 Production 10,000 Tables

Materials Labour

2,00,000 1,00,000 Prime cost 3,00,000 1,50,000 Total cost 4,50,000 45,000 Sales 4,95,000

Overheads (fixed) Profit – 10% on cost

Selling price per unit =

4,95,000 10,000

49.50

Statement showing Revised Selling price to maintain profit as in 2007-08

Total cost (2008-09) Profit (2007-08)

New selling price per unit =

4,50,000 55,000 New Sales 5,05,000 5,05,000 10,000

50.50

19. A manufacturing company has an installed capacity of 1,50,000 units per annum. Its structure is given below: (i) Variable cost per unit Materials – ` 10 Labour (subject to a minimum of ` 1,00,000 per month) – ` 10 Overheads – `4 (ii) Fixed overheads per annum – ` 1,92,300 (iii) Semi-variable overheads per annum at 75% capacity (it will increase by ` 4,000 per annum for an increase of every 5% of the capacity utilization or part there of) – ` 60,000

Output Costing/Unit Costing/Single Costing 221

The capacity utilization for the next year is budgeted at 75% for first three months, 80% for the next six months and 90% for the remaining three months. Required: If the company is planning to have a profit of 20% on the selling price, calculate the selling price for the next year. (C.A. (Inter), Nov. 2006) Solution: Cost sheet – Production – 1,21,875 units

Materials (W.N. 2) 12,18,750 Labour (W.N. 3) 12,37,500 Prime cost 24,56,250 Overheads: Variable (W.N. 4) 4,87,500 Fixed 1,92,300 Semi-variable (W.N. 5) 65,000 Total cost 32,01,050 Profit – 20% on selling price (i.e. 20/80 on cost) 8,00,263 Sales 40,01,313 Selling price per unit =

40,01,313 = ` 32.83 1, 21,875

Working Notes: 1. Output:

(i) 3 months = 1,50,000 ×

3 75 × = 28,125 units 12 100

6 80 × = 60,000 units 12 100 3 90 (iii) 3 months = 1,50,000 × × = 33,750 units 12 100

(ii) 6 months = 1,50,000 ×

Annual production = 1,21,875 units 2. Materials cost = 1,21,875 units × ` 10 = ` 12,18,750 3. Labour Minimum Payable (whichever higher) Actual (i) 3 months 28,125 × 10 = 2,81,250 1,00,000 × 3 = 3,00,000 3,00,000 (ii) 6 months 60,000 × 10 = 6,00,000 1,00,000 × 6 = 6,00,000 6,00,000 (iii) 3 months 33,750 × 10 = 3,37,500 1,00,000 × 3 = 3,00,000 3,37,500 Total 12,37,500

222 Cost Accounting

4. Variable overheads = 1,21,875 × 4 = ` 4,87,500 5. Semi-variable overheads: (a) For first 3 months – 75% of capacity

= 60,000 ×

3 12

= ` 15,000

(b) for next 6 months – (i) for 75% capacity

= 60,000 ×

6 12

= ` 30,000

6 = ` 2,000 12 3 = ` 15,000 (c) for last 3 months – (i) for 75% capacity = 60,000 × 12 3 15 (ii) for balance 15% capacity = 4,000 × × = ` 3,000 12 5

= 4,000 ×

(ii) for next 5% capacity

= ` 65,000

Total semi-variable overheads

20. A re-roller produced 400 metric tonnes of M.S. bars spending ` 36,00,000 towards materials and ` 6,20,000 towards rolling charges. Ten per cent of output was found to be defective, which had to be sold at 10% less than the price for good production. If the sales realization should give the firm an overall profit of 12.5% on cost, find the selling price per metric tonnes of both the categories of bars. The scrap raised during the rolling process fetched a realization of ` 60,000. (C.A. (PE.II), Nov. 2005) Solution: Cost Sheet

Materials Rolling charges Less: Scrap realization Total cost Add: Profit – 12.5% on cost Total sales

36,00,000 6,20,000 42,20,000 60,000 41,60,000 5,20,000 46,80,000

Statement showing Production details Gross production Less: 10% defective production

– –

400 tonnes 40 tonnes

Good production

–

360 tonnes

Output Costing/Unit Costing/Single Costing 223

Statement of equivalent production

Good production Defective production Total

Actual (units) % of completion Equivalent units 360 tonnes 100% 360 tonnes 40 tonnes 90% 36 tonnes 396 tonnes

Sales of 396 tonnes of equivalent production = ` 46,80,000 Selling price of good production per tonne =

46,80,000 = ` 11,818.18 396

Selling price of defective production per tonne

= 11,818.18 ×

90 = ` 10,636.36 10

21. The following details have been extracted from the records of M/S Vijay Industries Ltd:

Stock of raw materials on 1.4.2008 90,000 Stock of raw materials on 31.3.2009 93,500 Direct materials purchased 2,46,000 Direct wages 1,75,000 Indirect wages 26,500 Indirect materials 38,700 Factory rent and rates 27,500 Power 22,000 Depreciation on plant & machinery 17,500 Expenses on purchase 15,000 Carriage outward 7,600 salary – office 14,000 Salary – selling 12,500 Sales 7,25,000 Office rent rates 16,000 Advertising 19,000 Traveling salesmen salary and commission 23,800 Stock of finished goods on 1.4.2008 67,500 Stock of finished goods on 31.3.2009 61,000 Prepare a cost sheet showing prime cost, works cost, cost of production, cost of goods sold, cost of sales and profit.

224 Cost Accounting

Solution:

Cost sheet for the year ending 31.3.2009 Particulars

Total

Materials consumed: Direct materials purchase 2,46,000 Add: Stock of raw materials on 1.4.2008 90,000 Add: Expenses on purchase 15,000 3,51,000 Less: Stock of raw materials on 31.3.2009 93,500 Direct wages Prime cost Factory overheads: Indirect wages 26,500 Indirect materials 38,700 Factory rent and rates 27,500 Power 22,000 Depreciation on plant and machinery 17,500 Works cost Office and administration overheads: Salary – Office 14,000 Office rent and rates 16,000 Cost of production Add: Stock of finished goods on 1.4.2008 Less: Stock of finished goods on 31.3.2009 Cost of goods sold Selling and distribution overheads: Salary-selling Carriage outward Advertising Travelling salesmen salary and commission Cost of sales Profit (b.f. ) Sales

12,500 7,600 19,000 23,800 – – –

2,57,500 1,75,000 4,32,500

1,32,200 5,64,700

30,000 5,94,700 67,500 6,62,200 61,000 6,01,200

62,900 6,64,100 60,900 7,25,000

13

Job Costing and Batch Costing

Chapter

Practical Problems: A. Short Answer Type Questions: 1. Find the cost of job no. 505, from the following details: Materials issued for the job

` 20,000

Surplus materials returned to stores

` 750

Materials transferred to other jobs

` 1,250

Wages

` 12,000

Factory overheads charged at 75% on wages. Administration overheads recovered at 10% of work cost. Solution:

Job cost sheet – Job No: 505

Materials issued for the job Less: Surplus returned to stores 750 Less: Transferred to other jobs 1,250 Wages Prime cost Factory overheads: 75% on wages Works cost Administration overheads: 10% of works cost Total cost 2. The following information is available for the job no. 222. Direct materials Direct labour

– –

40,000 ` 25,000

– 20,000 – 2,000 18,000 12,000 30,000 9,000 39,000 3,900 42,900

226 Cost Accounting

Factory overheads 40% of direct labour. Profit desired is 20% on selling price. Find the selling price of job no. 222. Solution:

Job cost sheet – Job No: 222

Direct materials Direct labour Prime cost Factory overheads: 40% of direct labour Works cost Profit – 20% on selling price (i.e. 20/80 on cost) Selling price

40,000 25,000 65,000 10,000 75,000 18,750 93,750

3. From the following details calculate profit from job No.99. Materials issued from stores ` 13,000 Materials received from other job ` 2,000 Direct wages ` 9,000 Factory overheads – 50% on direct wages Administration overheads 20% on works cost. Profit 20% on selling price. Solution:

Job cost sheet – Job No. 99

Materials from stores Materials from other jobs Direct wages

13,000 2,000

15,000 9,000

Prime cost Factory overheads: 50% on direct labour Works cost Administration overheads: 20% of works cost Cost of production Profit – 20% on sales (i.e. 20/80 on cost) Sales

24,000 4,500 28,500 5,700 34,200 8,550 42,750

B. Long Answer Type Questions: 1. The following information for the year ended 31st March 2009 is obtained from the books of a factory:

Job Costing and Batch Costing 227

Completed Jobs ` Raw materials supplied from stores 90000 Wages 100000 Chargeable expenses 10000 Materials transferred to work-in-progress 2000 Materials returned to stores 1000 Factory overheads is 80% of the wages and office overheads 25% of factory cost. The value of the executed contracts during 2008-09 was ` 410000. Prepare consolidated completed jobs account showing the profit made or loss incurred on the contracts. (B.Com., Madras University) Solution: Consolidated Completed Jobs Account To Materials from stores (–) Transfer to WIP (–) Returned to stores

Prime cost

90,000 By Work-in-progress a/c (Completed jobs) 4,10,000 3,000 87,000 1,00,000 10,000 1,97,000

Works cost

80,000 2,77,000

2,000 1,000

To Wages To Chargeable expenses To Factory overheads (80% on wages) To Office overheads (25% on works cost) To Profit b/f

69,250 63,750 4,10,000

4,10,000

2. The following particulars are given in respect of job number 505 of an engineering company: Materials – ` 4010 Wages: Dept. A – 60 hours at ` 3 per hour Dept. B – 40 hours at ` 4 per hour Dept. C – 20 hours at ` 5 per hour

228 Cost Accounting

Variable overhead expenses for three departments were estimated as follows: Dept. A – ` 5,000 for 5,000 labour hours Dept. B – ` 3,000 for 1,500 labour hours Dept. C – ` 2,000 for 500 labour hours Fixed overheads: Estimated at ` 20,000 for 10,000 normal working hours. You are required to calculate the cost of Job No. 505 and calculate the price to give profit of 25% on selling price. (B.Com., Madras University, Sep. 1988) Solution:

Job cost sheet – Job No: 505

Materials Wages:

4,010

Variable:

Dept. A – 60 hrs. × ` 3

180

Dept. B – 40 hrs. × ` 4

160

Dept. C – 20 hrs. × ` 5 Prime cost

100

Dept. A – 60 hrs. × ` 1

60

Dept. B – 40 hrs. × ` 2

80

Dept. C – 20 hrs. × ` 4

80

4,450

220 240

Fixed: 120 hrs. × ` 2 Total cost Profit – 20% on selling price (i.e. 20/80 on cost) Selling price

440

460 4,910.00 1,227.50 6,137.50

3. From the records of a manufacturing company, the following budgeted details are available for the year 2010:

Direct materials 190000 Direct wages: Machine shop (12000 Hours) 63000 Assembly shop (10000 Hours) 48000 111000 Works overhead: Contd...

Job Costing and Batch Costing 229 Contd...

Machine shop Assembly shop Administration overheads Selling overheads Distribution overheads

88200 51800 140000 90000 81000 62100

Assuming that the company follows the absorption method of costing, you are required to: (a) Prepare a schedule of overhead rates from the figures available stating the basis of overhead recovery rates used under given circumstances: (b) Work out a cost estimate for the following job No.444 based on overhead rates so computed: Direct materials x – 25 kg at ` 16.80 per kg. y – 15 kg at ` 20.00 per kg. Direct labour – Machine shop 30 hours – Assembly shop 42 hours Solution:

Job cost sheet for the year 2010

Direct materials Direct wages:

1,90,000 Machine shop Assembly shop

63,000 48,000 Prime cost

1,11,000 3,01,000

Works overhead: Machine shop Assembly shop

88,200 51,800 Works cost

Administration overheads Cost of production Selling overheads Distribution overheads

81,000 62,100 Cost of sales

(a) Overhead recovery rates: (1) Works overhead per direct labour hour: Machine shop =

88, 200 = ` 7.35 12,000

1,40,000 4,41,000 90,000 5,31,000 1,43,100 6,74,100

230 Cost Accounting

51,800 = ` 5.18 10,000 (2) % of administration overheads on works cost: 90,000 × 100 = 20.41% = 4, 41,000 (3) % of selling and distribution overheads on works cost: 1, 43,100 = 32.45% = 4, 41,000 (4) Direct labour hour rates:

Assembly shop =

Machine shop =

63,000 = ` 5.25 12,000

Assembly shop =

48,000 = ` 4.80 10,000

(b) Job cost sheet – Job No: 444

Direct materials X – 25 kg. × ` 16.18

404.50

Y – 15 kg. × ` 20.00 Direct labour

300.00

Machine shop – 30 hrs. × ` 5.25 Assembly shop – 42 hrs. × ` 4.80 Prime cost Works overhead: Machine shop – 30 hrs. × ` 7.35

704.50

157.50 201.60

359.10 1,063.60

220.50

217.56 438.06 Assembly shop – 42 hrs. × ` 5.18 Works cost 1,501.66 Administration overheads: 20.41% on works cost 306.49 Cost of production 1,808.15 Selling and distribution overheads: 32.45% on works cost 487.29 Total cost 2,295.44 4. An Engineering firm has three departments. The budgeted expenses for the ensuing year are:

Materials Direct wages

Dept. A 10,000 13,664

Dept. B Dept. C 10,000 7,970 8,784 7,930 Contd...

Job Costing and Batch Costing 231 Contd...

Direct expenses Works expenses Administration Labour hours

176 9,760 2,688 1,220

228 6,484 2,560 1,621

90 6,110 1,989 611

Works expenses are charged to output at a man hour rate and administrative expenses are charged as a percentage on works cost. What price should be charged to Job No. 61 to include a profit of 10% on cost, on which direct costs are as follows: Dept. A Dept. B Dept. C 420 300 240 450 350 335 10 – – 240 216 200

Materials Direct wages Direct expenses Direct labour hours

(B.Com., Madras University, May 1994) Solution:

Job Cost Sheet — Job. No. 61. Particulars Materials Direct wages Direct expenses Prime cost

Dept. A 420.00

Dept. B 300.00

Dept. C 240.00

Total 960.00

450.00

350.00

335.00

1,135.00

10.00

–

–

10.00

880.00

650.00

575.00

2,105.00

1,920.00

864.00

2,000.00

22,354

2,800.00

1,514.00

2,575.00

6,889.00

Administration expenses

224.00

152.00

231.75

607.75

Cost of production

3,024.00

1,666.00

2,806.75

7,496.75

302.40

166.60

280.68

749.68

–

–

–

Works expenses Works cost

Profit – 10% on cost Sales

8,246.43

Workings: (a) Job Cost Sheet for a year Particulars Materials Direct wages Direct expenses

Total Dept. B Dept. C Dept. A 10,000 10,000 7,970 27,970 13,664 176

8,784 228

7,930 90

30,378 494 Contd...

232 Cost Accounting Contd...

Prime cost

23,840

19,012

15,990

58,842

9,760

6,484

6,110

22,354

Works cost

33,600

25,496

22,100

81,196

Administration expenses

2,688

2,560

1,989

7,237

Cost of production

36,288

28,056

24,089

88,433

Works expenses

(b) Overhead Recovery rates Particulars

Dept. A

Dept. B

Dept. C

(i) Works expenses per direct labour hour

9,760 1, 220

6, 484 1,621

6,110 611

=`8

=` 4

= ` 10

(ii) % of Administrative expenses on works cost

2,688 2,560 ×100 × 100 33,600 25, 496

= 8%

= 10.04%

1,989 × 100 22,100

= 9%

(c) Overheads for Job No. 61 Particulars (i) Works expenses (ii) Administration expenses

Dept. A 240 × 18

Dept. B 216 × 4

Dept. C 200 × 10

= ` 1,920

= ` 864

= ` 2,000

8 × 2,800 100

= ` 224

10.04 × 1,514 100

= ` 152

9 × 2,575 100

= ` 231.75

5. The following details are taken from Falcon Engineering Ltd. for the year 2008:

Materials used Direct wages Total overheads Labour hours worked Machine hours works

1,50,000 90,000 75,000 25,000 30,000

Job Costing and Batch Costing 233

The following are the details relating to Job No. 25: Materials used Labour hours Direct labour Machine hours

` 15,000 3,500 ` 10,000 4000

Calculate the total cost of the job using the following methods of recovery of overheads: 1. Direct labour hour basis 2. Direct wages basis 3. Machine hour basis Solution: Job Cost Sheet – Job No. 25 Particulars Materials used Direct labour Prime cost Overheads

Direct Labour hour basis (a) 15,000 10,000 25,000 10,500 (3,500 × 3)

Direct Wages basis (b) 15,000 10,000 25,000 8,333

35,500

33,333

Total cost Working Notes:

83.33 ⎞ ⎛ ⎜10,000 × ⎟ 100 ⎠ ⎝

Overhead recovery rates:

(a) Direct labour hour rate

=

Overheads Direct labour hours

75,000 = ` 3 per hour 25,000 Overheads × 100 = Direct wages

= (b) % on direct wages

(c) Machine hour rate

=

75,000 × 100 = 83.33% 90,000

=

Overheads Machine hours

=

75,000 = ` 2.50 per hour 30,000

Machine hour basis (c) 15,000 10,000 25,000 10,000 (4,000 × 2.50)

35,000

234 Cost Accounting

6. The following information was taken from Patel Engineering Ltd. for the year ended 31st March 2009:

Materials issued from stores Direct wages Direct expenses Materials returned to stores

Completed Jobs ( ) Incomplete Jobs ( ) 145000 12000 130000 20000 17500 6000 5000 –

Factory overheads are 80% of wages, office overheads are 35% of factory cost and selling and distribution overheads are 10% of cost of production. The completed jobs realized ` 6,50,000. Required: (i) Prepare work-in-progress ledger control a/c (ii) Prepare completed jobs ledger control a/c and (iii) Cost of sales control a/c Solution: Work-in-Progress Ledger Control A/c

To Cost ledger control a/c (materials issued) To Cost ledger control a/c (direct wages) To Cost ledger control a/c (direct expenses) To Cost ledger control a/c (factory overheads)

1,57,000 By 1,50,000 By 23,500 By

Completed jobs control a/c 3,91,500 (See WN) Cost ledger control a/c 5,000 (materials returned) Balance c/d

1,20,000 4,50,500 54,000

To Balance b/d

54,000

4,50,500

Completed Jobs Ledger Control A/c

To Work-in-progress ledger control a/c To Office overheads ledger control a/c (3,91,500 × 35/100)

3,91,500 By Cost of sales control a/c 5,28,525

1,37,025 5,28,525

5,28,525

Job Costing and Batch Costing 235

Cost of Sales Control a/c

To

Completed jobs control a/c

To

Selling and distribution overheads ledger control a/c (5,28,525 × 10/100) Profit

To

Working Notes:

5,28,525 By Cost ledger control a/c 6,50,000 (Sales) 52,853 68,622 6,50,000

6,50,000

Works Cost of Completed Jobs

Materials issued Less: Materials returned Prime cost Direct wages Direct expenses Prime cost Factory overheads – 80% of wages

1,45,000 5,000 1,40,000 1,30,000 17,500 2,87,500 1,04,000 3,91,500

7. A Ltd. received a job order for 500 units, the production of which has to pass through three production departments X, Y and Z. Machine hour rate is used to charge factory overheads to jobs. The machine hour rates for the departments are: Department X – ` 10, Department Y – ` 12, Department Z – ` 20. The production department spent the following machine hours on this Job: Department X – 75 hours, Department Y – 60 hours, Department Z – 50 hours. The direct expenses for the job are Direct materials ` 12,000 and Direct wages ` 10,000. Administration overheads are used to be charged at 30% on works cost. Due to rise in costs, administration cost is expected to increase by 50%. From past experience it is found that 10% of gross production will be scrapped and sale of which will fetch 25% of its cost. Find the selling price of the job after adding 20% profit on cost. Also find the price per unit. Solution:

Job cost sheet – Production 500 units

Direct materials Direct wages Prime cost

12,000 10,000 22,000 Contd...

236 Cost Accounting Contd...

Factory overheads: Dept. X – 75 hrs. × ` 10

750

Dept. Y – 60 hrs. × ` 12

720

Dept. Z – 50 hrs. × ` 20

1,000 Works cost

24,470.00 11,011.50

Administration overheads: 30 150 = 24, 47 × × 100 100 Gross cost of production Less: Sale of scrap = 35,481.50 ×

2,470

35,481.50 887.04

10 25 × 100 100

Net cost of production Profit – 20% on cost Sales

34,594.46 6,918.89 41,513.35

41,513.35 = ` 83.03 500 8. Modern Industries Ltd. gives the following information relating to Job No. 25.

Selling price p/u =

Direct materials

– ` 12500

Direct wages: Dept. A – 1,000 hours at ` 12 per hour Dept. B – 600 hours at ` 15 per hour Variable overheads: Dept. A – ` 40,000 for 10,000 labour hours Dept. B – ` 60,000 for 12,000 labour hours Fixed overheads ` 20,000 for 10,000 hours. Calculate the cost of Job No. 25 and find the profit and profit percentage on sales. The selling price of the job is ` 52,000. Solution:

Job cost sheet – Job No. 25 Direct materials Direct wages: Dept. A – 1,000 hrs. × ` 12 Dept. B – 600 hrs. × ` 15

12,500 12,000 9,000

21,000 Contd...

Job Costing and Batch Costing 237 Contd...

Prime Cost

33,500

Overheads: 4,000

(i) Variable: Dept. A – 1,000 hrs. × ` 4

3,000

Dept. B – 600 hrs. × ` 5

7,000 3,200

(ii) Fixed: 1,600 hrs. × ` 2 Total cost

43,700 8,300 52,000

Profit (b.f) Selling price % of profit on selling price =

10,200

8,300 × 100 = 15.96% 52,000

Note: (i) Variable overhead rate per hour: Dept. A =

40,000 = `4 10,000

Dept. B =

60,000 = `5 12,000

(ii) Fixed overhead rate per hour: =

20,000 = `2 10,000

9. Easun Engineering received orders for two jobs during the month of July 2009. The following are the cost data relating to the jobs. Job No. 44 ( ) Materials issued 15,000 Direct wages 7,500 Factory overheads 4,500 Materials returned to stores 1,000 Material transfer from Job 44 to 45 2,500 Calculate the cost of jobs.

Job No. 45 ( ) 18,000 9,000 5,000 1,200 2,500

238 Cost Accounting

Solution:

Job Cost Sheet

Materials issued Materials returned to stores Material transfer from Job 44 to 45 Direct wages Prime cost Factory overheads Total cost

Job No. 44 ( ) Job No. 45 ( ) 15,000 18,000 (1,000) (1,200) (2,500) 2,500 11,500 19,300 7,500 9,000 19,000 28,300 4,500 5,000 23,500 33,300

10. Anand Ltd. supplies the following information relating to various jobs completed in the year ended 31st March 2009:

Materials used Direct wages Factory overheads Administration overheads Selling and distribution overheads Profit

300000 250000 200000 75000 90000 97,800

(a) Prepare a job cost sheet for the year ending 31.3.2009. Also calculate factory overheads percentage on direct wages, administration and selling and distribution overheads percentages on works cost. (b) The company received many job orders for the year 2009-10. Estimated direct expenses for the job are – Direct materials ` 4,00,000 and Direct wages ` 3,60,000. Overheads are recovered on above percentages. During the year 2009-10, it is anticipated that factory overheads will go up by 15%, administration expenses will remain constant, and selling and distribution expenses are likely to come down by 10%. If the company wants to earn same percentage of profit on cost as in 2008-09, what should be the sale price of the jobs in 2009-10. Solution: Job cost sheet for the year 2008-09

Materials used Direct wages Prime cost

3,00,000 2,50,000 5,50,000 Contd...

Job Costing and Batch Costing 239 Contd...

Factory overheads Works cost Administration overheads Cost of production Selling and distribution overheads Cost of sales Profit Sales

2,00,000 7,50,000 75,000 8,25,000 90,000 9,15,000 1,09,800 10,24,800

=

2,00,000 × 100 = 80% 2,50,000

Administration overheads percentage on works cost =

75,000 × 100 = 10% 7,50,000

Selling and distribution overheads % on works cost =

90,000 × 100 = 12% 7,50,000

Profit percentage on cost

1,09,800 × 100 = 12% 9,15,000

Factory overheads percentage on direct wages

=

Job cost sheet for the year 2009-2010

Direct materials Direct wages Prime cost Factory overheads: = 3,60,000 ×

80 115 × 100 100

Works cost Administration overheads: = 10,91,200 ×

10 100

Cost of production Selling and distribution overheads = 10,91,200 ×

4,00,000.00 3,60,000.00 7,60,000.00 3,31,200.00 10,91,200.00 1,09,120.00 12,00,320.00 1,17,849.60

12 90 × 100 100

Cost of sales Profit – 12% on cost Sales

13,18,169.60 1,58,180.35 14,76,349.95

240 Cost Accounting

11. In a factory following the job costing method, an abstract from the work-in-progress account as at 30th September was prepared as under: Job No. Materials

Direct Labour

Factory Overheads applied ( )

Hours 115 118 120

1325 810 765 2900

400 250 300

800 500 475 1,775

640 400 380 1,420

Materials used in October were as follows: Materials Requisition No.

Job No.

54 55 56 57 58 59

118 118 118 120 121 124

Cost ( ) 300 425 515 665 910 720 3,535

A summary of labour hours deployed during October is as under: Job No. 115 118 120 121 124 Indirect Labour: Waiting for materials Machine break down Idle time Overtime premium

Number of Hours Shop A 25 90 75 65 20 275

Shop B 25 30 10 – 10 75

20 10 5 6 316

10 5 6 5 101

Job Costing and Batch Costing 241

A shop credit slip was issued in October, that materials issued in October under requisition No. 54, was returned back to stores as being not suitable. A material transfer note issued in October indicated that material issued under requisition no. 55 for Job 118 was directed to Job 124. The hourly rate in Shop A per labour is ` 3 per hour while at Shop B, it is ` 2 per hour. The factory overhead is applied at the same rate as in September. Jobs 115, 118 and 120 were completed in October. You are required to compute the factory cost of the completed jobs. It is the practice of the management to put 10% on the factory cost to cover administration and selling overheads and invoice the job to the customer on a total cost plus 20% basis. What would be the invoice price of these three jobs? Solution:

Job Cost Sheet Particulars

Opening balance Materials incurred during October Wages (see WN (1)) Factory overheads – 80% on wages Works cost Administration and selling overheads – 10% on works cost Total cost Profit – 20% on cost Selling price

Job 115 2,765.00 – 125.00 100.00 2,990.00

Job 118 1,710.00 515.00 330.00 264.00 2,819.00

Job 120 1,620.00 665.00 245.00 196.00 2,726.00

299.00

282.00

273.00

3,289.00 657.80 3,946.80

3101 620.20 3,721.20

2,999 599.80 3,598.80

Working Notes: (1) Wages incurred during October: Job 115

– Shop A

– 25 hrs. × ` 3

= 75

Shop B

– 25 hrs. × ` 2

= 50 125

Job 118

– Shop A

– 90 hrs. × ` 3

= 270

Shop B

– 30 hrs. × ` 2

= 60 330

Job 120

– Shop A

– 75 hrs. × ` 3

= 225

Shop B

– 10 hrs. × ` 2

= 20 245

242 Cost Accounting

(2) % of factory overheads on wages: 640 × 100 = 80% 800 400 × 100 = 80% Job 118 = 500 380 × 100 = 80% Job 120 = 475

Job 115 =

Batch Costing: 12. Compute the economic batch quantity for a company using batch costing with the following information: Monthly demand for the component – 2,000 units Set up cost per batch – ` 120 Annual rate of interest – 6% Cost of manufacture per unit – ` 6 (B.Com., Madras University, Sep. 1992) Solution:

Economic batch quantity = =

2AS C 2 × 24,000 × 120 0.36

= 4,000 units. Note: 6 = 0.36 100 13. From the following particulars find out the economic batch size: Annual demand – 12,000 units Set up cost per batch – ` 120 Inventory carrying cost per unit per annum ` 6

Carrying cost (C) = 6 ×

Solution:

Economic batch quantity =

2AS C

2 × 12,000 × 120 6 = 692.82 (or) 693 units. 14. Leo Limited undertakes to supply 1,000 units of component per month for the month of January, February and March. Every month a batch order is opened against which materials and labour cost are booked at actuals. Overheads are levied at a rate per labour hour. The selling price is contracted at ` 15 per unit. From the following data, present the cost and profit per unit of each batch order and the overall position of the order for the 3000 units.

=

Job Costing and Batch Costing 243

Month January

Batch Output (Numbers) Material Cost ( ) Labour Cost ( ) 1,250 6,250 2,500

February

1,500

9,000

3,000

March

1,000

5,000

2,000

Labour is paid at the rate of ` 2 per hour. The other details are Month

Overheads (`) January 12,000 February 9,000 March 15,000

Total Labour Hours 4,000 4,500 5,000 (C.A. (Inter), May 87)

Solution:

Materials Wages Overheads Total cost Sales at ` 15 per unit Profit Profit per unit Cost per unit

January (1,250 units) 6,250 2,500 3,750 12,500 18,750 6,250 5.00 10.00

February (1,500 units) 9,000 3,000 3,000 15,000 22,500 7,500 5.00 10.00

March (1,000 units) 5,000 2,000 3,000 10,000 15,000 5,000 5.00 10.00

Total (3,750 units) 20,250 7,500 9,750 37,500 56,250 18,750 5.00 10.00

Overall position for 3 months for supply of 3,000 units: Sales = 3,000 × 15 = 45,000 Less: Cost = 3,000 × 10 = 30,000 Profit = 15,000 15. A company following batch costing supplies the following information relating to the production of component – X.15: Materials cost per unit ` 9.50; Labour cost of machine operator per hour ` 7.20; Rate of production is 5 units per hour. Machine hour rate is ` 15. The machine setup takes 5 hours. Prepare a comparative batch cost sheet for the production of (i) 100 units, (ii) 500 units and (iii) 1,000 units per batch. Also calculate cost per unit in each batch showing setup cost and production cost separately.

244 Cost Accounting

Solution:

Comparative Batch Cost Sheet (i) 100 units ( ) 950

Materials – ` 9.50 per unit

(ii) 500 units ( ) 4,750

(iii) 1,000 units ( ) 9,500

Wages – ` 7.20 per hour (at ` 1.44 per unit)

144

720

1,440

Machine expenses – ` 15 per hour (at ` 3 per unit) Machine setup cost Total cost Cost per unit

300

1,500

3,000

111 1,505 15.05

111 7,081 14.162

111 14,051 14.051

Note: Machine Setup Cost: Operator wages per setup

= ` 7.20 × 5 hrs. = ` 36

Machine expenses

= ` 15 × 5 hrs.

= ` 75 = ` 11

16. The demand for an item is uniform at the rate of 25 units per month. The fixed cost is Rs. 30 each time production is made. The production cost is ` 3 per unit and the inventory carrying cost is 50 paise per unit per month. If storage cost is ` 3 per item per month, determine how often to make a production run and of what size (EBQ). (ICWA, Inter) Solution:

EBQ =

2AS C

2 × 300 × 30 6 = 54.77 (or) 55 units.

=

Time interval between consecutive production runs = 365 = 66 days 5.45 300 No. of production runs in a year = = 5.45 runs 55

=

No.of days in a year No. of production runs in a year

14

Contract Costing/Terminal Costing

Chapter

Practical Problems A. Short answer type questions: 1. Calculate the profit that can be reasonably taken to profit and loss account from the following details? ` Notional profit – 50,000 Work certified – 4,00,000 Work uncertified – 25,000 Contract price – 6,00,000 Cash received – 3,20,000 Solution: Profit = Notional profit × 2/3 × = 50,000 × 2/3 ×

Cash received Work certified

3, 20,000 = ` 26,667 4,00,000

2. Calculate notional profit and profit transferred to Profit and Loss a/c, from the following details:

Contract price Cash received from contractors being 90% of work certified Uncertified work Contract cost

– – – –

` 10,00,000 7,20,000 50,000 7,00,000

246 Cost Accounting

Solution: Contract a/c To Contract cost To Notional profit (b.f)

7,00,000 By Work-in-progress: 1,50,000 100 ⎞ ⎛ Work certified ⎜ 7, 20,000 × ⎟ 9 ⎠ ⎝ Uncertified work

50,000 8,50,000

8,50,000 Profit = Notional profit 2/3 × = 1,50,000 × 2/3 × 3.

8,00,000

Cash received Work certified

90 = ` 90,000 100

Calculate notional profit from the following particulars:

Contract price – Cost incurred till date – Cash received – 80% of work certified is received in cash. Work uncertified –

` 15,00,000 7,50,000 6,40,000 30,000

Solution: Contract a/c

To Contract cost To Notional profit (b.f)

7,50,000 By Work-in-progress: 80,000 100 ⎞ ⎛ Work certified ⎜ 6, 40,000 × ⎟ 80 ⎠ ⎝ Uncertified work 8,30,000

8,00,000 30,000 8,30,000

4. From the following details calculate estimated profit and profit credited to profit and loss a/c for the year ended 31st March, 2009. Also calculate the amount of profit retained as reserve. Contract Price – ` 15,00,000 Work certified upto 31st March 2009 – ` 14,00,000 Expenses incurred on contract till 31st March 2009 – ` 12,00,000 Further expenses to be incurred after 31st March 2009 for completion of the contract is estimated at ` 75,000 Cash received – ` 12,00,000

Contract Costing/Terminal Costing 247

Solution:

Contract a/c

To Contract cost 12,00,000 To Notional Profit (b.f) 2,00,000

By Work-in-progress: Work certified 14,00,000

14,00,000

14,00,000

Estimated profit: Contract cost till 31.3.2009 Add: Estimated further expenses for completion Total estimated cost Contract price

` – 12,00,000 75,000 12,75,000 15,00,000

Estimated profit Profit

2,25,000 = Estimated profit × = 2,25,000 ×

Reserve

Cash received Work certified

12,00,000 = ` 1,92,857 14,00,000

= Notional profit – profit

= 2,00,000 – 1,92,857 = ` 7,143 5. From the following information calculate the value of uncertified work: Contract price – ` 20,00,000 Value of work certified on 28.2.2009 – ` 12,00,000 Expenses incurred since work certified to 31.3.2009 are: Materials – ` 60,000, Labour – ` 50,000. Overheads usually charged at 10% of materials and labour. Solution:

Expenses incurred since work certified: Materials – Labour – _ Add: Overheads 10% of materials and labour

` 60,000 50,000 1,10,000 11,000

Value work uncertified

1,21,000

248 Cost Accounting

6. A contractor supplies you the following information relating to a contract for the year ended 31st March 2010: Contract price – ` 20,00,000 Cost incurred for completion of 2/3rd of the contract – ` 11,50,000 Architects certificate has been issued for 50% of contract and cash paid by contractor amounted to ` 8,00,000. Compute the value of work uncertified. Solution: Work completed Less: Work certified Work uncertified

2 3 1 2 1 6

Total cost incurred for 2/3 of contract = ` 11,50,000 Value of work uncertified (on cost basis) = 11,50,000 ×

1 = ` 1,91,667. 6

B. Long Answer Type Questions: 1. When a contract is large enough to extend over a number of years, what proportion of profit should be taken to the profit and loss account at the end of each year under each of the following cases? (i) when the work has just started and the cost of work done is only about 10% of the contract price. (ii) when the work was reasonably advanced and about 60% of work has been completed. (iii) when the work is nearing completion and 95% has been completed. (ICWA (Inter), June 2008) (Ans: (i) Profit Nil; (ii) two-thirds of notional profit as reduced to percentage of cash received; (iii) A part of estimated profit in proportion to cash received bears to total contract price) 2. From the following information calculate the amount of profit to be transferred to Profit and Loss account: ` (a) Notional profit 1,20,000 Work certified 5,00,000 Contract Price 9,00,000 Cash received 4,50,000 Solution:

Profit = Notional profit × 2/3 ×

Cash received Work certified

Contract Costing/Terminal Costing 249

= 1,20,000 × 2/3 × (b) Notional profit Estimated profit Work certified Contract price Cash received Solution:

4,50,000 = ` 72,000 5,00,000 ` 50,000 60,000 9,00,000 10,00,000 8,10,000

Cash received Contract price 8,10,000 = 60,000 × = ` 48,600 10,00,000

Profit = Estimated profit ×

Note: Since work certified is 90% and contract is nearing completion, profit on estimated basis has been taken. ` (c) Notional profit 45,000 Cash received 2,00,000 Work certified 2,25,000 Contract price 8,00,000 Solution:

Cash received Work certified 2,00,000 = 45,000 × 1/3 × = 13,333.33 2, 25,000

Profit = Notional profit × 1/3 ×

(d) Notional profit Work certified Cash received Contract price

` 25,000 2,00,000 1,80,000 10,00,000

Ans: No profit is transferred to profit and loss a/c, because the work certified is less than 25% of contract price. ` (e) Contract price 20,00,000 Work certified 19,00,000 Cash received 16,00,000 Estimated profit 4,00,000 Notional profit 3,00,000

250 Cost Accounting

Cash received Contract price 16,00,000 = 4,00,000 × = ` 3,20,000 20,00,000 Note: Work certified is 95% of contract price and contract is almost complete. Hence, profit on estimated basis is taken for calculation of contract profit. 3. Construction Ltd. undertook a contract for the construction of a house on April 2008. The construction was completed on 31st March 2009. The following information was available from their cost records.

Solution:

Profit = Estimated profit ×

Materials sent to site 5,00,000 Labour charges paid 4,20,000 Direct expenses paid 50,000 Establishment expenses 60,000 Plant installed on 1.4.08 1,50,000 Materials returned to stores 12,000 Plant returned to stores on 31.12.08 50,000 Materials at site on 31.3.09 Wages accrued on 31.3.09 Direct expenses accrued on 31.3.09

15,000 25,000 7,500

The contract price was agreed at ` 14,00,000. Charge depreciation on plant at 20% per annum. Prepare contract account. Solution: Contract account for the year ending 31.3.2009.

To Materials To Labour charges paid 4,20,000 Add: Accrued 25,000 To Direct expenses paid 50,000 Add: Accured 7,500 To Establishment expense To Plant installed To Profit

5,00,000 By Contractee a/c 4,45,000 By Materials returned

14,00,000 12,000

57,500 By Materials at site 15,000 60,000 By Plant returned to stores 50,000 at cost 1,50,000 Less: Depreciation 7,500 42,500 (9 months) 3,37,000 By Plant at site at cost 1,00,000 Less: Depreciation 20,000 80,000 15,49,500 15,49,500

Contract Costing/Terminal Costing 251

4. A construction company undertook a contract at an estimated cost of ` 108 lakh, which includes a budgeted profit of ` 18 lakh. The relevant data for the year ended 31.3.2005 are as under:

Materials issued on site Direct wages paid Plant issued Site office expenses Materials returned from site Direct expenses Work certified Progress payments received

( in ’000) 5,000 3,800 700 270 100 500 10000 7200

A special plant was purchased specifically for this contract at ` 8,00,000 and after use on this contract till the end of 31.3.2005, it was valued at ` 5,00,000. The cost of materials at site at the end of the year was estimated at ` 18,00,000. Direct wages accrued as on 31.3.2005 was ` 1,10,000. Prepare the contract account for the year ended 31st March 2005 and compute the profit to be taken to the Profit and Loss account. (B.Com. (Hons.), Delhi University, 2005) Solution:

Contract account ( in ’000) To Materials issued To Direct wages Add: Accrued To Plant issued To Site office expenses To Direct expenses To Special plant To Notional profit To Profit To Reserve c/d

5,000 By work-in-progress: 3800 Work certified 110 3,910 By Materials returned 700 By Plant at site 270 By Material at site 500 800 1,220 12,400 813.33 By Notional profit 406.67 1,220.00

10,000 100 500 1,800

12,400 1,220 1,220

252 Cost Accounting

Note:

Profit = Notional profit × = 1,220 ×

Work certified Cash received × Contact price Work certified

10,000 7, 200 × = ` 813.33 10,800 10,000

5. A contractor obtained a contract for ` 600000 on 1st January 2008. The expenses incurred during the year ending December 31, 2008 were as under: Materials 1,80,000 Wages paid 1,60,000 Wages accrued 10,000 Other expenses 25,000 The plant specially installed for the contract worth ` 45,000 was returned to the stores subject to a depreciation of 20%. Materials on 31st December 2008 were valued at ` 24,000. Upto 31st December 2008, the contractor had received ` 3,60,000 in cash representing 80% of the work certified. Work uncertified was estimated at ` 4000. Prepare contract account, showing the profit for the year. Also show how the value of workin-progress would appear in the balance sheet as on 31st December 2008. (B.Com., Madras University) Solution:

Contract account ( in ’000)

To Materials To Wages paid

Add: Accrued To Other expenses To Plant at cost To Notional profit 100 ⎞ ⎛ To Profit ⎜ 94,000 × 2 / 3 × ⎟ 80 ⎠ ⎝

To Reserve c/d

1,60,000

10,000

1,80,000 By Work-in-progress: Work Certified 100 ⎞ ⎛ ⎜ 3,60,000 × ⎟ 80 ⎠ ⎝ 1,70,000 Work uncertified 25,000 By Plant returned to stores at cost 45,000 Less: Depreciation 94,000 By Materials at site 5,14,000 78.333.33 By Notional profit

43,867 94,000

4,50,000

4,000 45,000 9,000

36,000 24,000 5,14,000 94,000

94,000

Contract Costing/Terminal Costing 253

Balance sheet as on 31.12.2008 Liabilities

Assets

Profit and loss a/c

50,133 Work-in-progress (–) cash received (–) Reserve Materials at site

4,54,000 3,60,000 94,000 43,867 50,133 24,000

6. Following particulars relate to Contract No. 703

Contract price Materials Wages Machinery General expenses

6,00,000 1,20,000 1,64,000 20,000 8,600

Cash received ` 2,40,000, which is equal to 80% of work certified. Materials not used amounted to ` 10,000. Write off depreciation on machinery at 10%. Prepare contract account. Solution: Contract No. 703 account

To Materials To Wages paid

1,20,000 By Work-in-progress: 1,64,000 100 ⎞ ⎛ Work certified ⎜ 2, 40,000 × ⎟ 80 ⎠ ⎝

To Machinery To General expenses To Notional profit

20,000 By Materials at site 8,600 By Machinery at site at cost 15,400 (–) Depreciation 3,28,000 8,213 By Notional profit 7,187 15,400

To Profit To Reserve (b.f)

3,00,000

10,000 20,000 2,000

18,000 3,28,000 15,400 15,400

254 Cost Accounting

Note:

Profit = Notional profit ×

2 Cash received × 3 Work certified

2 80 × = ` 8,213 3 100 7. A undertook several large contracts and his ledger contained, therefore, a separate account for each contract. On 31.12.2008, the account of contract no. 22 showed the following amounts as expended there on:

= 15, 400 ×

Materials directly purchased Materials issued from stores Wages Direct expenses Plant purchased Sub-contract cost Establishment charges apportioned

1,80,000 50,000 2,44,000 24,000 1,60,000 14,000 40,000

The contract was for ` 15,00,000 and upto 31.12.2008 ` 6,00,000 have been received in cash which represented 80% of work certified. The materials at site unconsumed were valued at ` 15,000. The contract plant was to be depreciated by ` 16,000. Prepare contract account showing what profits thereon have been earned to date. (B.Com., Madras University) Solution:

Contract account No. 22

To Materials purchased 1,80,000 By Work-in-progress: To Materials issued from stores 50,000 100 ⎞ ⎛ Work certified ⎜ 6,00,000 × ⎟ 80 ⎠ ⎝ To To To To To To

Wages Direct expenses Plant purchased Sub-contract cost Establishment charges Notional profit

2,44,000 By Materials at site 24,000 By Plant at site (cost) 1,60,000 (–) Depreciation 14,000 40,000 1,97,000 9,09,000

7,50,000

15,000 1,60,000 16,000

1,44,000

9,09,000 Contd...

Contract Costing/Terminal Costing 255 Contd...

To Profit To Reserve

1,05,067 By Notional profit 91,933 1,97,000

1,97,000 1,97,000

2 Cash received × 3 Work certified 2 80 = 1,97,000 × × = ` 1,05,067 3 100 8. The following balances were extracted from the book of a building contractor at 31st March 2009:

Note:

Profit = Notional profit ×

Materials issued to site Wages paid Wages outstanding on 31.3.2009 Plant issued to site Direct charges Establishment charges Stock of materials at site on 31.3.09 Value of work certified at 31.3.09 Cost of work not yet certified Cash received from contractee

67,720 73,455 720 6,000 2,725 5,650 1,200 1,65,000 8,500 1,41,075

The work was commenced on 1st April, 2008 and the contract price agreed at ` 2,45,000. Prepare contract account for the year, providing for depreciation of plant at 25%. Set out the contractors balance sheet so far as it relates to the contract. Solution:

Contract account

To Materials issued To Wages paid 73,455 Add: Outstanding 720 To Plant issued To Direct charges To Establishment charges To Notional profit

67,720 By Work-in-progress: Work certified 1,65,000 74,175 Work not certified 8,500 6,000 By Materials at site 1,200 2,725 By Plant at site (cost) 6,000 5,650 Less: Depreciation 1,500 4,500 22,930 1,79,200 1,79,200 Contd...

256 Cost Accounting Contd...

To Profit To Reserve c/d

Note:

13,070 By Notional profit 9,860 22,930

22,930 22,930

2 Cash received × 3 Work certified 2 1, 41,075 = 22,930 × × = ` 13,070 3 1,65,000

Profit = Notional profit ×

Balance sheet Liabilities Profit and Loss a/c Wages outstanding

Assets 13,070 Work-in-progress 720 (–) cash received (–) Reserve Plant at site Materials at site

1,73,500 1,41,075 32,425 9,860 22,565 4,500 1,200

9. The following expenditures were incurred on the contract No. 77 to 31st March 2009:

Direct materials Direct wages Indirect materials Materials returned Plant issued Office and administration overheads apportioned

25,000 30,000 9,500 900 20,000 15,000

The following further information were obtained: (a) The contract price is ` 1,50,000 and the work commenced on 1st April 2008. (b) Depreciation on plant charged at 20% (c) The architect issued a completion certificate for four-fifths of the contract price on 20th March 2009. (d) The contract expenses given above included expenses incurred after 20th March 2009 are given below: Wages – 1,200 Materials – 2,000

Contract Costing/Terminal Costing 257

Establishment charges at 50% of wages. (e) Ignore depreciation on plant for valuation of work uncertified. (f) Materials at site on 31st March 2009 amounted to ` 6,500. (g) A fine of ` 2,000 is likely to be imposed for delay on completion. (h) Cash received is 90% of work certified. Required: (i) Prepare contract account (ii) Show profit taken to the credit of Profit and Loss account. (iii) Value of uncertified work. Solution:

Contract account No. 77

To Direct materials To Direct wages

25,000 By Work-in-progress: 30,000 4⎞ ⎛ Work certified ⎜1,50,000 × ⎟ 5 ⎝ ⎠

To Indirect materials To Plant issued To Office and administration overheads To Notional profit

9,500 Uncertified (WN1) 20,000 By Materials at site 15,000 By Plant at site (cost)

To Profit To Reserve (b.f )

47,700

(–) Depreciation By Materials returned

1,47,200 28,620 By Notional profit 19,080 47,700

Note: 1. Fine is not actual amount for the year, hence not considered. Working Note: (1) Value of uncertified work: Expenses incurred after 20th March: Wages – 1,200 Materials – 2,000 Establishment – 600 3,800 2 Cash received 2. Profit = Notional profit × × 3 Work certified 2 90 = 47,700 × × 3 100 = 28,620

1,20,000

3,800 6,500 20,000 4,000

16,000 900 1,47,200 47,700 47,700

258 Cost Accounting

10. The following is the summarized information relating to Contract No.100:

Contract price Wages General expenses Materials Cash received (80% of work certified) Materials at site Plant Materials transferred to other contract

6,00,000 1,64,000 8,600 1,20,000 2,40,000 6,000 20,000 4,000

Included in the above information are wages ` 3,500, materials ` 4,000 and other expenses ` 2,500 which were incurred since certification. Depreciate plant at 10%. Prepare contract account. (B.Com. (Hons.), Delhi University, 2004) Contract account No. 100

To Wages To Materials To General expenses To Plant To Notional profit

To profit To Reserve (b.f)

1,64,000 By Work-in-progress: 1,20,000 100 ⎞ ⎛ Work certified ⎜ 2, 40,000 × ⎟ 80 ⎠ ⎝ 8,600 Work uncertified (WN.1) 20,000 By Materials at site By Plant at site (cost) 25,400 (–) Depreciation Materials transferred to other contracts 3,38,000 13,547 By Notional profit 11,853 25,400

Working Note: 1. Value of work uncertified (expenses incurred since certification): Wages – 3,500 Materials – 4,000 Establishment – 2,500 10,000

3,00,000 10,000 6,000 20,000 2,000

18,000 4,000 3,38,000 25,400 25,400

Contract Costing/Terminal Costing 259

2. Profit = Notional profit × = 25,400 ×

2 Cash received × 3 Work certified

2 80 × = ` 13,547 3 100

11. Surya Construction Ltd. with a paid up share capital of ` 50 lakh undertook a contract to construct MIG apartments. The work commenced on the contract on 1st April 2002. The contract price was ` 60 lakh. Cash received on the contract upto 31st March, 2003 was ` 18 lakh (being 90% of workcertified). Work completed but not certified was estimated at ` 1,00,000. As on 31st March 2009 materials at site was estimated at ` 30000, machinery costing ` 2,00,000 was returned to stores and wages outstanding was ` 5,000. Plant and machinery is to be depreciated at 5%. The following were the ledger balances (Dr.) as per trial balance as on 31st March 2003:

Land and building Plant and machinery at site (60% at site) Furniture Materials Materials received from other contract Fuel and power Site expenses Office expenses Rates and taxes Cash at bank Wages

23,00,000 25,00,000 60,000 12,00,000 2,00,000 1,25,000 5,000 12,000 15,000 1,33,000 2,50,000

Prepare Contract Account and Balance Sheet. (B.Com. (Hons.) Delhi University, 2001) Solution:

Contract Account

To Materials To Materials received from other contract To Fuel and power To Site expenses

12,00,000 By Work-in-progress: 2,00,000 Work certified

20,00,000

100 ⎞ ⎛ ⎜18,00,000 × ⎟ 90 ⎠ ⎝

1,25,000 5,000

Work not certified

1,00,000 Contd...

260 Cost Accounting Contd...

To Office expenses To Rates and taxes To Wages paid and outstanding To Plant and machinery To Notional profit To Profit To Reserve

Note:

12,000 By Machinery returned (cost) 2,00,000 15,000 (–) Depreciation 10,000 1,90,000 2,55,000 By Plant & machinery at site 13,00,000 (cost) 15,00,000 (–) Depreciation 65,000 12,35,000 2,43,000 By Materials at site 30,000 35,55,000 35,55,000 72,900 By Notional profit 2,43,000 1,70,100 2,43,000 2,43,000

Profit = Notional profit × = 2,43,000 ×

1 Cash received × 3 Work certified

1 90 × = ` 72,900 3 100 Balance Sheet

Liabilities Share capital Profit and loss a/c Wages outstanding

Assets 50,00,000 Land & building 22,900 Plant & machinery 5,000 Furniture Cash at bank Work-in-progress (–) Cash received (–) Reserve Materials at site 50,27,900

Note:

Profit and loss a/c balance contract profit Less: Depreciation on plant and machinery not 5 ⎞ ⎛ charged to contract ⎜10,00,000 × ⎟ 100 ⎝ ⎠ Profit and loss a/c

23,00,000 23,75,000 60,000 1,33,000 21,00,000 18,00,000 3,00,000 1,70,100

1,29,900 30,000 50,27,900 ` 72,900

` 50,000 ` 22,900

Contract Costing/Terminal Costing 261

12. From the following information prepare the contract account for the year ended 30.9.2002:

Contract price Work certified Cash received 90% of work certified Materials at site on 30.9.2002 Wages paid Materials sent to site Site expenses Power and fuel Office expenses Rates and taxes

50,00,000 20,00,000 30,000 2,55,000 14,00,000 5,000 1,25,000 12,000 15,000 (ICWA (Inter), adopted)

Solution:

Contract Account

To To To To To To To

Materials sent to site 14,00,000 By Work-in-progress: Wages paid 2,55,000 Work certified 20,00,000 Site expenses 5,000 By Materials at site 30,000 Power and fuel 1,25,000 Office expenses 12,000 Rent and taxes 15,000 Notional profit 2,18,000 20,30,000 20,30,000 To Profit 65,400 By Notional profit 2,18,000 To Reserve 1,52,600 2,18,000 2,18,000 Note:

Profit = Notional profit × = 2,18,000 ×

1 Cash received × 3 Work certified

1 90 × = ` 65,400 3 100

13. A firm of building contractors undertook a contract on 1.4.2008. The contract price is ` 10,00,000. The following information was taken from their records:

262 Cost Accounting

Materials issued to site Materials purchased direct Wages paid Direct expenses paid Plant installed at cost Wages accrued on 31.3.2009 Direct expenses accrued on 31.3.2009 Cash received 90% of work certified Work uncertified

2,25,000 60,000 1,70,000 25,000 2,50,000 15,000 7,000 5,40,000 10,000

Of the plant and materials charged to the contract, materials worth ` 7,500 and plant costing ` 10,000 were destroyed in a fire accident. Some materials costing ` 6,000 were sold at a profit of ` 1,000. Plant returned to stores on 30.9.2008 was ` 40,000. Depreciate plant at 20% per annum. Materials at site on 31.3.2009 ` 20,000. You are required to prepare contract account and contractee account. Solution:

Contract Account

To Materials issued To Materials purchased

2,25,000 By Work-in-progress: 60,000 Work certified

6,00,000

100 ⎞ ⎛ ⎜ 5, 40,000 × ⎟ 90 ⎠ ⎝

To wages paid Add: Accrued

Direct expenses paid Add: Accrued Plant installed

1,70,000 15,000

Work uncertified 1,85,000 Abnormal loss: Materials Plant

10,000 7,500 10,000

25,000 7,000

32,000 By Materials sold 2,50,000 By Plant returned to stores (cost) (–) 6 months Depreciation

6,000 40,000 4,000

36,000 Contd...

Contract Costing/Terminal Costing 263 Contd...

To Notional profit To Profit To Reserve

Note:

By Plant at site (cost) (–) Depreciation 97,500 By Materials at site 8,49,500 58,500 By Notional profit 39,000 97,500 Profit = Notional profit × = 97,500 ×

2,00,000 40,000 1,60,000 20,000 8,49,500 97,500 97,500

2 Cash received × 3 Work certified

2 90 × = ` 58,500 3 100

Contractee account

To balance c/d

5,40,000 By Bank 5,40,000 5,40,000 5,40,000 By Balance b/d 5,40,000

14. The following is the trial balance of Premier Construction Company engaged on the execution of Contract No. 1047 for the year ended 31st December 2005:

Contractee’s account (amount received) Buildings Creditors Bank balance Capital account Materials Wages Expenses Plant

– 3,00,000 1,60,000 – – 72,000 35,000 – – 5,00,000 2,00,000 – 1,80,000 – 47,000 – 2,50,000 – 8,72,000 8,72,000

The work on the contract No. 1047 was commenced on 1st January 2005. Materials costing ` 1,70,000 were sent to the site of the contract but those of ` 6000 were destroyed in an accident. Wages of ` 1,80,000 were paid during the year. Plant costing ` 50,000 was used on

264 Cost Accounting

the contract all through the year. Plant with a cost of ` 2,00,000 was used from 1st January to 30th September and was then returned to stores. Materials of the cost of ` 4000 were at site on 31st December 2005. The contract was for ` 6,00,000 and the contractee pays 75% of the work certified. Work certified was 80% of the total contract at the end of 2005. Uncertified work was estimated at ` 15,000 on 31st December 2005. Expenses are charged to the contract at 25% of wages. Plant is to be depreciated at 10% p.a. Prepare contract account No. 1047 account for the year 2005 and make out the balance sheet as on 31st December 2005. Solution:

Contract Account

To Materials sent to site 1,70,000 By Work-in-progress: To Wages paid 1,80,000 Work certified To Plant 2,50,000 Work uncertified To Expenses (25% of wages) 45,000 By Materials destroyed in accident By Notional profit 90,000 By Plant returned (cost) (–) Depreciation (9 months) By Plant at site (cost) (–) Depreciation By Materials at site 7,35,000 To Profit 45,000 By Notional profit To Reserve 45,000 90,000 Note:

4,80,000 15,000 6,000 2,00,000 15,000 1,85,000 50,000 5,000 45,000 4,000 7,35,000 90,000 90,000

2 Cash received × 3 Work certified 2 3,00,000 = 90,000 × × = ` 45,000 3 4,00,000

Profit = Notional profit ×

Profit and loss account

To To To To

Expenses not charged to contract Depreciation on plant returned to stores (3 months) Materials destroyed in accident Profit – carried to balance sheet

2,000 5,000 6,000 32,000 45,000

By Contract profit

45,000

45,000

Contract Costing/Terminal Costing 265

Balance sheet as on 31.12.2005 Liabilities Capital Profit and loss a/c Creditors

Assets 5,00,000 Work-in-progress 32,000 (–) Cash received 72,000 (–) Reserve Buildings Bank balance Materials in stores Materials at site Plant in stores (1,85,000 – 5,000) Plant at site 6,04,000

4,95,000 3,00,000 1,95,000 45,000 1,50,000 1,60,000 35,000 30,000 4,000 1,80,000 45,000 6,04,000

15. Sanjay Builders obtained a contract on 1.4.2008, who close their accounts on 31st March every year. The following is information relating to the contract on 31st March 2009. ` Materials issued from stores – 1,50,000 Labour – 90,000 Supervision – 24,000 Establishment charges – 66,000 A machine costing ` 40,000 has been used in the contract for 146 days. Its working life is estimated at 7 years and its final scrap value is ` 5,000. Materials on hand on 31st March 2009 amounted to ` 5,000. The contract price is ` 6,50,000. By 31st March 2009 two-thirds of the contract was completed but architect issued certificate covering 50% of the contract. Cash received on the contract amounted to ` 3,00,000. Prepare contract account and show the profit to be taken to profit and loss account. Solution: Contract Account

To Materials issued 1,50,000 By Materials on hand To Labour 90,000 By Contract cost c/d To Supervision 24,000 To Establishment charges 66,000 To Machine depreciation 2,000

5,000 3,27,000

Contd...

266 Cost Accounting Contd...

To Contract cost b/d To Notional profit

3,32,000 3,27,000 By Work-in-progress: 79,750 50 ⎞ ⎛ Work certified ⎜ 6,50,000 × ⎟ 100 ⎠ ⎝ Work uncertified (W.N.1) 4,06,750 49,077 By Notional profit 30,673 79,750

To Profit To Reserve

Working Note: 1. Value of uncertified work: Work completed

–

2/3

Work certified (50%)

–

1/2

Work completed but not certified

–

1/6

Cost of contract for 2/3 completion

= 81,750

= 79,750 ×

3,25,000 81,750 4,06,750 79,750 79,750

= ` 3,27,000

\ Cost of 1/6 work completed but not certified = 3,27,000 ×

2. Profit = Notional profit ×

3,32,000

3 1 × 2 6

2 Cash received × 3 Work certified

2 3,00,000 × = ` 49,077 3 3, 25,000

16. Balaji Builders undertook a contract for ` 7,40,000. The work was commenced on 1st July 2007. The company closes its accounts on 31st March every year. The cost details were extracted from their books on 31st March, 2008:

Materials issued to contract 2,00,000 Materials purchased direct 50,000 Wages paid 1,75,000 Direct expenses paid 75,000 Plant purchased on 1.7.2007 1,60,000 Materials returned to stores 15,000 Plant returned to stores on 31.12.2007 60,000 Contd...

Contract Costing/Terminal Costing 267 Contd...

Wages outstanding on 31.3.2008 13,000 Direct expenses accrued on 31.3.2008 5,000 Materials at site on 31.3.08 20,000 Cash received 4,00,000 Charge depreciation at 20% p.a. on plant. Three-fourths of contract work has been completed but the architect issued certificate covering 60% of contract price. Prepare contract account showing the profit taken to profit and loss account. Also show contractee account. Solution:

Contract Account

To Materials issued To Materials purchased To Wages paid To Wages outstanding To Direct expenses paid Add: Outstanding To Plant purchased

1,75,000 13,000 75,000 5,000

To Contract cost b/d To Notional profit

To Profit To Reserve

2,00,000 By 50,000 By 1,88,000 (–) By 80,000 By 1,60,000 (–) By 6,78,000 5,04,000 By 40,800

Materials returned Plant returned at cost Depreciation Materials at site Plant at site (cost) Depreciation Contract cost c/d Work-in-progress: Work certified Work uncertified

5,44,800 24,505 By Notional profit 16,295 40,800

Working Note: (1) Value of work uncertified: Work completed Less: Work certified Work completed but not certified

– –

75% 60%

–

15%

Contract cost for 75% work completed Cost of work completed but not certified

= ` 5,04,000 5,04,000 × 15 75 = ` 1,00,800

=

15,000 60,000 6,000 1,00,000 15,000

54,000 20,000 85,000 5,04,000 6,78,000 4,44,000 1,00,800 5,44,800 40,800 40,800

268 Cost Accounting

2 Cash received × 3 Work certified 2 4,00,000 = 40,800 × × = ` 24,505 3 4, 44,000

(2) Profit = Notional profit ×

Note: 1. Depreciation on plant returned = 60,000 × 20/100 × 6/12 = ` 6,000. 2. Depreciation on plant at site = 1,00,000 × 20/100 × 9/12 = ` 15,000 3. Value of work uncertified: Cost incurred for 3/4th contract = 5,04,000 Cost of whole contract = 504000 × 4/3 = 6,72,000 Cost of 60% contract certified 672000 × 60/100 = 4,03,200 Cost of uncertified work = Cost incurred – Cost of 60% work certified = 5,04,000 – 4,03,200 = 1,00,800. 17. The following information relates to a building contract for ` 1000000.

Materials

2004 3,00,000

2005 84,000

Wages

2,30,000

1,05,000

22,000

10,000

6,000

1,000

7,50,000

10,00,000

Work uncertified

8,000

–

Materials at site

5,000

7,000

14,000

2,000

6,00,000

10,00,000

Direct expenses Indirect expenses Work certified

Plant issued Cash received

Value of plant at the end of 2004 and 2005 were ` 7,000 and ` 5,000 respectively. Prepare (a) Contract account and (b) Contractee’s account for two years taking into consideration such profit for transfer to the profit and loss account as you think proper. (B.Com., Madras University, Oct, 1986) Solution: Contract Account for the year 2004

To Materials To Wages To Direct expenses

3,00,000 By Work-in-progress: 2,30,000 Work certified 7,50,000 22,000 Work uncertified 8,000 Contd...

Contract Costing/Terminal Costing 269 Contd...

To Indirect expenses 6,000 By Materials at site To Plant issued 14,000 By Plant at site To Notional Profit 1,98,000 7,70,000 To Profit 1,05,600 By Notional profit To Reserve 92,400 1,98,000 Profit = Notional profit × = 1,98,000 ×

5,000 7,000 7,70,000 1,98,000 1,98,000

2 Cash received × 3 Work certified

2 6,00,000 × = ` 1,05,600 3 7,50,000

Contract Account for the year 2005

By Balance b/d: Work-in-progress Materials at site Plant at site To Materials To Wages To Direct expenses To Indirect expenses To Plant issued To Profit

7,58,000 5,000 7,000 84,000 1,05,000 10,000 1,000 2,000 1,32,400 11,04,400

By Balance b/d: Reserve 92,400 By Contractee a/c 10,00,000 By Materials at site 7,000 By Plant at site 5,000

11,04,400

Contractee account

2004 To Balance c/d To Contract a/c

6,00,000 2004 6,00,000 6,00,000 By Bank 6,00,000 10,00,000 2005 By Balance b/d 6,00,000 By Bank 4,00,000 10,00,000 10,00,000

270 Cost Accounting

18. The following information relates to a contract for ` 75,00,000. (The Contractee pays 90% of the value of work done as certified by the architect.)

Materials

1999 9,00,000

2000 11,00,000

2001 6,30,000

Wages

8,50,000

11,50,000

8,50,000

Direct expenses

35,000

1,25,000

45,000

Indirect expenses

15,000

20,000

–

17,50,000

56,50,000

75,00,000

–

10,000

–

1,00,000

–

–

Work certified Work in progress uncertified Plant issued

The value of plant at the end of 1999, 2000 and 2001 was respectively ` 80,000; ` 50,000 and ` 20,000. Prepare the contract accounts for all three years and show the relevant figures in the balance sheet. (B.Com., Madras University, Oct. 1992) Solution: Contract Account for the year 1999

To Materials To Wages To Direct expenses To Indirect expenses To Plant issued

9,00,000 By Work-in-progress: 8,50,000 Work Certified 35,000 By Plant at site 15,000 By Loss 1,00,000 19,00,000

17,50,000 80,000 70,000 19,00,000

Contract Account for the year 2000

By Balance b/d: Work-in-progress Plant at site To Materials To Wages To Direct expenses To Indirect expenses To Notional profit

By Work-in-progress: 17,50,000 Work certified 80,000 Work uncertified 11,00,000 By Plant at site 11,50,000 1,25,000 20,000 4,85,000 57,10,000

56,50,000 10,000 50,000

57,10,000 Contd...

Contract Costing/Terminal Costing 271 Contd...

2 90 ⎞ ⎛ To Profit ⎜14,85,000 × × ⎟ 3 100 ⎠ ⎝ To Reserve (b.f.)

8,91,000 By Notional profit 5,94,000 14,85,000

14,85,000

14,85,000

Contract account for 2001

To Balance c/d Work-in-progress Plant at site To Materials To Wages To Direct expenses To Profit

By Balance b/d 56,60,000 Reserve 50,000 By Contractee a/c 6,30,000 By Plant at site 8,50,000 45,000 8,79,000 81,14,000

5,94,000 75,00,000 20,000

81,14,000

Balance sheet as on 31.12.1999 Liabilities

Assets Work-in-progress (–) Cash received Plant at site

17,50,000 15,75,000 1,75,000 80,000

Balance sheet as on 31.12.2000 Liabilities Reserve

Assets By Work-in-progress 56,50,000 5,94,000 (–) Cash received 50,85,000 5,65,000 Plant at site 50,000

19. P. Ltd undertook a contract for the construction of a building at a contract price of ` 15,00,000. During the first year, the following amounts were spent against which a sum of ` 5,62,500 (representing 90% of the work certified) was received by the contractor:

272 Cost Accounting

Materials used Wages paid to the workers Overhead expenses

2,62,500 1,50,000 37,500

During the second year the contractor spent the following amounts:

Materials used Wages paid to the workers Overhead expenses

3,75,000 3,00,000 75,000

In the second year the contract was completed and a sum of ` 8,75,000 was received by the contractor. You are required to prepare the contract account and determine the profits. (M.Com., Periyar University, April 2008) Solution: Contract Account 1st year

To Materials used To Wages paid

2,62,500 By Work-in-progress: 1,50,000 100 ⎞ ⎛ Work certified ⎜ 5,62,500 × ⎟ 90 ⎠ ⎝ To Overhead expenses 37,500 To Notional profit 1,75,000 6,25,000 To Profit 52,500 By Notional profit To Reserve 1,22,500 1,75,000

Note:

Profit = Notional profit × = 52,500 ×

6,25,000

6,25,000 1,75,000 1,75,000

1 Cash received × 3 Work certified

2 5,62,500 × = ` 31500 3 6, 25,000

Contract Account 2nd year

To Balance b/d Work-in-progress

By Balance b/d 6,25,000 Reserve

1,22,500 Contd...

Contract Costing/Terminal Costing 273 Contd...

To Materials used To Wages To Overhead expenses To Profit

3,75,000 By Contractee a/c 15,00,000 3,00,000 75,000 2,47,500 16,22,500 16,22,500

Note: Since cash received on contract in the two years total ` 14,37,500. Profit on realization basis may be taken at ` 2,37,187.50. 14,37,500 = ` 2,37,187.50 Realised profit = 2,47,500 × 15,00,000 20. Constructors Ltd. is engaged in two contracts A and B during the year. The following particulars are obtained at the year end 31st December: Date of commencement Contract price Materials issued Materials returned Materials on site (Dec. 31) Direct labour Direct expenses Office expenses Plant installed Value of plant (Dec. 31) Cost of contract not certified Work certified Cash received Architect fees

Contract A April 1 6,00,000 1,60,000 4,000 22,000 1,50,000 66,000 25,000 80,000 65,000 23,000 4,20,000 3,78,000 2,000

Contract B September 1 5,00,000 60,000 2,000 8,000 42,000 35,000 7,000 70,000 64,000 10,000 1,35,000 1,25,000 1,000

During this period materials costing ` 9,000 have been transferred from contract A to contract B. You are required to prepare contract accounts and contractee’s accounts. (B.Com., Madras University, September 1988) Contract account

To Materials issued To Direct labour To Direct expenses

A 1,60,000 1,50,000 66,000

B 60,000 By Work-in-progress: 42,000 Work certified 35,000 Work not certified

4,20,000 1,35,000 23,000 10,000 Contd...

274 Cost Accounting Contd...

To Office expenses To Plant installed To Architect fees To Materials transfered from contract A To Notional profit To Profit

25,000 80,000 2,000 –

7,000 70,000 1,000 9,000

By Materials returned 4,000 2,000 By Materials on site 22,000 8,000 By Plant at site 65,000 64,000 By Materials transfered 9,000 – to contract B 60,000 – By Loss – 5,000 5,43,000 2,24,000 5,43,000 2,24,000 36,000 – By Notional profit 60,000 –

24,000 60,000

–

2 3,78,000 ⎞ ⎛ ⎜ 60,000 × 3 × 4, 20,000 ⎟ ⎝ ⎠

To Reserve

60,000

–

Contractee’s account A B A To Balance c/d 3,78,000 1,25,000 By Bank 3,78,000 3,78,000 1,25,000 3,78,000

B 1,25,000 1,25,000

21. Compute a conservative estimate of profit on a contract (which is 80% complete) from the following particulars. Illustrate at least four methods of computing the profit: ` (i) Total expenditure to date 1,02,000 (ii) Estimated further expenditure to complete the contract (including contingencies) 20,400 (iii) Contract price 1,83,600 (iv) Work certified 1,20,000 (v) Work uncertified 10,200 (vi) Cash received 97,920 (B.Com. (Hons.), Delhi University, 1997) Solution:

Contract account

To Contract cost till date To Notional profit

1,02,000 By Work-in-progress: 28,200 Work certified 1,20,000 Work uncertified 10,200 1,30,200 1,30,200

Contract Costing/Terminal Costing 275

Estimated profit: Total expenditure till date Add: Estimated further expenditure To complete the contract

– ` 1,02,000 – ` 20,400

Total estimated cost Contract price

– ` 1,22,400 – ` 1,83,600

Total estimated profit

– ` 61,200

Calculation of profit: 2 3

Method I:

Profit = Notional profit ×

Method II:

2 = ` 18,800 3 2 Cash received Profit = Notional profit × × 3 Work certified 2 97,920 = 28,200 × × = ` 15,341 3 1, 20,000

Method III:

Profit = Estimated profit ×

= 28,200 ×

Work certified Contract price

1, 20,000 = ` 40,000 1,83,600 Cash received Work certified Profit = Estimated profit × × Work certified Contract price

= 61,200 ×

Method IV:

1, 20,000 97,920 × = ` 32,640 1,83,600 1, 20,000 22. An expenditure of ` 2,34,000 has been incurred on a contract to the end of 31st March 2003. The value of work certified is ` 2,60,000. The cost of work done but not yet certified is ` 6,000. It is estimated that the contract will be completed by 30th June 2003 and an additional expenditure of ` 60,000 will have to be incurred to complete the contract. The total estimated 1 expenditure on the contract is to include a provision of 2 % for contingencies. The contract 2 price is ` 3,20,000 and ` 2,20,000 has been realised in cash upto 31st March 2003. Calculate the proportion of profit to be taken to the profit and loss account as on 31st March 2003 under different methods. Contract account for the year ended 31.3.2003

= 61,200 ×

To Expenditure 2,34,000 By Work-in-progress: To Notional profit 32,000 Work certified Work uncertified 2,66,000

2,60,000 6,000 2,66,000

276 Cost Accounting

Estimated Profit:

Total expenditure upto 31.3.2003 2,34,000 Add: Additional expenditure for completion 60,000 2,94,000 7,350 1 2.5 ⎞ ⎛ Add: 2 for contingencies ⎜ 2,94,000 × ⎟ 2 100 ⎠ ⎝ Total estimated cost Contract price Total estimated profit

3,01,350 3,20,000 18,650

Calculation of profit: Method I:

Profit = Notional profit ×

2 Cash received × 3 Work certified

2 2, 20,000 × = ` 18,051 3 2,60,000 2 Notional profit × 3 2 = ` 21,333 32,000 × 3 Work certified Estimated profit × Contract price 2,60,000 18,650 × = ` 15,153 2, 20,000

= 32,000 × Method II:

Profit = =

Method III:

Profit = =

Method IV:

Profit = Estimated profit × = 18,650 ×

Cash received Work certified

2, 20,000 = ` 12,822 3, 20,000

23. The contract ledger of M/s. XYZ showed the following expenditure on account of contract on 31st December 2006:

Materials Wages Plant Sundry expenses Establishment charges

2,10,000 2,93,000 70,000 15,000 10,000

Contract Costing/Terminal Costing 277

The contract was started on 1st January 2006 and the contract price was ` 10,00,000. Cash received on account to date was ` 4,80,000 representing 80% of work certified, remaining 20% being retained until completion. Value of plant on 31st December 2006 was ` 20,000 and the value of materials in hand was ` 6,000. The cost of work finished but not certified on said date was ` 50,000. Some of the materials costing ` 20,000 were found unsuitable and were sold for ` 16,000 and a part of plant costing ` 5,000 unsuited for the contract was sold at a profit of ` 1,000. The contractor estimated a further expenditure that would be incurred in completing the contract and took to the credit of P & L a/c for the year 2006. The preparation of estimated net profit on contract which the value of work certified bears to the contract price. This is to be further reduced by proportion of cash received that bears to work certified. The estimates of further expenditure were as follows: (i) that the contract would by completed by 30th June 2007. (ii) that a further sum of ` 30,000 would have to be spent on plant and its residual value on completion of the contract would be ` 12,000. (iii) that materials in addition to those in hand on 31st December 2006 would cost ` 1,00,000 and that further sundry expenses of ` 7,000 would be incurred. (iv) that the wages for the completion of the contract would amount to ` 1,69,900. (v) that the establishment expenses would cost the same amount per year as in the previous year. (vi) that ` 18,000 would be sufficient to provide for contingencies. Prepare contract account for the year ended 31st December 2006 and show the amount to be credited to P & L a/c for the year. Also show how the relevant figures would appear in the balance sheet as on that date. (B.Com. (Hons.), Delhi University, 2007) Solution: Contract account for the year ended 31.12.2006

To Materials 2,10,000 By Plant at site To Wages 2,93,000 By Materials in hand To Sundry expenses 15,000 By Materials sold To Establishment expenses 10,000 BY Plant sold To Plant 70,000 By Contract cost c/d 5,98,000 To Contract cost b/d 5,47,000 By Work-in-progress: To Notional profit 1,03,000 Work certified Work uncertified 6,50,000 To Profit 52,368 By Notional profit

20,000 6,000 20,000 5,000 5,47,000 5,98,000 6,00,000 50,000 6,50,000 1,03,000 Contd...

278 Cost Accounting Contd...

To Reserve

50,632 1,03,000

1,03,000

Working Note: (1) Calculation of estimated profit: ` 5,47,000 6,000

Contract cost upto 31.12.2006 Materials in hand on 31.12.2006 Additional expenditure : Materials Sundry expenses Wages 6⎞ ⎛ Establishment expenses ⎜10,000 × ⎟ 12 ⎠ ⎝ Contingencies

1,00,000 7,000 1,69,900

Plant depreciation (20,000 + 30,000 – 12,000)

5,000 18,000 38,000

Total estimated cost Contract price

8,90,900 10,00,000

total estimated profit

1,09,100

(2) Contact profit = Estimated profit × = 1,09,100 ×

Work certified Contract price

4,80,000 = ` 52,368 10,00,000

Balance sheet as on 31.12.2006 Liabilities

Assets

Profit and loss a/c 52,368 Work-in-progress (–) Cash received (–) Reserve Plant at site Materials at site

6,50,000 4,80,000 1,70,000 40,632 1,19,368 20,000 6,000

24. Modern Construction Ltd. obtained a contract No. B.37 for ` 40 lakh. The following balances and information relate to the contract for the year ended 31st March 2008:

Contract Costing/Terminal Costing 279

Work-in-Progress Work certified Work uncertified Materials at site Accrued wages

1.4.2007

31.3.2008

9,40,000 11,200 8,000 5,000

30,00,000 32,000 20,000 3,000

Additional information relating to the year 2007-2008 are: Materials issued from stores 4,00,000 Materials directly purchased 1,50,000 Wages paid 6,00,000 Architect fees 51,000 Plant hire charges 50,000 Indirect expenses 10,000 Share of general overheads for B.37 18,000 Materials returned to stores 25,000 Materials returned to supplier 15,000 Fines and penalties paid 12,000 The contractee pays 80% of work certified in cash. You are required to prepare: (i) Contract account showing clearly the amount of profits transferred to Profit and Loss account. (ii) Contractee’s account (iii) Balance Sheet (CA – PE II, May 2008) Solution: Contract account No. B37

To Balance b/d Work certified Work uncertified To Materials issued from stores To Materials purchased To Wages paid To Accrued wages on 31.3.2008

9,40,000 11,200 4,00,000 1,50,000 6,00,000 3,000

By Balance b/d Accrued wages By Work-in-progress: Work certified Work uncertified By Materials at site By Materials returned to stores

5,000 30,00,000 32,000 20,000 25,000 Contd...

280 Cost Accounting Contd...

To To To To To To

Architect fees Plant hire charges Indirect expenses Share of general overheads Fines and penalties Notional profit

To Profit To Reserve

Note:

51,000 By Materials returned to supplier 50,000 10,000 18,000 12,000 8,43,800 30,97,000 4,50,027 By Notional profit 3,93,773 8,43,800

Profit = Notional profit × = 8,43,800 ×

15,000

30,97,000 8,43,800 8,43,800

2 Cash received × 3 Work certified

2 80 × = ` 4,50,027 3 100

Contractee a/c

3.3.2008 To Balance c/d

24,00,000 1.4.2007 By Balance b/d 7,52,000 By Bank 16,48,000 24,00,000 24,00,000 Balance Sheet

Liabilities

Assets

Profit and loss a/c 4,50,027 Work-in-progress Wages outstanding 3,000 (–) Cash received (–) Reserve Materials at site

30,32,000 24,00,000 6,32,000 3,93,773 2,38,227 20,000

25. One of the building contracts currently engaged in by a construction company commenced 15 months ago and remain unfinished. The following information relating to the work on the contract has been prepared for the year just ended:

Contract Costing/Terminal Costing 281

Contract price Value of work certified at the end of the year Cost of work not yet certified at the end of the year Cost incurred: Opening balances Cost of work completed Materials at site During the year: Materials delivered to site Wages Hire of plant Other expenses Closing balance: Materials on site

( in ’000) 2,500 2,200 40 300 10 610 580 110 90 20

As soon as materials are delivered to the site, they are charged to the contract account. A record is also kept of materials as they are actually used on the contract. Periodically a stock check is made and any discrepancy between book stock and physical stock is transferred to a general contract material discrepancy account. This is absorbed back to each contract, currently at the rate of 0.5% of materials booked. The stock check at the year end revealed a stock shortage of ` 5,000. In addition to the direct charges listed above, general overheads are charged to contracts at 5% of the value of certified work. General overheads ` 15,000 had been absorbed into the cost of work completed at the beginning of the year. It has been estimated that further costs to complete the contract will be ` 2,20,000. This estimate includes the cost of materials on site at the end of the year just finished and also a provision for rectification. Required: (a) Explain briefly the distinguishing features of contract costing. (b) Determine the profitability of the above contract and recommend how much profit (to the nearest ` ’000) should be taken for the year just ended. (Provide a detailed schedule of cost.) (c) State how your recommendation in (b) would be affected if the contract price was ` 40,00,000 (rather than ` 25,00,000) and if no estimate has been made of costs to completion. (If required, suitable assumption may be made.) (ICWA (Inter), Nov. 1995) Working Notes: 1. Cost of materials booked: Materials delivered to site Add: Opening materials at site

– ` 6,10,000 – ` 10,000

282 Cost Accounting

` 6,20,000 Less: Closing materials at site

– ` 20,000 ` 6,00,000 – ` 5,000

Less: Shortage

– ` 5,95,000

Materials booked 2. 3. 4. 5.

Stock discrepancy charged to the contract is = 595 × 0.5/100 = ` 3,000 Cost of contract to date = ` 1,773 Total estimated cost ` 1,993 Notional Profit = Value of work certified + Work not certified – Cost of contract to date = ` 22,00,000 + 40,000 – 17,73,000 = ` 4,67,000

6. Profit for question (c) = National profit × 2/3 ×

Cash received Work certified

= 4,67,000 × 2/3 × 80/100 = ` 2,49,067. Solution:

Contract account for the year ended 31.12.2006 ( To Balance b/d Work completed Materials at site To Materials delivered To Wages To Hire of plant To Other expenses To Stock discrepancy To General overheads (110 – 15) To Cost of contract b/d To Notional profit

’000)

300 By Materials at site 10 By Stock shortage 610 580 110 By Cost of contract c/d 90 3 95 1,798 1,773 By Work-in-progress: 467 Work certified Work not certified 2,240

20 5

1773

1,798 2,200 40 2,240

Contract Costing/Terminal Costing 283

Working Note: (a) Computation of estimated profit: (` in ’000) Cost of contract till date Add: Estimated further expenditure

` 1,773 220

Total estimated cost Contract price

1,993 2,500

Total estimated profit

507

(b) Profit on estimated profit basis = Estimated profit × = 5,07,000 × (c) Profit on notional profit basis

Cash received Work certified

1,773 = ` 4,51,034 1,993

2 80 × 3 100 2 80 = 4,67,000 × × 2,49,067 3 100

= Notional profit ×

26. RST Construction Ltd. commenced a contract on April 1, 2005. The total contract was for ` 49,21,875. It was decided to estimate the total profit on the contract and to take to the credit of P &L a/c that proportion of estimated profit on cash basis, which work completed bore to the total contract. Actual expenditure for the period April 1, 2005 to March 31, 2006 and estimated expenditure on April 1, 2006 to September 30, 2006 are given below:

Materials issued Labour paid Labour prepaid Labour outstanding Plant purchased Expenses paid Expenses outstanding Expenses prepaid Plant returned to store (historical cost) Work Certified Work uncertified Cash received Materials at site

Apr’1, 2005 to Mar’ 31, 2006 (Actual) ` 7,76,250 5,17,500 37,500 12,500 4,00,000 2,25,000 25,000 15,000 1,00,000 (on 30.9.05) 22,50,000 25,000 18,75,000 82,500

Apr’1, 2006 to Sep’30, 2006 (Estimated) ` 12,99,375 6,18,750 – 5,750 – 3,75,000 10,000 – 3,00,000 (on 30.9.06) Full – – 42,500

284 Cost Accounting

The plant is subject to annual depreciation at 25% on written down value method. The contract is likely to be completed on September 30, 2006. Required: Prepare the contract account. Determine the profit on the contract for the year 2005-06 on prudent basis, which has to be credited to P & L a/c. (CA, PE II, May 2006) Solution: Contract account for the year ending 31.3.2006

To Materials issued To Labour paid Add: Outstanding Less: Prepaid To Plant purchased To Expenses paid Add: Outstanding Less: Prepaid To Contract cost b/d To Notional profit

To Profit To Reserve

5,17,500 12,500 5,30,000 37,500 2,25,000 25,000 2,50,000 15,000

7,76,250 By (–) By (–) 4,92,500 By 4,00,000 By

Plant returned Depreciation Plant at site Depreciation Materials at site Contract cost c/d

1,00,000 12,500 3,00,000 75,000

2,35,000 19,03,750 15,08,750 By Work-in-progress: 7,66,250 Work Certified Work uncertified 22,75,000 3,89,000 By Notional profit 3,77,250 7,66,250

87,500 2,25,000 82,500 15,08,750

19,03,750 22,50,000 25,000 22,75,000 7,66,250 7,66,250

Working note: (1) Calculation of estimated profit: (i) Calculation of estimated profit:

Contract cost upto 31.12.2006 15,08,750 Materials at site on 31.3.2006 82,500 Add: Further estimated cost for completion: Materials issued 12,99,375 Less: Materials at site (30.9.2006) 42,500 12,56,875

Contd...

Contract Costing/Terminal Costing 285 Contd...

Labour paid Add: Outstanding (30.9.2006) Add: Prepaid (31.3.2006) Less: Outstanding (31.3.2006) Expenses paid Add: Outstanding (30.9.2006) Add: Prepaid (30.3.2006) Less: Outstanding (31.3.2006)

6,18,750 5,750 37,500 6,62,000 12,500 3,75,000 10,000 15,000 4,00,000 25,000

25 6 ⎞ ⎛ Plant depreciation ⎜ 2, 25,000 × × ⎟ 100 12 ⎠ ⎝

Total estimated cost Contract price Estimated profit (2)

3,75,000 28,125

30,00,750 49,21,875 10,21,125

Profit = Estimated profit × = 10,21,125 ×

6,49,500

Cash received Work certified

18,75,000 = ` 3,89,000 49, 21,875

27. The following information relates to contract no. 333. You are required to prepare the contract account. The contractor is assured of a profit of 20% on total cost. The following are the expenses relating to the contract:

Materials purchased 75,000 Materials issued from stores 1,00,000 Indirect materials 25,000 Wages paid 1,10,000 Loose tools issued 6,000 Other direct charges 30,000 The contract took 3 months for completion. The value of tools and materials returned to stores were ` 500 and ` 6,000 respectively. It is the practice to charge administration and office expenses at 20% on works cost.

286 Cost Accounting

Solution:

Contract account No. 333

To To To To To To To Workings:

Materials purchased Materials issued Indirect materials Wages paid Loose tools issued Other direct charges Profit

75,000 By Contract price 1,00,000 By Loose tools returned 25,000 By Materials returned 1,10,000 6,000 30,000 81,480 4,95,380

4,88,880 500 6,000

4,95,380

Computation of contract price:

Materials used in the contract: ` Materials purchased Materials issued from stores

75,000 1,00,000 1,75,000 6,000

(–) Materials returned Wages paid Other direct charges Prime cost Indirect materials Depreciation on loose tools (6,000 – 500) Work cost Administration and office expenses: 20% on works cost Total cost Profit – 20% on total cost Contract price

1,69,000 1,10,000 30,000 3,09,000 25,000 5,500 3,39,500 67,900 4,07,400 81,480 4,88,880

Escalation clause: 28. X Ltd. obtained contract for ` 75,00,000. The work on the contract commenced on 1st April 2008. The following information was taken from the cost ledger of the company for the year ending 31.3.2009. Materials purchased Direct wages paid

16,00,000 8,00,000 Contd...

Contract Costing/Terminal Costing 287 Contd...

Administration expenses Plant purchased Materials at site on 31.3.2009 Wages outstanding on 31.3.2009 Work certified Cash received Work uncertified Depreciation on plant

2,75,000 7,00,000 40,000 40,000 32,00,000 25,00,000 50,000 1,40,000

There is an escalation clause in the contract deed. It contained the following provision: In the event of materials prices increasing over 5% of the prevailing price and wage rates increasing beyond 4% of the prevailing rate, the contract price would be increased by 50% of the material price increase over 5% and by 40% of increases in wages over 4%. Materials prices have gone by 30% since signing the contract. Wage rates have gone up by 20% since signing the contract. The value of work certified does not take into account the increase in materials price and wage rates. Prepare contract account. Solution:

Contract account

To Materials purchased Direct wages paid Add: Outstanding To Administration expenses To Depreciation on plant To Notional profit 1 25,00,000 ⎞ ⎛ To Profit ⎜ 6, 29,800 × × 3 32,00,000 ⎠⎟ ⎝

To Reserve

Working Note:

16,00,000 By Work-in-progress 8,00,000 Work certified 32,00,000 40,000 8,40,000 Work uncertified 50,000 2,75,000 By Materials at site 40,000 1,40,000 By Escalation in contract 1,94,800 price 6,29,800 34,84,800 34,84,800 1,64,010 By Notional profit 6,29,800

4,65,790 6,29,800

Computation of escalation allowed in contract Price: 30 = ` 3,60,000 (a) 30% increase in materials price = 15,60,000 × 130 25 (b) Increase in material price over 5% = 3,60,000 × = ` 3,00,000 30

6,29,800

288 Cost Accounting

(c) Escalation in contract price for increase in materials price over 5% 50 = 3,00,000 × = ` 1,50,000 100 20 (d) Increase in wages (20%) = 8,40,000 × = ` 1,40,000 120 16 (e) Increase in wages over 4% = 1,50,000 × = ` 1,12,000 20 (f) Escalation allowed in contract price for wage increase 40 = ` 44,800 = 1,12,000 × 100 (g) Total escalation allowed in contract price = 1,50,000 + 44,800 = 1,94,800 29. A construction company undertaking a number of contracts furnishes the following data relating to its incomplete contracts as on 31st March 2009: Contract Numbers (` in lakhs) Total contract price

723 23.20

726 14.40

729 10.08

731 28.80

Estimated cost on completion of contract

20.50

11.52

12.60

21.60

5.22

1.80

1.98

0.80

Direct wages

2.32

4.32

3.90

2.16

Overheads(excluding depreciation)

1.06

2.60

2.62

1.05

Profit reserve on 1.4.2008

1.50

–

–

–

Plant installed at cost

5.00

3.50

2.75

3.00

Materials at site 1.4.2008

0.75

–

–

–

Materials at site 31.3.2009

0.45

0.20

0.08

0.05

Work certified 31.3.2008

4.65

–

–

–

12.76

13.26

7.56

4.32

Work uncertified 31.3.2009

0.84

0.24

0.14

0.18

Progress payments received during the year

9.57

9.00

5.75

3.60

Expenses for the year ended 31.3.09: Direct materials

Work certified during the year 2008-2009

Depreciation at 20% per annum is to be charged on plant issued. While the Contract No. 723 was carried over from last year, the remaining contracts were started in the first week of April, 2008. Required: 1. Determine the profit/loss in respect of each contract for the year ended 31.3.2009. 2. State the profit/loss to be carried to profit and loss account for the year ended 31st March 2009 (CA, Inter)

Contract Costing/Terminal Costing 289

Solution: (i) Contract account Contract Numbers ( in Lakhs) 723

726

729

731

To Balance b/d: Materials at site

0.75

–

–

–

4.65

–

–

–

To Direct materials

5.22

1.80

1.98

0.80

To Direct wages

2.32

4.32

3.90

2.16

To Overheads

1.06

2.60

2.62

1.05

To Plant depreciation

1.00

0.70

0.55

0.60

15.00

9.42

9.05

4.61

1.50

–

–

–

Work certified

17.41

13.26

7.56

4.32

By Materials at site

0.45

0.20

0.08

0.05

Work uncertified

0.84

0.24

0.14

0.18

20.02

13.70

7.78

4.55

5.20

4.28

(1.27)

(0.06)

Work certified

Total ‘A’ By Balance b/d: Profit reserve on 1.4.2008 By Work-in-progress:

Total ‘B’ Notional Profit / Loss (B-A) (ii) Profit transfered to profit and loss a/c (a) Contract 723: Profit = National profit × 2/3 × = 5.20 × 2/3 × (b) Contract 726:

9.57 = ` 2.60 lakh 12.67

Profit = Estimated profit × = 2.88 ×

Cash received Work certified

9 = ` 1.80 14.40

(c) Contract 729: Loss = ` 1.27 lakh (d) Contract 731: Loss = 0.06 lakh

Cash received Work certified

290 Cost Accounting

30. Paramount Engineers are engaged in construction of a bridge under a long-term contract. The cost incurred upto 31.3.2009 was as under: Fabrication: (` in lakh) Direct materials 280 Direct labour 100 Overheads 60 440 Erection cost to date 110 550 The contract price is ` 11 crore and the cash received on account till 31.3.2009 was ` 6 crores. A technical estimate of the contract indicates the following degree of completion of work: Fabrication: Materials – 70%, direct labour and overheads 60%, erection 40%. You are required to estimate the profit that could be taken to Profit and Loss account against this partly completed contract as at 31.3.2009. (CA, Inter) Solution:

Statement showing estimated cost and estimated profit Degree of Completion

Cost

Direct materials

70%

(in lakhs) 280

Direct labour

60%

100

Overheads

60%

60

Erection

40%

110

–

550

Total incurred upto 31.3.2009 (A) Add: Further cost to be incurred for completion

Degree of Completion Calculation Direct materials

30%

Direct labour

40%

Overhead

40%

Erection costs

60%

Total further cost (B)

Amount (in lakhs) 120.00

280 ×

30 70

100 ×

40 60

66.67

60 ×

40 60

40.00

110 ×

60 40

165.00 391.67

Contract Costing/Terminal Costing 291

Total estimated cost for completion of contract

` 941.67 lakh ` 1,100.00 lakh

Contract price

` 158.33 lakh

Estimated profit Profit transferred to P&L: Estimated profit × = 158.33 ×

Cash received Cantract price

600 = ` 86.36 lakh 1100

31. A firm of building contractors began to trade on 1st January 2008. The following was the expenditure on a contract for ` 6,00,000.

Materials issued from stores Materials purchased for the contract Plant installed at cost Wages paid Wages accrued on 31.12.2008 Direct expenses paid Direct expenses due on 31.12.2008 Establishment

` 1,00,000 90,000 70,000 2,00,000 80,000 20,000 5,000 13,000

Of the plant and materials charged to the contract, plant which cost ` 4,000 and materials costing ` 3,000 were lost. Certain of the materials costing ` 4,000 were sold for ` 5000. On 31.12.2008 plant which cost ` 10,000 was returned to the stores and a part of the plant which cost ` 4,000 was damaged and could not be used. The work certified was for ` 4,80,000 and 80% of the same was received in cash. The cost of work done but uncertified was ` 2,000. Depreciation on plant was charged at 10% p.a. Prepare the contract account for the year ending 31.12.2008 by transferring to the profit and loss account the portion of profit which you think is reasonable. Show these details of the contract which would appear in the balance sheet of the firm as on 31.12.2008. (B.Com., Madras University, March 1988) Solution:

Contract account for the year ending 31.12.2008

To Materials issued To Materials purchased To Plant installed

1,00,000 By Work-in-progress: 90,000 Work certified 70,000 Work uncertified

4,80,000 2,000 Contd...

292 Cost Accounting Contd...

To Wages paid Add: Wages accrued Direct expenses paid Add: due To Establishment

2,00,000 80,000 20,000 5,000

By 2,80,000 By By 25,000 By 13,000 (–) By By (–) By 5,78,000

Plant lost Materials lost Materials sold Plant returned (cost) 10,000 Depreciation 1,000 Plant damaged (cost ) Plant at site 52,000 Depreciation 5,200 Loss

4,000 3,000 4,000 9,000 4,000 46,800 25,200 5,78,000

Balance Sheet as on 31.12.2008 Liabilities

Assets

Work-in-progress Wages accrued 80,000 (–) Cash received Direct expenses due 5,000 Plant at site 52,000 5,200 (–) Depreciation

4,82,000 3,84,000 98,000 46,800

32. The Manufacturers Ltd., began to trade on 1st January 2008. During 2008 the company was engaged on only one contract of which the contract price was ` 10,00,000. Of the plant and materials charged to the contract, plant which cost ` 10,000 and materials which cost ` 8,000 were lost in an accident. On 31st December 2008 plant costing ` 10,000 was returned to stores, the cost of work uncertified but finished was ` 4,000 and materials costing ` 8,000 were in hand on site. Charge 10% depreciation on plant and compile contract account and balance sheet from the following:

Share capital Creditors Cash received (80% of work certified) Land and buildings 86,000 Bank balance 50,000 Charged to contract Materials 1,80,000

2,40,000 20,000 4,00,000

Contd...

Contract Costing/Terminal Costing 293 Contd...

Plant Wages Expenses

50,000 2,80,000 14,000 6,60,000 6,60,000

Solution: Contract account for the year ending 31.12.2008

To Materials To Plant To Wages To Expenses

To Notional profit To Profit To Reserve

Note:

1,80,000 By Work-in-progress 50,000 100 ⎞ ⎛ Work certified ⎜ 4,00,000 × ⎟ 80 ⎠ ⎝ 2,80,000 Work uncertified 14,000 By Plant lost By Materials lost By Plant returned (cost) (–) Depreciation By Plant at site (cost) (–) Depreciation 42,000 By Materials in hand 5,66,000 22,400 By Notional profit 19,600 42,000

Profit = Notional Profit × 2/3 × = 42,000 × 2/3 ×

5,00,000 4,000 10,000 8,000 10,000 1,000 30,000 3,000

9,000 27,000 8,000 5,66,000 42,000 42,000

Cash received Work certified

80 = ` 22,400 100

Balance Sheet as on 31.12.2008 Liabilities Share capital Creditors Profit and loss a/c

Assets 2,40,000 Work-in-progress 20,000 (–) Cash received 4,400 (–) Reserve

5,04,000 4,00,000 1,04,000 19,600 84,400 Contd...

294 Cost Accounting Contd...

Land and buildings Bank balance Plant in stores Plant at site Materials at site

86,000 50,000 9,000 27,000 8,000 2,64,400

2,64,400

Note: Computation of profit taken to the balance sheet

Contract profit Less: Abnormal loss: Plant cost Materials lost Profit – Transferred to B/S a/c

22,400 10,000 8,000 18,000 4,400

15

Process Costing

Chapter

Practical Problems A. Short Answer Type Questions: 1. In a certain process 5,000 units were introduced at a cost of ` 75,000. Additional process cost incurred is ` 30,000. Actual units produced is 4,500 units. Normal process loss is 10% of input. Normal loss realised ` 3 per unit. Show process account. Compute cost per unit. Solution: Process account Units Amount Units Amount 5,000 75,000 By Normal loss: – 10% of 500 1,500 input (` 3 per unit)

To Input

To Additional process cost

– 5,000

30,000 By Production 1,05,000

Cost per unit =

1,03,500 = 4,500

4,500 5,000

1,03,500 1,05,000

23.

2. 2,500 units were introduced into process A at a cost of ` 8 per unit. Direct labour and departmental expenses amounted to ` 8,000. Normal process loss is 10% of input. Normal loss realised ` 4 per unit. Actual output during the period is 2,200 units. Compute abnormal loss and its value Process A account Units To Input To Direct labour and expenses

Cost per unit

Total

2,500

8

–

–

20,000 By Normal loss: –10% of input 8,000 By output

Units 250 2,200

Cost per Total unit 4 1,000 12

26,400 Contd...

296 Cost Accounting Contd...

By Abnormal loss 2,500

–

28,000

Workings: (i) Abnormal loss (units): Input (–) Normal loss 10%

: :

2,500 units 250 units

Normal production Actual production

: :

2,250 units 2,200 units

Abnormal loss

:

50 units

50 2,500

12 –

600 28,000

(ii) Abnormal loss value: Cost per unit = =

Total cost – Normal scrap value Normal production

28,000 – 1,000 = ` 12 2, 250

Abnormal loss = 50 units × ` 12 per unit = ` 600. Cost of production = 2,200 units × ` 12 per unit = ` 26,400 3. 1,000 kg of semi-finished goods is transferred from process A to process B at a cost of ` 25 per unit. The normal wastage in process B is an under: Weight loss : 5% of input Scrap : 10% of input Scrapped units realised ` 2.50 per kg. Labour and other expenses in process B amounted to ` 7,500. Actual output amounted to 900 kg. Compute cost per unit of finished units and abnormal gain. Solution: Process B account

To Process A a/c To Labour and other expenses To Abnormal gain

Units Cost per Total unit 1,000 25 25,000 By Weight loss 5% – – 7,500 By Scrap 10%

Units Cost per unit 50 –

50 1,050

900 1,050

37.94 –

1,897 By Output 34,397

100

2.50

Total – 250

37.94 34,147 – 34,397

Process Costing

Workings: (i) Abnormal loss (units): Input (–) Normal loss 15%

: :

1,000 units 150 units

Normal production Actual production

: :

850 units 900 units

Abnormal gain

:

(–)50 units

297

(ii) Abnormal gain value: Total cost – Normal scrap value Normal production 32,500 – 250 = = ` 37.94 850

Cost per unit =

Abnormal gain = 50 units × ` 37.94 per unit = ` 1,897. Cost of production = 900 units × ` 37.94 per unit = ` 34,146 (Approx.) 4. In process A 4,000 units were introduced in the beginning of the year 2009. At the end of the year 2009, 3000 units were completed and transfered to process B. 1,000 units were in process, degree of completion being – materials 75% labour 60% and overheads 50%. Compute equivalent units of production for each element of cost for the year 2009. Solution:

Statement of Equivalent Production: Input

Output Units

Units

Units introduced 4,000 Units completed Closing WIP 4,000

3,000 1,000 4,000

Equivalent Production Materials Labour Overheads % Units % Units % Units 100% 3,000 100% 3,000 100% 3,000 75% 750 60% 600 50% 500 – 3,750 – 3,600 – 3,500

5. Sri Ram Ltd furnished you the following information relating to process x (a) Opening work-in-progress – 3,000 units. Degree of completion: Materials – 80% Labour – 70% Overheads – 60% (b) Units introduced – 8,000 units. (c) Closing work-in-progress – 2,000 units. Degree of completion

298 Cost Accounting

Materials

– 75%

Labour

– 60%

Overheads

– 50%

(d) Number of units produced and transferred to next process is 8,500 units, balance being normal loss. Compute equivalent units of production under FIFO method: Solution: Statement of Equivalent Production: Input

Output Units

Equivalent Production Units

Materials %

Opening WIP

3,000 Units completed:

Units introduced

8,000 (i) From opening 3,000 (ii) From units introduced

5,500

20%

Units 600

Labour %

Units

30%

900

Overheads %

Units

40% 1,200

100% 5,500 100% 5,500 100% 5,500

8,500 Closing WIP

2,000

Normal Loss(b/f) 500 11,000

11,000

75% 1,500

60% 1,200

50% 1,000

–

–

–

–

–

–

–

7,600

–

7,600

–

7,700

6. Find out the equivalent production for the following data under the FIFO method: Opening work-in-progress

– 2,000 units

Degree of completion:

Materials 80% Labour 60% Overheads 60%

Units introduced

8,000 units

Closing work-in-progress

3,000 units

Degree of completion

Materials – 80% Labour 60% Overheads 60%

Assume there are no process losses. (B.Com. (Hons.), Delhi University)

Process Costing

Solution:

299

Statement of Equivalent Production: Input

Opening WIP Units introduced

Output

Equivalent Production Materials Labour Overheads % Units % Units % Units

Units

Units

2,000 Units completed: 8,000 (i) Opening WIP (ii) Units introduced

2,000 20% 400 40% 800 40% 5,000 100% 5,000 100% 5,000 100%

Closing WIP 10,000

7,000 3,000 10,000

80% 2,400 – 7,800

60% 1,800 – 7,600

60% –

800 5,000

1,800 7,600

7. From the following information relating to process x compute equivalent units of production using average cost method: (a) Opening work-in-progress – 1,000 units. Degree of completion: Materials – 100% Labour – 75% Overheads – 75% (b) Materials introduced into the process x – 19,000 units (c) Units scrapped – 1,500 units Degree of completion: Materials – 100% Labour 80% Overheads 80% (d) Closing work-in-progress – 1,000 units. Degree of completion Materials – 100% Labour – 80% Overheads – 80% (e) Units finished and transferred to process y – 17,500 units. (f) Normal loss: 5% of total input including opening work-in-progress. Solution:

Statement of Equivalent Production: Input

Output Units

Opening WIP

1,000

Units Units completed

17,500

Materials % Units 100% 17,500

Equivalent Production Labour Overheads % Units 100% 17,500 Contd...

300 Cost Accounting Contd...

Units introduced 19,000

Closing WIP Normal loss Abnormal loss

20,000

1,000 1,000 500 20,000

100% 1,000 – – 100% 500 – 19,000

8. Find out abnormal gain/loss units. Input – 3,000 units Output – 2,650 units Normal loss – 10% of input. Solution:

Input (–) Normal loss 10%

: :

3,000 units 300 units

Normal production Actual production

: :

2,700 units 2,650 units

Abnormal loss

:

50 units

9. Find out abnormal gain/ loss units Input – 5,000 units Normal loss – 10% of input Actual output – 4,600 units Solution:

Input (–) Normal loss 10%

: :

5,000 units 500 units

Normal production Actual production

: :

4,500 units 4,600 units

Abnormal gain

:

(–)100 units

10. Calculate the actual output Input – 7,000 units Opening stock – 3,000 units Normal Loss – 10% of total input including opening stock. Abnormal loss – 500 units. Solution:

Input Opening stock

: :

7,000 units 3,000 units

(–) Normal loss 10%

:

10,000 units 1,000 units

Normal production (–) Abnormal loss

: :

9,000 units 500 units

Actual production

:

8,500 units

80% –

– 80%

–

800 400 18,700

Process Costing

11. Find the input in the process Opening stock Normal loss Abnormal loss Actual output Solution: Actual output Add: Abnormal loss

– – – –

1,000 units. 10% of total input 100 units 8,900 units : :

8,900 units 100 units

:

9,000 units

:

1,000 units

Total input Less: Opening stock

: :

10,000 units 1,000 units

Input in the process

:

9,000 units

Normal production Add: Normal loss

10 90

301

B. Comprehensive Practical Problems: No Process Loss 1. A product passes through three process A, B and C. 5000 units of raw material are introduced in process A at ` 8 per units. All units were completed. The following are the expenses incurred in the process: Process A Indirect materials 13,000

Process B 11,000

Process C 8,000

Direct wage

21,000

19,000

27,000

Total manufacturing expenses incurred during the period is ` 33,500. Manufacturing expenses are apportioned on direct wages basis to various processes. Prepare process accounts. Solution:

Process A account

To Raw materials To Indirect materials To Direct wages To Manufacturing exp.

Units Cost per Total Units Cost per Total unit unit 5,000 8 40,000 By Output transfered 5,000 18.70 93,500 to process B – – 13,000 – –

– –

27,000 13,500

5,000

–

93,500

5,000

–

93,500

302 Cost Accounting

Process B account

To Process A

To Indirect materials To Direct wages To Manufacturing exp.

Units Cost per unit 5,000 18.70

Total

–

–

93,500 By Output transferred to process C 11,000

– –

– –

21,000 10,500

5,000

–

1,36,000

Units Cost per Total unit 5,000 27.20 1,36,000

5,000

–

1,36,000

Process C account

To Process B

To Indirect materials To Direct wages To Manufacturing exp.

Units Cost per Total unit 5,000 27.20 1,36,000 By Output transferred to process C – – 8,000 – –

– –

19,000 9,500

5,000

–

1,72,500

Units Cost per Total unit 5,000 34.50 1,72,500

5,000

–

1,72,500

2. Product ‘zed’ is produced in a company. The product passes through three process R, S and T before it is completed. The following are the expenses incurred during the month of September, 2009:

Raw materials introduced Cost per kg

Process R Process S Process T 7,500 kgs 1,375 kg 350 kgs 16

20

23

5%

10%

10%

Other materials added in the process (`)

15,000

13,000

9,000

Direct labour (`)

27,500

25,000

21,000

Production overheads (`)

15,625

24,125

18,200

Normal process loss on input

Prepare process accounts showing cost per unit of each process.

Process Costing

Solution:

303

Process R account

Units Cost per Total unit To Raw materials 7,500 16 1,20,000 By Normal loss 5% To Other materials – – 15,000 By Output transferred to process S To Direct labour – – 27,500 To Production overheads

–

–

15,625

7,500

–

1,78,125

Units Cost per unit 375 –

Total

7,125

25

1,78,125

7,500

–

1,78,125

–

Process S account Units Cost per Total unit 7,125 25 1,78,125 By Normal loss To Process R 10% To Raw materials 1,375 20 27,500 By Output transferred to process T To Other materials – – 13,000 To Direct labour

–

–

25,000

To Production overheads

–

–

24,125

8,500

–

2,67,750

Units Cost per unit 850 – 7,650

8,500

Total –

35 2,67,750

–

2,67,750

Process T account Units Cost per Total Units Cost per Total unit unit 7,650 35 2,67,750 By Normal loss 800 – – To Process S 10% To Raw materials 350 23 8,050 By Finished goods 7,200 45 3,24,000 a/c To Other – 9,000 materials To Direct labour – – 21,000 Contd...

304 Cost Accounting Contd...

To Production overheads

–

–

18,200

8,000

–

3,24,000

8,000

–

3,24,000

Normal Loss with Scrap Value 3. Product A passes through two process A and B. The output of process B is passed on to finished stock. 10,000 units of raw materials at ` 3 per unit was introduced in process A. The other expenses incurred in the processes were:

Direct wages Factory overheads Normal loss

Process A 15,000 13,500 5%

Process B 12,500 10,300 10%

Prepare process accounts. Scraps realized ` 3 per unit. Solution:

Process A account

To Raw materials

Units Cost per unit 10,000 3

Total

To Direct wages

–

–

To Factory overheads

–

–

30,000 By Normal loss 5% 15,000 By Production transfered to process ‘B’ 13,500

10,000

–

58,500

Units Cost per unit 500 3

Total 1,500

9,500

6

57,000

10,000

–

58,500

Process B account

To Process A To Direct wages

To Factory overheads

Units Cost per Total Units Cost per unit unit 9,500 6 57,000 By Normal loss 5% 950 3 – – 12,500 By Production 8,550 9 transfered to process B – – 10,300 9,500

–

79,800

9,500

–

Total 2,850 76,950

79,800

Process Costing

305

With Normal Loss and Sale of Product 4. At the end of process A, carried on in a factory during the week ending July 31st, 2002, the number of units produced was 850 units excluding 50 units damaged at the very end of the process. The damaged units realized ` 3 per unit as scrap. A normal wastage of 10 per cent occurs during the process, the wastage realized ` 2 per units. One unit of raw material costs ` 4. The other expenses per week were: Wages Power Production over heads

` 500 ` 200 ` 450

– – –

2 per cent on the selling price, the rest 40% of output is sold so as to show a profit of 16 3 of the output is transferred to process B. Prepare the process account.

Solution:

Process A account

Units Cost per unit To Raw materials 1,000 4 To Wages To Power

– –

– –

To Production overheads To Profit

–

–

–

–

1,000

–

Total 4,000 By Normal wastage 10% 500 By Units damaged 200 By Output:

Units Cost per unit 100 2

200

50

3

150

450 – 40% sold

340

–

2,304

384 60% sent to process ‘B’ 5,534

510

–

2,880

1,000

–

5,534

Workings: (1) Raw materials introduced: Output Add: damaged units

: :

850 units 50 units

Add: Normal wastage

: :

900 units 100 units

Materials introduced in the process

:

1,000 units

: : : :

` 5,150 200 4,950 150

(2) Cost of production of 850 units Total cost (–) Normal wastage (100 units × ` 2) (–) Sale of damaged units

Total

306 Cost Accounting

Cost of 850 units produced (3) Cost of 40% units (340 units) 2 Add: 16 % on sale price or 20% on cost 3 Sale price of 40% of output

:

4,800

:

` 1,920

:

` 384 ` 2,304

(4) Cost of 60% units = 510 units, cost (4,800 × 60%) ` 2,880

With Abnormal Loss and Normal Loss 5. 500 units were introduced into process B at ` 10 per unit labour ` 4,500, other production expenses ` 1950, Normal loss is estimated at 10% of input, scraps realized ` 2 percent – 400 unit were produced and passed on to process C, prepare process B account and abnormal loss account. Solution:

Process B account

Units Cost per unit To Units introduced 500 10 To Labour

–

–

To Other production expenses

–

–

500

–

Units Cost per unit 50 2

Total

5,000 By Normal wastage 10% 4,500 By Production 400 transfered to process ‘C’ 950 By Abnormal loss 50 10,450

500

Total 100

23

9,200

23

1,150

–

10,450

Abnormal loss account

To Process B

Units Cost per unit 50 23

50 Working Note: (1) Abnormal units: Input Less: Normal loss 10% Normal production

–

Total 1,150

By Normal loss By Net abnormal loss transferred to costing P&L labour

1,150

Units Cost per unit 50 2 – –

50

: :

500 units 50 units

:

450 units

–

Total 100 1,050

1,150

Process Costing

Actual production Abnormal loss (2) Cost per unit

: : =

307

400 units 50 units

Total cost – Normal scrap value Normal production

10, 450 – 100 = ` 23 450 (3) Abnormal loss = 50 × 23 = ` 1,150 (4) Cost of production = 400 × 23 = ` 9,200 6. 1,500 units were introduced into process I at a rate of ` 12 per unit. The direct labour amounted to ` 12,500. Production overhead was ` 7,600. The normal loss in the process is 10% of input but actual production amounted to 1,250 units. The scrap realized ` 2 per unit. Prepare process I account and abnormal loss account.

=

Solution:

Process ‘I ’ account

To Raw materials To Direct labour To Production overheads

Units Cost per unit 1,500 12 – – – – 1,500

–

Units Cost per unit 18,000 By Normal loss 150 2 12,500 By Production 1,250 28 7,600 By Abnormal loss 100 28

Total

38,100

Working Note: (1) Abnormal loss (units) Input :

1,500

1,500 units

(–) Normal loss 10%

:

150 units

Normal production

:

1,350 units

Actual production

:

1,250 units

Abnormal loss

:

100 units

(2) Cost of production per unit

=

Total cost–Normal scap value Normal production

=

38,100 – 300 = ` 28 1,350

(3) Value of abnormal loss

= 100 units × ` 28 per unit = ` 2,800.

(4) Value of production

= 1,250 units × ` 28 per unit = ` 35,000

–

Total 300 35,000 2,800 38,100

308 Cost Accounting

With Abnormal Gain and Normal Loss 7. 800 units of a material was introduced into process M at the rate of ` 2 per unit. The direct labour amounted to ` 4,500. The manufacturing expenses amounted to ` 1,980. The normal loss is 5% of input. The net production was 780 units. Prepare process M account and abnormal loss/gain account assuming the process scrap realized ` 2.50 per unit. Solution:

Process M account

To Raw materials To Direct labour To Manufacturing expenses To Abnormal gain

Units Cost per unit 800 2 – – – – 20

10.50

Units Cost per unit 1,600 By Normal loss 40 2.50 4,500 By Production 780 10.50 1,980

Total

100 8,190

210

820

–

8,290

Working Note: (1) Abnormal gain (units) Input (–) Normal loss 10%

: :

800 units 40 units

Normal production Actual production

: :

760 units 780 units

Abnormal gain

:

(–) 20 units

(2) Cost of production per unit =

Total

820

–

8,290

Total cost–Normal scrap value Normal production

8,080 – 100 = ` 10.50 760 = 20 units × ` 10.50 per unit = ` 210. = 780 units × ` 10.50 per unit = ` 8,190.

= (3) Value of abnormal gain (4) Value of production

Abnormal gain account Units Cost per Total unit To Normal loss (scrap 20 2.50 50 By Process M value) To Net gain transfered – – 160 to costing P&L a/c 20 – 210

Units Cost per Total unit 20 10.50 210

20

–

210

Process Costing

309

8. 1,000 units of raw materials at the rate of ` 7.50 were introduced in process N during the month of January. The expenses incurred in the process are: Direct labour ` 6,200 and production overheads ` 2,500. The output of the process is 925 units. The normal loss is 10% of input. Prepare process account and abnormal loss or gain account. Solution:

Process N account

To Raw materials

Units Cost per unit 1,000 7.50

To Director labour To Production overheads To Abnormal gain

– –

– –

25

18

Units Cost per unit 7,500 By Normal loss 100 – 10% 6,200 By Production 925 18 2,500

Total

Total – 16,650

450

1,025

–

16,650

1,025

Working Note: (1) Abnormal gain (units) Input (–) Normal loss 10%

: :

1,000 units 100 units

Normal production Actual production

: :

900 units 925 units

Abnormal gain

:

(–) 25 units

–

16,650

Total cost–Normal scap value Normal production 16, 200 = = ` 18 900 = 25 units × ` 18 per unit = ` 450. = 925 units × ` 18 per unit = ` 16,650.

(2) Cost of production per unit =

(3) Value of abnormal loss (4) Value of production

Abnormal gain account

To Normal loss To Net gain transferred to costing P&L a/c

Units Cost per unit 25 – – –

25

–

Total – 450

450

Units Cost per unit 25 18 By Process ‘N’

25

–

Total 450

450

310 Cost Accounting

With Abnormal Loss, Abnormal Gain and Normal Loss 9. The product CD is obtained after it passes through three distinct processes. The following information is obtained from the accounts for the month ending December 31, 2008. Items

Total

Direct materials

7,542

Process I 2,600

Direct wages

9,000

2,000

Production overheads

9,000

Process II Process III 1,980 2,962 3,000

4,000

1000 units at ` 3 each were introduced to process I. There was no stock of materials or work-in-progress at the beginning or end of the period. The output of each process passes direct to the next process and finally to finished stores. Production overhead is recovered at 100% of direct wages. The following additional data are obtained. Process Output during the month % of normal loss to input Value of scrap per unit I 950 5% 2 II 840 10% 4 III

750

15%

5

Prepare process cost accounts and abnormal gain or loss accounts. (B.Com., Madras University, March 1994) Solution: Process I account

To Raw materials

Units Cost per unit 1,000 3

Total

To Direct materials

–

–

To Direct wages

–

–

3,000 By Normal loss 5% 2,600 By Production transfered to process II account 2,000

To Production overheads (100% of direct wages)

–

–

2,000

1.000

–

9,600

Units Cost per Total unit 50 2 100 950

10

9,500

1.000

–

9,600

Process II account

To Process I

Units Cost per unit 950 10

Total 9,500 By Normal loss

Units Cost per Total unit 95 4 380 Contd...

Process Costing

311

Contd...

To Direct materials

–

–

To Direct wages To Production overheads (100% of direct wages )

– –

– –

950

–

1,980 By Production transferred to process III 3,000 By Abnormal loss 3,000

17,480

Working Note: (1) Abnormal gain (units) Input (–) Normal loss 10% Normal production Actual production

: : : :

Abnormal gain

:

(2) Cost of production per unit

(3) Value of abnormal loss (4) Value of production

950 95 855 840

840

20

16,800

15

20

300

950

–

17,480

units units units units

15 units

Total Cost–Normal Scarp Value Normal Production 17, 480 – 380 = = ` 20 855 = 15 units × ` 20 per unit = ` 300. = 840 units × ` 20 per unit = ` 16,800.

=

Process III account

To Process II

Units Cost per unit 840 20

To Direct materials

–

–

To Direct wages

–

–

To Production overhead (100% of direct wages) To Abnormal gain

–

–

36 876

Total 16,800 By Normal loss – 15% 2,962 By Production transferred to fin. stock 4,000

Units Cost per Total unit 126 5 630 750

38

28,500

4,000

36

1,368 29,130

876

29,130

312 Cost Accounting

Working Note: (1) Abnormal gain (units) Input (–) Normal loss 15% Normal production Actual production Abnormal gain (2) Cost of production per unit

(3) Value of abnormal loss (4) Value of production

: :

840 units 126 units

: : :

714 units 750 units (–)36 units

Total cost–Normal scarp value Normal production 27,762 – 630 = = ` 38 714 = 36 units × ` 38 per unit = ` 1,368. = 750 units × ` 38 per unit = ` 28,500.

=

With Abnormal Gain and Abnormal Loss, Sale of Finished Product 10. The following are the particulars relating to two processes X and Y for the month of January, 2005: Process X

Total Input (units) Normal loss (% of input) Additional cost incurred: Materials Direct labour Overheads Realizable value of scrap per unit Output (units)

Process Y 1,000 50,000 (at ` 1.50 per unit) 10% 5% – 35,000 27,500

4,080 45,000 39,500

` 0.50 43,000

`2 43,000

The entire output of process X was transferred to process Y. The entire output of process Y was sold at ` 6 per unit. Assume there was no opening or closing stock of any type in process X and Y. You are required to prepare the necessary accounts for the period. (B.Com. (Hons.), Delhi University, 2005) Solution: Process X account

To Input

Units Cost per unit 50,000 1.50

Total 75,000 By Normal loss 10%

Units Cost per unit 5,000 0.50

Total 2,500 Contd...

Process Costing

313

Contd...

To Direct labour

–

–

To Overheads

–

–

50,000

–

35,000 By Output transferred to process Y 27,500 By Abnormal loss 1,37,500

Working Note: (1) Abnormal loss (units) Input (–) Normal loss 10%

: :

50,000 units 5,000 units

Normal production Actual production

: :

45,000 units 43,000 units

Abnormal loss

:

2,000 units

(2) Cost of production per unit =

43,000

3 1,29,000

2,000

3

50,000

–

6,000 1,37,500

Total Cost–Normal Scarp Value Normal production

(3) Value of abnormal loss

1,37,500 – 2,500 = `3 45,000 = 2,000 units × ` 3 per unit = ` 6,000.

(4) Value of production

= 43,000 units × ` 3 per unit = ` 1,29,000.

=

Process Y account Units Cost per Total unit 43,000 3 1,29,000 By Normal loss To Process X To Direct materials 1,000 – 4,080 By Production transfered to fin. stock To Direct labour – – 45,000 To Overheads To Abnormal gain

– 1,200

–

Units Cost per Total unit 2,200 2 4,400 43,000 5.10 2,19,300

39,500

5.10

45,200

6,120 2,23,700

45,200

2,23,700

Finished stock account Units To Process Y

43,000

Cost per unit 5.10

Total 2,19,300 By Sales

Units 43,000

Cost per unit 6

Total 2,58,000 Contd...

314 Cost Accounting Contd...

To Profit

–

–

38,700

43,000

2,58,000

Working Note: (1) Input (43,000 + 1,00) Less: Normal loss 5%

43,000

= =

44,000 units 2,200 units

Normal production Actual production

= =

41,800 units 43,000 units

Abnormal gain

=

(–) 1,200 units

(2) Cost per unit

=

Total cost–Normal scrap value Normal production

=

2,17,500 – 4, 400 = ` 5.10 41,800

2,58,000

11. A product is produced in three consecutive processes. The details are given below: Items Raw materials used (1000 tonnes) ` Wages (`) Weight lost (% of input) Scrap (Sale price ` 50 per tonne) Sale price per tonne (`)

Process I Process II Process III 2,00,000 – – 87,500

39,500

10,710

5% 50 tons

10% 30 tons

20% 51 tons

350

500

850

Management expenses were ` 17,500 and selling expenses ` 10,000. Two-thirds of the output of process I and one half of the output of process II are passed on to the next process and the balances are sold. The entire output of process III is sold. Prepare the three processes accounts and a statement of profit. (B.Com., Madras University, March, 1993). Solution:

Process I account

To Raw materials To Wages

Units Cost per Total unit 1,000 – 2,00,000 By Normal loss Weight loss 5% – – 87,500 Scrap

Units 50

Cost per unit –

50

50

Total – 2,500 Contd...

Process Costing

315

Contd...

By Output: – 2/3 transferred to process II – 1/3 tranferred to fin. stock 1,000

–

2,87,500

316.67 1,90,000

300

316.67

1,000

Working note: (1) Output = Input – Weight loss – scrap = 1000 – 50 – 50 = 900 tons (2) Cost of production per unit

600

=

–

95,000 2,87,500

Total cost–Normal scrap value Normal Production

2,87,500 – 2,500 = ` 316.67 900 = 600 tonnes × ` 316.67 = ` 1,90,000.

=

2 output tranfered to process II 3 1 (4) Value of output transfered to finished stock = 300 tonnes × ` 316.67 = ` 95,000. 3 Process II account

(3) Value of

To Process I

To Wages

Units Cost per Total unit 600 316.67 1,90,000 By Normal loss:

Units

Weight loss 10%

60

–

600

–

39,500 Scrap By Output: 1 – transferred to 2 process III 1 – transferred to 2 fin. stock 2,29,500

Working Note: (1) Output

= Input – Weight loss – scrap = 600 – 60 – 30 = 510 tonnes

30

Cost per unit

Total

–

– 50

1,500

255

447.06 1,14,000

255

447.06 1,14,000

600

2,29,500

316 Cost Accounting

(2) Cost of production per tonne =

=

Total cost-Scrap Output

2, 29,500 – 1,500 = ` 447.06 (Approx) 510

Process III account Units Cost per Total unit To Process II 255 447.07 1,14,000 By Normal loss:

Units

Weight loss 20%

51

To Wages

–

–

10,710 Scrap By Output – transferred to fin. stock 1,24,710

255

Cost per unit

Total

–

–

51 153

50 2,550 798.43 1,22,160

255

1,24,710

Finished Stock account Units Cost per unit

Units Cost per unit

Total

To Transfer from:

Total

By Sales:

Process I Process II Process III To Management expenses

300 255 153 –

316.67 95,000 Process I 447.06 1,14,000 Process II 798.43 1,22,160 Process III – 17,500

To Selling expenses

–

–

10,000

To Profit

–

–

3,890

708

–

3,62,550

300 255 153

708

350 1,05,000 500 1,27,500 850 1,30,050

–

3,62,550

12. From the following figures, calculate the cost of the three processes where output of one process is passed on to the next process immediately on completion.

Wages and materials Works overhead Production-in units Stocks (units from proceeding process) 1st July 2008 Stocks (units from proceeding process) 31st July 2008

Process A 30,400 5,600 36,000 Nil

Process B 12,000 5,250 37,500 4,000

Process C 29,250 6,000 48,000 16,500

Nil

1,000

5,500

Process Costing

317

Solution: Process A account

To Wages and materials To Works overhead

Units Cost per Total Units unit 36,000 – 30,400 By Production 36,000 transferred to process B – – 5,600 36,000

–

36,000

36,000

Cost per Total unit 1 36,000

–

36,000

Process B account Units Cost per Total unit To Opening stock 4,000 1 4,000 By Normal loss 36,000 – 36,000 By Output To Process A transferred to process B To Wages and materials – – 12,000 By Closing stock To Works overhead – – 5,250 40,000

–

57,250

Units Cost per Total unit 1,500 – – 37,500

1.50

56,250

1,000

1

1,000

40,000

–

57,250

Process C account

To Opening stock

Units Cost per unit 16,500 1.50

To Process B

37,500

–

–

–

–

–

54,000

–

To wages and materials To works overhead

Total

Units Cost per unit 500 –

24,750 By Normal loss (b/f) 56,250 By Production 48,000 transferred to finished stock 29,250 By Closing 5,500 stock 6,000 1,16,250

54,000

Total –

2.25

1,08,000

1.50

8,250

–

1,16,250

With no Process Loss 13. Product z requires three distinct processes and after the third process the product is transferred to finished stock. You are required to prepare various process accounts from the following information.

318 Cost Accounting

Items Materials Labour Direct expenses Production overheads

Total Process I Process II 12,000 9,600 1,440 9,600 3,600 3,840 1,920 1,200 720 14,400 – –

Process III 960 2,160 – –

Production overhead is to be allocated to different processes on the basis of labour. Production during the period was 480 units but there is no opening and closing stock. Prepare process accounts for all the three processes. (B.Com., Madras University, October, 1988) Solution: Process I account

To Materials

To Labour

Units Cost per Total unit 480 – 9,600 By Production transferred to process II – – 3,600

To Direct expenses

–

–

1,200

To Production overheads (150% of wages)

–

–

5,400

480

–

19,800

Units Cost per unit 480 41.25

480

–

Total 19,800

19,800

Process II account

To Process I

To Materials

Units Cost per Total Units Cost per Total unit unit 480 41.25 19,800 By Production 480 65.75 31,560 transferred to process II – – 1,440

To Labour

–

–

3,840

To Direct Exp.

–

–

720

To Production overheads (150% of wages)

–

–

5,760

480

–

31,560

480

–

31,560

Process Costing

319

Process III account

To Process II

To Materials

Units Cost per Total Units Cost per Total unit unit 480 65.75 31,560 By Production 480 79 37,920 transferred to Fin. Stock – – 960

To Labour

–

–

2,160

To Production overheads (150% of wages)

–

–

3,240

480

–

37,920

480

–

37,920

14. A product is obtained after passing it through three processes. The following information is collected for January 2009: Direct materials (`) Direct wages Output in units during the month Normal loss Value of scrap per unit (`)

Process I 5,200

Process II 3,960

Process III 5,924

4,000 950 5% 4

6,000 840 10% 8

8,000 750 15% 10

Additional information: 1000 units at ` 6 each were introduced in process I. Therefore no stock of materials or WIP at the beginning or at the end of the month. The production overhead was ` 18,000 for that month. They are to be allocated on the basis of direct wages. Prepare the process accounts indicating normal loss, abnormal loss and abnormal gain. (B.Com., Madras University, October, 1995) Solution: Process I account

To Materials To Direct materials

To Direct wages To Production overheads (100% of wages)

Units Cost per Total unit 1,000 6 6,000 By Normal loss 5% – – 5,200 By Production transferred to process II – – 4,000 –

–

4,000

1,000

–

19,200

Units Cost per Total unit 50 4 200 950

1,000

20

–

19,000

19,200

320 Cost Accounting

Process II account Units Cost per Total Units Cost per Total unit unit To Process I 950 20 19,000 By Normal 95 8 760 loss 10% To Direct materials – – 3,960 By Production 840 40 33,600 transferred to process III To Direct wages – – 6,000 By Abnormal 15 40 600 loss To Production overheads – – 6,000 (100% of wages) 950 – 34,960 950 – 34,960 Working Note: (1) Abnormal loss (units) Input (–) Normal loss 10%

: :

950 units 95 units

Normal production

:

855 units

Actual production

:

840 units

Abnormal loss

:

15 units

(2) Cost of production per unit

=

Total cost–Normal scarp Normal production

34,960 – 760 = ` 40 855 = 15 units × ` 40 = ` 600. = 840 units × ` 40 = ` 33,600

= (3) Value of abnormal loss (4) Value of production

Process III account

To Process II To Direct materials

To Direct wages

Units Cost per Total Units Cost per Total unit unit 840 40 33,600 By Normal 126 10 1,260 loss 15% – – 5,924 By Production 750 76 57,000 transferred to fin. stock – – 8,000 Contd...

Process Costing

321

Contd...

To Production overheads (100% of wages) To Abnormal gain

–

–

36

76

876 Working Note: (1) Abnormal gain (units) Input (–) Normal loss 15%

8,000

–

2,736 58,260

: :

840 units 126 units

Normal production Actual production

: :

714 units 750 units

Abnormal gain

:

(–) 36 units

(2) Cost per unit of production

=

876

–

58,260

Total cost–Normal scrap value Normal production

55,524 – 1, 260 = 76 714 = 36 units × ` 76 = ` 2,736. = 750 units × ` 76 = ` 57,000

= (3) Value of abnormal loss (4) Value of production

15. Prepare the necessary accounts from the following details Materials Labour Overheads Input (units) Normal loss

Process A 30,000 10,000 7,000 20,000 10%

Process B 3,000 12,000 8,600 17,500 4%

Sale value of wastage per unit 1 There was no opening or closing stock or work-in-progress. Final output from process B was 17,000 units. Entire output of process A was transfered to process B. (B.Com, Madras University, April 1987) Solution: Process A account

To Input To Labour

Units Cost per Total unit 20,000 – 30,000 By Normal loss 10% –

–

Units Cost per Total unit 2,000 1 2,000

10,000 By Production 17,500 transferred to process B

2.50

43,750 Contd...

322 Cost Accounting Contd...

T o Overheads

–

–

20,000

–

7,000 By Abnormal loss 47,000

20,000

Working Note: (1) Abnormal loss (units) Input

:

20,000 units

(–) Normal loss 10%

:

2,000 units

Normal production

:

18,000 units

Actual production

:

17,500 units

Abnormal loss

:

500 units

=

Total cost–Normal scrap value Normal production

=

47,000 – 2,000 = ` 2.50 18,000

(2) Cost of production per unit

500

(3) Value of abnormal loss

= 500 units × ` 2.50 = ` 1,250.

(4) Value of production

= 17,500 units × ` 2.50 = ` 43,750

2.50 –

1,250 47,000

Process B account

To Process A To Materials

To Labour To Overheads To Abnormal gain

Units Cost per Total unit 17,500 2.50 43,750 By Normal loss 4% – – 3,000 By Production transferred to fin. stock – – 12,000 –

– 200

17,700 Working Note: (1) Abnormal gain (units) Input (–) Normal loss 4% Normal production Actual production

Units Cost per Total unit 700 1 700 17,000

3.967

67,440

17,700

–

68,140

8,600

3.967 –

790 68,140

: :

17,500 units 700 units

: :

16,800 units 17,000 units

Process Costing

Abnormal gain

:

323

(–) 200 units

Total cost–Normal scrap value Normal production 67,350 – 700 = = ` 3.967 (approx) 16,800

(2) Cost of production per unit =

= 200 units × ` 3.967= ` 793.4. = 17,000 units × ` 3.967 = ` 67,439

(3) Value of abnormal gain (4) Value of production

With Normal Loss Only 16. A product passes through three possess A, B and C. 10,000 units at a cost of ` 1 were issued to process A. The other direct expense were: Process A 1,000 5,000 1,050

Sundry materials Direct labour Direct expenses

Process B 1,500 8,000 1,188

Process C 1,480 6,500 1,605

The wastage of process A was 5%, process B 4%, and process C 5%. The wastage of process A has sold at ` 0.25 per unit and that of B at ` 0.50 per unit and that of C at ` 1.00 per unit. Prepare process accounts. (B.Com., Madras University, March 1989) Solution: Process A account Units Cost per Total unit To Raw material 10,000 1 10,000 By Normal loss 5% To Sundry materials – – 1,000 By Production transfered to process B To Direct labour – – 5,000 To Direct exp.

–

–

1,050

10,000

–

17,050

Units Cost per Total unit 500 0.25 125 9,500

10,000

1.78

–

16,925

17,050

Process B account

To Process A

Units Cost per Total unit 9,500 1.78 16,925 By Normal loss 4%

Units Cost per Total unit 380 0.50 190 Contd...

324 Cost Accounting Contd...

To Sundry materials

–

–

To Direct labour

–

–

1,500 By Production transferred to Process C 8,000

To Direct exp.

–

–

1,188

9,500

–

27,613

9,120

9,500

3.01

–

27,423

27,613

Process C account

To Process B To Sundry materials

To Direct labour To Direct exp.

Units Cost per Total unit 9,120 3.01 27,423 By Normal loss 5% – – 1,480 By Production transferred to Process C – – 6,500 –

–

1,605

9,120

–

37,008

Units Cost per Total unit 456 1 456 8,664

9,120

4.22

–

36,552

37,008

17. A product passes through two processes. The output of process I becomes the input of process II and the output of process II is transferred to warehouse. The quantity of raw materials introduced into process I is 20,000 kg at `10 per kg. The cost and output data for the month under review are as under:

Direct Materials (`) Direct Labour (`) Production overheads Normal loss on input Output (units) Realization of scrap per unit

Process I 60,000

Process II 40,000

40,000

30,000

39,000 8% 18,000 2.00

40,250 5% 17,400 3.00

The company’s policy is to fix the selling price of the end product in such way as to yield a profit of 20% on selling price. Required: (i) Prepare the process accounts (ii) Determine the selling price per unit of the end product. (ICWA (Inter), Nov. 2002)

Process Costing

325

Solution: Process I account

To Raw materials

Units Cost per unit 20,000 10

Total

To Direct materials

–

–

To Direct labour

–

–

To Production overheads

–

–

2,00,000 By Normal loss 8% 60,000 By Output transferred to process II 40,000 By Abnormal loss 39,000

20,000

–

3,39,000

Working Note: (1) Abnormal loss (units) Input (–) Normal loss 8%

: :

20,000 units 1,600 units

Normal production Actual production

: :

18,400 units 18,000 units

Abnormal loss

:

400 units

(2) Cost of production per unit =

Units Cost per unit 1,600 2 18,000

400

20,000

Total 3,200

18.25 3,28,500

18.25

–

7,300

3,39,000

Total cost–Normal scrap value Normal production

3,39,000 – 3, 200 ` 18.25 18, 400 = 400 units × ` 18.25 = ` 7,300. = 18,000 units × ` 18.25 = ` 3,28,500.

= (3) Value of abnormal loss (4) Value of production

Process II account

To Process I To Direct materials To Direct Labour

Units Cost per Total unit 18,000 18.25 3,28,500 By Normal loss 5% – – 40,000 By Production transferred to fin. stock – – 30,000

Units Cost per unit 900 3 17,400

25.50

Total 2,700 4,43,700

Contd...

326 Cost Accounting Contd...

To Production overheads To Abnormal gain

–

–

300

25.50

18,300

40,250 7,650

–

Working Note: (1) Abnormal gain (units) Input (–) Normal loss 5%

4,46,400

: :

18,000 units 900 units

Normal production Actual production

: :

17,100 units 17,400 units

Abnormal gain

:

(–) 300 units

(2) Cost of production per unit

18,300

=

Total cost–Normal scrap value Normal production

=

4,38,750 – 2,700 ` 25.50 17,100

(3) Value of abnormal gain

= 300 units × ` 25.50 = ` 7,650.

(4) Value of production

= 17,400 units × ` 25.50 = ` 4,43,700.

–

4,46,400

Finished stock account

To Process II To Profit 20% on selling price (or) 20/80 on cost price

Units Cost per Total unit 17,400 25.50 4,43,700 By Sales – – 1,10,925

Units Cost per Total unit 17,400 31.875 5,54,625

17,400

17,400

–

5,54,625

–

5,54,625

18. The manufacturing operations of Lovely Products Limited, involve three distinct processes for its product. The output of process P is charged to process Q at a profit of 25% on cost and that of process Q to process R on similar basis. The completed production is transferred to stock at a price which gives process R a profit of 25% on cost. From the following particulars, prepare process accounts and finished stock account. The stock in each process is valued at prime cost.

Process Costing

Process P Process Q Materials 14,000 21,000 Labour 21,000 14,000 Closing stock 7,000 14,000

327

Process R 7,000 27,000 21,000

Show also the actual realised profit to be taken to the credit of the profit and loss account. (B.Com., Madras University, October, 1987) Solution: Process P account

To Materials

Units Cost per unit 14,000 –

To Labour

21,000

–

Units Cost per Total unit 14,000 By Production 28,000 7,000 35,000 transferred to process Q 21,000

35,000

–

35,000

7,000

–

7,000

28,000

–

28,000

Less: Closing stock To Profit 25% on cost

Total

–

7,000

7,000

28,000

7,000

35,000

28,000

7,000

35,000

Process Q account

To Process P

Units Cost per unit 28,000 7,000

To Materials

21,000

–

Units Cost per Total unit 35,000 By Production 50,400 19,600 70,000 transferred to process Q 21,000

To Labour

14,000

–

14,000

63,000

7,000

70,000

12,600

1,400

14,000

50,400

5,600

56,000

–

14,000

14,000

50,400

19,600

70,000

Less: Closing stock To Profit 25% on cost

Total

50,400

19,600

70,000

328 Cost Accounting

Process R account

To Process Q

To Materials To Labour

Units Cost per unit 50,400 19,600

7,000

–

Units Cost per unit 70,000 By Production 67,358 36,392 transferred to finished stock 7,000

27,000

–

27,000

84,400 Less: Closing stock To Profit

Total

Total 1,03,750

19,600 1,04,000

17,042

3,958

21,000

67,358

15,642

83,000

–

20,750

20,750

67,358

36,392 1,03,750

67,358

36,392

1,03,750

Statement showing realised profit Process P Q R Total

Process profit 7,000 14,000 20,750 41,750

Unrealised profit – 1,400 3,958 5,358

Realised profit 7,000 12,600 16,792 36,392

19. Product A passes through three processes, before it is transferred to the finished stock. The following information is obtained for the month of July: Items Opening stock Direct materials Direct wages Manufacturing overheads Closing stock Profit percentage on transfer price to next process Inter process profit for opening stock

Process I 5,000 40,000 35,000 20,000 10,000 25% –

Process II 8,000 12,000 40,000 24,000 4,000 20% 1,395

Process III 10,000 15,000 35,000 20,000 15,000 10% 2,690

Finished stock 20,000 – – – 30,000 – 6,534

Stock in process is valued at prime cost and finished stock has been valued at the price at which it is received from process III. Sales during the period were ` 4,00,000. Required: (i) Process accounts (ii) Actual realized profit

Process Costing

329

(iii) Valuation of stock for balance sheet purpose. (ICWA – Inter-adopted) Solution: Process I account

To Direct materials

Units Cost per unit 40,000 –

To Direct wages

35,000

–

40,000 By Production transfered to process II 35,000

Prime cost

75,000

–

75,000

To Manufacturing overheads To Opening stock

20,000

–

20,000

5,000

–

5,000

1,00,000 Less: Closing stock To Profit 25% on transfer price or 1/3 on cost

Total

–

10,000

90,000

–

90,000

30,000

30,000

90,000

1,20,000

90,000

1,20,000

Total

1,00,000

10,000 –

Units Cost per unit 90,000 30,000

30,000 1,20,000

30,000

Process II account

To Process II

To Direct materials To Direct wages Prime cost To Manufacturing overheads To Opening stock

Units Cost per Total Units Cost per Total unit unit 90,000 30,000 1,20,000 By 1,69,303 80,697 2,50,000 Production transfered to process II 12,000 – 12,000 40,000 1,42,000 24,000 6,605 1,72,605

–

40,000

30,000 1,72,000 – 1,395

24,000 8,000

31,395 2,04,000 Contd...

330 Cost Accounting Contd...

Less: Closing stock

3,302 1,69,303

To Profit 20% on transfer price or 1/4 on cost

–

1,69,303

698

4,000

30,697 2,00,000 50,000

50,000

80,697 2,50,000

1,69,303

80,697 2,50,000

Process III account

Cost

Profit 1,69,303 80,697

To Process III

To Direct materials To Direct wages Prime cost To Manufacturing overheads To Opening stock Less: Closing stock To Profit 10% on transfer price or 1/9 on cost

15,000 35,000 2,19,303 20,000

– – 80,697 –

Total Cost Profit Total 2,50,000 By 2,35,648 1,14,352 3,50,000 Production transferred to finished stock a/c 15,000 35,000 3,00,000 20,000

7,310 2,46,613 10,965 2,35,648 –

2,690 83,387 4,035 79,352 35,000

10,000 3,30,000 15,000 3,15,000 35,000

2,35,648 1,14,352

3,50,000

2,35,648 1,14,352 3,50,000

Finished stock account

Cost

Profit To Opening stock 13,466 6,534 To Process III 2,35,648 1,14,352 To Profit

– 60,000 2,49,114 1,80,886

Total 20,000 By Sales 3,50,000 By Closing stock 60,000 4,30,000

Cost Profit Total 2,28,916 1,71,084 4,00,000 20,198 9,802 30,000

2,49,114 1,80,886 4,30,000

Process Costing

331

Statement showing actual realised profit Process (1)

Process Profit (2)

I II III Finished stock Total

30,000 50,000 35,000 60,000 –

Unrealised profit Closing stock Opening stock (3) (4) – – 1,395 698 2,690 4,035 6,534 9,802 – –

Actual realised (2 + 3 – 4) = (5) 30,000 50,697 33,655 56,732 1,71,084

Valuation of closing stock for balance sheet purpose Process I II III Finished stock Total

Closing Stock 10,000 4,000 15,000 30,000 –

Unrealised profit – 698 4,035 9,802 –

Cost price 10,000 3,302 10,965 20,198 44,465

Work-in-progress – Computation of Equivalent Units Only 20. During the month of April 2009, 15,000 units were introduced into process A 13,500 units were completed and passed on to process B. The remaining units were completed in all respects to the extent of 80%. Complete the equivalent units for the purpose of cost ascertainment. Solution:

Statement showing equivalent units Particular Completed units Closing stock of WIP Total

No. of units Degree of completion Equivalent units 13,500 100% 13,500 1,500 80% 1,200 – – 14,700

21. Two processes are involved in the production of product ‘max’. In A Limited 20,000 units are introduced in process X at ` 5 per unit. The other expenses incurred are direct labour ` 57,000 and production overheads amount to ` 47,500. 16, 000 units were completed and passed on to process y. The balance units were 100% complete regarding materials and 75% regarding labour and overheads.

332 Cost Accounting

Required: (i) Statement of equivalent production (ii) Statement of cost (iii) Statement of evaluation and (iv) Process x account Solution: (i) Statement of equivalent production Input

Output Units

Units

Units introduced 20,000 Units completed 16,000 Closing WIP 4,000 20,000 20,000

Equivalent production Materials Labour and Overheads % Units % Units 100% 16,000 100% 16,000 100% 4,000 75% 3,000 20,000 19,000

(ii) Statement of cost Particular

Total cost Raw materials 1,00,000 Labour 57,000 Overheads 47,500 Total –

Equivalent units 20,000 19,000 19,000 –

Cost per equivalent unit 5.00 3.00 2.50 10.50

(iii) Statement of evaluation Particular

Elements of cost

Units completed Total cost Closing stock of WIP Materials Labour Overheads

No. of units 16,000 4,000 3,000 3,000

Cost p/u 10.50 5.00 3.00 2.50

Total cost 1,68,000 20,000 9,000 7,500 36,500

(iv) Process X account Units Cost per Total Units unit To Raw materials 20,000 5 1,00,000 By Production 16,000 To Labour – – 57,000 By Closing WIP 4,000 To Overheads – – 47,500 20,000 – 2,04,500 20,000

Cost per Total unit 10.50 1,68,000 – 36,500 –

2,04,500

Process Costing

333

With Closing Stock, Normal Loss and Abnormal Loss 22. During the month of April 2003, 4,000 units were introduced into process A at a cost of ` 23,200. At the end of the month 3,000 units were completed and transferred to process B account. 720 units were still in process and 280 units were scraped. A normal wastage of 5% was expected. It was estimated that the incomplete units have reached a stage in production as follows. Materials Labour and overheads

75% 50%

The additional costs incurred were: ` Materials Wages Overheads

6,160 13,760 6,880

Units scrapped realized at ` 2 per unit. Prepare: (i) A statement showing equivalent production and (ii) Statement shaving cost per unit. Solution: (i) Statement of equivalent production Input

Output Units

Units introduced

Units

4,000 Units completed 3,000 Closing WIP 720 Normal loss 200 Abnormal loss 80 4,000 4,000

Equivalent production Materials Labour and Overheads % Units % Units 100% 3,000 100% 3,000 75% 540 50% 360 – – – – 100% 80 100% 80 3,620 3,440

Note: It is assumed that abnormal loss arose only at the end of the process. Hence, 100% degree of completion is taken for abnormal loss units. (ii) Statement showing cost per unit Particulars Raw materials Add: Additional materials

Total cost

units

Cost per unit

23,200 6,160 29,360 Contd...

334 Cost Accounting Contd...

Less: Normal scrap Wages Overheads Total

400

–

28,960 13,760 6,880 –

3,620 3,440 3,440 –

8 4 2 14

Equivalent Units Only: FIFO 23. The following data are available in respect of process Z for January, 2007. (i) Opening stock of work-in-progress 800 units at a cost of ` 4,000. (ii) The degree of completion of opening work-in-progress: materials 100%, labour 60% and overheads 60%. (iii) Input of materials 9,200 units. (iv) Units scraped 1,200 units. The stage of completion is materials 100%, labour 80% and overheads 80%. (v) Closing work-in-progress: 900 units. The stage of completion of these units was: materials 100%, labour 70% and overheads 70%. (vi) 7,900 units were completed and transferred to next process. (vii) Normal loss is 8% of the total input. Your are required to compute equivalent production under FIFO method. (B.Com. (Hons.), Delhi University, 2007) Solution: (i) Statement of equivalent production Input

Output Units

Opening WIP Units introduced

Units

Equivalent production Materials Labour and Overheads % Units % Units

800 Units completed: 9,200 (i) Opening WIP (ii) Units introduced Closing WIP Normal loss Abnormal loss 10,000

800

–

–

7,100 100% 7,100 7,900 900 100% 900 800 – – 400 100% 400 10,000

8,400

40%

320

100%

7,100

70% –

630 –

80%

320 8,370

Process Costing

335

24. The following particulars are extracted from the books of Y Limited for the month of August 1998: Opening stocks of WIP Degree of completion:

200 units Materials

100%

Labour Overhead Units introduced in August 1998 Completed units in August 1998 Closing WIP (units) Degree of completion: Materials Labour Overhead

40% 40% 1050 1100 150 100% 70% 70%

Prepare a statement of equivalent production. Solution: (i) Statement of equivalent production Input

Output Units

Opening WIP

200

Units introduced 1,050

Units

Equivalent production Materials Labour and Overheads % Units % Units

Units completed: (i) Opening WIP (ii) Units introduced Closing WIP

1,250

200

–

–

900 100% 900 1,100 150 100% 150 1,250 1,050

60%

120

100%

900

70%

105 1,125

–

FIFO Method – Abnormal Gain 25. From the following information for the month of October, 2003, prepare process III cost account. Opening WIP in process III – 1800 units at ` 27,000 Transfer from process II – 47,700 units at ` 5,36,625 Transferred to warehouse – 43,200 units Closing WIP of process III – 4,500 units Units scrapped – 1800 units

336 Cost Accounting

Direct materials added in process III – ` 1,77,840 Direct wages – ` 87,840 Production overheads – ` 43,920 Degree of completion: Opening Stock Materials 80% Labour 60% Overheads 60%

Closing Stock 70% 50% 50%

Scraped Units 100% 70% 70%

The normal loss in process was 5% of the production and scrap was sold at ` 6.75 per unit. (CA-PEII, November 2003) Solution: Statement of equivalent production Input

Opening WIP

Output

Units 1,800 Output:

Units

Equivalent Production Materials I Materials II Labour and overheads % Units % Units % Units

(i) Opening WIP 1,800 – 47,700 (ii) Input 41,400 100% 43,200 Closing WIP 4,500 100% Normal loss 5% 2,250 – 49,950 – Less: Abnormal 450 100% gain 49,500 49,500 –

– 20% 360 40% 720 41,400 100% 41,400 100% 41,400 4,500 70% 3,150 50% 2,250 – – – – – 45,900 – 44,910 – 44,370 450 100% 450 100% 450 45,450

–

44,460

–

43,920

Statement of cost Total cost Material I – 5,36,625.00 (–) Normal loss 2,250 × 6.75 = 15,187.50 5,21,437.50 Materials II – 1,77,840 Direct labour 87,840 Overheads 43,920 Total

Equivalent unit Cost p/u 45,450 44,460 43,920 43,920

11.4728 4.00 2.00 1.00 18.4728

Process Costing

337

Statement of evaluation Elements of cost

Equivalent units Cost Per unit

Units completed (i) From op. WIP OP. balance Materials II Labour Overheads (ii) From input Total cost Closing WIP:

Materials I Materials II Labour & overheads

Abnormal gain

Total cost

– 360 720 720 41,400

– 4 2 1 18.4728

4,500 3,150 2,250

11.4728 4.00 3.00

450

18.4728

Total 27,000 1,440 1,440 720 7,64,774 7,95,374 51,628 12,600 6,750 70,978 8,313

Process III A/c Units Cost per Total Units Cost per Total unit unit To Opening WIP 1,800 – 27,000 By Normal loss 2,250 6.75 15,188 To Process II 47,700 – 5,36,625 By Transfer to 43,200 – 7,95,371 fin. stock To Direct materials – – 1,77,840 By Closing WIP 4,500 – 70,979 To Direct wages – – 87,840 To Production overheads To Abnormal gain

–

–

43,920

450

–

8,313

49,950

8,81,538

49,950

8,81,538

Average Cost Method – Equivalent Units Only 26. Following information is available regarding process A for the month of June 2009. (i) Opening work-in-progress: 2,000 units Degree of completion: Materials 100% Labour and Overheads 70% (ii) Unit introduced into the process – 16,000 units (iii) Units scrapped – 2,000 units

338 Cost Accounting

Degree of completion: Materials 100% Labour and overheads 60% (iv) Units transferred to next process – 16,000 units (v) Normal loss 10% of total input. Prepare equivalent production using average method Solution: (i) Statement of equivalent production Input

Output Units

Units

Opening WIP 2,000 Units completed Units introduced 16,000 Normal loss Abnormal loss 18,000

16,000 1,800 200 18,000

Equivalent production Materials Labour and Overheads % Units % Units 100% 16,000 100% 16,000 – – – – 100% 200 60% 120 16,200 – 16,120

27. The following information is given in respect of process III for the month of January 2001: Opening stock – 2,000 units, made up of: Direct Materials – I ` 12,350 Direct Materials – II ` 13,200 Direct labour ` 17,500 Overheads ` 11,000 Transfer from process No. 2: 20,000 units at ` 6.00 per unit. Transfer to process no. 4: 17,000 units. Direct Materials ` 30,000 Direct labour ` 60,000 Overheads ` 60,000 Scrap: 1000 units Direct Materials 100% Direct labour 60% Overheads 60% Normal loss: 10% of Total input including opening WIP: Scrapped units realized ` 4 per unit. Closing stock: 4,000 units Degree of completion: Direct Materials 80% Direct labour 60% Overheads 40%

Process Costing

339

Prepare process no. 3 Account using average price method, along with necessary supporting statement. (CA (Inter), May – 2001) Solution:

Statement of equivalent production

Input

Output

Equivalent Production Materials I

Units Opening WIP From Process 2

Units

%

Units

Materials II %

Units

Labour %

2,000 Units 17,000 100% 17,000 100% 17,000 100% completed 20,000 Closing WIP Normal loss 10%

4,000 100%

1,700 22,700

Less: Abnromal gain 22,000

–

4,000

80%

–

–

22,000

–

– 21,000

700 100%

3,200

–

20,200

700 100%

20,300

60%

Units

%

Units

17,000 100%

17,000

2,400

– –

700 100%

19,500

overheads

19,400

40%

1,600

–

– –

18,600

700 100%

700

18,700

17,900

Statement of cost Total cost Material I (20,000 × 6) Add: Opening WIP Less: Normal scrap (1,700 × 4) Materials II Add: Opening WIP Labour Add: Opening WIP Overheads Add: Opening WIP Total

1,20,000 12,350 1,32,350 6,800 30,000 13,200 60,000 17,500 60,000 11,000

Equivalent units Rate p/u

1,25,550

20,300

6.1847

43,200

19,500

2.2154

77,500

18,700

4.1444

71,000 –

17,900

3.9665 16.511

–

340 Cost Accounting

Statement of evaluation Particulars

Elements of cost

Equv. units

(1) Completed units Total cost (2) Closing WIP Material I Material II Labour Overheads Total – 3. Abnormal gain Total cost

17,000 4,000 3,200 2,400 1,600 – 700

Cost p/u 16.511 6.1847 2.2154 4.1444 3.9665 – 16.511

Total cost 2,80,688 24,739 7,089 9,946 6,346 48,120 11,558

Process No. 3 Account Units Cost per unit

Total

To Opening WIP To Transfer from process No. 2

2,000 20,000

To Direct materials To Direct Labour

– –

– –

To Overheads

–

–

60,000

To Abnormal gain

700

–

11,558

22,700

–

3,35,608

Units Cost per unit

– 54,050 By Normal loss 1,700 6 1,20,000 By Output 17,000 transferred to Process No.4 30,000 By Closing WIP 4,000 60,000

22,700

4

Total 6,800 2,80,688

–

48,120

–

3,35,608

28. Process 2 receives units from process I and after carrying out works on the units, transfers them to process 3. For the accounting period the relevant data are as follows: Opening WIP 200 units (25% complete) valued at ` 5,000 800 units received from process I value at ` 8,600 840 units were transferred to process 3 Closing WIP 160 units (50% complete) The cost of the period were ` 33,160 and no units were scrapped. Required: Prepare the process 2 account using average cost method of valuation. (ICWA (Inter), Nov. 1995)

Process Costing

341

Solution: (i) Statement of equivalent production Input

Output

Opening WIP Units introduced

Units

Units

200 Units completed 800 Closing WIP 1,000

840 160 1,000

Equivalent production Materials Labour and Overheads % Units 100% 840 50% 80 920

Statement of cost Total Cost 5,000 8,600 33,160 46,760

Opening WIP Units received form Process I Other process costs Total

No. of units

Cost per unit

920

50.826

Statement of apportionment of cost No. of units Competed units Closing WIP

840 80

Rate p/u 50.826 50.826

Total 42,694 4,066

Process 2 account

To Opening WIP

To From process I To Other costs

Units Cost per unit 200 –

Total

800 –

– –

5,000 By Production Transfered to Process 3 8,600 By Closing WIP 33,160

1,000

–

46,760

Units Cost per unit 840 50.826

160 1,000

50.826 –

Total 42,694

4,066 46,760

FIFO Method 29. From the following details, prepare a statement of production, statement of cost and statement of evaluation. Opening WIP 500 units at ` 6 per unit.

342 Cost Accounting

Transfer from processes no. 1: 15,000 units at ` 32,175 Direct materials added in process No. 2: ` 10,350 Direct wages: ` 27,260 and production overheads ` 21,845. Units scrapped 800 Normal loss 5% of production. Transfer to process no.3: 13,200 units. Closing stock – 1,500 units Degree of completion: Opening Stock Closing Stock Scrapped Units Materials 80% 100% 60% Labour 50% 80% 40% Overheads 50% 80% 40% Units scrapped realized ` 2 per unit. (M.Com., Periyar University, April, 2008) Solution: (i) Statement of equivalent production Input

Opening WIP From process I

Output

Units 500 Units completed:

Units

15,000 (i) Opening WIP

500

(ii) Process 1 Closing WIP Normal loss Abnormal loss 15,500

Equivalent Production Materials I Materials II Labour and overheads % Units % Units % Units

–

12,700 100% 13,200 1,500 100% 700 – 100 100% 15,500 –

–

20%

100

50%

250

12,700 100% 12,700 100% 12,700 1,500 100% 1,500 – – – 100 60% 60 14,300 – 14,360

80% 1,200 – – 40% 40 – 14,190

Statement cost

Materials from process I (–) Normal scrap (700 × 2)

32,175 1,400

Total cost

Equivalent units

30,775

14,300

Rate p/u 2.1521 Contd...

Process Costing

343

Contd...

Materials added in the process Direct wages Overheads Total

27,260 21,845

10,350

14,360

0.7208

49,105 –

14,190 –

3.4605 6.3334

Statement of evaluation Particulars

Elements of cost Equv. units

(1) Units completed: (a) Opening WIP Opening value Material II Labour & OHS (b) From process I Total cost

Cost p/u

– 100 250 12,700

– 0.7208 3.4605 6.3334

(2) Closing WIP

Materials I Materials II Labour & OHS

1,500 1,500 1,200

2.1521 0.7208 3.4605

(3) Abnormal loss

Materials I Materials II Labour & OHS

100 60 40

2.1521 0.7208 3.4605

Total cost 3,000 73 865 80,434 84,372 3,228 1,081 4,153 8,462 215 43 138 396

Process No. 2 Account

To Opening WIP To Process 1

To Direct materials To Direct Wages To Production Overheads

Units Cost per unit 500 6 15,000 –

Total

–

–

– –

– –

3,000 By Normal loss 32,175 By Production transferred to Process No.3 10,350 By Abnormal loss 27,260 By Closing WIP 21,845

15,500

–

94,630

Units Cost per unit 700 2 13,200 6.39

Total 1,400 84,372

100

–

396

1,500

–

8,462

15,500

–

94,630

16 Chapter

Joint Products, By-products and Main Products Costing

A. Short Answer Type Problems: 1. A Ltd produces four joint products. The cost of raw materials consumed is ` 12,500. Expenses incurred upto separation stage are ` 7,500. The number of units produced were: A -650 units, B-430 units, C-520 units and D-400 units. Apportion the joint cost. Solution: Total joint cost: Cost of raw materials consumed Expenses incurred upto separation stage Total Joint Cost Ratio of units produced = 650 : 430 : 520 : 400 Apportionment of joint cost to products: Product A

= 20,000 ×

650 2,000

= ` 6,500

Product B

= 20,000 ×

430 2,000

= ` 4,300

Product C

= 20,000 ×

520 2,000

= ` 5,200

Product D

= 20,000 ×

400 2,000

= ` 4,000

2. Cost of process P: ` 42,000 Joint products produced Q- 600 units and R-500 units. Selling price per unit : Q ` 12 and ‘R’ ` 17.10. Apportion the joint cost on sales value basis. Solution: Sales value

= Number of units × Selling price p/u

12,500 7,500 20,000

Joint Products, By-products and Main Products Costing

Product

Q = 600 × 12 = ` 7,200

Product

R = 500 × 17.10 = ` 8,550

Ratio of sales

345

= 7200 : 8550

Joint cost of product

Q=

42,000 ¥ 7, 200 = ` 19,200 15,750

Joint cost of product

R=

42,000 ¥ 8,550 = ` 22,800 15,750

3. In a chemical industry by-product Y is obtained while producing main product X. The total cost incurred upto the separation point is: ` 25,000. Further processing cost incurred for main product is ` 5,000. The market value of main product X and by-product Y is ` 38,000 and ` 1,500. Find the profit from main product X if the sales value of by product Y is treated as other income. Solution: Sales value of main product X Less: Cost incurred upto separation point = 25,000 Further processing cost = 5,000 Profit

0 = 38,000 30,000 8,000

Note: Sales value of by product Y is credited to Profit and Loss account as other income. 4. In a dairy while producing the product M, by-product B is obtained. The cost incurred in the common process upto split-off point is ` 35,000. Further processing cost incurred for the main product is ` 9,000. The market value of the products M and B are ` 50,000 and ` 5,000 respectively. If sales revenue of by product B is added to the market value of main product M, find the profit. Solution: Computation of Profit Sales value of product - M Add: Sales value of product - B Total sales value Less: Joint cost incurred upto Split of point – 35,000 Further processing cost – 9,000 Profit

– 50,000 – 5,000 – 55,000

– 44,000 – 11,000

5. X Ltd produces four joint products A, B, C and D. Product C does not require further processing, hence sold at split off point for 65,000. Products A, B and D were sold after

346 Cost Accounting

further processing. The additional processing costs are: ` 18,000, ` 20,000 and ` 15,000 respectively. The sales value of the products A, B and D after further processing are ` 1,23,000, ` 92,000 and ` 85,000 respectively. Find the “relative sales value” of the joint products. Solution: Computation of relative sales value Products A Sales value Less: Further processing cost Relative sales value

1,23,000 18,000 1,05,000

B

C

D

92,000 20,000 72,000

65,000 – 65,000

85,000 15,000 70,000

Note: Relative sales value = Sales value after further processing – further processing cost. 6. 750 units of joint product X was produced in a process. The product could be sold at split of point at ` 22 per unit. If further processing cost of ` 9,000 is incurred, the joint product can be sold at ` 30 per unit. State whether the product is to be sold at split off point or after further processing. Solution: Sales value after further processing (750 × 30)

22,500

Sales value if sold at split off point (750 × 22) Incremental sales revenue due to further processing

16,500 6,000

Less: Further processing cost Loss due to further processing

9,000 – 3,000

Ans: Further processing results in a loss of ` 3,000. Hence, the product X should be sold at split off point.

B. Comprehensive Problems: 1. (Physical units basis) The following data have been extracted from the books of M/s. Eastern Coke Co. Ltd.: Joint products Yield in lbs. of recovered products per tonne of coal. Coke

1,420

Coal tar

120

Benzol

22

Sulphate of ammonia

26

Gas

412

Joint Products, By-products and Main Products Costing

347

The price of coal is ` 80 per tonne. The direct labour and overhead costs to the point of split off are ` 40 and ` 60 respectively per tonne of coal. Calculate material, labour, overhead and total cost of each product on the basis of weight. (B.Com., Madras University) Solution: Statement showing apportionment of joint cost

Materials Labour Overheads Total

Coke

Coal tar

56.80 28.40 42.60 127.80

4.80 2.40 3.60 10.80

By Products Benzol Sulphate of ammonia 0.88 0.44 0.66 1.98

1.04 0.52 0.78 2.34

Gas

Total

16.48 8.24 12.36 37.08

80 40 60 180

Note: Ratio of weight = 1420 : 120 : 22 : 26 : 412. 2. (Sales value and selling price basis). The joint cost of making 50 units of product A, 100 units of product B and 150 units of product C are ` 2, ` 3 and ` 4 respectively. The products did not require any further processing costs after split off point. You are required to apportion the joint cost (a) on selling price basis and (b) on sales value basis. Solution: Apportion next of Joint Cost: (a) Ratio of selling price Joint cost of product A Joint cost of product B Joint cost of product C

= = = =

2:3:4 900 × 2/9 = ` 200 900 × 3/9 = ` 300 900 × 4/9 = ` 400

(b) Sales value basis Sales value – product A Sales value – product B Sales value – product C Ratio of sales value Joint cost of product A Joint cost of product B Joint cost of product C

= = = = = = =

50 × 2 = ` 100 100 × 3 = ` 300 150 × 4 = ` 600 1:3:6 900 × 1/10 = ` 90 900 × 3/10 = ` 270 900 × 6/10 = ` 540

348 Cost Accounting

3. (Physical units and market value basis) Three joint products are produced by passing chemicals through two successive processes. Output from process I is transferred to process II from which the three joint products are produced and immediately sold. The data regarding the processes of April 1990 is given below:

Direct materials (2500 kg at ` 4 per kg) Direct labour Overheads Normal loss Scrap value

Process I

Process II

10,000

–

13,000 9,000 10% of input

15,000 15,800 Nil –

` 2 per kg 2,200 kg

Output

Joint products X-600 kg Y-1,000 kg Z-600 kg

There were no opening or closing stocks in either process and the selling prices of the output from process II were: Joint product X ` 25, Y ` 20 and Z ` 15. Required: (a) Prepare an account for process I together with any abnormal loss or gain accounts. (b) Calculate the profit attributable to each of the joint products by apportioning the total costs from process II: (i) According to weight of output (ii) By the market value of the production. Solution: (a) Process I account Particulars

No. of Units

Rate (p/u)

Total

Particulars

To Direct materials

2,500

4.00

10,000

By Normal loss – 10% of Input By Abnormal loss By Production – transferred to process II a/c

To Direct labour

–

–

13,000

To Overheads

–

–

9,000

2,500

–

32,000

No. of Units

Units

250

2.00

500

50

14.00

700

2,200

2,500

Total

14.00 30,800

–

32,000

Joint Products, By-products and Main Products Costing

Working Note: (1) Abnormal loss (Units): Input Less: Normal loss 10% Normal output Actual output Abnormal loss (2) Abnormal loss account:

– – – – –

Abnormal loss = =

349

2,500 kg 250 kg 2,250 units 2,200 units 50 units

Total cost – Normal scrap value × Abnormal loss (units) Normal output 32,000 - 500 ¥ 50 2, 250

= ` 700 Abnormal Loss a/c Particulars To Process I a/c

No. of Units 50

50

Rate (p/u) 14

–

Total 700

700

Particulars

No. of Units By Scrap 50 By Abnormal loss – transferred to costing P&L a/c 50

Rate (p/u) 2 –

Total

–

700

(b) Computation of total cost of process II: Cost transferred from process I Add: Process expenses Direct labour Overheads – Total cost

–

30,800

–

15,000 15,800 61,600

(i) Statement of profit - Joint cost apportioned in weight of output ratio: Process II – Joint products X Y Z Sales value Less: Total cost (` 61,600; Ratio: 6:10:6) Loss

(600 × 25) 15,000 16,800

(1,000 × 20) 20,000 28,000

(600 × 15) 9,000 16,800

(–) 1,800

(–) 8,000

(–) 7,800

100 600

350 Cost Accounting

(ii) Statement of Profit – Joint cost apportioned in the market value of production: Process II – Joint products X Y Z Sales value Less: Total cost (` 61,600; Ratio: 15:20:9) Loss

15,000 21,000

20,000 28,000

9,000 12,600

(–) 6,000

(–) 8,000

(–) 3,600

4. (Reverse cost method) A factory is engaged in the production of a product X and in the course of its manufacturer a by-product Y is produced which after a separate process has commercial value. The following is the information for the month of December 2008: Joint Expenses Materials Wages Overheads

10,000 4,000 2,500

Separate Expenses X Y 2,000 2,500 2,500 2,500 1,400 1,000

The output for the month was: X-150 tonnes, Y – 50 tonnes 1 The selling price of the product Y is ` 200 per tonne. The profit on Y is 33 % on cost. 3 Prepare the necessary accounts to show the cost of X per tonne. (B.Com., Bangalore University) Solution: Joint Expenses Account To Materials To Labour To Overheads

10,000 4,000 2,500 16,500

By Product Y (See WN) By Product X (b.f.)

1,500 15,000 16,500

Separate Expenses A/c - Product X To Materials To Labour To Overheads To Joint expenses

2,000 2,500 1,400 15,000 20,900

By Cost of Production (b.f.)

20,900

(Cost per tonne = 20,900/150 = ` 139.33)

20,900

Joint Products, By-products and Main Products Costing

351

Separate Expenses A/c - Product Y To Materials To Labour

2,500 2,500

To Overheads To Joint expenses (See WN)

1,000 1,500 7,500

By cost of production

7,500

(Cost per tonne = 7500/50 = ` 150.00)

7,500

Working Note: Sales value of product Y (50 × 200)

–

10,000

1 33 1 3 Less: Profit 33 % on cost or 1 3 133 3 on Sales value Total cost Less: Separate cost Joint cost of product Y

– – – –

2,500 7,500 6,000 1,500

5. A company produced a main chemical product M and in the process, by-product B is produced. The cost upto the point of separation are 1,20,000. The separate additional costs incurred after separation point are 33,000 and 3,000 respectively. The quantities emerging at separation point 1,50,000 kg and 30,000 kg respectively. All the production was sold at the following prices: M at 1.96 per kg. B at 0.20 per kg. Selling and distribution overheads applicable to the above quantities are 1,900 and 365 respectively. Prepare statements of profit or loss for both M and B on each of the following basis: (a) Value of B nil at separation point. (b) Apportion costs upto separation on quantity basis (c) Apportion costs upto separation on the basis of sales. (B.Com., Madras University) Solution: Statement of Profit: (a) Value of B at separation point is nil.

352 Cost Accounting

Products M

B

Sales value (after further processing) (1,50,000 × 1.96) (A) 2,94,000 Joint cost (5:1 Ratio) 1,20,000 Selling and distribution expenses 1,900 Separate additional cost 33,000 Total cost (B) 1,54,900 Profit (A-B) 1,39,100

(30,000 × 0.20) 6,000 – 365 3,000 3,365 2,635

(b) Joint cost apportioned on quantity basis: Products

Sales value (after further processing) Joint cost (5:1 ratio) Separate additional cost Selling and distribution expenses Total cost Profit/(loss) (A-B)

(A)

(B)

M

B

2,94,000 1,00,000 33,000 1,900 1,34,900 1,59,100

6,000 20,000 3,000 365 23,365 (17,365)

(c) Joint cost apportioned on sales value basis: Products

Sales value (after further processing) Joint cost – 1,20,000 (ratio – 294:6) Separate additional cost Selling and distribution expenses Total cost Profit (A-B)

(A)

(B)

M

B

2,94,000 1,17,600 33,000 1,900 1,52,500 1,41,500

6,000 2,400 3,000 365 5,765 235

6. (Reverse cost method) Two products A and B are obtained in a crude form and required further processing at a cost of 5 for A and 4 for B per unit before sale. Assuming a net margin of 25% on cost, their sale prices are fixed at 13.75 and 8.75 per unit respectively. During the period, the joint cost was 88,000 and the output were: A–8,000 units and B–6,000 units.

Joint Products, By-products and Main Products Costing

353

Ascertain the joint cost per unit. (B.Com. (Hons.), Delhi University, 2002) Solution: Products A Sales value Less: Profit 25% on cost (or) 25/125 on sales Total cost Less: Separate cost A – 8,000 × 5 = 40,000 B – 6,000 × 4 = 24,000 Sales value at the point of separation Joint cost of products

B

(8,000 × 13.75) 1,10,000 22,000 88,000

(6,000 × 8.75) 52,500 10,500 42,000

40,000 48,000

24,000 18,000

88,000 ¥ 48,000 66,000

88,000 ¥ 18,000 66,000

` 64,000 64,000/8,000

` 24,000 24,000/6,000

`8

`4

Joint cost per unit

Note: Joint costs apportioned in the sales value at the point of separation. 7. Strong Limited produces four joint products A, B, C and D all of which emerge from the processing of one raw material. The following are the relevant data: Production for the period: Joint Product

Number of Units

A B C D

500 900 400 200

Selling price per unit 18 8 4 11

The company budgets for a profit of 10% of sales value. The other estimated costs are:

Carriage inwards Direct wages Manufacturing overheads

1,000 3,000 2,000

354 Cost Accounting

Administration overhead10% of sales value. Calculate the maximum price that may by paid for the raw material. (B.Com. (Hons.), Delhi University) Solution:

Statement showing maximum raw materials cost Sales value

= No. of units × Selling price p/u

–

Joint product A

– 500 × 18

–

9,000

Joint product B

– 900 × 8

–

7,200

Joint product C

– 400 × 4

–

1,600

Joint product D

– 200 × 11

–

2,200

Total sales value

–

20,000

Less: Profit - 10% on sales

–

2,000

Total cost

–

18,000

–

6,000

–

12,000

Less: Carriage inward Direct wages

– 1,000 – 3,000

Manufacturing OHS – 2,000 Balance cost being material cost

Ans: Strong Ltd. can offer ` 12,000 towards cost of materials. 8. (Reverse cost method) A factory is engaged in the production of chemical X and in the course of its manufacture a by-product Y is produced, which after a separate process has commercial value. For the month of March 2007, the following are summarized cost daa: Joint expenses

Separate Expenses X

Y

Materials

19,200

7,360

780

Labour

11,700

7,680

2,642

3,450

1,500

544

Overheads

The output of the month was 142 tonnes of X and 49 tonnes of Y. The selling price of Y averaged ` 280 per tonne. Assuming the profit on Y is estimated at 50% of selling price, calculate the cost of X per tonne. (B.Com. (Hons.), Delhi University, 2007)

Joint Products, By-products and Main Products Costing

Solution: Joint expenses account Y To Materials To Labour To Overheads

19,200 11,700 3,450 34,350

By Product Y By Product x (b/f)

2,894 31,456 34,350

Product X account To Separate expenses: To Materials

7,360

By cost of production (Cost per tonne)

To Labour

7,680

47,996 = ` 338) 142

To Overheads To Joint cost

1,500 31,456 47,996

47,996

47,996

Product Y account To Separate expenses: To Materials To Labour To Overheads To Joint cost

780 2,642

By cost of production (Cost per tonne =

6,860

6,860 ` 140) 49

544 2,894 6,860

6,860

Working note: Sales value of product Y (49 × 280)

13,720

Less: Profit – 50% on selling price

6,860

Total cost Less: Separate expenses

6,860 3,966

Joint cost

2,894

355

356 Cost Accounting

9. Calculate the estimated cost of production of by-product X and Y at the point of separation from the following information: By-products X Y 28 20

Selling price per unit (`) Additional processing cost per unit Number of units produced

4 600

3 400

Selling expenses amount to 20% on cost of sales. Selling prices are fixed by adding a profit of 25% on sales. Solution:

Computation of value of by-products at the point of separation: By-products

Sales value

X

Y

(600 × 28)

(400 × 20)

16,800

8,000

4,200

2,000

12,600

6,000

2,520

1,200

10,080

4,800

2,400

1,200

7,680

3,600

Less: Profit 25% on sales Cost of sales Less: Selling expenses 20% on cost of sales Cost of production Less: Additional processing cost X – 600 × 4 – 2,400 Y – 400 × 3 – 1,200 Value at the point of separation

10. (Reverse cost method) The chemical manufacturing company manufactures a main product and two by-products. Data for a month are shown below: Main Product

Sales Production cost: After separation (`) Administration cost (`) Ratio of distribution and selling expenses Net profit on sales

By-products P Q

3,00,000 – 40,000

40,000 – 5,000

30,000 – 3,000

20,000

2,000

1,000

75% 20%

15% 15%

10% 10%

Joint Products, By-products and Main Products Costing

357

Expenses in the common process upto separation point is ` 1,95,500. Apportion the joint cost among main product and joint products. Solution:

Statement showing apportionment of joint cost Main Product

Sales

By-products P Q

Total

3,00,000

40,000

30,000

3,70,000

60,000

6,000

3,000

69,000

2,40,000

34,000

27,000

3,01,000

Less: Production cost after separation

(40,000)

(5,000)

(3,000)

(48,000)

Administration cost

(20,000)

(2,000)

(1,000)

(23,000)

Joint cost including selling and distribution expenses Less: Selling and distribution expenses

1,80,000

27,000

23,000

2,30,000

25,875

5,175

3,450

34,500

1,54,125

21,825

19,550

1,95,500

Less: Profit Cost of sales

(2,30,000 – 1,95,500 = 34,500) Join cost Decision involving further processing: 11. Inorganic Chemicals purchases salt and processes it into more refined products such as caustic soda, chlorine and PVC (Polyvinyl Chloride). During the month of April, 2000, Inorganic Chemicals purchases salt for ` 10,00,000. Conversion cost of ` 15,00,000 were incurred upto the split off point, at which time two saleable products were produced: Caustic soda and chlorine. Chlorine can be further processed into PVC. The April production and sales information are as follows: Production

Sales

Sale price per tonne

Caustic soda

1200 tonnes

1200 tonnes

Chlorine PVC

800 tonnes 500 tonnes

– 500 tonnes

` 1,250 – ` 5,000

All 800 tonnes of chlorine were further processed at an incremental cost of ` 5,00,000 to yield 500 tonnes of PVC. There were no by-products or scrap from this further processing of chlorine. There were no beginning or ending inventories of caustic soda, chlorine or PVC in April. There is an active market for chlorine. Inorganic chemicals could have sold all its April production of chlorine at ` 1,875 a tonne.

358 Cost Accounting

Required: (i) Calculate, how the joint cost of ` 25,00,000 would be allocated between caustic soda and chlorine under each of the following methods: (1) Sales value at split off (2) Physical measure (tonnes) (3) Estimated net realizable value. (ii) What is the gross margin percentage of caustic soda and PVC under the three methods cited in requirement? (iii) Lifetime Swimming Pool Products offers to purchase 800 tonnes of chlorine in May 2000 at ` 1,875 a tonne. This sale would mean that no PVC would be produced in May. How would the offer affect May operating income? (CA (Inter), May 2000) Solution: (a) Apportionment of joint expenses: (1) Sales value at split off basis: Caustic soda (1) Sales value at split off point Ratio of sales value = 1:1 Apportionment of joint expenses

Chlorine

(1,200 × 1,250) 15,00,000

(800 × 1,875) 15,00,000

(25,00,000 × 1/2) 12,50,000

(25,00,000 × 1/2) 12,50,000

(2) Physical measure (tonnes) basis: Caustic soda Weight of output Ratio of weight of output Apportionment of joint expenses

Chlorine

1,200 tons

800 tons

(25,00,000 × 3/5)

(25,00,000 × 2/5)

15,00,000

10,00,000

(3) Estimated net realisable value - basis: Caustic soda (1) Sales value after further processing Less: Further processing cost Net realisable value

(1,200 × 1,250) 15,00,000 – 15,00,000

Chlorine (500 × 5,000) 25,00,000 5,00,000 20,00,000 Contd...

Joint Products, By-products and Main Products Costing Contd...

Ratio of net realisable value = 3 : 4 Apportionment of joint expenses

(25,00,000 × 3/7)

(25,00,000 × 4/7)

10,71,429

14,28,571

(b) Gross margin under the three methods as in (i) above: (i) Sales value at split off point basis: Caustic soda (1) Sales value Less: Additional processing cost Net realisable value Less: Joint cost Gross margin % of Gross margin on sales

Chlorine

15,00,000

25,00,000

–

5,00,000

15,00,000

20,00,000

12,50,000

12,50,000

2,50,000

7,50,000

2,50,000 7,50,000 ¥ 100 ¥ 100 15,00,000 25,00,000

16.67%

30%

(ii) Physical measure basis Caustic Soda

Chlorine

Sales value

15,00,000

25,00,000

Less: Additional processing cost Net realisable value

– 15,00,000

5,00,000 20,00,000

Less: Joint cost

15,00,000 –

10,00,000 10,00,000

Gross margin % of Gross margin on sales

–

–

10,00,000 ¥ 100 25,00,000

40%

359

360 Cost Accounting

(iii) Net realisable value basis Caustic soda

Chlorine

15,00,000

25,00,000

–

5,00,000

15,00,000

20,00,000

10,71,429

14,28,571

4,28,571

5,71,429

Sales value Less: Additional processing cost Net realisable value Less: Joint cost Gross margin % of Gross margin on sales

4, 28,571 ¥ 100 15,00,000

5,71, 429 ¥ 100 25,00,000

28.57%

(c) Sales value of chlorine at split off point

22.86%

15,00,000

Sales value of PVC

25,00,000

Additional revenue from conversion of chlorine into PVC

10,00,000

Less: Additional processing cost Profit from additional processing of chlorine into PVC

5,00,000 5,00,000

Ans: If chlorine is sold at split off point, the additional profit from conversion of chlorine into PVC ` 5,00,000 will be lost. The offer from Lifetime Swimming Pool Products to buy chlorine should not be accepted. 12. In a chemical plant four different products, viz. AB, BC, CD and DD emerge from the input of crude oil. Product AB can be sold immediately, but the remaining three products require further processing before they can be marketed. In a month, 40,000 litres of curde oil were produced at a cost of ` 30 per litre and processed at a cost or ` 3 lakh. The details of output obtained, further processing cost, selling price per unit etc are give below: Product AB BC CD DD

Output 8,000 kg 10,000 kg 12,000 kg 5,000 litres

Further processing cost Selling price at the point of sale – 80,000 1,20,000 60,000

45/kg 60/kg 70/kg 80/litre.

Joint Products, By-products and Main Products Costing

361

Prepare: (i) Statement showing apportionment of joint cost on suitable basis and productwise profitability statement. (ii) If the company finds a market for CD at As 63/kg without further processing, will it be advisable to accept it? Solution: (a) Total joint cost Cost of crude oil (40,000 × 30)

= ` 12,00,000

Processing cost

= ` 3,00,000 = ` 15,00,000

Total Suitable basis for apportionment of joint cost

= Relative sales value method

Computation of Relative Sales Value Products

Sales Less: Further processing cost Relative sales value Relative sales value ratio

AB

BC

CD

DD

(8,000 × 45) 3,60,000 – 3,60,000 36

(10,000 × 60) 6,00,000 80,000 5,20,000 52

(12,000 × 70) 8,40,000 1,20,000 7,20,000 72

(5,000 × 80) 4,00,000 60,000 3,40,000 34

Statement showing apportionment of joint cost Products AB BC CD DD

Relative sales value ratio 36/194 52/194 72/194 34/194

15,00,000 15,00,000 15,00,000 15,00,000

× × × ×

36/194 52/194 72/194 34/194

Share of joint cost 2,78,000 4,02,000 5,57,000 2,63,000

Note: Joint cost share to products are rounded off to nearest thousand.

Statement of Profit

AB Sales

(A)

3,60,000

Products BC CD 6,00,000

8,40,000

DD 4,00,000

362 Cost Accounting

Costs Joint cost

2,78,000

Further processing cost Total cost

(B)

Profit (A) - (B)

4,02,000

5,57,000

2,63,000

80,000

1,20,000

60,000

2,78,000

4,82,000

6,77,000

3,23,000

82,000

1,18,000

1,63,000

77,000

–

(b) Sales value of product CD if sold at split off point (12,000 × 63)

7,56,000

Less: Joint cost

5,57,000 Profit

1,99,000

Profit from product CD if sold after further processing

1,63,000

Conclusion: Product CD should be sold at split off point because profit decreases by ` 36,000 if sold after further processing. 13. A company produces two joint products X and Y, from the same basic raw materials. The processing is completed in three departments: Materials are mixed in department I. At the end of this process X and Y get separated. After separation X is completed in the department II and Y is finished in department III. During a period 2,00,000 kg of raw materials were processed in department I at a total cost of ` 8,75,000 and the resultant 60% becomes X and 30% become Y and 10% normally lost in processing. In department II 1/6 of the quantity received from department I is lost in processing. X is further processed in department II at a cost of ` 1,80,000. In department II 1/6 of the quantity received from department I is lost in processing. X is further processed in department II at a cost of ` 1,50,000. The details of sales during the year:

Quantity sold (kg) Sale price per kg (`)

Product X

Product Y

90,000

1,15,000

10

4

There were no opening stocks. If these products are sold at split off point, the selling price of X and Y would be ` 8 and ` 4 per kg respectively. Required: (a) Prepare a statement showing the apportionment of joint cost to X and Y in proportion of sales value at split of point. (b) Prepare a statement showing the cost per kg of each product indicating joint cost, processing cost and total cost separately.

Joint Products, By-products and Main Products Costing

363

(c) Prepare a statement showing the product wise profit for the year. (d) On the basis of profits before and after further processing of product X and Y give your comment whether products should be further processed or not. (CA – PE II, May 2005) Solution: (a) Statement showing apportionment of joint cost in proportion of sales value at split of point: Particulars

Input X (60%) 2,00,000 1,20,000

Raw material introduced in Department-I (kg)

Output Y (30%) Loss (10%) 60,000 20,000

Selling price p/u at split off point (`)

–

8

4

–

Sales value at split off point (`)

–

9,60,000

2,40,000

–

4

1

Sales value ratio

8,75,000 × 4/5 8,75,000 × 1/5

Apportionment of joint cost (`)

= 7,00,000

= 1,75,000

(b) Statement showing output in Departments II and III

Input-transfer from department I Further materials added Loss in process (1/6) Output

Department II Product X (kg) 1,20,000 – 1,20,000 20,000 1,00,000

Department III Product Y (kg) 60,000 60,000 1,20,000 – 1,20,000

Statement showing cost per kg Particulars

Product X Cost per kg Total

Product Y Total Cost per kg

Joint cost

7,00,000

7.00

1,75,000

1.458

Further processing cost

1,80,000

1.80

1,50,000

1.250

Total cost

8,80,000

8.80

3,25,000

2.708

364 Cost Accounting

(c) Statement of Profit Particulars Kg Total cost Less: Closing stock Cost of goods sold Profit (b.f) Sales (at x ` 10 and ` 4 per kg)

Product X Total

1,00,000 10,000 90,000 – 90,000

Product Y Kg Total

8,80,000 88,000 7,92,000 1,08,000 9,00,000

1,20,000 5,000 1,15,000 – 1,15,000

3,25,000 13,540 3,11,460 1,48,540 4,60,000

(d) Statement showing profit at split off point and after further processing: Particulars

Product X

Product Y

9,60,000 7,00,0000 2,60,000 1,08,000

2,40,000 1,75,000 65,000 1,48,540

Sales value at split off point Less: Share of joint cost Profit at split off point Profit after further processing (see (c) above)

(d) Decision: Product X should be sold at split off point and product Y should be sold after further processing. 14. Tee Pee Ltd in the course of refining crude oil obtains four joint products A, B, C and D. The total cost till the split of point was ` 97,600. The output and sale in the year 1990 were as follows: Product

Output (Gallons)

Sales

Separate cost

A B C D

5,00,000 10,000 5,000 9,000

1,15,000 10,000 4,000 30,000

30,000 6,000 – 1,000

You are required to: (i) Calculate the net income for each of the products if the joint costs are apportioned on the basis of sales value of the different products. (ii) What would be the net income of the company from each product if it decides to sell the products at the split off point itself @ A 15 paise, B 50 paise, C 80 paise and D ` 3 per gallon?

Joint Products, By-products and Main Products Costing

365

(iii) In case the company expects to operate at the same level of production and sales in the year 1991, could the company increase the net income by altering its processing decisions? If so, what would be the expected overall income? Which products should be processed further and which would be sold at split off? Assume that all costs incurred after the split off point are variable. (CS (Inter), December, 1991) Solution: (a) Statement showing net income of each products, if sold at split off point: Particulars Sales Less: Joint cost (` 97,600, apportioned in sales ratio 115:10:4:30 Less: Further processing cost Profit/loss

A

B

C

D

1,15,000 70,592

10,000 6,138

4,000 2,455

30,000 18,415

44,408 14,408 30,000

3,862 (2,138) 6,000

1,545 1,545 –

11,585 10,585 1,000

(b) Statement net income of products if sold at split off point Particulars

A

B

C

D

Sales

75,000

5,000

4,000

27,000

Less: Joint cost

70,592

6,138

2,455

18,415

4,408

(1,138)

1,545

8,585

Profit (loss)

(c) To maximize profit, product A and D should be sold after further processing and products B and C should be sold at split off point. Total income – when A, B and D are sold After further processing – ` 24,400 Total income when A and D are sold after Further processing and B and C sold at Split off point (14,408 – 1,138 + 1,545 + 10,585) – ` 25,400

17

Service Costing or Operating Costing

Chapter

Practical Problems A. Short Answer Problems 1. A transport company operates 3 buses between two towns, the distance between the towns is 70 km. The seating capacity of the buses is 55 passengers. They make two round trips per day. The buses operate on all the days in the month of August, 2008. On average 80% of seats are occupied. Calculate the total km and passenger km. Solution:

Total km

= No. of buses × No. of trips × distance per trip × No. of days operated = 3 × 2 × 140 × 31 = 26,040 km Total passenger km = Total km × Seating capacity × % of seats occupied = 26,040 × 55 × 80/100 = 11,45,760 km. 2. APN Bus Service Ltd runs the following buses in Tamilnadu. Seating capacity 25 buses – 40 passengers 40 buses – 45 passengers On average each bus covers a distance of 250 km daily. 90% of the seats are occupied on average. All buses operate 25 days a month and 10% of the buses are kept away from the road for repairs. Find the effective total passenger km.

Solution: Total km For 25 buses For 40 buses Total passenger km

= = = =

No. of buses × Distance per day × no. of days 25 × 250 × 25 = 1,56,250 km 40 × 250 × 25 = 2,50,000 km Total km × Seating capacity × % of seats occupied

For 25 buses = 1,56,250 × 40 × 90/100

=

For 40 buses = 2,50,000 × 45 × 90/100

= 1,01,25,000

Total passenger km.

56,25,000

= 1,57,50,000

Service Costing or Operating Costing

Less: 10% for repairs

=

Effective total passenger km

367

15,75,000

= 1,41,75,000

3. A bus started from Delhi for Mussorie with 50 passengers on board. 20 passengers got off at Dehradun and the bus proceeded with the remaining passengers. In the evening the same bus left Mussoorie with 50 passengers, 10 passengers got off at Dehradun and the bus resumed its journey with remaining passengers for Delhi. The distance between Delhi and Dehradun is 280 km, and between Dehradum to Mussoorie is 20 km. Compute the passenger km and cost per passenger km, if the total cost of running the bus comes out to be ` 5,000. (B.Com. (Hons.), Delhi University) Solution: Total passenger km : No. of km × No. of passengers (1) Onward journey: (a) Delhi to Dehradun = 280 × 50 = 14,000 (b) Dehradun to Mussoorie = 20 × 30 = 600 (2) Return journey (a) Mussoorie to Dehradun = 20 × 50 = 1,000 (b) Dehradun to Delhi = 280 × 40 = 11,200 Total passenger km

= 26,800

Cost per passenger km = 5,000/26,800 = ` 0.19 4. A city municipality arranges for the removal of its garbage by means of vehicle transport. The following vehicles are maintained. No. of vehicles – Specification 30 – 5 tonnes lorries 40 – 3 tonnes lorries 50 – 2 tonnes lorries 20 – 4 tonnes lorries On an average each lorry makes 5 trips a day and each trip covers an average distance of 6 km. Each lorry carries garbage of 50% of its capacity. On an annual average, 10% of lorrys are laid up for repairs every day. The conservancy work is carried out daily. Calculate tonne-km per month. (B.Com. (Hons.), Delhi University) Solution: Total tonne kms.

= No. of vehicles × No. of trips × trip distance × No. of days × loading capacity × % of capacity carried = 30 × 5 × 6 × 5 × 30 × 50/100 = 67,500 = 40 × 5 × 6 × 3 × 30 × 50/100 = 54,000 = 50 × 5 × 6 × 2 × 30 × 50/100 = 45,000 = 20 × 5 × 6 × 4 × 30 × 50/100 = 36,000 Total tonne km

= 2,02,500

368 Cost Accounting

Less: 10% for repairs

=

Effective tonne km

20,250

= 1,82,250

5. Mr. Anand runs a truck. It runs between two cities which are 300 km apart. The truck starts with a load of 10 tonnes and returns with a load of 7 tonnes on the same day. It operates on an average 25 days in a month. Calculate tonne km. Solution: Tonne kms. = No. of trucks × No. of trips × Trip distance × No. of days × Average load carried = 1 × 1 × 600 × 25 × 8.5 = 1,27,500 tonne kms. 10 + 7 = 8.5 tonnes Note: Average lead carried = 2 Commercial tonne km and Absolute tonne km 6. A truck starts with a load of 12 tonnes from city X, unloads 3 tonnes enroute in the city Y and proceeds to city Z with balance load. On return journey it starts with a load of 10 tonnes from city Z to city X direct. The distance from city X to Y is 80 km, from city Y to Z is 100 km. and from city Z to X is 150 km. Compute absolute tonne km and commercial tonne km. Solution: Computation of Absolute tonne km: = Distance covered × Actual load carried City X to Y = 80 × 12 = 960 City Y to Z = 100 × 9 = 900 City Z to X = 150 × 10 = 1,500 Total

= 3,360

Computation of commercial tonne km: = Total distance covered × Average load carried = 330 × 10.33 Total commercial tonne km = 3,409. Note: Average load carried Total distance covered

=

12 + 9 + 10

= 10.33

= 80 + 100 + 150 = 330

7. A lorry runs between two towns which are 60 km apart. The lorry makes three trips a day. Average load carried is 8 tonnes and 30% of the time it runs empty. It runs 27 days in a month. Calculate tonne km.

Service Costing or Operating Costing

369

Solution: Tonne km

= No. of vehicles × No. of trip × Trip distance × No. of days × loads carried = 1 × 3 × 120 × 27 × 8 = 77,760 Less: 30% empty run = 23,328 Effective tonne km

= 54,432

Room Days: 8. A lodging house has 150 rooms. During summer 90% of the rooms are occupied and in winter only 50% of the rooms are full. Take 7 months for summer and 5 months for winter. Assume 30 days a month on average. Compute room days. Solution:

Room days = No. of rooms × No. of days × No. of months × % of rooms occupied Summer = 150 × 30 × 7 × 90/100 = 28,350 Winter = 150 × 30 × 5 × 50/100 = 11,250 Total room days

= 39,600

9. Globe International Ltd., a hotel gives the following details about the number of rooms in the hotel and their occupancy during different seasons:

50 single room suites 70 double room suites 40 family room suites

Summer 100% 90% 80%

Winter 90% 60% 50%

The number of months of summer and winter are 8 months and 4 months respectively. Take 30 days a month. The rental charges for double rooms suites are twice the rate of single room suites. The rental charges for family rooms is thrice the single room suites. Compute room days equivalent to single room suites. Solution: Equivalent single room days = No. of rooms × No. months × No. of days × Weightage × % of rooms occupied Summer: Single room = 50 × 8 × 30 × 1 × 100/100 = 12,000 Double room = 70 × 8 × 30 × 2 × 90/100 = 30,240 Family room = 40 × 8 × 30 × 3 × 80/100 = 23,040 Winter: Single room = 50 × 4 × 30 × 1 × 90/100 = 5,400 Double room = 70 × 4 × 30 × 2 × 60/100 = 10,080 Family room = 40 × 4 × 30 × 3 × 50/100 = 7,200 Total room days equal to single rooms

= 87,960

370 Cost Accounting

10. There are 1,100 seats in a cinema theatre, divided into 4 types as follows: Balcony – 200 seats First class – 350 seats Second class – 300 seats Third class – 250 seats The ticket rates for second class is twice the rate for third class, the rate for first class is thrice the rate for third class and the rate for balcony is four times the rate for third class. Daily three shows are run for 360 days in a year with 75% seats occupied. Compute number of man shows equal to third class. Solution:

Man shows equivalent to third class = No. of seats × No. of days × Weightage × No. of shows per day × % of seats occupied Balcony = 200 × 360 × 4 × 3 × 75/100 = 6,48,000 First class = 350 × 360 × 3 × 3 × 75/100 = 8,50,500 Second class = 300 × 360 × 2 × 3 × 75/100 = 4,86,000 Third class = 250 × 360 × 1 × 3 × 75/100 = 2,02,500 21,87,000

Standard Load: 11. A truck carries synthetic water storage tanks weighing 2 tonnes occupying the whole of the loading space. The loading capacity of the truck is 8 tonnes. The total distance covered in a month is 3,000 km. Find the total standard tonne km. Solution:

Standard tonne km = Distance covered × Loading capacity = 3,000 × 8 = 24,000. 12. From the following information calculate total km and passenger km: No. of buses: 5 Days operated in the month: 25 Trips made by each bus: 4 Distance of route: 20 km long (one side) Capacity of the bus: 50 passengers Normal passenger travelling 90% of capacity. (B.Com., Madras University) Solution: Total km = No. of buses × No. of trips × trip distance × No. of days = 5 × 4 × 40 × 25 = 20,000 Total passenger km = Total distance × Seating capacity × % of seats occupied = 20,000 × 50 × 90/100 = 9,00,000

Service Costing or Operating Costing

371

B. Comprehensive Problems: 1. A transport company is running 4 buses between two towns which are 50 km away from each other. Seating capacity of each bus is 40 passengers. The following particulars are given from their books for April 2008:

Wages of operators and drivers Salaries Diesel, oil Repairs and expenses Insurance and tax Depreciation Interest

2,400 1,000 4,000 800 1,600 2,600 2,000

Actual passengers carried were 75% of the seating capacity. All the buses ran on all the days of the month. Each bus made one round trip per day. Find out the cost per passenger km. (B.Com., Madras University) Solution: Operating Cost Sheet for the month of April 2008 Particulars Fixed Expenses Wages of operators and drivers Salaries Insurance and tax Interest Running Expenses Diesel, oil, etc. Repairs and maintenance expenses Depreciation

2,400 1,000 1,600 2,000 7,000 4,000 800 2,600 7,400

Total cost Cost per passenger km = =

Tatol cost Passenger km 14, 400 ` 0.04 3,60,000

7,000

7,400 14,400

372 Cost Accounting

Workings: Computation of passenger km: = No. of buses × No. of trips × Trip distance × No. of days × Seating capacity × % of seats occupied = 4 × 1 × 100 × 30 × 40 × 75/100 = 3,60,000 passenger km 2. Vignesh Travellers, a transport company is running two buses between two places 150 km apart. The seating capacity of each bus is 40 passengers. The following particulars are taken from their books for the month of April:

Wages of drivers, conductors and cleaners Salary of office and supervisory staff Diesel and oil Repairs Tax and insurance Depreciation Interest and other bank charges

3,000 1,500 6,000 1,500 2,000 3,000 2,500

The actual passengers carried were 75% of the seating capacity. The bus ran on all the days. Each bus made a to and fro trip. Find out the cost per passenger km. Solution:

Operating Cost Sheet for the month of April Particulars Standing Charges Wages of drivers, conductors and cleaners Salary of office and supervisory staff Tax and insurance Interest and other bank charges Running Expenses Diesel and oil Repairs Depreciation Total cost

3,000 1,500 2,000 2,500 9,000

9,000

6,000 1,500 3,000 10,500 10,500 19,500

Service Costing or Operating Costing

Cost per passenger km = =

373

Total expenses Total passenger km 19,500 = ` 0.036 5, 40,000

Workings: Computation of passenger km: = No. of buses × No. of trips × Trip distance × No. of days × Seating capacity × % of seats occupied = 2 × 1 × 300 × 30 × 40 × 75/100 = 5,40,000 passenger km 3. From the following data calculate the cost per kilometre of a vehicle:

Value of vehicle Road licence fees per year Insurance charges per year Garage rent per year Driver’s wages per month Cost of petrol per litre

1,50,000 1,000 2,000 6,000 2,000 ` 32 16

Kilometre per litre

Proportionate charges for tyre and maintenance per km – ` 0.50. Estimated life – 1,50,000 km. Estimated annual kilometres – 20,000 km. Ignore interest on capital. Solution:

Operating Cost Sheet Particulars

Total (p.a.)

Standing charges Road licence fees Insurance charges Garage rent Driver’s wages (2000 × 12)

Standing charges per km =

33,000 20,000

1,000 2,000 6,000 24,000 33,000 –

per km

1.65

Contd...

374 Cost Accounting Contd...

Running expenses Tyre and maintenance Depreciation (1,50,000/1,50,000) Petrol (32/16) Total cost

– – –

0.50 1.00 2.00 5.15

4. Sri Narayanan owns a fleet of taxies and the following information is available from the records maintained by him: No. of taxies Cost of each taxi

10 ` 2,00,000

Salary of manager

` 6,000 p.m.

Salary of accountant

` 4,000 p.m.

Salary of cleaner

` 2,000 p.m.

Salary of mechanic

` 4,000 p.m.

Garage rent

` 2,000 p.m. 6% p.a

Insurance premium Annual tax

` 6,000 per taxi

Driver’s salary

` 2,000 p.m. per taxi

Annual repairs

` 2,000 per taxi

Total life of a taxi is about 2,00,000 km. A taxi runs in all 3,000 km. in a month of which 30% of it runs empty. Petrol consumption is 10 km at ` 30 per litre. Calculate the cost of running a taxi per km. Solution: Operating Cost Sheet for the month Particulars Standing Charges Salary of manager Salary of accountant Salary of cleaner Salary of mechanic Garage rent Insurance premium Tax Driver’s salary

Cost for 10 taxies 6,000 4,000 2,000 4,000 2,000 10,000 5,000 20,000

Cost per taxi 600 400 200 400 200 1,000 500 2,000 Contd...

Service Costing or Operating Costing

375

Contd...

Total fixed expenses (A) Running Expenses Repairs (2,000 × 10/12) Petrol (3,000 × 30/10) × 10 Depreciation (2,00,000/2,00,000 × 3,000) × 10 Total running expenses (B) Total expenses (A + B) Cost per passenger km =

=

53,000

5,300

1,667 90,000 30,000 1,21,667 1,74,667

167 9,000 3,000 12,167 17,467

Total expenses per taxi Effective km per taxi per month 17, 467 = ` 8.32 2,100

Workings: Total km run by a taxi per month

= 3,000

Less: 30% empty run Effective km

= 900 = 2,100

5. A transport company operates a bus service on 25 km long route. Purchase price of the chasis was ` 8.5 lakh and it was furnished at cost of ` 1.5 lakh. It will have residual value of ` 2 lakh at the end of 5 years of normal working life. Annual road tax amount to ` 24,000. While the insurance premium is valued at 2.5% of the total cost of the bus. Annual repairs is estimated at ` 30,000. Garage rent is payable at ` 4,000 per month. Tyre and tube will cost 50 paise per km. Salaries of one driver and one conductor will be ` 3,500 and ` 2,500 per month respectively. In addition, they will receive 10% of the collection as commission, which will be shared between the driver and conductor in the ratio of 60:40. Other administrative salaries and expenses will cost ` 47,000 per annum. Diesel, oil and lubricants will cost at ` 4.50 per km. The bus will make 4 round trips per day for 25 days in a month, carrying 42 passengers in each trip. Assuming 20% profit on takings, prepare, (a) Operating statement for a year, including fixed and variable cost, (b) Cost per passenger km, with working notes, and (c) Fare per passenger km and fare per one way trip. (ICWA (Inter), June 2008, adopted)

376 Cost Accounting

Solution: (a) Operating Cost Sheet per year Particulars Fixed Cost Road tax Insurance premium (10,00,000 × 2.5/100) Garage rent (4,000 × 12) Salary of driver (3,500 × 12) Salary of conductor (2,500 × 12) Administrative salaries and expenses

Total p.a. 24,000 25,000 48,000 42,000 30,000 47,000 2,16,000

Variable Cost Depreciation =

Total cost–Scrap value Life

⎛ 10,00,000 – 2,00,000 ⎞ = ⎜ ⎟ 5 ⎝ ⎠

Tyres and tubes (0.50 × 60,000) Repairs Diesel, oil and lubricants (4.50 × 60,000) Total Driver and conductor commission (7,06,000 × 10/70) Total cost Add: Profit 20% on takings (8,06,857 × 20/80) Total takings (b) Cost per passenger km

=

Total cost Total passenger km

8,06,857 = ` 0.32 25, 20,000 Total takings = Total p.km

= (c) Fare per passenger km

=

10,08,571 25, 20,000

Effective km = ` 0.40. Fare per passenger per one way trip = 0.40 × 25 = ` 10. Note: Depreciation and annual repairs may also be shown as fixed cost.

1,60,000 30,000 30,000 2,70,000 7,06,000 1,00,857 8,06,857 2,01,714 10,08,571

Service Costing or Operating Costing

Working Note: (i) Total km

377

= Distance per trip × No. of trips per day × No. of days in a month × No. of months in a year = 50 × 4 × 25 × 12 = 60,000 km

(ii) Total passenger km

= Total km × No. of passengers = 60,000 × 42 = 25,20,000 per km

6. A person owns a bus, which runs between Delhi to Chandigarh and back for 10 days in a month. The distance from Delhi to Chandigarh is 150 miles. The bus completes the trip from Delhi to Chandigarh and back on the same day. The bus goes another 10 days in a month towards Agra. The distance from Delhi to Agra is 120 miles. The trip is also completed on the same day. For the rest 4 days of its operation in a month it runs in the local city. Daily distance covered in the city is 40 miles. Calculate the rate the person should charge from 1 passengers when he wants to earn profit of 33 % on his takings. The other information is 3 given below:

Cost of the bus Depreciation Salary of driver Salary of conductor Salary of part time accountant Insurance Diesel consumption 4 miles per litre costing

60,000 20% 350 p.m. 350 p.m. 160 p.m. 1,680 p.m.

Token tax

` 600 p.m.

Lubricant oil ` 10 per 100 miles Repairs and maintenance

` 500 p.m.

Permit fees Normal capacity

` 10

` 284 p.m. 50 persons

This bus is generally occupied 90% of the capacity when it goes to Chandigarh and 80% when it goes to Agra. It is always full when it runs within the city, passenger tax is 20% of his net takings. (B.Com., Bangalore University, Apr. 2002)

378 Cost Accounting

Solution: (a) Operating Cost Sheet Particulars

Total cost p.m.

Fixed expenses Salary of driver Salary of conductor Salary of part time accountant Insurance Token tax Permit fees

350 350 160 1,680 600 284 3,424

Total fixed expenses Variable Expenses

1,000

20 1 ⎞ ⎛ × ⎟ Depreciation = ⎜ 60,000 × 100 12 ⎠ ⎝

Repairs and maintenance Diesel (5,560 × 10/4) Total cost Profit – 33

1 % on net takings or 50% on cost 3

Net takings Passenger tax 20% on net takings Total takings Rate per passenger miles =

500 13,900 18,824 9,412 28,236 5,647 33,883

33,883 = ` 0.14 2,39,000

Workings: (i) Computation of total miles: Total miles = Trip distance × No. of trips per day × No. of days Delhi to Chandigarh = 150 × 2 × 1 × 10 = 3,000 Delhi to Agra = 120 × 2 × 1 × 10 = 2,400 Local city = 40 × 4 = 160 Total miles = 5,560 (ii) Computation of passenger miles: Passenger miles = Trip miles × Seating capacity × % of seats occupied Delhi to Chandigarh = 3,000 × 50 × 90/100 = 1,35,000 Delhi to Agra = 2,400 × 50 × 80/100 = 96,000 Local city = 160 × 50 = 8,000 Total passenger miles

= 2,39,000

Service Costing or Operating Costing

379

7. Pooja transport runs a mini bus with a capacity of 25 seats. The bus runs between two towns which are 25 km apart. It runs for 30 days in a month and on an average 80% of seating capacity is utilized. The bus makes two round trips each day.

Cost of the bus Estimated scrap value at the end of its useful life of 10 years Driver’s salary per month Conductor’s salary per month Manager’s salary per month Cleaner’s salary per month Garage rent per annum Life tax Rent, lighting etc. per month Repairs per month Diesel, oil etc. per month

5,00,000 20,000 3,000 2,500 2,000 1,500 10,800 24,000 500 1,200 12,000

1 % of takings. The driver and the conductor are given 10% of 3 profit as bonus to be divided equally between the two. Prepare a statement to show: (a) Operating cost per passenger km. (b) The fare per passenger km. (B.Com., Bangalore University, Apr. 2004) Solution: Operating Cost Sheet

The profit expected was 33

Particulars

Total Cost p.m. ( )

Fixed expenses Driver’s salary Conductor’s salary Manager’s salary Cleaner’s salary Garage rent (10,800/12) Life tax (24,000/10/12) Rent, lighting Total fixed expenses

3,000 2,500 2,000 1,500 900 200 500 10,600

Running expenses Depreciation =

Total cost–Scarp value 1 × Life 12 Contd...

380 Cost Accounting Contd...

4,000

⎛ 5,00,000 – 20,000 ⎞ 1 = ⎜ ⎟× 10 ⎝ ⎠ 12

Repairs Diesel, oil, etc. Total cost Add: Profit – 33

1 % on net takings (or) 50% on cost 3

(a) Operating cost per passenger km

(b) Fare per passenger km

Total takings

=

Total cost Passenger km

=

27,800 = ` 0.46 60,000

=

Total takings 41,700 = Passenger km 60,000

1,200 12,000 27,800 13,900 41,700

= ` 0.70. (c) Bonus to driver and conductor

= 10% of profit 10 = 13,900 × 100 = ` 1,390.

Workings: (i) Total km

= Trip distance × No. of trips per day × No. of days = 25 × 2 × 2 × 30= 3,000 km (ii) Total passenger km = Total km × Seating capacity × % of seats occupied = 3,000 × 25 × 80/100 = 60,000 per km 8. The Road Transport Company which keeps a fleet of lorries shows the following information: Km run for April 2009 : 30,000 Wages for April : ` 2,000 Petrol, oil etc. : ` 4,000 Depreciation to be allowed at 25% on original cost of ` 1,00,000 Repairs for the month : ` 6,000 Garage rent, etc., for the month : ` 1,000 Licence, insurance, etc., for the year: ` 6,000 Prepare operating cost statement for April 2009 showing the total cost and variable cost per running km. (B.Com., Madras University)

Service Costing or Operating Costing

381

Solution: Operating Cost Statement for the month of April 2009 Particulars

Total p.m.

Fixed Expenses Wages Garage rent Licence, insurance (6,000/12) Total – A

2,000 1,000 500 3,500

Per km ( )

0.117

Variable expenses 2,083

25 1 ⎞ ⎛ × ⎟ Depreciation = ⎜1,00,000 × 100 12 ⎠ ⎝

Repairs Petrol, oil, etc. Total – B Total cost (A + B)

6,000 4,000 12,083 15,583

0.403 0.520

Note: Depreciation may be taken as fixed cost also. 9. Union Transport Company supplies the following details in respect of a truck of 5 tonne capacity: Cost of truck ` 4,50,000 Estimated life 10 years Diesel, oil, grease ` 75 per trip each way. Repairs and maintenance ` 2,500 per month. Driver’s wages ` 2,500 per month. Cleaner’s wages ` 1,250 per month Insurance ` 24,000 per year Tax ` 12,000 per year General supervision charges ` 24,000 per year The truck carries goods to and from the city covering distance of 50 miles each way. On onward trip freight is available to the extent of full capacity and on return 20% of capacity. Assuming that the truck runs on an average 25 days a month, work out: (a) Operating cost per tonne mile (b) Rate per tonne per trip that the company should charge if a profit of 50% on freightage is to be earned. (CA, Inter)

382 Cost Accounting

Solution:

Operating Cost Sheet Particulars

Total p.m. ( ) Per tonne mile ( )

Fixed expenses Driver’s wages Cleaner’s wages Insurance (24,000/12) Tax (12,000/12) General supervision charges (24,000/12)

2,500 1,250 2,000 1,000 2,000 8,750

Total – A

1.17

Variable expenses 3,750

⎛ 4,50,000 1 ⎞ × ⎟ Depreciation = ⎜ 12 ⎠ ⎝ 10

Diesel, oil and grease (75 × 2 × 25) Repairs and maintenance Total – B Total cost (A + B) Add: Profit 50% on freightage (i.e. 100% on cost) Freightage (a) Operating cost per tonne mile

=

3,750 2,500 10,000 18,750 18,750 37,500

18,750 7,500

= ` 2.50 (b) Freightage per tonne mile

(c) Rate per tonne per trip (one way) (d) Rate per tonne per trip (both ways) Workings: (1) Total miles run (2) Total tonne miles

=

37,500 7,500

= = = = =

`5 5 × 50 ` 250 250 × 2 ` 500

= 50 × 2 × 25 = 2,500 = Total miles × Average load carried = 2,500 × 3 = 7,500 5 +1 = 3 tonnes. (3) Average load carried = 2

1.33 2.50 2.50 5.00

Service Costing or Operating Costing

10. Mr. Anand owns a vehicle and provides the following data: Cost of vehicle ` 7,50,000 Estimated life 3,00,000 lakh km Loading capacity 10 tonnes Annual mileage run 40,000 km Driver’s wages per hour ` 20 Km run per hour 30 Cost of diesel ` 30 per litre Km run per litre of diesel 6 km A set of tyre costs ` 12,000 Number of tyres in the vehicle – 10 Life of tyres 30,000 km each Insurance ` 15,000 per annum. Tax, licence, etc. ` 12,000 per annum. Oil, lubricants, etc. ` 0.50 per km. Repairs and maintenance ` 6,000 per month. Calculate the cost per running km and tonne km. Solution:

Operating Cost Sheet Particulars

Total p.a. ( )

Fixed charges Insurance Tax, licence, etc. Driver’s wages (WN-2) Total – A

15,000 12,000 26,667 53,667

Running expenses ⎛ 7,50,000 ⎞ × 40,000 ⎟ Depreciation = ⎜ ⎝ 3,00,000 ⎠

1,00,000

⎛ 30 ⎞ Cost of diesel ⎜ × 40,000 ⎟ ⎝ 6 ⎠

2,00,000 80,000

⎛ 12,000 × 5 ⎞ Cost of tyres ⎜ × 40,000 ⎟ ⎝ 30,000 ⎠

Oil, lubricants, etc. (0.50 × 40,000) Repairs and maintenance (6,000 × 12) Total – B Total cost (A+B)

20,000 72,000 4,72,000 5,25,667

383

384 Cost Accounting

(a) Cost per running km

=

5, 25,667 = ` 13.14 40,000

(b) Cost per tonne km

=

5, 25,667 = ` 1.31 4,00,000

=

Annual km km per hour

=

40,000 = 1333.33 hours 30

Working Note: (1) Total hours

(2) Driver’s wages

= 1,333.33 × 20 = 26,667

(3) Tonne km

= 40,000 × 10 = 4,00,000

(4) A set of tyre

= 2 tyres.

(5) No. of sets

= 10/2 = 5 set tyres

11. Iron ore is transported from two mines A and B and unloaded at points in a railway station. A is at a distance of 10 km and B is at a distance of 15 km from the rail head points. A fleet of lorries of 5 tonnes carrying capacity is used for the transport of ore from mines. Records reveal that the lorries average a speed of 30 km per hour when running and regularly take 10 minutes to unload at the rail head. At mine A loading time averages 30 minutes per load while at mine B loading time averages 20 minutes per load. Driver’s wages, depreciation, insurance and taxes are found to cost ` 9 per hour operated. Fuel, oil, tyres, repairs and maintenance cost ` 1.20 per km. Draw up a statement showing cost per tonne km of carrying iron ore from each mine. If the coal is of equal quality and price at pit head, from which colliery should the purchases be made? (CA (Inter), Nov. 2001) Solution: Mine A (i) Time per trip: Running time

Mine B

⎛ 20 × 60 ⎞ ⎜ ⎟ 40 minutes ⎝ 30 ⎠

⎛ 30 × 60 ⎞ ⎜ ⎟ 60 minutes ⎝ 30 ⎠

Loading time Unloading time

30 minutes 10 minutes

20 minutes 10 minutes

Total time per trip

80 minutes

90 minutes

Service Costing or Operating Costing

385

(ii) Operating cost per trip: Driver’s wages, depreciation, insurance and taxes at ` 9 per hour Fuel, oil, tyres, repairs and maintenance at ` 1.20 per km.

` 12

⎛ 80 × 9 ⎞ ⎜ ⎟ ⎝ 60 ⎠

(1.20 × 20) Total

(iii) Tonne km

(10 × 5) ⎛ 36 ⎞ ⎜ ⎟ ⎝ 50 ⎠

50

⎛ 90 × 9 ⎞ ⎜ ⎟ ⎝ 60 ⎠

` 24 (30 × 1.20) 36

` 13.50

` 36.00 49.50

(15 × 5)

75

⎛ 49.50 ⎞ ` 0.66 ⎜ ⎟ ⎝ 75 ⎠ Ans: Coal is to be purchased from mine B, since its cost per tonne km is lower. 12. A company presently brings coal to its factory from a nearby yard and the rate paid for transportation of coal from the yard located 6 km away to factory is ` 50 per tonne. The total coal to be handled in a month is 24,000 tonnes.

(iv) Cost per tonne km

` 0.72

The company is considering a proposal to buy its own trucks and has the option of buying either a 10 tonne capacity or a 8 tonne capacity truck. The following informations is available:

Purchase price (`) Life (years) Scrap value at the end of 5th year Km per litre of diesel

10 tonne truck 8 tonne truck 10,00,000 8,50,000

Repair/maintenance p.a. per truck (`)

5 Nil 3 60,000

5 Nil 4 48,000

Other fixed expenses p.a. (`)

60,000

36,000

20

20

Lubricants and sundries per 100 km (`)

Each truck will daily make 5 trips (to and fro) on an average for 24 days in a month. Cost of diesel ` 15 per litre. Salary of drivers ` 3,000 per month–two drivers will be required for a truck. Other staff expenses ` 1,08,000 p.a. Prepare a comprehensive cost sheet on the basis of the above data showing transport cost per tonne of operating 10 tonne and 8 tonne truck at full capacity utilization. (CA (Final), Nov. 1998)

386 Cost Accounting

Solution:

Comparative monthly Operating Cost Statement Particulars

10 Tonne Truck ( )

Fixed Expenses Driver’s salary (See W.N. 4 & 5) Other staff expenses (1,08,000/12) Other fixed expenses (60,000/12, 36,000/12) Operating Expenses Depreciation (See W.N. 9) Diesel (W.N. 7) Lubricants and sundries (W.N. 8) Repairs and maintenance (W.N. 10) Total cost Total coal handled Cost per tonne

8 Tonne Truck ( )

1,20,000 9,000 5,000

1,50,000 9,000 3,000

3,33,333 1,44,000 5,760 1,00,000 7,17,093 24,000 tons

3,54,167 1,35,000 7,200 1,00,000 7,58,367 24,000 tons

7,17,093 24,000

7,58,367 24,000

= ` 29.88

= ` 31.60

Working Note: Particulars (1) (2) (3) (4)

Coal handled per month Coal handled per day (24,000/24) Coal handled per trip (1000/5) No. of trucks required

(5) Driver salary (6) Total km run per month (7) Cost of diesel

(8) Cost of lubricants and sundries

10 Tonne Truck 24,000 tonnes 1,000 tonnes 200 tonnes (200/10) 20 trucks (20 × 2 × 3,000)

8 Tonne Truck ( ) 24,000 tonnes 1,000 tonnes 200 tonnes (200/8) 25 trucks (25 × 2 × 3,000)

` 1,20,000 (20 × 5 × 2 × 6 × 24) 28,800 km

` 1,50,000 (25 × 5 × 2 × 6 × 24) 36,000 km

15 3 ` 1,44,000

28,800 ×

28,800 ×

20 100

` 5,760

15 4 ` 1,35,000

36,000 ×

36,000 ×

20 100

` 7,200 Contd...

Service Costing or Operating Costing

387

Contd...

⎛ Cost-Scrap ⎞ (9) Depreciation ⎜ ⎟ Life ⎝ ⎠

10,00,000 ×

(10) Repairs and maintenance

20 1 × 5 12

8,50,000 ×

25 1 × 5 12

` 3,33,333

` 3,54,167

⎛ 60,000 ⎞ × 20 ⎟ ⎜ ⎝ 12 ⎠

⎛ 48,000 ⎞ × 25 ⎟ ⎜ ⎝ 12 ⎠

` 1,00,000

` 1,00,000

13. Vidya Vikas High School arranges holiday trip to its students. The trip covers important holiday spots in Karnataka and Maharastra. The trip will take 5 days. Totally 50 students joined the trip. The school hired a bus at a hire charge of ` 4,000 per day inclusive of diesel. Permit fees, entrance fees and food expenses of drivers and an assistant is to be met by the school at ` 150 per driver per day and at ` 100 per day for the assistant. The expenses estimated for the trip are as follows: Permit fees for the trip ` 3,500. For visiting amusement parks, zoos and planetarium entrance fees are to be paid at ` 5 per student on 4 occasions. Breakfast, lunch and refreshments are to be provided at ` 75 per student per day. Two teachers are to accompany the students and are paid an allowance of ` 300 per day each. Accommodation facilities for the students are to be arranged at a cost of ` 1,750 for the trip. Prepare an operating cost statement for the trips and calculate the amount to be collected from each student for the trip. Solution:

Operating Cost Statement per Trip Particulars

Fixed charges Permit fees Bus hire charges (4,000 × 5) Driver’s food expenses (150 × 5 × 2) Assistant food expenses (100 × 5) Teacher’s allowances (300 × 2 × 5) Variable expenses Entrance fees for amusement parks, zoos and planentarium (5 × 50 × 4) Breakfast, lunch and refreshments (75 × 50 × 5) Accommodation Total cost

Total 3,500 20,000 1,500 500 3,000 28,500

28,500 1,000

18,750 1,750 20,500

20,500 50,000

388 Cost Accounting

Charges per student =

50,000 = ` 1,000 50

Note: Assumed two drivers for the bus. 14. Arvind owns a tractor which he uses for tilling the farm lands on hire. The following are the details of the tractor: Cost of tractor – ` 12,50,000 Estimated life – 6 years Sale value at the end of 6 years – ` 2,50,000 Annual repairs and maintenance cost – ` 18,000 Cost of tyres and tubes per annum – ` 35,000 Sale of old tyres, tubes and spare parts – ` 5,000 Wages of a driver ` 4,000 per month Diesel consumption per hour 4 litres. Cost of diesel ` 30 per litre. Engine oil and lubricants amount to ` 2,500 per month Cleaning charges ` 160 per month. The tractor runs for 6 hours daily and 20 days in a month on average. If Arvind wants to earn a profit of 30% on his investment annually, what amount he should charge per hour? Solution:

Operating Cost Statement Particulars

Total (p.a.)

Fixed Charges Wages for driver (4,000 × 12) Operating and Maintenance Charges:

48,000 1,66,667

⎛ 12,50,000 – 2,50,000 ⎞ Depreciation ⎜ ⎟ 6 ⎝ ⎠

Repairs and maintenance: Tyres and tubes Less: Sale of old tyres and tubes Diesel (WN-2) Engine oil and lubricants (2,500 × 12) Cleaning charges (160 × 12) Total cost 30 ⎞ ⎛ Add: Profit – 30% on investment ⎜12,50,000 × ⎟ 100 ⎠ ⎝

Total charges

48,000

18,000 35,000 5,000

30,000 1,72,800 30,000 1,920

4,19,387 4,67,387 3,75,000 8,42,387

Service Costing or Operating Costing

Hire charges per hour = Working note: (1) Total hours operated per annum = = (2) Cost of diesel = =

389

8, 42,387 = ` 585 1, 440

6 hrs. × 20 days × 12 months 1,440 hours. 1,440 hrs × 4 litres × ` 30 per litre ` 1,72,800

Decision Making: 15. ACME company is considering three proposals for conveyance facilities for its sales staff, who normally travel on an average 20,000 km per annum locally. The proposals are as follows: I. Purchase and maintain own fleet of cars: Average cost of a car is ` 2.50 lakh. Petrol consumption is @ 12 km/litre. Each car has a resale value of ` 50,000 at the end of five years. II. Allow the executives to use their own car and reimburse expenses at ` 5 per km and insurance premia. III. Hire cars from outside agency for ` 30,000 per year per car. The company shall also bear the cost of petrol (` 3.75 per km). Taxes, tyre etc. Following data are available for consideration: (i) Petrol – ` 45 per litre (ii) Repairs and maintenance @ 50 paise per km. (iii) Insurance ` 4,800 per year per car. (iv) Taxes ` 2,400 per year per car (v) Tyres @ 40 paise per km. (vi) Driver wages and bonus ` 30,000 per annum per car. Which of the proposals in acceptable. (ICWA (Inter), June 2005) Solution: Proposal I – Purchase of Own Fleet of Cars Operating Cost Sheet Particulars Fixed Expenses Insurance Taxes Driver wages and bonus Total

Total (p.a.)

per km

4,800 2,400 30,000 37,200 Contd...

390 Cost Accounting Contd...

Fixed expenses per km

37, 200 20,000

1.86

40,000

2.00

– – – –

3.75 0.50 0.40 8.51

Variable expenses 2,50,000 – 50,000 ⎞ Depreciation ⎛⎜ ⎟ 5 ⎝ ⎠

Petrol (45/12) Repairs and maintenance Tyre cost Total cost per km

Proposal II – Reimbursement of Executives Car Expenses Reimbursement of expenses per km. Insurance charges per km (4,800/20,000) Total cost per km

= 5.00 = 0.24 = 5.24

Proposal III – Hire of Cars from outside agency Particulars

per km Hire charges (30,000/20,000) 1.50 Petrol (45/12) 3.75 Tyre 0.40 Repairs and maintenance 0.50 Total cost per km 6.15 Ans: Proposal II to reimburse executives car expenses is acceptable, since its cost of ` 5.24 is lower than the other two proposals. 16. A practicing chartered accountant now spends ` 0.90 per km on taxi rate for his clients work. He is considering two alternatives, the purchase of a new small car or an old big car. The estimated cost figures are: Purchase price Sale price Repairs and services per annum Tax and insurance per annum Petrol consumption per litre Petrol price per litre

New small car 35,000 19,000 1,000 1,700 10 km 3.50

Old big car 20,000 12,000 1,200 700 7 km 3.50

Service Costing or Operating Costing

391

He estimates that he does 10,000 km annually, which of the three alternatives will be cheaper? If his practice expands and he is to do 19,000 km per annum what should be his decision? At how many km per annum will the costs of two cars break-even and why? Ignore interest and income tax. (CA, Inter) Solution: Statement showing cost of three alternative proposal – 10,000 km Taxi Fixed expenses Depreciation Repairs and services Tax and insurance Total fixed cost Fixed cost per km Variable cost Cost of petrol per km Taxi hire charges

New small car

– – – – – – 0.90 0.90

Old big car

3,200 1,000 1,700 5,900 0.59

1,600 1,200 700 3,500 0.35

0.35 – 0.94

0.50 – 0.85

Decision: Old big car is preferable since its cost per km is cheaper. Statement showing cost of three alternative proposal – 19,000 km Taxi Total fixed cost Fixed cost per km Variable cost: Petrol cost Taxi hire charges

New small car – 5,900 – 0.31

– 0.90 0.90

Old big car 3,500 0.18

0.35

0.50 –

0.66

– 0.68

Decision: New small car is preferable since its cost per km is lower than other two proposals when annual km done is 19,000 km Total km at which cost per km of both cars break even: =

Difference in fixed cost Difference in variable cost per km

=

2, 400 0.15

= 16,000 km

392 Cost Accounting

Power Generation: 17. From the following data, find out in an appropriate cost sheet form the generating cost of electricity per unit in an iron and steel works during the month of April, 2008: (a) Fuel: Coal at the beginning of month: 500 tonnes. Supply during the month 1,100 tonnes. Balance at the end of month 400 tonnes. Annual contract for the supply of coal F.O.R. colliery at ` 10 per tonne. Add: 10% to cover freight and handling charges. (b) Oil: 10 tonnes at ` 250 per tonne. (c) Water: 50,000 litres. Pumping charges at 25 paise per 100 litres. 1 (d) Depreciation of steam boiler: Capital value ` 24,000 and the rate of depreciation 12 % 2 per annum. (e) Salaries and wages of boiler house: 10 men at ` 100 per month each. 40 coolies at ` 20 per month each. (f) Recovery on account of sale of ashes: 100 tons at ` 1 per tonne. (g) Salaries and wages of the generating station: 50 men at ` 100 per month each. 20 coolies at ` 20 per month each. (h) Repairs and maintenance of the generating equipment: ` 2,600, capital value ` 1,20,000 1 and the rate of depreciation 12 % per annum. 2 (i) Share of administration charges ` 1,750 (j) Number of units generated: 1,46,000 (k) Loss in the process 2000 units generated. (B.Com., Madras University) Solution: Operating Cost Sheet for the month of April, 2008 Particulars

Total Per month

(1) Cost of fuel: Opening stock of coal – 500 tonnes at ` 10 per ton

5,000

Add: Supply during the month-1,100 tonnes at ` 10 per tonne

11,000 16,000

Add: 10% for freight and handling charges 10 ⎞ ⎛ ⎜⎝11,000 × ⎟ 100 ⎠

1,100 17,100 Contd...

Service Costing or Operating Costing

393

4,000

Less: Closing stock – 400 tonnes of Coal at ` 10 per ton Less: Sale of ashes (100 × 1) (2) Oil (250 × 10)

100

0.25 ⎞ ⎛ (3) Water ⎜ 50,000 × ⎟ 100 ⎠ ⎝

13,000 2,500 125

(4) Depreciation of steam boiler (5) Salary and wages of boiler house:

250 Men – 10 × 100 Coolies – 40 × 20

1,000 800

Men – 50 × 100 Coolies – 20 × 20

5,000 400

1,800

(6) Salary and wages of generating station:

(7) Repairs and maintenance of generating equipment (8) Depreciation of generating equipment: (9) Administration charges Total cost Total units generated Less: Loss in transit Units available for sale Cost per unit

12.5 1ˆ Ê ¥ ÁË1, 20,000 ¥ ˜ 100 12 ¯

5,400 2,600 1,250 1,750 28,675

= 1,46,000 units = 2,000 units = 1,44,000 units =

28,675 1, 44,000

= Re. 0.20 (approx). Cinema Theatre: 18. Paramount Theatre at Bangalore is a mini theatre with a seating capacity of 500 seats. The seats are classified into 3 categories. They are: I Class – 200 seats II Class – 200 seats III Class – 100 seats The following is the other relevant information for the month of November 2008: (1) Salaries and wages: 2 managers at ` 7,500 per month each. 12 gatekeepers and attenders ` 3,000 per month each.

394 Cost Accounting

4 security guards ` 2,500 per month each. 4 operators – ` 5,000 per month each. 2 clerks – ` 3,000 per month each. (2) Other expenses: Lighting and power

` 1,25,000

Carbon

` 1,00,000

Advertisement Repairs and maintenance Office expenses Hire for print Miscellaneous expenses

` 60,000 ` 1,00,000 ` 75,000 ` 2,00,000 ` 65,067

(3) Depreciation: Cost of building ` 90,00,000, depreciation at 5% p.a. Cost of projector and equipment ` 60,00,000 depreciation at 25% p.a. Cost of furniture and fixtures ` 10,00,000, depreciation at 10% p.a. Daily 3 shows are run throughout the year. The theatre operates 360 days a year. The seats are occupied 80% on average. The charges levied are in the ratio of 3:2:1 for the three classes of seats. Find the charge to be made for the three classes of seats assuming that the management wants to earn a profit 20% on cost. Solution: Operating Cost Sheet for the month of April, 2008 Particulars 1. Salaries and wages: Managers (7,500 × 2) Gatekeepers and attenders (3,000 × 12) Security guards (2,500 × 4) Operators (5,000 × 4) Clerks (3,000 × 2) 2. Other expenses: Lighting and power Carbon Advertisement Repairs and maintenance Office expenses Hire for print

Per month 15,000 36,000 10,000 20,000 6,000

87,000

1,25,000 1,00,000 60,000 1,00,000 75,000 2,00,000 Contd...

Service Costing or Operating Costing

395

Contd...

Miscellaneous expenses 3. Depreciation:

65,067

5 1ˆ Ê Building Á 90,00,000 ¥ ¥ ˜ Ë 100 12 ¯

7,25,067

37,500

25 1ˆ Ê ¥ Projector and equipment Á 60,00,000 ¥ ˜ Ë 100 12 ¯ 10 1ˆ Furniture and fixtures ÊÁ10,00,000 ¥ ¥ ˜ Ë 100 12 ¯ Total cost Add: Profit – 20% on cost Total collections

1,25,000 8,333 – – –

1,70,833 9,82,900 1,96,580 11,79,480

Charges per show: III class

=

11,79, 480 79, 200

= ` 14.89

II class

= (14.89 × 2)

= ` 29.78

I class

= (14.89 × 3)

= ` 44.67

Workings: Number of man shows in terms of equivalent III Class seats: = No. of seats × Weightage × No. of shows per day × No. days × % of seats occupied 80 = 43,200 100 80 = 28,800 Second class = 200 × 2 × 3 × 30 × 100 80 Third class = 100 × 1 × 3 × 30 × = 7,200 100 Total equivalent man shows = 79,200

First class = 200 × 3 × 3 × 30 ×

Hotel - Lodging: 19. Trident Hotel, Chennai, supplies you the following information: (a) Capacity: Single bedrooms – 100, Double bedrooms – 75, and Family room – 50. (b) Occupancy Ratio: (i) During summer (30 weeks) – Single room 100%, Double room 90% and family room 80%. (ii) During winter (22 weeks) – Single room 80%, Double room 70% and family room 60%.

396 Cost Accounting

(c) Salary and wages: 2 managers ` 10,000 per month each. 2 accounts clerk ` 3,000 per month each. 2 receptionist ` 6,000 per month each. Thirty attenders – ` 2,500 per month each. Five security guards at ` 5,000 per month each. (d) Other expenses: Lighting and power – ` 4,00,000 Interior decoration – ` 3,00,000 Licence fees – ` 1,50,000 Linen and laundry – ` 2,00,000 Repairs and maintenance – ` 3,00,000 Depreciation – building – ` 1,00,000 Depreciation – furniture – ` 50,000 Insurance – ` 75,000 Water and gardening – ` 75,000 (e) Yearly profit desired at 30% on the total investment of ` 2 crore (f) Rent is charged in ratio of 1 : 2 : 3 among the three types of rooms. Calculate the rent to be charged for each type of room. Solution: Operating Cost Sheet for a year Particulars

Total per year

1. Salaries and wages: Managers (2 × 10,000 × 12)

2,40,000

Accounts clerk (2 × 3,000 × 12)

72,000

Receptionist (2 × 6,000 × 12) Attenders (30 × 2,500 × 12) Security guards (5 × 5,000 × 12) 2. Other expenses: Lighting and power Interior decoration License fees Linen and laundry Repairs and maintenance Depreciation – building

1,44,000 9,00,000 3,00,000

16,56,000

4,00,000 3,00,000 1,50,000 2,00,000 3,00,000 1,00,000 Contd...

Service Costing or Operating Costing

397

Contd...

Depreciation – furniture Insurance Water and gardening Total cost Add: Profit – 30% on investment of ` 2 crores Total collections Rent charges per room per day: Single room

50,000 75,000 75,000 – –

16,50,000 33,06,000 60,00,000

–

93,06,000

= = ` 79.60

Double room

= 79.60 × 2 = ` 159.20

Family room

= 79.60 × 3 = ` 238.80

Workings: Total room days in terms of single rooms: = No. of rooms × Weightage × No. of weeks × No. days per week × % of occupancy I. Summer: Single bedroom

= 100 × 1 × 30 × 7 × 100% =

21,000

Double bedroom

= 75 × 2 × 30 × 7 ×

90 100

=

28,350

Family room

= 50 × 3 × 30 × 7 ×

80 100

=

25,200

=

12,320

II. Winter: 80 100

Single bedroom

= 100 × 1 × 22 × 7 ×

Double bedroom

= 75 × 2 × 22 × 7 ×

70 100

=

16,170

Family room

= 50 × 3 × 22 × 7 ×

60 100

=

13,860

Total equivalent room days

= 1,16,900

Hospital: 20. Surya Sugalaya Hospital supplies you the following information for the year ending 31.3.2009: 1. Inpatient department has 50 beds of which 90% is full during the year. Inpatient department functions on all 365 days in the year. 2. Outpatient ward works 300 days in a year. The average number of outpatients visiting the hospital daily is 150. The amount charged for each outpatient is one fifth of the charge levied for an inpatient.

398 Cost Accounting

3. Salaries: Administration: 1 Manager – ` 15,000 per month 2 Assistant Managers – ` 8,000 per month each 1 Accountant – ` 8,000 per month 4 Clerks – ` 5,000 per month each 5 Peons – ` 2,000 per month each. 4. Salaries – Medical: 1 Chief medical officer – ` 40,000 per month 5 Doctors – ` 30,000 per month each. 25 Nurses – ` 5,000 per month each. 15 Ward boys – ` 3,500 per month each. 30 Attenders and peons – ` 2,000 per month each. 5. Cost of medicines, drugs and chemicals Opening stock – ` 2,00,000 Purchases – ` 24,50,000 Closing stock – ` 1,50,000 6. Depreciation Building – ` 4,00,000 Equipment – ` 3,00,000 Furniture – ` 50,000 7. Other expenses: Lighting and power – ` 3,00,000 Office expenses – ` 50,000 Telephone expenses – ` 75,000 Cleaning and waste disposal – ` 23,625 Ascertain the cost of service provided to an inpatient and an outpatient per day. Solution: Operating Cost Sheet for a year Particulars

Total per year

(a) Salaries – Administration: Managers

15,000

Asst. managers (8,000 × 12)

16,000

Accountant

8,000

Clerks (5,000 × 4)

20,000

Peons (2,000 × 5)

10,000

69,000 Contd...

Service Costing or Operating Costing

399

Contd...

(b) Salaries – medical: Chief medical officer

40,000

Doctors (30,000 × 5)

1,50,000

Nurses (5,000 × 25)

1,25,000

Ward boys (3,500 × 15)

52,500

Attenders and peons (2,000 × 30)

60,000

4,27,500

(c) Cost of medicines: Purchases

24,50,000

Add: Opening stock

2,00,000 26,50,000

Less: Closing stock

1,50,000

25,00,000

(d) Depreciation: Building

4,00,000

Equipment

3,00,000

Furniture

50,000

7,50,000

(e) Other expenses: Lighting and power

3,00,000

Office expenses

50,000

Cleaning and waste disposal

23,625

Telephone expenses

75,000

4,48,625

–

41,95,125

Total cost Cost per outpatient =

41,95,125 = ` 33. 1, 27,125

Cost per inpatient = 33 × 5 = ` 165 Workings: (i) No. of outpatients = 300 × 150 = 45,000 (ii) No. of inpatients = 50 × 365 ×

90 × 5 = 82,125 100

(equivalent to outpatients) Total equivalent outpatients = 1,27,125 Canteen/Hotel - Boarding: 21. Union Transport Company is running a canteen for the benefit of its employees. The following is the information for the month of October, 2008:

400 Cost Accounting

(i) Total number of employees using the services of canteen are 750. Out of the above 50% of employees took meals once a day for 20 days in the month, another 20% took meals once a day in all the days of month. The balance 30% took tiffin once a day for 25 days in a month. The charge for the tiffin is 80% of the cost of meals. (ii) The expenses for the month are: (a) Wages and salaries: 1 Manager – ` 15,000 per month 1 Assistant Manager – ` 9,000 per month 5 Cooks – ` 7,000 per month each 10 Attenders and assistants – ` 2,000 per month each. 1 Clerk – ` 4,000 per month 1 Cashier – ` 4,000 per month 1 Accountant – ` 7,500 per month (b) Consumable stores and provisions for the month: Oil 2 tins costing ` 2,400 each Ghee 5 litres at ` 150 per litre Vegetables ` 4,500 Rice – 500 kg costing ` 28 per kg. Atta, maida, etc. ` 4,000 Gas and fuel ` 8,000 Power and lighting ` 6,000 Egg, meat, etc. ` 3,000 Miscellaneous expenses ` 3,500 Subsidy borne by the management ` 26,500 Find the amount collected from employees per meal and per tiffin. Solution: Operating Cost Sheet for the month of October 2008 Particulars

Total per month

(a) Wages and salaries: Manager Asst. manager

15,000 9,000

Cooks (7,000 × 5)

35,000

Attenders and assistants (2,000 × 10)

20,000

Clerk

4,000

Cashier

4,000

Accountant

7,500

94,500 Contd...

Service Costing or Operating Costing

401

Contd...

(b) Consumable stores and provisions: Oil (2 × 2,400)

4,800

Ghee (5 × 150)

750

Vegetables

4,500

Rice (500 × 28)

14,000

Atta, maida etc.

4,000

Gas and fuel

8,000

Power and lighting

6,000

Egg, meat etc.

3,000

Miscellaneous expenses

3,500

Total cost Less: Subsidy borne by management Net cost of food and tiffin Cost per meal =

48,550

–

1,43,050

–

26,500

–

1,16,550

1,16,550 = ` 7.00 16,650

Cost per tiffin = 7 ×

80 = ` 5.60 100

Workings: 1. Number of meals: (i) 375 employees × 20 days (ii) 150 employees × 31 days

= 7,500 = 4,650

2. No. of tiffins – equivalent to meals: 80 = 4,500 100 Total equivalent meals = 16,650

= 225 employees × 25 days ×

School Bus: 22. EPS is a public school having 25 buses each plying in different directions for the transport of its school students. In view of large number of students availing the bus service, the buses work two shifts daily both in the morning and in the afternoon. The buses are garaged in the school. The workload of the students has been so arranged that in the morning, the first trip picks up senior students and the second trip plying an hour later picks up the junior students. Similarly, in the afternoon, the first trip takes the junior students and an hour later the second trip takes the senior students home.

402 Cost Accounting

The distance travelled by each bus one way is 16 km. The school works 24 days in a month and remains closed for vocation in May and June. The bus fee, however, is payable by the students for all the 12 months in a year. The details of expenses for the year 2003-2004 are as under: Driver’s salary – payable for all the 12 months – ` 5,000 per month per driver Cleaner’s salary – payable for all the 12 months – ` 3,000 per month per cleaner (one cleaner has been employed for every five buses) Licence fees, taxes etc. ` 2,300 per bus per annum. Insurance premium – ` 15,600 per bus per annum. Repairs and maintenance ` 16,400 per bus per annum. Purchase price of the bus ` 16,50,000 each. Life of the bus – 16 years. Scrap value – ` 1,50,000 Diesel cost ` 18.50 per litre. Each bus gives an average of 10 km per litre of diesel. The seating capacity of each bus is 60 students. The seating capacity is fully occupied during the whole year. The school follows differential fees based on distance travelled as under: Students picked up and dropped within the range of distance from the school 4 km 8 km 16 km

Bus fees

% of students availing this facility 15% 30% 55%

25% of full 50% of full Full

Ignore interest. Since the bus fees has to be based on average cost, you are required to: (a) Prepare a statement showing the expenses of operating a single bus and the fleet of 25 buses for a year. (b) Work out the average cost per student per month in respect of: (a) Students coming from a distance upto 4 km from the school (b) Students coming from a distance upto 8 km from the school. (c) Students coming from a distance upto 16 km from the school (CA – PE II, May 2004) Solution: Operating Cost Statement Particulars Fixed expenses: Driver’s salary

Single Bus Per annum 5,000 × 12 × 25

60,000

25 buses Per annum 15,00,000 Contd...

Service Costing or Operating Costing

403

Contd...

Cleaner’s salary Licence fees and taxes Insurance premium Repairs and maintenance Depreciation

7,200

1,80,000

2,300 15,600 16,400 93,750

57,500 3,90,000 4,10,000 23,43,750

56,832

14,20,800

2,52,082

63,02,050

3,000 ¥ 25 ¥ 12 5

16,50,000 - 1,50,000 16

Diesel cost

(WN. 1) Total

Average cost per student: (a) Students coming from a distance upto 4 km =

2,52,082 = ` 59.34 4, 248

(b) Students coming from a distance upto 8 km = 59.34 × 2 = ` 118.68 (c) Students coming from a distance upto 16 km = 118.68 × 2 = ` 237.36 Working Note: (1) Diesel cost per bus: Distance travelled by a bus per year: = Trip distance (one way) × No. of trips (one way) × No. of days in a month × No. of months = 16 × 8 × 24 × 10 = 30,720 km 18.50 = ` 56,832 10 (2) (a) No. of students travelling in a bus = Capacity × No. of trips

Diesel cost = 30,720 ×

= 60 × 2 = 120 students (b) No. of equivalent students in terms of 25% fees paying students: Category = No. of students × Weightage

Total

(i) Travelling upto 4 km = (120 × 15%) = 18 × 1

= 18 students

(ii) Travelling upto 8 km = (120 × 30%) = 36 × 2

= 72 students

(iii) Travelling upto 16 km = (120 × 55%) = 66 × 4

= 264 students

Total equivalent students per month Total equivalent students per year = 354 × 12 = 4,248 students

= 354 students

18

Marginal Costing

Chapter

A. Short Answer Type Questions 1. Selling price per unit – ` 40 Variable cost per unit – ` 25 Fixed cost – ` 3,60,000 Calculate (a) P/V ratio, (b) Break-even point. Solution: Contribution × 100 (a) P/V ratio = Sales 15 × 100 = 37.5% = 40 Note: Selling price per unit Less: Variable cost per unit

= ` 40 = ` 25

Contribution per unit

= ` 15

(b) Break-even point (in units)

=

Fixed cost Contribution per unit

3,60,000 = 24,000 units 15 Fixed cost = P/V ratio

=

Break-even point (in `)

=

3,60,000 × 100 37.5

= ` 9,60,000 2. Fixed cost ` 4,20,000; selling price per unit ` 50; variable cost ` 35. Find out (a) Break-even point in units and (b) New break-even point if selling price is reduced by 10%. Solution: (a) Break-even point (in units)

=

Fixed cost Contribution per unit

=

4, 20,000 = 28,000 units 15

Marginal Costing 405

Note: Selling price p/u Less: Variable cost p/u

= ` 50 = ` 35

Contribution per unit

= ` 15

(b) New break-even point (in units)

=

Fixed cost New contribution per unit

=

4, 20,000 = 42,000 units 10

Note: Selling price p/u Less: 10% reduction in price

= ` 50 = `5

New selling price

= ` 45

Less: Variable cost

= ` 35

New contribution

= ` 10

3. Sales ` 10,000; variable cost 75% of sales, profit ` 1,000. Find (a) break-even sales; (b) what would be the sales volume to realize a profit ` 1,500? Solution: (a) Break-even sales

Note:

Fixed cost P/V ratio 1,500 = ` 6,000 = 25 /100

=

Sales Less: Variable cost (75% of sales)

= ` 10,000 = ` 7,500

Contribution

= ` 2,500

Fixed cost

= Contribution – Profit = 2,500 – 1,000 = ` 1,500 Contribution 2,500 ×100 = ×100 = 25% P/V ratio = Sales 10,000 (b) Sales volume to earn a profit of ` 1,500 Sales volume (in ` )

=

Fixed cost + Desired profit Contribution per unit

=

1,500 + 1,500 25 / 100

= ` 12,000

406 Cost Accounting

4. Sales ` 5,00,000; fixed cost ` 1,00,000 and break-even point ` 4,00,000. Find (a) P/V ratio, (b) profit Solution: (a) P/V ratio

Fixed cost BEP 1,00,000 × 100 = 25% = 4,00,000

=

(b) Profit

= Sales × P/V ratio – Fixed cost = 5,00,000 × 25/ 100 – 1,00,000 = ` 25,000

5. Fixed cost ` 1,00,000; profit ` 25,000; break-even point ` 2,00,000. Find the sales. Solution: Sales

Contribution P/V ratio 1, 25,000 = ` 2,50,000 = 50 / 100

=

Note:

(i) Contribution = Fixed cost + Profit = 1,00,000 + 25,000 = ` 1,25,000 (ii) P/V ratio

Fixed cost ×100 BEP 1,00,000 × 100 = 50% = 2,00,000

=

6. The ratio of variable cost to sales is 75%. The break-even point occurs at 60% of capacity sales. Find the capacity sales when fixed costs are ` 1,00,000. Also compute profit at 80% capacity sales. Solution: Break-even point sales (i.e., at 60% capacity) = ` 4,00,000 ⎛ 4,00,000 ⎞ = ` 6,66,667 Capacity sales = ⎜ ⎝ 60 / 100 ⎟⎠

Note: % of variable cost to sales P/V ratio Break-even point

= 75% = 25% Fixed cost = P/V ratio 1,00,000 = = ` 4,00,000 25 / 100

Marginal Costing 407

Profit at 80% capacity sales: Profit = Sales × P/V ratio – Fixed cost = 6,66,667 × 80/100 × 25/100 – 1,00,000 = 1,33,333 – 1,00,000 = ` 33,333 7. P/V Ratio – 40%, margin of safety – 30%, sales volume ` 5,00,000. Find the profit. Solution: Profit Profit %

= Margin of safety × P/V ratio = Margin of safety % × P/V ratio = 30% × 40% = 12% on sales

Profit on sales volume of ` 5,00,000: Profit

= 5,00,000 × 12 /100 = ` 60,000 8. Margin of safety ` 50,000; MS ratio – 25%, P/V ratio – 40%. Find (a) break-even sales; (b) fixed cost; (c) profit.

Solution: (a) BEP sales Margin of safety (i.e., 25% on sales)

= ` 50,000 100 = ` 2,00,000 25

Total sales (i.e., 100%)

= 50,000 ×

Less: Margin of safety

= ` 50,000

Break-even sales

= ` 1,50,000

(b) Fixed cost

= BEP sales × P/V ratio = 1,50,000 × 40 / 100 = ` 60,000 (c) Profit = Total sales × P/V ratio – Fixed cost = 2,00,000 × 40/100 – 60,000 = ` 20,000 9. Fixed cost ` 60,000; Profit ` 40,000. P/V ratio 40%. Find sales. Solution: Contribution

Sales

= Fixed cost + Profit = 60,000 + 40,000 = ` 1,00,000 Contribution = P/V ratio =

1,00,000 = ` 2,50,000 40 / 100

408 Cost Accounting

10. Selling price ` 75 per unit Variable cost ` 50 per unit Fixed expenses ` 3,00,000 Calculate: (a) P/V ratio, (b) break-even point in units; (c) new selling price per unit if breakeven point is reduced to 80,000 units. Solution: (a) P/V ratio

Contribution × 100 Sales 25 × 100 = 33.33% = 75

=

Note: Contribution per unit

= Sales – Variable cost = 75 – 50 = ` 25 Fixed cost = Contribution per unit

(b) BEP (in units)

3,00,000 = 12,000 units 25 (c) New selling price if break-even point is reduced to 8,000 units: Break-even point (in ` ) = Total cost

=

Total cost

= Variable cost + Fixed cost = 8,000 × 50 + 3,00,000 = 4,00,000 + 3,00,000

= ` 7,00,000 7,00,000 New selling price per unit = 8,000 = ` 87.50 11. A plant reduces a product which costs ` 3 per unit when produced in quantities of 10,000 units and ` 2.50 per unit when produced in quantities of 20,000 units. You are asked to estimate fixed cost. BEP sales (i.e., total cost)

Solution:

Changes

Units 10,000 20,000 10,000

Variable cost per unit

Total cost (` ) (10,000 × 3) (20,000 × 2.50)

Changes in cost Changes in unit 20,000 = = `2 10,000 =

= 30,000 = 50,000 = 20,000

Marginal Costing 409

Total cost for 20,000 units Less: Variable cost (20,000 × 2) Fixed cost

= ` 50,000 = ` 40,000 = ` 10,000

12. The profit volume ratio of a company is 40% and its margin of safety is 50%. Work out the net profit if sales volume is ` 8,00,000. Solution: Profit Profit %

= Margin of safety × P/V ratio = Margin of safety % × P/V ratio = 50% × 40% = 20% on sales 20 20 = 8,00,000 × Profit = Sales × 100 100 = ` 1,60,000 13. A company has a P/V ratio of 40%. By what percentage must sales be increased to offset (i) 10% reduction in selling and (ii) 20% reduction selling price.

Solution: Let present selling price be

–

` 100

Less: Variable cost (complement of P/V ratio)

–

` 60

Present contribution

–

` 40

(i) If selling price is reduced by 10% New selling price

–

` 90

Less: Variable cost

–

` 60

New contribution

–

` 30

Sales for a contribution of ` 30

=

Sales for a contribution of ` 40

=

Increase in sales (120 – 90)

=

% Increase in sales

= =

` 90 90 × 40 = ` 120 30 ` 30 Increase in sales × 100 Sales 30 × 100 = 33 1/3% 90

(ii) If selling price is reduced by 20% New selling price Less: Variable cost New contribution

– – –

` 80 ` 60 ` 20

Sales for a contribution of ` 20

=

` 80

410 Cost Accounting

Sales for a contribution of ` 40 Increase in sales (160 – 80) % increase in sales

80 × 40 = ` 160 20 = ` 80 Incerase in sales ×100 = Sales 80 × 100 = 100% = 80

=

14. Sales – ` 12,00,000 P/V ratio – 40% Find variable cost. Solution: Contribution

Variable cost

= Sales × P/V ratio 40 = ` 4,80,000 = 12,00,000 × 100 = Sales – Contribution

= 12,00,000 – 4,80,000 = ` 7,20,000 15. X Ltd. earned a profit of ` 50,000 on a sales of ` 4,00,000 in the first quarter of the year 2009-2010. In the next quarter the profit and sales are ` 70,000 and ` 5,00,000 respectively. Find (a) P/V ratio, and (b) Fixed cost. Solution: Quarter I Quarter II

Sales (` ) 4,00,000 5,00,000

Profit (` ) 50,000 70,000

Changes

1,00,000

20,000

(a) P/V ratio

=

Changes in profit Changes in sales

20,000 × 100 = 20% 1,00,000 = Sales × P/V ratio – Profit 20 – 50,000 = 4,00,000 × 100 = 80,000 – 50,000

=

(b) Fixed cost

= ` 30,000 16. From the following data calculate (a) P/V ratio, (b) profit and (c) sales volume required to earn a profit of ` 5,000.

Marginal Costing 411

Sales Fixed cost Break-even point Solution: (a) P/V ratio =

` 20,000 ` 4,000 ` 10,000

Fixed cost × 100 Break-even point

4,000 × 100 = 40% 10,000 (b) Profit = Sales × P/V ratio – Fixed cost 40 – 4,000 = 20,000 × 100 = ` 4,000 (c) Sales required to earn a profit of ` 5,000

=

Sales

=

Fixed cost + Desired profit P/V ratio

=

4,000 + 5,000 40,000

= ` 22,500 17. X Ltd. has two factories A and B producing the same article whose selling price is ` 200. Other details are: A B Capacity in units 10,000 15,000 Variable cost (`) 120 150 Fixed expenses 2,50,000 3,00,000 Determine: (a) BEP of each factory (b) P/V ratio of each factory and (c) Composite P/V ratio. Solution: (a) BEP (in units) = Factory A

=

Factory B

=

(b) P/V ratio

=

Factory A

=

Fixed cost Contribution per unit 2,50,000 = 3,125 units 80 3,00,000 = 6,000 units 50 Contribution ×100 Sales 80 × 100 = 40% 200

412 Cost Accounting

50 × 100 = 25% 200 (c) Composite P/V ratio: 40 2 25 3 × + × = 100 5 100 5

Factory B

=

= 16 + 15 = 31% 18. In a purely competitive market, 10,000 pocket transistors can be manufactured and sold and certain profit is generated. It is estimated that 2,000 pocket transistors need be manufactured and sold in a monopoly market to earn the same profit. Profit under both the condition is targeted at ` 2,00,000. The variable cost per transistor is ` 100 and the total fixed cost is ` 37,000. You are required to find out the selling price both under monopoly and competitive conditions. (ICWA, Inter) Solution: Statement showing selling price under competitive conditions 10,000 units ( ) 10,00,000 37,000 10,37,000 2,00,000 12,37,000

Variable cost (10,000 × 100) Fixed cost Total cost Profit Sales Selling price per unit =

12,37,500 = ` 123.70 10,000

Statement showing selling price under monopoly conditions Variable cost (2,000 × 100) Fixed cost

2,00,000 37,000 2,37,000 2,00,000 4,37,000

Total cost Profit Sales Selling price per unit

=

4,37,000 = ` 218.50 2,000

Marginal Costing 413

B. Comprehensive Practical Problems Absorption Costing 1. The following information are extracted from the books of X Ltd. Installed capacity (units) Opening stock (units) Closing stock (units) Production (units) Selling price per unit (`) Fixed cost for the year (`) Variable cost per unit

2008-09 20,000 – – 15,000 40

2009-10 20,000 – 2,000 18,000 40

2010-11 20,000 2,000 – 16,000 40

1,00,000

1,00,000

1,00,000

` 25

` 25

` 25

You are required to prepare statements showing profit or loss for the above three years under (a) absorption costing; and (b) marginal costing. Solution: Statement of Profit or Loss – Absorption Costing Particulars Variable cost Fixed cost Cost of production Add: opening stock Less: Closing stock Cost of goods sold Profit Sales

2008-09 3,75,000 (15,000 × 25) 1,00,000 4,75,000 –

2009-10 4,50,000 (18,000 × 25) 1,00,000 5,50,000 –

2010-11 4,00,000 (16,000 × 25) 1,00,000 5,00,000 61,111

4,75,000 – 4,75,000 1,25,000 6,00,000 (15,000 × 40)

5,50,000 61,111 4,88,889 1,51,111 6,40,000 (16,000 × 40)

5,61,111 – 5,61,111 1,58,889 7,20,000 (18,000 × 40)

Statement of Profit or Loss – Marginal Costing Particulars Sales (A) Variable cost of sales: Cost of production Add: Opening stock

2008-09 6,00,000

2009-10 6,40,000

2010-11 7,20,000

3,75,000 – 3,75,000

4,50,000 – 4,50,000

4,00,000 50,000 4,50,000 Contd...

414 Cost Accounting Contd...

Less: Closing stock

–

Variable cost of sales (B) Contribution (A – B) Less: Fixed cost Profit

3,75,000 2,25,000 1,00,000 1,25,000

50,000 (2,000 × 25) 4,00,000 2,40,000 1,00,000 1,40,000

– 4,50,000 2,70,000 1,00,000 1,70,000

Working Note: No. of units sold Production (units) Add: Opening stock Less: Closing stock Sales

2008-09 15,000 – 15,000 – 15,000

2009-10 18,000 – 18,000 2,000 16,000

2010-11 16,000 2,000 18,000 – 18,000

P/V ratio, BEP, Margin of safety, etc. 2. The following informations is extracted from the books of Best Ltd. for the year 2010-11: Fixed cost ` 75,000 Variable cost ` 1,25,000 Number of units sold 10,000 Selling price per unit ` 30 Calculate (a) P/V ratio; (b) break-even point; (c) margin of safety ratio; (d) sales required to earn a profit of ` 50,000 Solution: Contribution ×100 (a) P/V ratio = Sales =

1,75,000 × 100 = 58.33% 3,00,000

Note: Sales (10,000 × 30) Less: Variable cost Contribution (b) Break-even point (in ` )

(c) Margin of safety ratio: Margin of safety sales

= ` 3,00,000 = ` 1,25,000 = ` 1,75,000 Fixed cost P/V ratio 75,000 = ` 1,28,580 = 58.33 / 100

=

= Total sales – BEP sales

Marginal Costing 415

= 3,00,000 – 1,28,580 = ` 1,71,420 MS ratio

=

MS sales Total sales

1,71, 420 = 57.14% 3,00,000 (d) Sales required to earn a profit of ` 50,000

=

Sales

=

Fixed cost + Desired profit P/V ratio

75,000 + 50,000 58.33 / 100 = ` 2,14,298 3. The following information is extracted from the books of Prime Ltd.

=

Year

Sales (` ) 5,00,000 6,00,000

2009 2010

Profit (` ) – 15,000

Loss (` ) 10,000 –

Calculate (a) P/V ratio; (b) fixed cost; (c) break-even point; (d) sales required to earn a profit of ` 30,000; (e) margin of safety and MS ratio for sales in (d) above. Solution: (a) P/V ratio

Changes in profit × 100 Changes in sales 25,000 × 100 = 25% = 1,00,000 (b) Fixed cost = Sales × P/V ratio – Profit = 6,00,000 × 25 / 100 – 15,000 = 1,50,000 – 15,000 = ` 1,35,000 Fixed cost (c) Break-even point = P/V ratio 1,35,000 = ` 5,40,000. = 25 / 100 (d) Sales required to earn a profit of ` 30,000 Fixed cost + Desired profit Sales = P/V ratio 1,35,000 + 30,000 = 25 / 100 = ` 6,60,000

=

416 Cost Accounting

(e) MS sales

= Total sales – BEP sales = 6,60,000 – 5,40,000 = ` 1,20,000 MS sales × 100 MS ratio = Total sales 1, 20,000 × 100 = 18.18% = 6,60,000 4. X Ltd. sells 1,000 units of a product per month. The selling price is ` 25 per unit. The variable cost is ` 16 per unit. Fixed cost is ` 4,000 per month. To meet the increased competition, they want to reduce the price by 10%. Calculate (a) present and future P/V ratio (b) also find the number of units that the company should sell to maintain the present profit. Solution: Marginal Cost Statement – Present Per unit ( ) 25 16 9

Sales Less: Variable cost Contribution Less: Fixed cost Profit (a)

(i) Present P/V ratio

Total ( ) 25,000 16,000 9,000 5,000 4,000

Contribution ×100 Sales 9 = 36% = 25

=

(ii) Future P/V ratio: Present selling price Less: 10% reduction in price

= ` 25.00 = ` 2.50

New selling price

= ` 22.50

Less: Variable cost

= ` 16.00

New contribution

= ` 6.50

6.50 × 100 = 28.89% 22.50 (b) No. of units to be sold to maintain the present profit. Fixed cost + Desired profit = New contribution per unit

Future P/V ratio

=

=

4,000 + 4,000 = 1,231 units 6.50

Marginal Costing 417

5. Best Ltd. provides the following information relating to the manufacture of a product: Per unit ( ) 58 20 14 6 72,000

Selling price Direct materials Direct wages Variable overheads Fixed overheads per year

(a) Find BEP and P/V ratio. (b) If sales is 20% and 30% above the break-even point, what would be the profits? Solution: (a) Selling price Less: Marginal cost: Direct materials Direct wages Variable overheads Contribution

Per unit (`) 58 20 14 6

40 18

Fixed cost = Contribution per unit 72,000 = 4,000 units (or) ` 2,32,000 = 18 Contribution ×100 P/V ratio = Sales 18 = = 31.03% 58 (b) (i) Profit if sales is 20% above the BEP: ` BEP sales 2,32,000

BEP (in units)

Add: 20% increase Total sales Profit

46,400 2,78,400 = Sales × P/V ratio – Fixed cost = 2,78,400 × 31.03 / 100 – 72,000 = `14,387.52

418 Cost Accounting

(ii) Profit if sales is 30% above the BEP: BEP sales Add: 30% increase Total sales Profit

2,32,000 69,600 3,01,600 = Sales × P/V ratio – Fixed cost = 3,01,600 × 31.03 /100 – 72,000 = ` 21,586.48 6. H Ltd. produced and sold 20,000 cycles last year at a price of ` 2,000 each. The cost structure per cycle is as follows: Direct materials Direct wages Variable overheads Fixed overheads Total cost Profit Sales

600 500 300 200 1,600 400 2,000

Due to heavy competition the price has to be reduced to ` 1,900 for the coming year. Assuming no change in cost rates, find out how many extra cycles should be sold to ensure the same amount of total profits as in the last year. Solution: Marginal Cost Statement – Last Year Sales (A) Less: Variable cost: Direct materials Direct wages Variable overheads Total (B) Contribution (A – B) Less: Fixed cost Profit New selling price Less: Variable cost

Per unit 2,000

20,000 units 4,00,00,000

600 500 300 1,400 600 200 400

1,20,00,000 1,00,00,000 60,00,000 2,80,00,000 1,20,00,000 40,00,000 80,00,000

= =

Per unit (`) 1,900 1,400

Marginal Costing 419

New contribution per unit = No. of units to be sold to earn last year profit: =

500 Fixed cost + Desired profit Contribution per unit

40,00,000 + 80,00,000 = 24,000 years 500 Extra cycles to be sold = 24,000 – 20,000 = 4,000 cycles 7. M Ltd. manufactures and sells four products namely P, Q, R and S. The sales mix of the products in total sales are: 40%, 25%, 20% and 15% of P, Q, R and S respectively. Total Budgeted sales is ` 10,00,000. Variable costs are: P – 70% Q – 60% R – 65% S – 50% Fixed costs are ` 2,00,000 Calculate BEP of the products on overall basis and also find out the net profit on budgeted sales.

=

Solution: Marginal Cost Statement – Budgeted Sales Particulars

Products P 4,00,000 2,80,000 1,20,000 – –

Budgeted sales Less: Variable cost Contribution Less: Fixed cost Profit Break-even point (`)

Q 2,50,000 1,50,000 1,00,000 – –

=

Fixed cost × Sales Contribution

=

2,00,000 × 10,00,000 3,65,000

= ` 5,47,945

R 2,00,000 1,30,000 70,000 – –

Total S 1,50,000 75,000 75,000 – –

10,00,000 6,35,000 3,65,000 2,00,000 1,65,000

420 Cost Accounting

8. The following details are extracted from the books of a company for two years: Sales (`) 25,00,000 31,00,000

2009-10 2010-11

Total cost (`) 20,40,000 25,80,000

Calculate: (a) P/V ratio (b) Fixed cost (c) Break-even point (d) Sales required to earn a profit of ` 6,50,000 (e) Profit on sales volume of ` 40,00,000 and margin of safety ratio. Solution: 2009-2010 2010-2011 Difference (a) P/V ratio

(b) Fixed cost

(c) Break-even point

Sales 25,00,000 31,00,000 6,00,000

Total cost 20,40,000 25,80,000 –

=

Changes in profit × 100 Changes in sales

=

1, 20,000 × 100 = 20% 6,00,000

Profit (Sales – Total cost) 4,60,000 5,80,000 1,20,000

= Sales × P/V ratio – Profit = 25,00,000 × 20/100 – 4,60,000 = ` 40,000 Fixed cost = P/V ratio 40,000 = = ` 2,00,000 20 / 100

(d) Sales required to earn a profit of ` 6,50,000 Fixed cost + Desired profit P/V ratio 40,000 6,50,000 = ` 34,50,000. = 20 / 100

=

(e) (i) Profit on sales volume of ` 40,00,000 Profit = Sales × P/V ratio – Fixed cost = 40,00,000 × 20/100 – 40,000 = ` 7,60,000

Marginal Costing 421

(ii) MS sales

MS ratio

= Total sales – BEP sales = 40,00,000 – 2,00,000 = ` 38,00,000 M.S. sales = Total sales =

38,00,000 × 100 = 95% 40,00,000

9. A company has an annual fixed cost of ` 2,10,000. In 2010 sales amounted to ` 8,00,000 as compared with ` 6,50,000 in 2009. Profit in 2010 was ` 63,000 higher than that in 2009. (i) At what level of sales does the company break even. (ii) Determine profit or loss on a forecasted sales volume of ` 10,00,000. (iii) If there is a reduction in selling price by 10% in 2011 and the company desires to earn the same amount of profit as in 2010, what would be the required sales volume? Solution: (a) Break-even point

Note: P/V ratio

Fixed cost P/V ratio 2,10,000 = ` 5,00,000 = 42 / 100 Changes in profit × 100 = Changes in sales 63,000 × 100 = 1,50,000

=

= 42% (b) Profit on sales volume of ` 10,00,000 Profit = Sales × P/V ratio – Fixed cost = 10,00,000 × 42/100 – 2,10,000 = ` 2,10,000 (c) Sales required to earn a profit of ` 6,50,000 Fixed cost + Desired profit = Revised P/V ratio =

2,10,000 + 1, 26,000 = ` 9,44,880. 35.56 / 100

Note: (1) Profit earned in 2010: Profit = Sales × P/V ratio – Fixed cost = 8,00,000 × 42/100 – 2,10,000 = ` 1,26,000

422 Cost Accounting

(2) Revised P/V ratio: Let present selling price be Less: 10% reduction in price New selling price Less: Variable cost (100-42) Revised contribution

– – – – –

100 10 90 58 32

32 = 35.56% 90 10. A firm producing and selling product M, sells 12,000 units per annum at a selling price of ` 20 per unit. Variable cost per unit is ` 10 per unit. Annual fixed cost is ` 72,000. Market research shows that there is a great demand for the product if the price can be reduced. It is estimated that 60,000 units can be sold, if price is reduced to ` 12.50. Advice the management in this regard. Solution: Marginal Cost Statement

Revised P/V ratio

Particulars

Sales Less: Variable cost at ` 10 per unit Contribution Less: Fixed cost Profit

=

Present 12,000 units at 20 per unit ( ) 2,40,000 1,20,000

Future 60,000 units at 12.50 per unit ( ) 7,50,000 6,00,000

1,20,000 72,000 48,000

1,50,000 72,000 78,000

Difference

5,10,000 4,80,000 30,000 – 30,000

Decision: The proposal to reduce the price is acceptable because the profit increases by ` 30,000. 11. The following information is taken from the books of Premier Ltd: Sales ` 5,00,000 Variable cost ` 3,00,000 Fixed cost ` 1,20,000 (a) Find out the P/V ratio, BEP and margin of safety. (b) Calculate the effect on the above of the following: (i) 15% increase in fixed cost. (ii) 10% decrease in fixed cost. (iii) 10% decrease in variable cost. (iv) 20% increase in variable cost. (v) 10% decrease in fixed cost and 10% increase in variable cost. (vi) 10% increase in sales volume. (vii) 15% decrease in sales volume. (viii) 20% increase in fixed cost and 20% decrease in variable cost.

Marginal Costing 423

Solution: (a) P/V ratio

Note: Contribution BEP

Cotribution ×100 Sales 2,00,000 = × 100 = 40% 5,00,000

=

= Sales – Variable cost = 5,00,000 – 3,00,000 = ` 2,00,000 Fixed cost 1, 20,000 = = ` 3,00,000 = P/V ratio 40 / 100

MOS

= Total sales – BEP sales = 5,00,000 – 3,00,000 = ` 2,00,000 (b) (i) 15% increase in Fixed cost: P/V ratio does not change, i.e., = 40% BEP Note: Revised fixed cost MOS

=

Revised fixed cost 1,38,000 = = ` 3,45,000 P/V ratio 40 / 100

= 1,20,000 + 15% = ` 1,38,000 = Total sales – BEP sales = 5,00,000 – 3,45,000 = ` 1,55,000

(ii) 10% decrease in fixed cost: P/V ratio do not change, i.e., = 40% Revised fixed cost 1,08,000 = = ` 2,70,000 BEP = P/V ratio 40 / 100 Note:

Revised fixed cost MOS

= 1,20,000 – 10% = ` 1,08,000 = Total sales – BEP sales = 5,00,000 – 2,70,000 = ` 2,30,000

(iii) 10% decrease in variable cost: P/V ratio

Note:

Revised contribution

=

Revised contribution × 100 Sales

=

2,30,000 × 100 = 46% 5,00,000

= Sales – Revised variable cost = 5,00,000 – (3,00,000 × 90/100) = 5,00,000 – 2,70,000 = ` 2,30,000

BEP MOS

Fixed cost 1, 20,000 = = ` 2,60,870 P/V ratio 46 / 100 = Total sales – BEP sales

=

= 5,00,000 – 2,60,870 = ` 2,39,130

424 Cost Accounting

(iv) 20% increase in variable cost: P/V ratio

Note:

Revised contribution

Revised contribution × 100 Sales 1, 40,000 × 100 = 28% = 5,00,000

=

= Sales – Revised variable cost = 5,00,000 – (3,00,000 + 20%) = 5,00,000 – 3,60,000 = ` 1,40,000

Fixed cost = ` 4,28,571 P/V ratio MOS = Total sales – BEP sales = 5,00,000 – 4,28,571 = ` 71,429 (v) 10% decrease in fixed cost and 10% increase in variable cost:

BEP

=

P/V ratio

=

Revised contribution × 100 Sales

=

1,70,000 × 100 = 34% 5,00,000

BEP

=

Revised fixed cost 1,08,000 = = ` 3,17,647 P/V ratio 34 / 100

MOS

= Total sales – BEP sales = 5,00,000 – 3,17,647 = ` 1,82,353

Note: (1) Revised variable cost (2) Revised contribution (3) Revised fixed cost

= 3,00,000 + 10/100 = ` 3,30,000 = 5,00,000 – 3,30,000 = ` 1,70,000 = 1,20,000 – 10% = ` 1,08,000

(vi) 10% increase in sales volume: P/V ratio = Does not change i.e., 40% BEP = Does not change i.e., ` 3,00,000 MOS

= = Note: Revised sales = (vii) 15% decrease in sales volume: P/V ratio = BEP = MOS = =

Revised sales – BEP sales ` 5,50,000 – 3,00,000 = ` 2,50,000 5,00,000 + 10% = ` 5,50,000 Does not change i.e., 40% Does not change i.e., ` 3,00,000 Revised sales – BEP sales ` 4,25,000 – 3,00,000 = ` 1,25,000

Marginal Costing 425

Note:

Revised sales

= 5,00,000 + 15% = ` 4,25,000

(viii) 20% increase in fixed cost and 20% decrease in variable cost =

Revised contribution × 100 Sales

=

2,60,000 × 100 = 52% 5,00,000

BEP

=

Revised fixed cost 1, 44,000 = = ` 2,76,923 P/V ratio 52 / 100

MOS

= Total sales – BEP sales

P/V ratio

= 5,00,000 – 2,76,923 = ` 2,23,077 Note: (1) Revised variable cost

= 3,00,000 – 20/100 = ` 2,40,000

(2) Revised contribution

= Sales – Revised variable cost = 5,00,000 – 2,40,000 = ` 2,60,000

(3) Revised fixed cost

= 1,20,000 + 20% = ` 1,44,000

Sales Mix 12. The following information is taken from the records of Sri Ram Ltd. Products (i) Direct materials (ii) Direct wages (iii) Selling price per unit (iv) Fixed overheads for the year

A( ) 35 18 85 ` 25,000

(v) Variable overheads 100% of direct wages (vi) Proposed sales mix: (i) 500 units of A and 1,000 units of B (ii) 750 units of A and 750 units B (iii) 1,000 units of A and 500 units B Calculate: (a) The unit marginal cost and unit contribution. (b) The total contribution and profit from each of the above sales mixes.

B( ) 42 20 100

426 Cost Accounting

Solution: (a) Statement showing marginal cost and contribution per unit Particulars

Products

Selling price (A) Marginal cost: Direct materials Direct wages Variable overheads (100% of D. wages) Total (B) Contribution (A-B)

A( ) 85

B( ) 100

35 18 18 71 14

42 20 20 82 18

(b) Statement of Contribution and Profit of each Sales mix: Particulars

Products A( )

Sales Mix (i) Sales – No. of units Total contribution (`) Less: Fixed cost (`) Profit Sales Mix (ii) Sales – No. of units Total contribution (`) Less: Fixed cost (`) Profit Sales Mix (i) Sales – No. of units Total contribution (`) Less: Fixed cost (`) Profit

Total ( )

B( )

500 7,000

1,000 18,000

1,500 25,000

–

–

20,000

–

–

5,000

750 10,500

750 13,500

1,500 24,000

–

–

20,000

–

–

4,000

1,000 14,000

500 9,000

1,500 23,000

–

–

20,000

–

–

3,000

Make or Buy: 13. Ride Well Cycles Ltd. purchases 20,000 bells per annum from an outside supplier at ` 5 each. The management feels that these be manufactured and not purchased. A machine costing ` 50,000 will be required to manufacture the item within the factory. The machine has an annual capacity of 30,000 units and life of 5 years. The following additional information is also available:

Marginal Costing 427

Materials cost per bell will ` 2.00 Labour cost per bell ` 1.00 Variable overheads 100% of labour cost You are required to advise whether: (i) The company should continue to purchase the bells from outside supplier or should make them in the factory; and (ii) Should the company accept an order to supply 5,000 bells to the market at a selling price of ` 4.50 per unit? (ACS, Inter) Solution: (a) Statement showing cost of manufacturing a bell:

Materials cost Labour cost Variable overheads (100% of labour) Variable cost Depreciation per bell (relevant cost) Cost of manufacture Purchase cost

2.00 1.00 1.00 4.00 0.50 4.50 5.00

Decision: The company should produce the bell because there will be a savings of ` 0.50 per bell. Annual savings will be (20,000 × 0.50) = ` 10,000. (b) Acceptance of order for supply of 5,000 bells: Variable cost of manufacturing Price offered per bell Profit

4.00 4.50 0.50

Decision: The order for 5,000 units should be accepted because there will be a profit of ` 0.50 per unit. Note: Cost of machine (i) Machinery depreciation = Life 50,000 = ` 10,000 p.a. = 5 years Depreciation per bell

=

10,000 = ` 0.50 20,000

428 Cost Accounting

(ii) Depreciation is not included in the cost of manufacturing 5,000 bells produced additionally. Depreciation is recovered by 20,000 units. 14. Auto Ltd. manufactures motor cars. At present it manufactures 10,000 units of component X.123. The following are the cost details of manufacturing 10,000 units of the above component. Direct materials – ` 7,00,000 Direct labour – ` 7,00,000 Variable factory overheads – ` 5,00,000 Fixed factory overheads – ` 6,00,000 An outside supplier offers to supply the component at a price of ` 210 per unit. There will be a saving of ` 1,00,000 in fixed cost. Required: Should the component be continued to be manufactured in the factory or purchased from outside supplier. The capacity released cannot be put to any other use. In case the released capacity can be leased to other manufacturers at a rent of ` 2,50,000. What would be your decision? Solution: (a) Price offered by outside supplier Less: Savings in fixed cost (1,00,000/10,000)

= ` 210 per unit = ` 10 per unit = ` 200 per unit

Net purchase price Statement showing variable cost of manufacture Direct materials Direct labour Variable factory overheads Total variable overheads Variable cost per unit

9,00,000 7,00,000 5,00,000 21,00,000 =

21,00,000 = ` 210 10,000

Decision: Since the production cost is more than the net purchase price, it is profitable to purchase the component from outside supplier. (b) Net purchase price as above = ` 200 per unit Variable cost of manufacture (as above) = ` 21,00,000 Less: Rent received from leasing idle capacity = ` 2,50,000 Net production cost

= ` 18,50,000

Net production cost per unit

=

18,50,000 = ` 185 10,000

Marginal Costing 429

Decision: The cost of manufacture is lower than the net purchase price. So it is better to purchase the component from the outside supplier and let out the idle capacity to other manufacturers. 15. The following information is taken from the records of vision Ltd. Particulars

Product A (per unit) B (per unit)

Selling price

` 200 3 kg

` 300 5 kg

` 40

` 60

` 40

` 50

` 10 5 hours

` 15 8 hours

` 15

` 20

` 20

` 50

Raw material consumed Materials cost Direct wages Direct expenses Machine hours used Overhead expenses Fixed Variable

Direct wages is ` 10 per hour. Comment on the profitability of each product when: (i) Total sales potential in units is limited. (ii) Total sales potential in value is limited. (iii) Raw material is in short supply. (iv) Production capacity in terms of machine hours is limited. (v) Production capacity in terms of labour hour is limited. Solution: Statement showing contribution per unit and per unit of limiting factors Particulars Selling price (A) Variable cost: Raw materials Direct wages Direct expenses Variable overheads Total (B) Contribution per unit (A-B)

Products A( ) 200

(B) 300

40 40 10 20 110 90

60 50 15 50 175 125

430 Cost Accounting Contd...

P/V ratio

90 × 100 = 45% 200

125 × 100 = 41.67% 300

Contribution per machine hour

90 = ` 18 5

125 = ` 15.63 8

Contribution per kg of materials

90 = ` 30 3

125 = ` 25 5

90 = ` 22.50 4

125 = ` 25 5

Contribution per labour hour

Statement showing ranking of products Limiting factor (a) (b) (c) (d) (e)

Sales (units) Sales (value) Raw material Machine hours Labour hours

Product ranking Basis of ranking A B II I Contribution per unit I II P/V ratio I II Contribution per kg of material I II Contribution per machine hour II I Contribution per labour hour

Comment: (1) Product A is more profitable when sales potential in value, raw materials and machine hours are limiting factors. (2) Product B is more profitable when sales potential in units and labour hours are limiting factors. 16. A market gardener is planning his production for next season and he asks you, as a cost accountant, to recommend the optimal product mix of vegetable production for the coming year. He has given you the following data relating to the current year. Potatoes 50 20 1,000

Turnips 40 16 1,250

Parships 60 18 1,590

Carrots 50 24 1,350

Fertilizers (`)

70

50

90

80

Seeds (`)

30

40

60

50

Area occupied (in acres) Yield per acre (in tonnes) Selling price per tonne (`) Variable cost per acre:

Contd...

Marginal Costing 431 Contd...

Pesticides (`) Direct wages (`)

50

40

40

50

800

900

1,000

1,140

The land which is being used for production for carrots and parships can be used for either crop, but not for potatoes and turnips. The land being used for potatoes and turnips can be used for either crop, but not for carrots and parships. In order to provide adequate market service, the gardener must produce each year at least 80 tonnes each of potatoes and turnips and 72 tonnes each of parships and carrots. Annual fixed cost ` 25,00,000. (a) You are required to prepare a statement to show: (i) The profit for the current year (ii) The profit for the production mix which you would recommend (b) Assuming that the land could be cultivated in such a way that any of the above crops could be produced and there was no market commitment, you are required to: (i) Advise the market gardener on which crop he could concentrate his production; (ii) Calculate the profit if he were to do so, and (iii) Calculate the break-even point sales in terms of rupees. Solution: (a) Statement showing contribution per acre and ranking of crops Particulars Sales (A) Variable cost: Fertilisers Seeds Pesticides Direct wages Total (B) Contribution (A – B) Ranking

Crops Turnips Potatoes 20,000 20,000 (1,000 × 20) (1,250 × 16) 70 30 50 800 950 19,050 I

50 40 40 900 1,030 18,970 II

(i) Total profit for the current year: Potatoes – ` 19,050 × 50 acres Turnips – ` 18,970 × 40 acres Parships – ` 27,430 × 60 acres Carrots – ` 31,080 × 50 acres

= = = =

Parships 28,620 (1,590 × 18)

Carrots 32,400 (1,350 × 24)

90 60 40 1,000 1,190 27,430 II

80 50 50 1,140 1,320 31,080 I

` 9,52,500 ` 7,58,800 ` 16,45,800 ` 15,54,000

432 Cost Accounting

Less: Fixed cost

= ` 49,11,100 = ` 25,00,000

Current year profit

= ` 24,11,100

Total

(ii) Product mix: Statement showing allotment of land: (1) for potatoes and turnips: Total area available = 90 acres Potatoes 80 = 4 acres Minimum land allotted 20 Balance land 81 acres allotted to potatoes (being ranked I) 81 acres Total land allotted

Turnips 80 = 5 acres 16

85 acres

Total 9 acres

–

81 acres

5 acres

90 acres

(2) for parships and carrots: Total area available = 110 acres Parships Minimum land allotted Balance land 103 acres allotted to carrot (being ranked I) Total land allotted

Total

72 = 4 acres 18 –

Carrots 72 24 = 3 acres 103 acres

4 acres

106 acres

110 acres

7 acres 103 acres

Suggested product mix = potatoes 85 acres, turnips 5 acres, parships 4 acres and carrot 103 acres. Profit for suggested sales mix Land allotted Contribution per acre (`) Total contribution (`) Less: Fixed cost Profit (b)

Potatoes 85 acres 19,050

Turnips 5 acres 18,970

Parships Carrots 4 acres 106 acres 27,430 31,080

Total 200 acres –

16,19,250

94,850

1,09,720

51,18,300

– –

– –

32,94,480

– –

– –

25,00,000 26,18,300

(i) When there is no minimum market commitment: Contribution per acre (` ) Ranking

Potatoes Turnips Parships Carrots 19,050 18,970 27,430 31,080 III

IV

II

I

Marginal Costing 433

Decision: The gardener should concentrate on maximising the production of carrots. So allot all the land to carrot. (ii) Statement of Profit – Crop Carrot Total land Yield per acre Total yield (200 × 24) Selling price per tonne

200 acres 24 tons 4,800 tonnes ` 1,350

Total sales value (1,350 × 4,800) Less: Variable cost (1,320 × 200) Contribution Less: Fixed cost Profit (iii) Breakeven point (` )

=

Fixed cost × sales Contribution

=

25,00,000 × 64,80,000 62,16,000

64,80,000 2,64,000 62,16,000 25,00,000 37,16,000

= ` 26,06,178 17. The following particulars are extracted from the records of a company: Particulars Sales (`) Consumption of material

Products A (per unit) B (per unit) 100 120 2 kg. 10

3 kg. 15

15

10

Direct expenses (`) Machine hours used (hours) Overhead expenses

5

6

3

2

Fixed (`)

5

10

15

20

Materials cost (`) Direct wages (`)

Variable (`)

Direct wages per hour is ` 5. (a) Comment on the profitability of each product (both use the same raw material) when: (i) Total sales potential is limited. (ii) Raw material is in short supply. (iii) Production capacity (in terms of machine hours) is the limiting factor.

434 Cost Accounting

(b) Assuming raw material as the key factor, availability of which is 10,000 kg and maximum sales potential of each product being 3,500 units, find out the product mix which will yield the maximum profit. (ICWA, Inter) Solution: Statement showing contribution per unit and contribution per unit of key factor Particulars Selling price per unit (A) Variable costs: Materials cost Direct wages Direct expenses Variable overheads Total (B) Contribution per unit (A – B) Contribution per kg of material Contribution per machine hour P/V ratio

Products A (per unit) B (per unit) 100 120 10 15 5 15 45 55

15 10 6 20 51 69

55 = ` 27.50 2

69 = ` 23 3

55 = ` 18.33 3

69 = ` 34.50 2

55 × 100 = 55% 100

69 × 100 = 57.5% 120

Comment: (a) (i) When sales potential is limited : Product B is recommended because its P/V ratio is higher. (ii) When raw material is limited : Product A is recommended because it yields higher contribution per kg of materials. (iii) When machine hour is limited Product B is recommended because its contribution per machine hour is higher. (b) Product mix when raw material available is 10,000 kg only: Total materials available – 10,000 kg Less: Materials utilised to produce 3,500 units of product A (3,500 × 2) – 7,000 kg Balance material 3,000 kg is used to produce – 3,000 kg 1,000 units of product B (3,000/3) Suggested sales mix is 3,500 units of product A and 1,000 units of product B.

Marginal Costing 435

Accepting orders below total cost: 18. A Ltd. operating at 50% of its capacity produces and sells 10,000 units at a price of ` 10 per unit. The cost details are as follows: Materials Wages Variable overheads Fixed overheads

25,000 25,000 15,000 10,000 75,000

A foreign buyer offers to buy 10,000 units at a unit price of ` 7.25. Due increase in volume of production material price of all materials decrease by 2%. Wage rates remain constant but due to employment of new workers, labour efficiency decreases by 3% on all production. Prepare a statement showing changes in profit if export order is accepted. Advise the management whether export order should be accepted or not. Solution: Marginal Cost Statement Particulars Sales (A) Variable costs: Materials Wages Variable overheads Total (B) Contribution (A – B) Less: Fixed overheads Profit

Local market 10,000 units ( ) 1,00,000

Local and Export order 20,000 units ( ) 1,72,500

25,000 25,000 15,000 65,000 35,000 10,000 25,000

49,000 51,500 30,000 1,30,500 42,000 10,000 32,000

Decision: Profit increases from ` 25,000 to ` 32,000 if export order is accepted. So it is profitable to accept the export order. Working Note: (1) Total sales: Local market sales (10,000 units × ` 10)

= ` 1,00,000

Add: Export order value (10,000 units × ` 7.25)

= ` 72,500

Total sales

= ` 1,72,500

436 Cost Accounting

(2) Total materials cost

=

25,000 98 × 20,000 × = ` 49,000 10,000 100

(3) Total wages

=

25,000 103 = ` 51,500 × 20,000 × 10,000 100

19. A company currently operating at 80% capacity gives the following particulars: Sales Direct materials Direct labour Variable overheads Fixed overheads

32,00,000 10,00,000 4,00,000 2,00,000 13,00,000

An export order has been received that would utilise half the capacity of the factory. The order cannot be split, i.e., it has to be taken in full and executed at 10% below the normal domestic price or rejected totally. The alternatives available to the management are: (1) Reject the order and continue with the domestic sales only (as at present) or (2) Accept the order, split the capacity between overseas and domestic sales and turn away excess domestic demand or (3) Increase the capacity so as to accept the export order and maintain the present domestic sales by (a) Buying an equipment that will increase the capacity by 10%. This will result in increase of ` 1,00,000 in fixed costs. (b) Work overtime to meet balance of required capacity. In that case labour will be paid at one and a half times the normal wage rate. Prepare a comparative statement of profitability and suggest the best alternative. (CA, Inter) Solution: Comparative Statement of Profitability Particulars

Sales: Domestic Export Total sales (A) Variable Costs:

Domestic sales only 80% capacity

32,00,000 – 32,00,000

50% domestic and 50% export Sales 100% capacity 20,00,000 18,00,000 38,00,000

80% domestic and 50% export Sales 130% capacity 32,00,000 18,00,000 50,00,000 Contd...

Marginal Costing 437 Contd...

Materials Direct labour Variable overheads Total variable cost (B) Contribution (A – B) Less: Fixed costs Profit

10,00,000 4,00,000 2,00,000 16,00,000 16,00,000 13,00,000 3,00,000

12,50,000 5,00,000 2,50,000 20,00,000 18,00,000 13,00,000 5,00,000

16,25,000 7,00,000 3,25,000 26,50,000 23,50,000 14,00,000 9,50,000

Decision: Since profit under alternative (c) is highest, it should be accepted. Working Note: (1) Domestic sales at 50% capacity

= 32,00,000 × 50/80 = ` 20,00,000

(2) Export sales: Domestic sales at 50% capacity Less: 10% reduction Export sales at 50% capacity (3) Direct materials at 100% capacity (4) (5) (6)

(7) (8)

= 20,00,000 = 2,00,000 = 18,00,000 = 10,00,000 × 100/80 = ` 12,50,000 Direct materials at 130% capacity = 10,00,000 × 130/80 = ` 16,25,000 Direct labour at 100% capacity = 4,00,000 × 100/80 = ` 5,00,000 Direct labour at 110% capacity = 4,00,000 × 110/80 = ` 5,50,000 Add: Wages for 20% capacity = 4,00,000 × 20/80 × 1.5 = ` 1,50,000 Direct labour at 130% capacity = ` 7,00,000 Variable overheads at 100% capacity = 2,00,000 × 100/80 = ` 2,50,000 Variable overheads at 130% capacity = 2,00,000 × 130/80 = ` 3,25,000

Discontinuing product line: 20. AB Ltd. produces and sells three products X, Y and Z. Their cost details are as follows: Particulars Sales Costs: Direct materials Direct labour Variable overheads Fixed overheads Total cost

Products X( ) 3,00,000 1,00,000 48,000 41,000 65,000 2,54,000

Y( ) 4,50,000 1,75,000 62,000 54,000 90,000 3,81,000

Z( ) 5,00,000 1,90,000 1,76,000 95,000 70,000 5,31,000

438 Cost Accounting

As the total cost of product Z is more than the sales revenue, the management wants to discontinue the product. Total fixed cost will be same even after discontinuing the product Z. Advise whether it is advisable to discontinue the product. Solution: Marginal Cost Statement – Present Particulars

Products

Sales (A) Variable costs: Direct materials Direct labour Variable overheads Total (B) Contribution (A – B) Less: Fixed cost Profit / (loss)

Total

X( ) 3,00,000

Y( ) 4,50,000

Z( ) 5,00,000

12,50,000

1,00,000 48,000 41,000 1,89,000 1,11,000 65,000 46,000

1,75,000 62,000 54,000 2,91,000 1,59,000 90,000 69,000

1,90,000 1,76,000 95,000 4,61,000 39,000 70,000 (31,000)

4,65,000 2,86,000 1,90,000 9,41,000 3,09,000 2,25,000 84,000

Marginal Cost Statement – Future Particulars Sales (A) Less: Variable costs Direct materials Direct labour Variable overheads Total (B) Contribution (A – B) Less: Fixed overheads Profit

Products

Total

X( ) 3,00,000

Y( ) 4,50,000

7,50,000

1,00,000 48,000 41,000 1,89,000 1,11,000 – –

1,75,000 62,000 54,000 2,91,000 1,59,000 – –

2,75,000 1,10,000 95,000 4,80,000 4,80,000 2,25,000 45,000

Decision: Product Z gives a contribution of ` 39,000. So profit will decrease from ` 84,000 to ` 45,000. So it should not be discontinued. Plant Merger: 21. Two manufacturing companies which have the following operating details decide to merge: Capacity utilization Sales (` In lakhs)

Company 1 Company 2 90% 60% 540 300 Contd...

Marginal Costing 439 Contd...

Variable costs (` In lakhs) Fixed costs (` In lakhs)

396

225

80

50

Assuming that the proposal has been implemented, calculate: (i) Break-even sales of the merged plant and capacity utilization at that stage. (ii) Profitability of the merged plant at 80% capacity utilization. (iii) Sales turnover of the merged plant to earn a profit of ` 75 lakh. (iv) When the merged plant is working at a capacity to earn a profit of ` 75 lakh what percentage increase in selling price is required to sustain an increase of 5% in fixed overheads. (CA, Inter) Solution: (a) Marginal Cost Statement of plants at 100% capacity (` in lakhs) Particulars

Company 1 100% capacity 600 440 160 80 80

Sales Less: Variable cost Contribution Less: Fixed cost Profit BEP of merged plant

=

Company 2 100% capacity 500 375 125 50 75 Fixed cost × sales Contribution

130 × 1,100 = ` 501.75 lakh 285 BEP sales × 100 = Total sales

= Percentage of BEP capacity utilisation

=

501.75 × 100 = 45.61% 1,100

(b) Profitability of merged plant at 80% capacity ( Sales at 80% capacity Less: Variable cost Contribution Less: Fixed cost Profit

Merged plant 100% capacity 1,100 815 285 130 155

in lakhs) 880 652 228 130 98

440 Cost Accounting

(c) Sales required to earn a profit of ` 75 lakh Fixed cost + Desired profit × Sales Sales required = Contribution =

130 + 75 × 1,100 = ` 791.23 lakh 285

(d) % increase in sales to maintain the profit of ` 75 lakh when fixed overhead increases by 5% New fixed overheads = 130 + 6.5 = 136.5 lakh Increased fixed cost × Sales Additional sales required = Contribution 6.5 × 1,100 = ` 25.09 lakh = 285 % increase in sales

=

25.09 × 100 = 3.17% 791.25

Indifference Point 22. X Ltd. wants to buy a machine to replace labour. Two machines, i.e., A and B are available. Both machines have the capacity to produce 25,000 units. Their operating costs are as follows: Fixed costs Variable cost per unit

Machine A ( ) Machine B ( ) 60,000 90,000 7.00 5.50

Find the indifference point. Solution: Indifference point =

Difference in fixed cost Difference in variable cost per unit

30,000 = 20,000 units 1.50 23. Y Company has just been incorporated and plans to produce a product that will sell for ` 10 per unit. Preliminary market surveys show that demand will be around 10,000 units per year. The company has the choice of buying one of two machines, each of which has a capacity of 10,000 units per year. Machine A would have fixed costs of ` 30,000 per year would yield a profit of ` 30,000 per year on the sale of 10,000 units. Machine B would have fixed costs of ` 18,000 per year and would yield a profit of ` 22,000 per year on the sale of 10,000 units. Variable costs behave linearly for both machines.

=

Required: (a) Breakeven sales for each machine. (b) Sales level where both machines are equally profitable

Marginal Costing 441

(c) Range of sales where one machine is more profitable than the other. (ICWA, Inter) Solution: Computation of Variable cost per unit Particulars Sales (A) Contribution: Fixed cost Profit Total (B) Variable cost (A – B) Variable cost per unit Contribution per unit P/V ratio

Machine A (10,000 units – `) 1,00,000 30,000 30,000 60,000 40,000 4.00 6.00 60% =

Fixed cost Contribution per unit

Machine A

=

30,000 = 5,000 units 6

Machine B

=

18,000 = 4,500 units 4

(a) Break-even sales (in units)

Machine B (10,000 units – `) 1,00,000 18,000 22,000 40,000 60,000 6.00 4.00 40%

(b) Sales level where both machines are equally profitable (i.e., indifference point) =

Changes in fixed cost Changes in variable cost per unit

=

12,000 = 6,000 units 2

(c) Range of sales where machines are profitable. (1) Machine A is more profitable for sales level above 6,000 units. The contribution per unit or P/V ratio is higher for machine A. So machine A will earn more profit at higher sales levels. (2) Machine B is more profitable in the sales range above 4,500 units and below 6,000 units. Fixed cost of machine B is lower. So it will be more profitable than machine A at lower sales level. Exploring new market: 24. The following extracts are taken from the sales budget of a company for the current year:

442 Cost Accounting

` (in ‘000) 1,000

Sales – 40,000 units at ` 25 per unit Selling costs: Advertising Salesmen’s salary Travelling expenses Rent of sales office Others

100 80 50 10 10

250

The management is considering a proposal to establish a new market in the eastern region in the next year. It is proposed to increase the advertising expenditure by 25% and appoint an additional sales supervisor at a salary of ` 30,000 per year to establish a market. This will involve additional travelling and travelling expenses shall increase by 10%. Target annual sales volume at the existing selling price for the new market is 10,000 units. The estimated variable cost of production is ` 12 per unit. Should the company try to establish the new market? (ICWA, Inter) Solution: Statement of Profitability of New Market (in ‘000) 250

Sales in new market 10,000 units at ` 25 per unit Less: Costs Variable cost at ` 12 per unit Increase in advertisement expenditure (1,00,000 × 25%) Additional sales supervisor salary Additional travelling expenses (50,000 × 10%) Profit from new market

120 25 30 5

180 70

Decision: New market gives an additional profit of ` 70,000. So it is profitable to explore the new market. Shut Down Point 25. XY Ltd. operating at its normal capacity produces and sells 50,000 units per year. The unit cost of manufacturing at normal capacity is as follows: Direct materials Direct labour Variable overheads Fixed overheads Total

15.00 5.00 6.50 10.00 36.50

Marginal Costing 443

Each unit of the product is sold at ` 44 per unit. Variable selling expenses amount to ` 2.25 per unit. Due to economic slow down, the company expects to sell only 10,000 units in the next year. The management wants to shut down the plant temporarily. The unavoidable fixed cost amounts to ` 1,60,000. The additional cost of plant shut down is ` 15,000 and reopening cost amounts to ` 20,000. Whether the plant should be shut down? What is the shut down point? Solution: Statement showing contribution per unit Selling price Less: Variable costs Direct materials Direct labour Variable overheads Variable selling expenses Contribution per unit

– 15.00 5.00 6.50 2.25

44.00

28.75 15.25

Avoidable fixed cost due to plant shut down Present fixed overheads (50,000 units × ` 10) Less: Unavoidable fixed cost Additional cost of shutdown Cost of reopening Avoidable fixed cost Shut down point

=

Avoidable fixed cost Contribution per unit

=

3,05,000 = 20,000 units 15.25

–

` 5,00,000

1,60,000 15,000 20,000 –

1,95,000 3,05,000

Decision: As the demand for the product is only 10,000 units, i.e., below shut down point, it is advisable to close the plant. 26. AB Ltd. sells its product at ` 25 per unit. In a period, it produces and sells 10,000 units, it incurs a loss of ` 7.50 per unit. If the volume is raised to 25,000 units it earns a profit of ` 6 per unit. (1) Calculate break-even point in terms of rupees and in terms of units. (2) Find out the margin of safety and profit if the volume of sales is 35,000 units (3) If minimum fixed costs are ` 75,000, irrespective of the level of production, find out the shut down point.

444 Cost Accounting

Solution: (1) Break-even point (in ` )

Break-even point (in units)

Fixed cost P/V ratio 2, 25,000 = ` 3,75,000 = 60 / 100 Fixed cost = Contribution per unit

=

= Note: (i)

Changes

No. of units 10,000 25,000 –

(ii) P/V ratio

(iii) Fixed cost

Variable cost

Variable cost per unit Contribution per unit (2) Sales of 35,000 units (35,000 × 25)

2, 25,000 = 15,000 units 15

Sales (` ) 2,50,000 6,25,000 3,75,000

Profit / (Loss) ` (75,000) 1,50,000 2,25,000

=

Changes in profit ×100 Changes in sales

=

2,25,000 ×100 = 60% 3,75,000

= = = = =

Sales × P/V ratio – Profit 6,25,000 × 60/100 – 1,50,000 ` 2,25,000 Sales × Complement of P/V ratio 6,25,000 × 40/100 = ` 2,50,000

2,50,000 = ` 10 25,000 = Selling price p/u – Variable cost p/u = 25 – 10 = ` 15

=

= ` 8,75,000

Less: Break-even point

= ` 3,75,000

Margin of safety Profit

= ` 5,00,000 = Margin of safety × P/V ratio 60 = ` 3,00,000 = 5,00,000 × 100 Avoidable fixed cost = P/V ratio 1,50,000 = = ` 2,50,000 (or) 10,000 units) 60 / 100

(3) Shut down point

Marginal Costing 445

Avoidable fixed cost

= Total fixed cost – Minimum fixed cost = 2,25,000 – 75,000 = ` 1,50,000

Break-even chart 27. From the following data prepare a break-even chart: Budgeted output – 1,00,000 units Fixed expenses – ` 2,00,000 Variable expenses per unit – `8 Selling price per unit – ` 16 If the selling price is reduced to ` 14.40. What will be the new break-even point. Solution:

Proof: Statement showing contribution per unit Selling price per unit Less: Variable cost Contribution Present BEP (in units)

=

Present (`) New (`) 16.00 14.40 8.00 8.00 8.00 6.40

Fixed cost Contribution per unit

2,00,000 = 25,000 units 8 Fixed cost = New contribution per unit

= New BEP (in units)

=

2,00,000 = 31,250 units 6.40

19

Budget and Budgetary Control

Chapter

I. Practical Problems A. Short Answer Types Questions 1. A company expects to sell 1,500 units of a product in a budget period. The desirable closing balance is 300 units. The company is estimated to have an opening balance of 200 units. The labour hours required for producing one unit of the product is 3 hours. Normal idle time is estimated at 10% time paid for. Calculate the budgeted labours hours required. Solution: Production Budget Budgeted sales Add: The desired closing balance

– –

Less: The estimated opening balance Budgeted production

– –

1,500 units 300 units 1,800 units 200 units 1,600 units

Direct Labour Hour Budget Labour hour required for production (1,600 units × 3 hrs.) Ê 4,800 ¥ 10 ˆ Add: 10% Normal idle time Á ˜¯ Ë 90

Gross budgeted direct labour hours

4,800 hrs. 533 hrs. 5,333 hrs.

2. A Ltd. budgets to sell 12,500 units of a product in the next year. The stock at the beginning of the next year is estimated at 3,500 units. The company desires to maintain a stock of 5,000 units at the end of the next year. From the past experience, it is found that 2% of units introduced in the process is lost normally at the end of the manufacturing process. Prepare a production budget (gross).

Budget and Budgetary Control

447

Solution: Production Budget Particulars

Units

Budgeted sales

12,500

Add: Desired closing balance

5,000 17,500

Less: Estimated opening balance Good production 2ˆ Ê Add: Normal loss in production Á14,000 ¥ ˜ Ë 98 ¯

Budgeted production (Gross)

3,500 14,000 286 14,286

3. X Ltd. produced 60,000 units during the current year. The opening stock is 16,000 units and closing stock is 5,000 units. The goods are sold at ` 20 per units. In the forthcoming year, it is estimated that sales will go up by 20%. Selling price is also expected to increase by 10%. Prepare a sales budget for the next year. Solution: Sales Budget Particulars

Units

No. of units produced during current year

60,000

Add: Opening stock

16,000 76,000

Less: Closing stock

5,000

Current year sales

71,000

Add: Expected increase in sales 20%

14,200

Budgeted sales for next year

85,200

Expected Selling price per unit (`) (See WN. 1)

18,74,400

Budgeted sales value (`) Working note: Current selling price per unit Add: Expected increase (20 × 10/100) Budgeted selling price

22

= ` 20 = `2 = ` 22

448 Cost Accounting

4. Prepare a production budget for 3 months ending 31 March, 2011 for a factory producing four products, on the basis of the following information: Types of Product

Estimated stock on 1.1.2011

Estimated sales from Jan-Mar 2011

Desired closing stock on 31, March 2011

A

2,000

10,000

3,000

B

3,000

15,000

5,000

C

4,000

13,000

3,000

D

3,000

12,000

2,000

Solution: Production Budget

Estimated sales during

Product A (Units)

Product B (Units)

Product C (Units)

Product D (Units)

10,000

15,000

13,000

12,000

3,000

5,000

3,000

2,000

13,000

20,000

16,000

14,000

2,000

3,000

4,000

3,000

11,000

17,000

12,000

11,000

Jan-Mar 2011 Add: Closing stock on 31st March, 2011 Less: Opening stock on 1st Jan 2011

Budgeted production

5. A sales manager of a company estimates to sell 25,000 units of a product in the next year. The estimated stock at the beginning of the next year is 7,000 units and desired closing balance for the next year is 4,000 units. Two raw materials are used in the production of the product. They are material X and material Y. 4 units of material X and 5 units of material Y are mixed to product one unit of product. Raw material X costs ` 5 per unit and material Y cost ` 9 per unit. The stock of materials at the beginning of the next year is – Material X – 5,000 units and Y – 7,000 units. The stock of materials desired at the end of the next year is – Material X – 10,000 units and material Y – 12,000 units). Prepare a materials purchase budget for next year.

Budget and Budgetary Control

449

Solution: Production Budget Particulars Budgeted sales

Units 25,000

Add: Desired closing balance

4,000 29,000

Less: Estimated opening balance

7,000

Budgeted production

22,000

Materials Purchase Budget Particulars Materials required for production Add: Desired closing balance

Less: Estimated opening stock Materials to be purchased Cost price per unit Value of materials to be purchased

Materials X (units) 88,000 (22,000 × 4)

Materials Y (units) 1,10,000 (22,000 × 5)

10,000

12,000

98,000

1,22,000

5,000

7,000

93,000

1,15,000

`5

`9

` 4,65,000

` 10,35,000

6. The repairs and maintenance cost of machinery is ` 45,000 when production is 6,000 units. The repairs and maintenance cost is ` 39,000 when the production is 5,000 units. Find the repairs and maintenance cost for a budgeted production of 9,000 units. Solution: No. of units Level – I Level – II Difference Variable cost per unit =

6,000 5,000 1,000

Difference in costs Difference in units

Repairs and Maintenance Cost ( ) 45,000 39,000 6,000

450 Cost Accounting

=

6,000 = ` 6 per unit 1,000

Total Fixed Cost: Total repairs and maintenance for production of 6,000 units Less: Variable cost (6,000 units × ` 6 p/u) Total fixed cost

= ` 45,000 = ` 36,000 = ` 9,000

Budgeted Repairs and Maintenance Cost for production of 9,000 units

Variable cost (9,000 units × ` 6 per unit)

54,000

Fixed cost

9,000

Budgeted repairs and maintenance cost 63,000 7. From the following information, prepare materials purchase budget for January, 2011: Material X (units) 25,000

Estimated stock on 1.1.2011 Estimated stock on 31.1.2011 Estimated consumption during January, 2011 Standard price p/u

Material Y (units) 32,000

36,000

40,000

2,37,000

2,93,000

`3

`5

Solution: Materials Purchase Budget Particulars Estimated consumption during Jan 2011 Add: Estimated stock on 31.1.2011

Less: Estimated stock on 1.1.2011 Quantity of material to be purchased Standard price per unit Value of material to be purchased

Materials X (units)

Materials Y (units)

2,37,000

2,93,000

36,000

40,000

2,73,000

3,33,000

25,000

32,000

2,48,000

3,01,000

`3

`5

7,44,000

15,05,000

Budget and Budgetary Control

451

B. Comprehensive Practical Problems: 1. (Flexible Budget). A company produces a standard product. The estimated costs per unit are as follows: Raw materials ` 4.00, wages ` 2.00, variable overheads ` 5.00. Semi-variable costs are: Indirect materials ` 235, indirect labour ` 156, repairs ` 570. The variable costs included in semi-variable cost are: Indirect materials ` 0.05, indirect labour ` 0.08, reparis ` 0.10. The fixed cost are: Factory ` 2,000, administration ` 3,000, selling and distribution ` 2,500. The above costs are 70% of normal capacity producing 700 units. The selling price is ` 10 per unit. Prepare a flexible budget for 80% and 100% normal capacities from the above information. (B.Com., Bangalore University) Solution: Flexible Budget Particulars

70% capacity (700 units) Per unit Total ( ) ( )

80% capacity (800 units) Total Per unit ( ) ( )

100% capacity (1,000 units) Total Per unit ( ) ( )

Variable costs: Materials

2,800

4.00

3,200

4.00

4,000

4.00

Labour

1,400

2.00

1,600

2.00

2,000

2.00

Overheads

3,500

5.00

4,000

5.00

5,000

5.00

Indirect materials

35

0.05

40

0.05

50

0.05

Indirect labour

56

0.08

64

0.08

80

0.08

Repairs

70

0.10

80

0.10

100

0.10

7,861

11.23

8,984

11.23

11,230

11.23

Indirect materials

200

0.28

200

0.25

200

0.20

Indirect labour

100

0.14

100

0.12

100

0.10

Repairs

500

0.71

500

0.63

500

0.50

Factory

2,000

2.86

2,000

2.50

2,000

2.00

Administration

3,000

4.29

3,000

3.75

3,000

3.00

Selling & distribution

2,500

3.57

2,500

3.13

2,500

2.50

Total (A) Fixed costs:

Contd...

452 Cost Accounting Contd...

Total (B)

8,300

11.85

8,300

10.38

8,300

8.30

16,161

23.08

17,284

21.61

19,530

19.53

Sales

7,000

10.00

8,000

10.00

10,000

10.00

Loss

9,161

13.08

9,284

11.61

9,530

9.53

Total Cost (A + B)

2. (Flexible Budget). The following data are available in a manufacturing company for an yearly period: (` in Lakhs) Fixed expenses: Wages and salaries – 9.5 Rent, rates and taxes – 6.6 Depreciation – 7.4 Sundry administration expenses – 6.5 Semi-variable expenses (at 50% capacity) Maintenance and repairs – 3.5 Indirect labour – 7.9 Sales department salaries – 3.8 Sundry administration expenses – 2.8 Variable expenses: (at 50% capacity) Materials – 21.7 Labour – 20.4 Other expenses – 7.9 98.0 Assume that the fixed expenses remain constant at all levels of production. Semi-variable expenses remain constant between 45% and 65% of capacity, increasing by 10% between 65% and 80% capacity and by 20% between 80% and 100% capacity. Sales at various levels are: (` in Lakhs) 50% capacity

–

100

60% capacity

–

120

75% capacity

–

150

90% capacity

–

180

100% capacity

–

200

Prepare flexible budget for the year and forecast the profit at 60%, 75%, 90% and 100% of capacity.

Budget and Budgetary Control

453

Solution: Flexible Budget ( in Lakhs) Particulars 50%

60%

Capacity 75%

Materials

21.70

26.04

32.55

39.06

43.40

Labour

20.40

24.48

30.60

36.72

40.80

7.90

9.48

11.85

14.22

15.80

Maintenance and repairs

3.50

3.50

3.85

4.20

4.20

Indirect labour

7.90

7.90

8.69

9.48

9.48

Sales department salaries

3.80

3.80

4.18

4.56

4.56

Sundry administration expenses

2.80

2.80

3.08

3.36

3.36

Wages and salaries

9.50

9.50

9.50

9.50

9.50

Rent, rates & taxes

6.60

6.60

6.60

6.60

6.60

Depreciation

7.40

7.40

7.40

7.40

7.40

Sundry administration expenses

6.50

6.50

6.50

6.50

6.50

98.00

108.00

124.80

141.60

151.60

Sales

100.00

120.00

150.00

180.00

200.00

Profit

2.00

12.00

25.20

38.40

48.40

90%

100%

Variable cost:

Other expenses Semi-variable cost:

Fixed costs:

Total cost

3. (Flexible Budget) ABC Ltd has prepared the budget for the production of one lakh units of the only commodity manufactured by it for a costing period as follows: (` in Lakhs) (i) Raw materials

–

2.52

(ii) Direct labour

–

0.75

(iii) Direct expenses

–

0.10

(iv) Works overhead (60% fixed)

–

2.25

(v) Administration overheads (80% fixed)

–

0.40

(vi) Selling overheads (50% fixed)

–

0.20

Prepare a flexible budget for 60,000, 70,000 and 80,000 units.

454 Cost Accounting

Solution: Flexible Budget Particulars

Raw materials Direct labour Direct expenses

60% capacity (60,000 units)

70% capacity (70,000 units)

80% capacity (80,000 units)

Total ( )

Per unit ( )

Total ( )

Per unit ( )

Total ( )

Per unit ( )

1,51,200

2.52

1,76,400

2.52

2,01,600

2.52

45,000

0.75

52,500

0.75

60,000

0.75

6,000

0.10

7,000

0.10

8,000

0.10

1,35,000

2.25

1,35,000

1.93

1,35,000

1.69

54,000

0.90

63,000

0.90

72,000

0.90

32,000

0.53

32,000

0.46

32,000

0.40

4,800

0.08

5,600

0.08

6,400

0.08

10,000

0.17

10,000

0.14

10,000

0.12

6,000

0.10

7,000

0.10

8,000

0.10

4,44,000

7.40

4,88,500

6.98

5,33,000

6.66

Works overhead: 60% fixed 40% variable Administration overheads: 80% fixed 20% variable Selling overheads: 50% fixed 50% variable Total Cost

4. (Flexible Budget) From the following data, prepare a flexible budget for production of 40,000 units and 75,000 units, distinctly showing variable cost and fixed cost as well as total cost. Also show element-wise cost per unit. Budgeted output is 1,00,000 units and budgeted cost per unit is as follows: ` (per unit) Direct materials

–

95

Direct labour

–

50

Production overheads (variable)

–

40

Production overheads (fixed)

–

5

Selling overheads (10% fixed)

–

10

Administration overheads (fixed)

–

5

Distribution overheads (20% fixed)

–

15 (B.Com. (Hons.), Delhi University)

Budget and Budgetary Control

455

Solution: Flexible Budget Particulars

Capacity - 40,000 units

Capacity - 75,000 units

Total ( )

Per unit ( )

Total ( )

Per unit ( )

Direct materials

38,00,000

95.00

71,25,000

95.00

Direct labour

20,00,000

50.00

37,50,000

50.00

Production overheads – variable

16,00,000

40.00

30,00,000

40.00

Selling expenses – 90% variable

3,60,000

9.00

6,75,000

9.00

Distribution expenses – 80% variable Total (A)

4,80,000

12.00

9,00,000

12.00

82,40,000

206.00

1,54,50,000

206.00

5,00,000

12.50

5,00,000

6.67

5,00,000

12.50

5,00,000

6.67

1,00,000

2.50

1,00,000

1.33

Variable costs:

Fixed cost: Production overheads – fixed (1,00,000 × 5) Administration overheads – fixed (1,00,000 × 5) Selling overheads – fixed (1,00,000 × 1) Distribution overheads – fixed (1,00,000 × 3) Total (B)

3,00,000

7.50

3,00,000

4.00

14,00,000

35.00

14,00,000

18.67

Total Cost (A + B)

96,40,000

241.00

1,68,50,000

224.67

5. (Flexible Budget) X company produces a standard product. The estimated cost per unit are given below: Materials

10

Direct wages

8

Direct expenses

2

Variable overheads

3 23

Semi-variable overheads at 100% activity level (10,000 units) are estimated to be ` 40,000 and these overheads vary in steps of ` 2,000 for each change in output of 1,000 units. Fixed overheads are estimated at ` 50,000. The selling price per unit is also estimated at ` 40.

456 Cost Accounting

Prepare a flexible budget at 50%, 70% and 90% levels of activity. (B.Com., Bangalore University) Solution: Flexible Budget Particulars

50% capacity (5,000 units)

70% capacity (7,000 units) Total ( )

Per unit ( )

90% capacity (9,000 units)

Total ( )

Per unit ( )

Total ( )

Per unit ( )

Materials

50,000

10.00

70,000

10.00

90,000

10.00

Direct wages

40,000

8.00

56,000

8.00

72,000

8.00

Direct expenses

10,000

2.00

14,000

2.00

18,000

2.00

Variable overheads

15,000

3.00

21,000

3.00

27,000

3.00

1,15,000

23.00

1,61,000

23.00

2,07,000

23.00

Semi-variable overheads

30,000

6.00

34,000

4.86

38,000

4.22

Fixed overheads

50,000

10.00

50,000

7.14

50,000

5.56

1,95,000

39.00

2,45,000

35.00

2,95,000

32.78

5,000

1.00

35,000

5.00

65,000

7.22

2,00,000

40.00

2,80,000

40.00

3,60,000

40.00

Variable expenses

Total

Total cost Profit (bf) Sales

6. (Cash Budget) XYZ Ltd, produces goods mostly for stock during April to June 2011. Prepare a cash budget for the above period indicating bank overdraft the company may require at the end of each month. The following are the budgeted figures of the company. (1) Month February March April May June

Sales

Purchase

Wages

Overheads

5,40,000 5,88,000 6,13,000 6,51,000 6,94,000

5,75,000 6,10,000 6,47,000 7,20,000 7,30,000

55,000 61,000 67,000 74,000 80,000

25,000 30,000 33,000 40,000 44,000

(2) Cash sales is 40% of total sales. 50% of credit sales is collected in the month following the sales and the remaining 50% of credit sales collected in the second month following the sales.

Budget and Budgetary Control

(3) (4) (5) (6) (7)

457

Sales commission at 5% on total sales is paid in the month following the sales. All purchases are on 2 month credit. ½ wages are paid in the same month and the balance in the next month. ¼ overheads are paid in the same month and the balance in the next month. Cash at bank on April 1, 2011 is estimated at ` 55,000.

Solution: Cash Budget for 3 months from April to June 2011 Particulars

April

May

55,000

(60,550)

(1,85,750)

Cash sales

2,45,200

2,60,400

2,77,600

Receipts from customers (See WN.1)

3,38,400

3,60,300

3,79,200

6,38,600

5,60,150

4,71,050

5,75,000

6,10,000

6,47,000

Wages

64,000

70,500

77,000

Overheads

30,750

34,750

41,000

Sales commission

29,400

30,650

32,550

6,99,150

7,45,900

7,97,550

(60,550)

(1,85,750)

(3,26,500)

Opening cash balance/(bank o/d)

June

Receipts:

Total Payments: Creditors

Closing cash balance/(bank o/d) Working Note: (i)

Total sales

February 5,40,000

March 5,88,000

April 6,13,000

May 6,51,000

June 6,94,000

Cash sales 40%

2,16,000

2,35,200

2,45,200

2,60,400

2,77,600

Credit sales 60%

3,24,000

3,52,800

3,67,800

3,90,600

4,16,400

First 50% of credit sales (next month)

–

1,62,000

1,76,400

1,83,900

1,95,300

Second 50% of credit sales (second month)

–

–

1,62,000

1,76,400

1,83,900

–

–

3,38,400

3,60,300

3,79,200

Collections from customers:

458 Cost Accounting

7. (Cash budget) From the following information relating to X Ltd, prepare a cash budget for the half year ended 30th September, 2011: (a) Budgeted sales and costs: Month March April May June July August September

Sales

Purchases

1,50,000 1,40,000 1,54,000 1,68,000 1,82,000 2,04,000 2,40,000

90,000 1,20,000 84,000 1,36,000 1,28,000 1,51,000 1,62,000

Wages

Overheads

18,000 28,000 20,800 22,200 30,000 28,000 25,000

31,000 35,400 36,500 36,500 37,000 37,500 38,000

(b) Other information: (i) Bank balance on 1.4.2011 was ` 72,000 (ii) A loan instalment of ` 25,000 is payable from July to December, 2011. (iii) Sales commission at 5% on sales is payable in the following months of sales. (iv) ` 50,000 is expected from distributors as advance deposits in the month of July. (v) 50% of sales are on credit. The credit term 1 month. (vi) 50% of purchases are on each basis and the balance is payable in the next month. (vii) 25% of overheads are payable in the month following their incidence. (viii) Wages are payable on the first day of the following month. Solution: Cash Budget for 6 months ending 30.09.2011 Particulars

May

June

July

Aug

72,000

52,200

25,975

11,975

12,500

(35,475)

Cash sales

70,000

77,000

84,000

91,000

1,02,000

1,20,000

Collection from debtors

75,000

70,000

77,000

84,000

91,000

1,02,000

–

–

–

50,000

–

–

2,17,000

1,99,200

1,86,975

2,36,975

2,05,500

1,86,525

60,000

42,000

68,000

64,000

75,500

81,000

Opening balance (overdrafts)

April

Sep

Receipts:

Deposit from distributors Total Payments: Cash purchase

Budget and Budgetary Control

459

Credit purchase

45,000

60,000

42,000

68,000

64,000

75,500

Wages

18,000

28,000

20,800

22,200

30,000

28,000

Overheads

34,300

36,225

36,500

36,875

37,375

37,875

7,500

7,000

7,700

8,400

9,100

10,200

–

–

–

25,000

25,000

25,000

1,64,800

1,73,225

1,75,000

2,24,475

2,40,975

2,57,575

52,200

25,975

11,975

12,500

(35,475)

(71,050)

Sales commission Loan instalment Total Closing cash balance/ (overdraft)

8. (Cash Budget) (a) Prepare a cash budget for three months ending 30th June, 2011 from the information given below: Month February March April May June

Sales

Materials

Wages

Overheads

14,000 15,000 16,000 17,000 18,000

9,600 9,000 9,200 10,000 10,400

3,000 3,000 3,200 3,600 4,000

1,700 1,900 2,000 2,200 2,300

(b) Credit terms are: Sales/Debtors - 10% sales are on cash, 50% of the credit sales are collected next month and the balance in the following month. Creditors

–

Materials

– 2months

–

Wages

– ¼ month

–

Overheads

– ½ month

(c) Cash and bank balance on 1.4.2011 is expected to be ` 6,000 (d) Other relevant information is: (i) Plant and machinery will be installed in February, 2011 at a cost of ` 96,000. The monthly instalments of ` 2,000 is payable from April onwards. (ii) Dividend at 5% on preference share capital of ` 2,00,000 will be paid on 1st June. (iii) Advance to be received for sale of vehicles ` 9,000 in June. (iv) Dividends from investments amounting to ` 1,000 are expected to be received in June. (v) Income tax (advance) to be paid in June, is ` 2,000. (ICWA, Inter)

460 Cost Accounting

Solution: Cash Budget for 3 months ending 30th June, 2011 Particulars

April

May

June

6,000

3,950

3,000

1,600

1,700

1,800

13,050

13,950

14,850

Dividend from investments

–

–

1,000

Advance for sale of vehicle

–

–

9,000

20,650

19,600

29,650

Creditors for materials

9,600

9,000

9,200

Wages (W.N. 2)

3,150

3,500

3,900

Overheads (W.N. 3)

1,950

2,100

2,250

Plant and machinery

2,000

2,000

2,000

Preference dividend paid

–

–

10,000

Income tax advance

–

–

2,000

Total

16,700

16,600

29,350

3,950

3,000

300

Opening cash and bank balance Receipts: Cash sales Credit sales (W.N. 1)

Total Payments:

Closing cash and bank balance Working Note: (1) Total sales 10% cash sales Credit sales

February

March

April

May

June

14,000

15,000

16,000

17,000

18,000

1,400

1,500

1,600

1,700

1,800

12,600

13,500

14,400

15,300

16,200

–

6,300

6,750

7,200

7,650

–

–

6,300

6,750

7,200

–

–

13,050

13,950

14,850

Collections from credit sales: First 50% of credit sales (previous month) Balance 50% of credit sales (two month earlier) Collection from credit sales

Budget and Budgetary Control

(2)

February

March

April

May

June

– ¾ of current month

–

–

2,400

2,700

3,000

– ¼ of previous month

–

–

750

800

900

–

–

3,150

3,500

3,900

June

461

Payment for wages

Wages paid

(3)

February

March

April

May

– ½ of current month

–

–

1,000

1,100

1,150

– ½ of previous month

–

–

950

1,000

1,100

Overheads paid

–

–

1,950

2,100

2,250

Payment for overheads

9. (Cash Budget) From the following information, prepare cash budget for the months of January to April. Expected Sales

Expected Purchases

January

60,000

January

48,000

February

40,000

February

80,000

March

45,000

March

81,000

April

40,000

April

90,000

Wages are to be paid to workers at ` 5,000 per month. Balance at bank on1st January ` 8,000. It has been decided by the management that: (i) In case of deficit fund within a limit of ` 10,000, arrangement can be made with the bankers. (ii) In case deficit fund exceeding ` 10,000 but within the limit of ` 42,000, issue of debenture is preferred. (iii) In case of deficit fund exceeding ` 42,000, issue of shares is preferred (considering the fact that it is within the limit of authorised capital). (M.Com., Madras University)

462 Cost Accounting

Solution: Cash Budget Particulars

Jan

Feb

8,000

15,000

–

–

60,000

40,000

45,000

40,000

68,000

55,000

45,000

40,000

48,000

80,000

81,000

90,000

5,000

5,000

5,000

5,000

53,000

85,000

86,000

95,000

15,000

–

–

–

Deficit (B – A)

–

(30,000)

(41,000)

(55,000)

Issue of debentures

–

30,000

41,000

–

Issue of shares

–

–

–

55,000

15,000

–

–

–

Opening cash balance

March

April

Receipts: Sales Total (A) Payments: Purchases Wages Total (B) Surplus (A – B)

Closing cash and bank balance

10. (Cash Budget) Prepare cash budget for July to December, 2011 from the following information: (i) The estimated sales, expenses, etc. are as follows: ( in Lakhs) Months

June

July

Aug

Sept

Oct

Nov

Dec

Sales

34

40

40

50

50

60

65

Purchases

24

16

17

20

20

25

28

Wages and salaries

12

14

14

18

18

20

22

Miscellaneous expenses Interest received

5

6

6

6

7

7

7

2

–

–

2

–

–

2

Sale of shares

–

–

20

–

–

–

–

(ii) 20% of the sales are on cash with 3% cash discount and the balance on credit. (iii) 1% of credit sales are returned by the customers. 2% of net receivable constituted bad debts. 50% of good accounts receivable are collected in the month following the sales with 1% cash discount, 30% of good accounts receivable are collected in the 2nd month following the sales and the rest in the 3rd month following the sales.

Budget and Budgetary Control

463

(iv) The time lag in the payment of miscellaneous expenses and purchases is one month. Wages and salaries are paid fortnightly with a time lag of 15 days. (v) The company keeps a minimum cash balance of ` 25.00 lakh. Cash in excess of ` 27.00 lakh is invested in 9% government securities in the multiple of ` 1 lakh. Interest is receivable on monthly basis. Shortfalls in the minimum cash balance are made good by borrowings from banks in multiple of ` 2 lakh and repaid by the same amount. The rate of interest is 12% p.a. (compound interest) (vi) Opening cash balance is ` 26 lakh. (vii) Sales in the month of April and May was ` 44 and 40 lakh respectively. Solution: Cash Budget for 6 months from July to December 2011 ( in Lakhs) Particulars

July

Aug

Sept

Oct

Nov

Dec

26.00

26.96

27.10

27.87

27.43

27.27

7.76

7.76

9.70

9.70

11.64

12.61

29.20

29.50

29.96

34.73

37.06

42.45

Interest received

–

–

2.00

–

–

2.00

Interest from Govt. bonds

–

–

0.11

0.13

0.14

0.16

Sales of shares

–

20.00

–

–

–

–

62.96

84.22

68.87

72.43

76.27

84.49

24.00

16.00

17.00

20.00

20.00

25.00

5.00

6.00

6.00

6.00

7.00

7.00

13.00

14.00

16.00

18.00

19.00

21.00

42.00

36.00

39.00

44.00

46.00

53.00

20.96

48.22

29.87

28.43

30.27

31.49

6.00

–

–

–

–

–

Repayment of borrowings with interest

–

6.12

–

–

–

–

Investment in Govt. bond

–

15.00

2.00

1.00

3.00

4.00

Net closing cash balance

26.96

27.10

27.87

27.43

27.27

27.49

Opening balance Receipts: Cash sales (WN 2) Credit sales (WN. 3, 4, 5)

Total (A) Payments: Purchases Misc. expenses Wages and salaries (WN. 6) Total (B) Gross cash balance (A-B) Borrowings

Working Note: 1. Let gross sales be Less: Cash sales Credit sales

– – –

100% 20% 80%

464 Cost Accounting

2. Receipt from sales: Cash sales Less: Cash discount 3% (20 × 3/100) Net cash sales 3. Credit sales Less: Sales return 1% Net credit sales Less: Bad debts 2% (79.2 × 2/100) Good debtors 4. Receipt from previous month sale

– – – – – – – –

20.0% 0.6% 19.4% 80.00% 0.80% 79.20% 1.584% 77.616%

50 99 (Net of 1% cash discount) = 77.616 × 100 ¥ 100 = 38.42%

Receipt from sales 2 months earlier = 77.616 ×

30 = 23.28% 100

Receipt from sales 3 months earlier = 77.616 ×

20 = 15.52% 100

5. Amount received from debtors: Particulars

July

Aug

Sept

Oct

Nov

Dec

13.06

15.37

15.37

19.21

19.21

23.05

23.28% of sales two months earlier

9.31

7.92

9.31

9.31

11.64

11.64

15.52% of sales three months earlier

6.83

6.21

5.28

6.21

6.21

7.76

29.20

29.50

29.96

34.73

37.06

42.45

38.42% of previous month sales

6. Payment of wages and salaries: Particulars

July

Aug

Sept

Oct

Nov

Dec

½ of previous month

6.00

7.00

7.00

9.00

9.00

10.00

½ of current month

7.00

7.00

9.00

9.00

10.00

11.00

13.00

14.00

16.00

18.00

19.00

21.00

11. (Production and Production Cost Budget) Gama Engineering Company Ltd manufactures two products X and Y. An estimate of the number of units to be sold in the first seven months of 2011 is given below:

Budget and Budgetary Control

January February March April May June July

Product X (Units) 5,500 5,600 5,800 6,000 6,200 6,200 6,000

465

Product Y (Units) 4,400 4,400 4,200 4,000 3,800 3,800 3,900

It is anticipated that: 1. There will be no stock of work-in-progress at the end of any month. 2. Finished units equal to half the anticipated sales for the next month will be in stock at the end of each month (including December 2010). The budgeted production and production cost for the year ending 31st December, 2011 are as follows: Product X

Product Y

90,000

65,000

21

18

8

10

Variable factory overheads (`)

4,50,000

3,25,000

Fixed factory overheads (`)

3,40,000

4,10,000

Production (units) Direct materials per unit (`) Direct wages per unit (`)

You are required to prepare: (a) A production budget showing number of units produced each month, (b) A summarised production cost budget for 6 months from January to June 2011. Solution: (a) Production Budget Particulars

Jan

Feb

Mar

Apr

May

June

Sales

5,500

5,600

5,800

6,000

6,200

6,200

Add: Closing stock

2,800

2,900

3,000

3,100

3,100

3,000

8,300

8,500

8,800

9,100

9,300

9,200

2,750

2,800

2,900

3,000

3,100

3,100

Product X:

Less: Opening stock

Contd...

466 Cost Accounting Contd...

Production

5,550

5,700

5,900

6,100

6,200

6,100

Sales

4,400

4,400

4,200

4,000

3,800

3,800

Add: Closing stock

2,200

2,100

2,000

1,900

1,900

1,950

6,600

6,500

6,200

5,900

5,700

5,750

Less: Opening stock

2,200

2,200

2,100

2,000

1,900

1,900

Production

4,400

4,300

4,100

3,900

3,800

3,850

Product Y:

(b) Summarised Production Cost Budget for 6 months from Jan to June 2011 Particulars Direct materials Direct wages Prime cost Variable factory overheads Fixed factory overheads Production cost

Product X (35,550 units) Total ( ) 7,46,550 2,84,400 10,30,950 1,77,750 1,70,000 13,78,700

Per unit ( ) 21.00 8.00 29.00 5.00 4.78 38.78

Product Y (24,350 units) Total ( ) 4,38,300 2,43,500 6,81,800 1,21,750 2,05,000 10,08,550

Per unit ( ) 18.00 10.00 28.00 5.00 8.42 41.42

12. (Production Budget and Materials Purchase Budget). As a cost accountant of Modern Manufacturing Company, you are asked to prepare a quarterly production Budget and Direct Materials purchase Budget for the accounting year 1st April 2011 to 31st March 2012. The following information is relevant: (i) The company manufactures only two products A and B (ii) The sales volume forecast (in units) 2011-2012

A

B

Quarter – I

5,000

4,500

Quarter – II

4,000

5,000

Quarter – III

4,500

5,500

Quarter – IV

5,500

4,000

2012-13 Quarter - I

4,000

5,000

(iii) Raw materials requirement forecast: Two raw materials X and Y are used in the manufacture of the two products. Standard quantity and price of these materials are as below:

Budget and Budgetary Control

467

Standard quantities: Raw materials X – 4 units for each unit of Product A at ` 15 per unit. Raw materials Y – 5 units for each unit of Product B at ` 10 per unit. (iv) It is planned that the closing stock at the end of each quarter should be maintained at a level equal to half the expected sales for the next quarter for both the products. The raw materials stock at the end of each quarter should be equal to half of the material consumed in the next quarter for both materials. (v) Stock of product A and B at the end of Quarter-I in financial year 2012-13 is estimated at 3,000 units and 3,250 units respectively. Solution: Production Budget Particulars

Quarter - I A B (Units) (Units) Budgeted sales 5,000 4,500 Add: Closing stock 2,000 2,500 7,000 7,000 Less: Opening stock 2,500 2,250 Production 4,500 4,750

Quarter – II A B (Units) (Units) 4,000 5,000 2,250 2,750 6,250 7,750 2,000 2,500 4,250 5,250

Quarter – III A B (Units) (Units) 4,500 5,500 2,750 2,000 7,250 7,500 2,250 2,750 5,000 4,750

Quarter - IV A B (Units) (Units) 5,500 4,000 2,000 2,500 7,500 6,500 2,750 2,000 4,750 4,500

Raw Materials Purchase Budget Particulars

Quarter - I

Quarter – II

Quarter – III

Quarter - IV

X (Units) Y (Units) X (Units) Y (Units) X (Units) Y (Units) X (Units) Y (Units) Raw materials consumed

(4,500 × 4) (4,750 × 5) (4,250 × 4) (5,250 × 5) (5,000 × 4) (4,750 × 5) (4,750 × 4) (4,500 × 5) 18,000 23,750 17,000 26,250 20,000 19,000 19,000 22,500

Add: Closing stock

8,500

13,125

10,000

11,875

9,500

11,250

10,000

14,375

26,500

36,875

27,000

38,125

29,500

35,000

29,000

36,875

9,000

11,875

8,500

13,125

10,000

11,875

9,500

11,250

17,500

25,000

18,500

25,000

19,500

23,125

19,500

25,625

Cost per unit

` 15

` 10

` 15

` 10

` 15

` 10

` 15

` 10

Value of materials purchased (`)

2,62,500

2,50,000

2,77,500

2,50,000

2,92,500

2,31,250

2,92,500

2,56,250

Less: Opening stock

468 Cost Accounting

Working Note: (1) Production in 2012-2013 – Quarter I A 4,000 3,000 7,000 2,000 5,000

Sales (Units) Add: Closing stock Less: Opening stock Production

B 5,000 3,250 8,250 2,500 5,750

(2) Materials consumed in Quarter I of 2012-13: Material X 5,000 × 4

Material Y 5,750 × 5

= 20,000 units

= 28,750 units

(3) Closing Stock of Materials at the Quarter IV: Material X =

20,000 = 10,000 units 2

Material Y =

28,750 = 14,375 units 2

(4) Total Production during 2011-2012: Product A = 4,500 + 4,250 + 5,000 + 4,750 = 18,500 units Product B = 4,750 + 5,250 + 4,750 + 4,500 = 19,250 units (5) Total value of purchase: Material X = 2,62,500 + 2,77,500 + 2,92,500 + 2,92,500 = ` 11,25,000 Material Y = 2,50,000 + 2,50,000 + 2,31,250 + 2,56,250 = ` 9,87,500 13. (Production Budget and Direct Labour Hour Budget) A Ltd manufactures a single product P with a single grade of labour. The sales budget and finished goods stock budget for the 1st quarter ending 30.6.2011 are as follows: Sales

- 1,400 units.

Opening stock

- 100 units.

Closing stock

- 140 units.

It is budgeted that 10% of finished work will be scrapped.

Budget and Budgetary Control

469

The standard direct labour content of product P is 3 hours. The budgeted productivity ratio for direct labour is only 80%. The company employs 36 direct operatives, who are expected to average 144 working hours each in the first quarter. Your are required to prepare: (a) Production budget (b) Direct labour budget and (c) Comment on the problem that your direct labour budget reveals and suggest how this problem might be overcome. Solution: (a) Production Budget Sales

–

1,400 units

Add: Closing stock

–

140 units 1,540 units

Less: Opening stock

–

Goods production (90%)

100 units 1,440 units

Add: Wastage (10/90 × 1,440)

–

160 units

Gross production

–

1,600 units

(b) Direct Labour Hour Budget Total standard labour hours required for gross production (1,600 units × 3 hrs.)

= 4,800 hrs.

Productivity ratio

= 80%

100 ˆ Ê Total actual hours required Á 4,800 ¥ ˜ Ë 80 ¯

= 6,000 hrs.

Total labour hours available (36 × 144)

= 5,184 hrs.

Shortage of direct labour

= 816 hrs.

(c) There is a shortage of 816 direct labour hours. This can be solved by allowing overtime or improving labour productivity or reducing finished goods stock. 14. (Sales overhead Budget) - Prepare a sales overhead budget for the month of January, February and March from the estimates given below: Advertisement – ` 12,500 Salaries of the sales department – ` 15,000 Expenses of sales department – ` 10,500 Counter salesman salaries and DA – ` 16,000 Commission to counter salesman at 1% on their sales. Travelling salesman commission at 10% of their sales and expenses at 5% on their sales.

470 Cost Accounting

The sales during the period work estimated as follows: Month January February March

Counter Sales

Travelling Salesman Sales

2,80,000 3,20,000 3,40,000

1,10,000 1,15,000 1,20,000

Solution: Sales Overhead Budget Particulars

January

February

March

Variable expenses: Commission to counter salesman at 1% of their sales

2,800

3,200

3,400

Travelling salesman commission at 10% of their sales

11,000

11,500

12,000

5,500

5,750

6,000

19,300

20,450

21,400

Advertisement

12,500

12,500

12,500

Salaries of the sales department

15,000

15,000

15,000

Expenses of the sales department

10,500

10,500

10,500

Counter salesman salaries and DA

16,000

16,000

16,000

Total (B)

54,000

54,000

54,000

73,300

74,450

75,400

3,90,000

4,35,000

4,60,000

18.79%

17.11%

16.39%

Travelling salesman expenses at 5% of their sales Total (A) Fixed overheads:

Total sales overhead (A + B) Total sales % of sales overhead on sales

15. (Control Ratios) Calculate (a) efficiency ratio, (b) activity ratio and (c) capacity ratio, from the following figures: Budgeted production

– 88 units.

Standard hours per unit

– 10

Actual production

– 75 units

Actual working hours

– 600 (B.Com. (Hons.), Delhi University)

Budget and Budgetary Control

471

Solution: (a) Efficiency ratio: =

Standard hours for actual production × 100 Actual hours worked

=

750 ¥ 100 = 125% 600

=

Standard hours for actual production × 100 Budgeted hours

=

750 ¥ 100 = 85.23% 880

=

Actual hours worked × 100 Budgeted hours

=

600 ¥ 100 = 68.10% 880

(b) Activity ratio:

(c) Capacity ratio:

Note: (1) Standard hours for actual production: = Standard hours per unit × Actual production = 10 × 75

= 750 hours

(2) Budgeted hours: = Standard hours per unit × Budgeted production = 10 × 88

= 880 hours

16. (Control Ratios) In a manufacturing shop product X requires 2.5 man-hours and product Y requires 6 man-hours. In a month of 25 working days of 8 hours a day, 2,000 units of X and 1,000 with of Y were produced. The company employs 50 workers in the shop and the budgeted man-hours are 1,08,000 for the year. You are required to work out the capacity ratio, activity ratio and efficiency ratio. (ICWA, Inter) Solution: (a) Capacity Ratio: =

Actual man-hours worked × 100 Budgeted man-hours

=

10,000 ¥ 100 9,000

= 111.11%

472 Cost Accounting

(b) Activity ratio: =

Standard hours for actual production × 100 Budgeted man-hours

=

11,000 ¥ 100 9,000

=

Standard man-hours for actual production × 100 Actual man-hours worked

=

11,000 ¥ 100 = 111% 10,000

= 122.22%

(c) Efficiency ratio:

Note: (1) Standard hours for actual production: = Standard hours per unit × Actual production Product X = 2.5 × 2,000

= 5,000 hrs

Product Y = 6 × 1,000

= 6,000 hrs

Total

= 11,000 hrs

(2) Actual Man-hours worked: = No. of workers × No. of days × No. of hours per day = 50 × 25 × 8

= 10,000 hrs.

(3) Budgeted man-hours per month: =

Budgeted hours for the year No. of months in a year

=

1,08,000 = 9,000 hrs. 12

20 Chapter

Standard Costing and Variance Analysis

III. Practical Problems A. Short Answer Type Questions 1. Given that the cost standards for material consumption are 40 kg at ` 10 per kg. Compute the variances when the actual are 48 kg. at ` 12 per kg. Calculations: (1) Actual cost of actual quantity = Act qty. × Act. price = 48 × 12 = ` 576 (2) Standard cost of actual quantity = Act. quantity × Std. price = 48 × 10 = ` 480 (3) Standard cost of actual quantity, had actual quantity been used in standard ratio: No material mix - not applicable (4) Standard cost of standard quantity for actual output = Std. price × Std. qty. = 10 × 40 = ` 400 Variances: (1) Material cost variance (MCV) =4–1 = 400 – 576 = ` 176 (A) (2) Material price variance (MPV) =2–1 = 480 – 576 = ` 96 (A) (3) Material usage variance (MUV) =4–2 = 400 – 480 = ` 80 (A)

474 Cost Accounting

Verification: MCV = MPV + MUV 176 (A) = 96 (A) + 80 (A) 2. The budgeted and actual materials are as follows: Product

Budget

Actual

Quantity (Unit)

Price ( )

Quantity (Unit)

Price ( )

X

600

3

800

4

Y

800

4

600

3

Calculate material variances.

(B.Com., Madras University)

Solution: Calculations: (1) Actual cost of actual quantity: = Act. qty. × Act. price X = 800 × 4

= ` 3,200

Y = 600 × 3

= ` 1,800

Total

= ` 5,000

(2) Standard cost of actual quantity: = Act. qty. × Std. price X = 800 × 3

= ` 2,400

Y = 600 × 4

= ` 2,400

Total

= ` 4,800

(3) Standard cost of actual quantity, had actual quantity been used in standard mix ratio: = Std. qty ×

Total weight of act. mix × Std. price Total weight of std. mix

X = 600 ×

1400 ×3 1400

= ` 1,800

Y = 800 ×

1400 ×4 1400

= ` 3,200

Total

= ` 5,000

(4) Std. cost of std. qty. for actual output: = Std. Qty. × Std. price X = 600 × 3 = ` 1,800

Standard Costing and Variance Analysis

475

Y = 800 × 4 = ` 3,200 Total

= ` 5,000

Variances: (1) Material Cost Variance (MCV) =4–1 = 5,000 – 5,000 = Nil (2) Material price variance (MPV) =2–1 = 4,800 – 5,000 = ` 200 (A) (3) Material usage variance (MUV) =4–2 = 5,000 – 4,800 = ` 200 (F) (4) Material mix variance (MMV) =3–2 = 5,000 – 4,800 = ` 200 (F) (5) Material yield variance (MYV) =4–3 = 5,000 – 5,000 = Nil Verification: (1) MCV = MPV + MUV 0 = 200 (A) + 200 (F) 0=0 (2) MUV

= MMV + MYV

200 (F) = 200 (F) + Nil 3. From the data given below, calculate (a) Material cost variance (b) Material price variance (c) Material usage variance Particulars

Standard Quantity (units)

Standard Price ( )

Actual Quantity (units)

Actual Price ( )

Material A

1,050

2.00

1,100

2.25

Material B

1,500

3.25

1,400

3.50

Material C

2,100

3.50

2,000

3.75

(B.Com., Madras University)

476 Cost Accounting

Solution: Calculations: (1) Actual cost of actual quantity = Actual qty × Actual price Material A = 1,100 × 2.25

= ` 2,475

Material B = 1,400 × 3.50

= ` 4,900

Material C

= ` 7,500

= 2,000 × 3.75 Total

= ` 14,875

(2) Standard cost of actual quantity = Actual qty × Standard price Material A = 1,100 × 2.00

= ` 2,200

Material B = 1,400 × 3.25

= ` 4,550

Material C

= ` 7,000

= 2,000 × 3.50

Total = ` 13,750 (3) Standard cost of actual quantity, had actual quantity been used in standard mix ratio: Not required. (4) Standard cost of standard quantity for actual output = Standard qty × Standard price Material A = 1,050 × 2.00

= ` 2,100

Material B = 1,500 × 3.25

= ` 4,875

Material C

= ` 7,350

= 2,100 × 3.50 Total

= ` 14,325

Variance: (a) Material cost variance (MCV) =4–1 = 14,325 – 14,875 = ` 550 (A) (b) Material price variance (MPV) =2–1 = 13,750, – 14,875 = ` 1,125 (A) (c) Material usage variance (MUV) =4–2 = 14,325 – 13,750 = ` 575 (F) Verification: MCV = MPV + MUV = 550 (A) = 1,125 (A) + 575 (F) 550 (A) = 550 (A)

Standard Costing and Variance Analysis

477

4. Calculate labour variances from the following: Standard hours: 100 hrs. at ` 5 per hour. Actual hours 95 at ` 7 per hour. Solution: Calculations: (1) Actual wages paid = Actual hours x Actual rate = 95 × 7 = ` 665 (2) Standard wages for actual hours = Actual hours × Standard rate = 95 × 5 = ` 475 (3) Not applicable (4) Not applicable (5) Standard wages for standard hours for actual output = Standard hours for actual output × Standard rate = 100 × 5 = ` 500 Variance: (1) Labour cost variance (LCV) =5–1 = 500 – 665 = ` 165 (A) (2) Labour rate variance (LRV) =2–1 = 475 – 665 = ` 190 (A) (3) Labour efficiency variance (LEV) =5–2 = 500 – 475 = ` 25 (F) Verification: LCV = LRV + LEV 165 (A) = 190 (A) + 25 (F) 165 (A) = 165(A) 5. Calculate labour variances from the following: Particulars

Budget

Actual

Hours (Unit)

Rate ( )

Men

800

3

2,400

Women

200

2

1,000

–

Total

Amount ( ) Hours (Unit)

Rate ( )

Amount ( )

600

2.50

1,500

400

500

2.00

1,000

2,800

1,100

–

2,500

(B.Com., Madras University)

478 Cost Accounting

Solution: Calculations: (1) Actual wages for actual hours = Actual hours × Actual rate Men

= 600 × 2.50 = ` 1,500

Women

= 500 × 2 = ` 1,000 Total = ` 2,500

(2) Standard wages for actual hours = Actual hours × Standard rate = ` 1,800

Men = 600 × 3

= ` 1,000

Women = 500 × 2 Total

= ` 2,800

(3) Not applicable – No idle time (4) Standard wages for actual hours, had labour been utilised in standard mix ratio = Total time of actual mix × Standard mix ratio × Standard rate Men = 1,100 × 8/10 × 3 Women = 1,100 × 2/10 × 2 Total

= ` 2,640 = ` 440 = ` 3,080

(5) Standard wages for standard time for actual output = Standard time for actual out × standard rate Men = 800 × 3 = ` 2,400 Women = 200 × 2

= ` 400

Total = ` 2,800 Variance: (1) Labour cost variance (LCV) =5–1 = 2,800 – 2,500 = ` 300 (F) (2) Labour rate variance (LRV) =2–1 = 2,800 – 2,500 = ` 300 (F) (3) Labour efficiency variance (LEV) =5–2 = 2,800 – 2,800 = Nil (4) Labour mix variance (LMV) =4–2 = 3,080 – 2,800 = ` 280 (F)

Standard Costing and Variance Analysis

479

(5) Labour yield variance =5–4 = 2,800 – 3,080 = ` 280 (A) Verification: (1) LCV = LRV + LEV 300 (F) = 300 (F) + Nil (2) LEV = LMV + LYV = 280 (F) + 280 (A) 6. The standard and actual labour force required for completing a job is given as follows: Particulars

Std. Hours

Std. rate ( )

Actual Hours

Actual rate ( )

Men

45

50

48

55

Women

50

40

45

40

Calculate: (a) Labour cost variance; (b) Labour rate variance; (c) Labour efficiency variance; Solution: Calculations: (1) Actual wages paid for actual hours = Actual hours × Actual rate Men = 48 × 55

= ` 2,640

Women = 45 × 40

= ` 1,800

Total

= ` 4,440

(2) Standard wages for actual hours = Actual hours × Standard rate Men = 48 × 50 = ` 2,400 Women = 45 × 40

= ` 1,800

Total

= ` 4,200

(3) Not applicable (4) Not required (5) Standard wages for standard time for actual output = standard time for actual output × standard rate Men = 45 × 50

= ` 2,250

Women = 50 × 40

= ` 2,000

Total

= ` 4,250

480 Cost Accounting

Variances: (1) Labour cost variance (LCV) =5–1 = 4,250 – 4,440 = ` 190 (A) (2) Labour rate variance (LRV) =2–1 = 4,200 – 4,440 = ` 240 (A) (3) Labour efficiency variance (LEV) =5–2 = 4,250 – 4,200 = ` 50 (F) Verification: LCV = LRV + LEV 190 (A) = 240 (A) + 50 (F) 190 (A) = 190 (A) 7. From the following data, calculate the labour variances: Actual gross wages – ` 4,000 Standard hours produced – 16,000 Standard rate per hour – 30 paise Actual hours worked – 16,000 Solution: Calculations: (1) Actual wages paid = ` 4,000 (2) Standard wages for actual hours = Actual hours × Standard rate = 16,000 × 0.30 = ` 4,800 (3) Not applicable (4) Not applicable (5) Standard wages for standard hours for actual output = Standard time for actual output × Standard rate = 16,000 × 0.30 = ` 4,800 Variances: (1) Labour cost variance (LCV) =5–1 = 4,800 – 4,000 = ` 800 (F) (2) Labour rate variance (LRV) =2–1 = 4,800 – 4,000 = ` 800 (F)

Standard Costing and Variance Analysis

(3) Labour efficiency variance (LEV) =5–2 = 4,800 – 4,800 = Nil Verification: LCV = LRV + LEV 800 (F) = 800(F) + Nil. 8. From the following information calculate: (a) Material usage variance (b) Material cost variance (c) Material rate variance Standard: Materials for 70 kg of finished product 100 kg. Price of materials – `1 per kg. Actual: Output - 2,10,000 kg. Material used 2,80,000 kg. Cost of material ` 2,52,000 Solution: Calculations: (1) Actual cost of materials used: = ` 2,52,000 (given) (2) Standard cost of actual quantity = Actual quantity × Standard price = 2,80,000 × 1 = ` 2,80,000 (3) Not applicable (4) Standard cost of standard quantity for actual output: = Standard quantity for actual output × standard price. = 3,00,000 × 1 = ` 3,00,000 Note: Standard quantity for actual output = 100/70 × 2,10,000 = 3,00,000 kg Variances: (1) Materials cost variance (MCV) =4–1 = 3,00,000 – 2,52,000 = ` 48,000 (F) (2) Material price variance (MPV) =2–1 = 2,80,000 – 2,52,000 = ` 28,000 (F)

481

482 Cost Accounting

(3) Material usage variance (MUV) =4–2 = 3,00,000 – 2,80,000 = ` 20,000 (F) Verification: MCV = MPV + MUV 48,000 (F) = 28,000 (F) + 20,000 (F) 48,000 (F) = 48,000 (F) 9. The following data relates to standard and actual labour force: Standard rate of wages per hour ` 10 Standard hours – 300 Actual rate of wages per hour ` 12 Actual hours – 200 Calculate: (a) Labour cost variance (b) Labour rate variance (c) Labour efficiency variance Solution: Calculations: (1) Actual wages for actual hours = Actual hours × Actual rate = 200 × 12 = ` 2,400 (2) Standard wages for actual hours = Actual hours × standard rate = 200 × 10 = ` 2,000 (3) Not applicable (4) Not applicable (5) Standard wages for standard time for actual output = Standard hours for actual output × Standard rate = 300 × 10 = ` 3,000 Variances: (1) Labour cost variance (LCV) =5–1 = 3,000 – 2,400 = ` 600 (F) (2) Labour rate variance (LRV) =2–1 = 2,000 – 2,400 = ` 400 (A)

Standard Costing and Variance Analysis

(3) Labour efficiency variance (LEV) =5–2 = 3,000 – 2,000 = ` 1,000 (F) Verification: LCV = LRV + LEV 600 (F) = 400 (A) + 1,000 (F) 600 (F) = 600 (F) 10. From the following information calculate: (i) Labour cost variance; (ii) labour rate variance; (iii) labour efficiency variance; Standard 28 hours ` 4 per hour

Actual 26 hours ` 4.50 per hour

Solution: Calculations: (1) Actual wages for actual hours == Actual time × Actual rate = 26 × 4.50 = ` 117. (2) Standard wages for actual hours = Actual time × Standard rate = 26 × 4 = ` 104 (3) Not applicable (4) Not applicable (5) Standard wages for standard time for actual output = Standard time × Standard rate = 28 × 4 = ` 112. Variances: (1) Labour cost variance (LCV) =5–1 = 112 – 117 = ` 5 (A) (2) Labour rate variance (LRV) =2–1 = 104 – 117 = ` 13 (A) (3) Labour efficiency variance (LEV) =5–2 = 112 – 104 = ` 8 (F) Verification: LCV = LRV + LEV 5 (A) = 13(A) + 8(F) 5(A) = 5 (A)

483

484 Cost Accounting

11. A company produces one product and the standard cost card contains the following information: Budget

Actual

4,000

4,400

Fixed overhead (`)

26,000

26,000

Variable overhead (`)

24,000

34,000

Output for the month (units)

Calculate overhead variances. Solution: (A) Calculations – Variable overheads: (1) Actual variable overheads = ` 34,000 (given) (2) Standard variable overheads = Bud. variable OH rate per hour × Actual hours = Not applicable (3) Recovered variable overheads = Budgeted VOHS per unit × Actual production = 6 × 4,400 = ` 26,400 Note: Budgeted variable overheads per unit =

Bud. VOHS 24000 = = ` 6. Bud. Production 4000

Variance: Variable overhead cost variance =3–1 = 26,400 – 34,000 = ` 7,600 (A) (B) Calculations - Fixed overheads: (1) Actual fixed overheads ` 26,000 (2) Budgeted fixed overheads ` 26,000 (3) Not applicable - working days not given (4) Not applicable - working days not given (5) Recovered fixed overheads = Bud. FOH rate per unit × Actual production = 6.50 × 4,400 = ` 28,600 Note: Bud. FOHS rate per unit =

Bud. VOHS Bud. Production

=

26,000 = ` 6.50 4,000

Standard Costing and Variance Analysis

Variances: (1) FOH cost variance =5–1 = 28,600 – 26,000 = ` 2600(F) (2) FOH expenditure variance =2–1 = 26,000 – 26,000 = NIL (3) FOH efficiency variance =5–2 = 28,600 – 26,000 = ` 2,600 (F) Verification: FOH. cost variance = FOH. exp. variance + FOH eff. variance 2,600 (F) =

NIL + 2,600 (F)

12. From the following data calculate sales variances: Product

Budget

Actual

Quantity (Units)

Price ( )

Quantity (Units)

Price ( )

X

1,500

30

2,000

29

Y

1,000

50

700

50

Solution: Calculations: (1) Actual sales realised = Act. Qty × Act. Price x = 2,000 × 29

= ` 58,000

y = 700 × 50

= ` 35,000

Total

= ` 93,000

(2) Budgeted sales for actual quantity = Act. Qty × Bud. price x = 2,000 × 30

= ` 60,000

y = 700 × 50

= ` 35,000

Total

= ` 95,000

(3) Budgeted sales value, had sales been made in standard mix ratio = Total weight of act. mix × Std. mix ratio × Std. Rate x = 2,700 ×

15 × 30 = ` 48,600 25

485

486 Cost Accounting

y = 2,700 ×

10 × 50 = ` 54,000 25

Total = ` 1,02,600 (4) Budgeted Sales for budgeted quantity = Bud. Qty × Bud. Price x = 1,500 × 30 = ` 45,000 y = 1,000 × 50 = ` 50,000 Total

= ` 95,000

Variances: (1) Sales value variance =4–1 = 95,000 – 93,000 = ` 2,000 (A) (2) Sales price variance =2–1 = 95,000 – 93,000 = ` 2,000 (A) (3) Sales volume variance =4–2 = 95,000 – 95,000 = Nil (4) Sales mix variance =3–2 = 1,02,600 – 95,000 = ` 7600 (F) (5) Sales quantity variance =4–3 = 95,000 – 1,02,600 = ` 7,600 (A) Verification: (1) Volume variance = Price variance + Volume variance 2,000 (A) = 2,000(A) + Nil (2) Volume variance = Mix variance + Quantity variance Nil = 7,600 (F) + 7,600 (A) 13. The budgeted and actual sales of a concern manufacturing a single product are furnished below: Budgeted Sales: 10,000 units at ` 4.00 per unit Actual Sales: 5,000 units at ` 3.50 per unit 8,000 units at ` 4.00 per unit Calculate sales variances.

Standard Costing and Variance Analysis

487

Solution: Calculations: (1) Actual sales realised = Act. qty × Act. price = 5,000 × 3.50 = 8,000 × 4.00

= ` 17,500 = ` 32,000

Total

= ` 49,500

(2) Budgeted sales for actual quantity = Act. qty × Bud. price = 13,000 × 4 = ` 52,000 (3) Not applicable – No. sales mix (4) Budgeted sales for budgeted quantity = Bud. qty × Bud. price = 10,000 × 4 = ` 40,000 Variances: (1) Sales value variance =4–1 = 40,000 – 49,500 = ` 9,500 (F) (2) Sales price variance =2–1 = 52,000 – 49,500 = ` 2,500 (A) (3) Sales volume variance =4–2 = 40,000 – 52,000 = ` 12,000 (F) Verification: Value variance = Price variance + Volume variance 9,500 (F) = 2,500 (A) + 12,000 (F) 9,500 (F) = 9,500 (F)

B. Comprehensive Practical Problems Material Variances: 1. The standard material cost to produce a tonne of chemical X is: 300 kg of material A at ` 10 per kg. 400 kg of material B at ` 5 per kg. 500 kg of material C at ` 6 per kg. During a period, 100 tonnes of mixture X were produced from the usage of: 35 tonnes of material A at a cost of ` 9,000 per tonne 42 tonnes of material B at a cost of ` 6,000 per tonne 53 tonnes of material C at a cost of ` 7,000 per tonne Calculate price, usage and mix variance. (B.Com. (Hons.), Delhi University)

488 Cost Accounting

Solution: Calculations: (1) Actual cost of actual quantity = Act. qty × Act. price Material A = 35 × 9,000 = ` 3,15,000 Material B = 42 × 6,000 = ` 2,52,000 Material C = 53 × 7,000 = ` 3,71,000 Total = ` 9,38,000 (2) Standard cost of actual quantity = Act. qty × Std. price Material A = 35 × 10,000 = ` 3,50,000 Material B = 42 × 5,000 = ` 2,10,000 Material C = 53 × 6,000 = ` 3,18,000 Total = ` 8,78,000 (3) Standard cost of actual quantity, had it been used in standard mix ratio: = Total weight of actual mix × Std. mix ratio × Std. price. 3 Material A = 130 × × 10,000 = ` 3,25,000 12 4 × 5,000 = ` 2,16,667 Material B = 130 × 12 Material C = 130 ×

5 × 6,000 = ` 3,25,000 12 Total = ` 8,66,667

(4) Standard cost of std. quantity for actual output = Std. quantity for actual production × Std. price Material A = 30 × 10,000 = ` 3,00,000 Material B = 40 × 5,000 = ` 2,00,000 Material C = 50 × 6,000 = ` 3,00,000 Total = ` 8,00,000 Note: Standard quantity for actual output 300 × 100 = 30,000 kg (or) 30 tonnes 1 400 × 100 = 40,000 kg (or) 40 tonnes Material B = 1

Material A =

Material A =

500 × 100 = 50,000 kg (or) 50 tonnes 1

Standard Costing and Variance Analysis

489

Variances: (1) Material price variance (MPV) =2–1 = 8,78,000 – 9,38,000 = ` 60,000 (A) (2) Material usage variance =4–2 = 8,00,000 – 8,78,000 = ` 78,000 (A) (3) Material mix variance =3–2 = 8,66,667 – 8,78,000 = ` 11,333 (A) 2. A company manufactures a particular chemical, the standard material cost being: 40% of material X at ` 20 per kg. 60% of material Y at ` 30 per kg. A standard loss of 10% is expected in production. During one month 182 kg of chemical were produced from the use of 90 kg of material X at ` 18 per kg and 110 kg at ` 34 per kg Calculate the following variances for the month: (a) Material price variance; (b) Material mix variance; (c) Material yield variance; (d) Material cost variance (B.Com., Madras University) Solution: Calculations: (1) Actual cost of act. quantity = Act. qty × Act. price Material X = 90 × 18 = ` 1,620 Material Y = 110 × 34 = ` 3,740 Total = ` 5,360 (2) Std. cost of act. quantity = Act. qty × Std. price Material X = 90 × 20 = ` 1,800 Material Y = 110 × 30 = ` 3,300 Total = ` 5,100 (3) Std. cost of materials used, had it been used in std. mix ratio = Total weight of act. mix × Std. mix ratio × Std. price

40 × 20 = ` 1,600 100 60 × 30 = ` 3,600 Material Y = 200 × 100 Total = ` 5,200

Material X = 200 ×

490 Cost Accounting

(4) Standard cost of std. quantity for actual output = Std. qty for actual × Std. price Material X = 80.89 × 20 = ` 1,618 Material Y = 121.33 × 30 = ` 3,640 Total = ` 5,258 Note: (1) Let Std. qty be – 1.0 kg (–) std. loss 10% – 0.1 kg Std. output – 0.9 kg (2) Total standard quantity for actual output 1 = × 182 = 202.22 0.9 40 Std. quantity of material X (40%) = 202.22 × = 80.89 kg 100 Std. quantity of material Y (60%) = 202.22 ×

60 = 121.33 kg 100

Variances: (a) Material price variance (MPV) =2–1 = 5,100 – 5,360 = ` 260 (A) (b) Materials mix variance (MMV) =3–2 = 5,200 – 5,100 = ` 100 (F) (c) Material yield variance (MYV) =4–3 = 5,258, – 5,200 = ` 58 (F) (d) Material cost variance (MCV) =4–1 = 5,258 – 5,360 = ` 102 (A) Verification: MPV MMV MYV MUV MCV

260 (A) 100 (F) 58 (F) 158(F)

158 (F) 102 (A)

Standard Costing and Variance Analysis

3. From the following information compute; (a) Material mix variance; (c) Material usage variance Particulars

A

Quantity (Unit) 4

Budget Unit Price ( ) 1.00

B

2

C Total

(b) Material price variance;

Actual Unit Price ( ) 3.50

4.00

Quantity (Unit) 2

2.00

4.00

1

2.00

2.00

2

4.00

8.00

3

3.00

9.00

8

–

16.00

6

–

18.00

Total ( )

Solution: Calculations: (1) Act. cost of act. quantity = ` 18 (given) (2) Std. cost of act. quantity = Act. qty × Std. cost Material A = 2 × 1 = ` 2.00 Material B = 1 × 2 = ` 2.00 Material C = 3 × 4 = ` 12.00 Total = ` 16.00 (3) Standard cost of act. qty, had it been used in std. mix ratio = Total weight of act. mix × Std. mix ratio × Std. price 4 Material A = 6 × × 1 = ` 3.00 8 2 Material B = 6 × × 2 = ` 3.00 8 2 × 4 = ` 6.00 Material C = 6 × 8 Total = ` 12.00 (4) Std. cost of std qty for actual output = Std. qty. for actual output × Std. price Material A = 4 × 1 = ` 4.00 Material B = 2 × 2 = ` 4.00 Material C = 2 × 4 = ` 8.00 Total = ` 16.00

491

Total ( ) 7.00

492 Cost Accounting

Variances: (a) Material mix variance (MMV) =3–2 = 12 – 16 = ` 4 (A) (b) Material price variance (MPV) =2–1 = 16 – 18 = ` 2(A) (c) Material usage variance (MMV) =4–2 = 16 – 16 = 0 4. Mixers Ltd. is engaged in producing a standard mix using 60 kg. of Chemical X and 40 kg of chemical Y. The standard loss of production is 30%. The standard price of X is ` 5 per kg and of Y is ` 10 per kg. The actual mixture and yield were as follows: X – 80 kg at ` 4.50 per kg. Y – 70 kg at ` 8.00 per kg. Actual yield 115 kg. Calculate all material variances. Solution: Calculations: (1) Actual cost of actual quantity = Act. qty × Act. price Material X = 80 × 4.50 = ` 360 Material Y = 70 × 8.00 = ` 560 Total = ` 920. (2) Standard cost of actual quantity = Act. qty × Std price Material X = 80 × 5.00 = `

400

Material Y = 70 × 10.00 = ` 700 Total = ` 1,100 (3) Standard cost of actual quantity, had it been used in standard mix ratio: = Total weight of act. mix × Std mix ratio × Std price 60 × 5 = ` 450 Material X = 150 × 100 40 Material Y = 150 × × 10 = ` 600 100 Total = ` 1,050 (4) Standard cost of std. qty for actual output = Std. qty for actual output × Std price

Standard Costing and Variance Analysis

Material X = 98.57 × 5 = `

493

Material Y = 65.71 × 10 = `

657

Total = ` 1,150 Note: (i) Standard mix (60 + 40) = 100 kg (–) Std. loss 30% = 30 kg Std. Output = 70 kg (ii) Std. qty for actual output 60 Material X = × 115 = 98.57 kg 70 Material Y =

40 × 115 = 65.71 kg 70

Variances: (1) Material cost variance (MCV) =4–1 = 1,150 – 920 = ` 230 (F) (2) Material price variance (MPV) =2–1 = 1,100 – 920 = ` 180 (F) (3) Material usage variance (MUV) =4–2 = 1,150 – 1,100 = ` 50 (F) (4) Material mix variance (MMV) =3–2 = 1,050 – 1,100 = ` 50 (A) (5) Material yield variance (MYV) =4–3 = 1,150 – 1,050 = ` 100 (F) Verification: (1) MCV = MPV + MUV 230 (F) = 180 (F) + 50 (F) 230(F) = 230(F) (2) MUV = MMV + MYV 50 (F) = 50 (A) + 100(F) 50 (F) = 50 (F)

493

494 Cost Accounting

5. A company produces a finished product by using three basic raw materials. The following standards have been set for raw materials: Material A – 25% at ` 4 per kg Material B – 35% at ` 3 per kg Material C – 40% at ` 2 per kg The standard loss in process is 20% of input. During a particular month, the company produced 2,400 kg of finished product. The details of stock and purchases for the month are as under: Materials A

Opening Stock (Kgs.) 200

Closing Stock (Kgs.) 350

Purchases during the month (Kg) 800

Cost of purchases ( ) 3,600

B

150

200

1,000

3,500

C

300

200

1,100

1,980

The opening stock was valued at standard cost. You are required to compute: (1) Material price and cost variances when (a) variance is calculated at the point of issue on FIFO basis and (b) variance is calculated at the point of issue on LIFO basis. (2) Material usage, mix and yield variances. (CA, Inter) Solution:

Calculations: Actual cost of act. quantity = Act. qty × Act price.

(a) FIFO basis: Material A – From op. stock at std. cost – From Purchases Material B – From op. stock at std. cost Material C

= 200 × 4.00 = `

800

= 450 × 4.50 = ` 2,025 = 150 × 3.00 = `

450

– From purchases

= 800 × 3.50 = ` 2,800

– From op. stock at std. cost

= 300 × 2.00 = `

– From Purchases

= 900 × 1.80 = ` 1,620 Total

Note: (1) Actual quantity (used) = OP stock + Purchases – Cl. stock Material A = 200 + 800 – 350 = 650 kg Material B = 150 + 1,000 – 200 = 950 kg Material C = 300 + 1,100 – 200 = 1,200 kg Total = 2,800 kg Note 2: Actual Price = Cost of purchase ÷ Purchase quantity

600

= ` 8,295

Standard Costing and Variance Analysis

Material A = 3,600 ÷ 800

= ` 4.50

Material B = 3,500 ÷ 1000

= ` 3.50

Material C = 1,980 ÷ 1,100

= ` 1.80

(1) (b) Actual cost of act. qty – on LIFO basis = Act. qty × Act. price Material A – Used from purchases

= 650 × 4.50

= ` 2,925

Material B – Used from purchases

= 950 × 3.50

= ` 3,325

Material C – Used from op. stock at std. cost = 100 × 2.00

= ` 200

= 1100 × 1.80 = ` 1,980

– From purchases

Total

= ` 8,430

(2) Std. cost of Act. qty = Act. qty × Std price Material A = 650 × 4

= ` 2,600

Material B = 950 × 3

= ` 2,850

Material C = 1,200 × 2 = ` 2,400 = ` 7,850

Total

(3) Std cost of actual quantity, had it been used in standard mix ratio. = Total weight of act. mix × Std mix ratio × Std. price 25 ×4 100 35 Material B = 2800 × 100 × 3

Material A = 2800 ×

Material C = 2800 ×

= ` 2,800 = ` 2,940

40 ×2 100

= ` 2,240

Total

= ` 7,980

(4) Std. Cost of std. qty for actual output = Std. qty for actual output × Std. price Material A = 750 × 4

= ` 3,000

Material B = 1,050 × 3 = ` 3,150 Material C = 1,200 × 2 = ` 2,400 Total

= ` 8,550

100 Note: (1) Total std qty for actual output = 2,400 × = 3,000 kg 80 25 × 3,000 = 750 kg Material A = 100 35 × 3,000 = 1,050 kg Material B = 100

495

496 Cost Accounting

Material C =

40 × 3,000 = 1,200 kg 100

Variances: (1) Material cost variance (MCV) =4–1 (a) Under FIFO Method = 8,550 – 8,295 = ` 255 (F) (b) Under LIFO Method = 8,550 – 8,430 = ` 120 (F) (2) Material price variance (MUV) =2–1 (a) Under FIFO basis = 7,850 – 8,295 = ` 445 (A) (b) Under LIFO basis = 7,850 – 8,430 = ` 580 (A) (3) Material usage variance (MUV) =4–2 = 8,550 – 7,850 = ` 700 (F) (4) Material mix variance (MMV) =3–2 = 7,980 – 7,850 = ` 130 (F) (5) Material yield variance (MYV) =4–3 = 8,550 – 7,980 = ` 570 (F) Verification: (1) MCV = MPV + MUV (a) Under FIFO 255 (F) = 445(A) + 700 (F) 255 (F) = 255 (F) (b) under LIFO = 580 (A) + 700 (F) 120 (F) = 580 (A) + 700 (F) 120 (F) = 120 (F)

Standard Costing and Variance Analysis

497

(2) MUV = MMV + MYV 700 (F) = 130 (F) + 570 (F) 700 (F) = 700 (F) 6. A company is manufacturing a chemical product making use of four different types of raw materials provides the standard imformations as follows: Raw Material A

Share of total input (%) 40%

Cost of raw material per kg ( ) 50

B

30%

80

C

20%

90

D

10%

100

There is an inevitable normal loss of 10% during the processing. For April 2007, the management furnishes the following information: Raw Material

Quantity Consumed (kg)

A

42,000`

48

B

31,000

80

C

18,000

92

D

9,000

110

Cost of material per kg ( )

Output obtained for the month was 92,000 kg. Calculate: (a) Material cost variance; (b) Material price variance; (c) Material mix variance; (d) Material yield variance (e) Material usage variance Solution: Calculations: (1) Actual cost of actual quantity = Act. qty × Act. price Material A = 42,000 × 48 = ` 20,16,000 Material B = 31,000 × 80 = ` 24,80,000 Material C = 18,000 × 92 = ` 16,56,000 Material D = 9,000 × 110 = ` 9,90,000 Total = ` 71,42,000

(ICWA, Inter)

498 Cost Accounting

(2) Std. Cost of act. quantity = Act. qty × Std. cost Material A = 42,000 × 50 = ` 21,00,000 Material B = 31,000 × 80 = ` 24,80,000 Material C = 18,000 × 90 = ` 16,20,000 Material D = 9,000 × 100 = ` 9,00,000 Total = ` 71,00,000 (3) Std. cost of actual quantity, had it been used in standard mix ratio. = Total weight of actual mix × std. mix ratio × Std. price. 40 Material A = 1,00,000 × × 50 = ` 20,00,000 100 30 Material B = 1,00,000 × × 80 = ` 24,00,000 100 20 × 90 = ` 18,00,000 Material C = 1,00,000 × 100 10 × 100 = ` 10,00,000 Material D = 1,00,000 × 100 Total = ` 72,00,000 (4) Std. Cost of standard quantity for actual output. = Std. Qty for actual output × Std. Price. Material A = 40,888.89 × 50

= ` 20,44,445

Material B = 30,666.67 × 80

= ` 24,53,333

Material C = 20,444.44 × 90

= ` 18,40,000

Material D = 10,222.22 × 100

= ` 10,22,222

Total

= ` 73,60,000

Note: Total weight of Standard mix = 92,000 ×

100 = 1,02,222.22 kg 90

40 = 40,888.89 100 30 Std. qty of Material B = 1,02,222.22 × = 30,666.67 100 20 Std. qty of Material C = 1,02,222.22 × = 20,444.44 100 10 Std. qty of Material D = 1,02,222.22 × = 10,222.22 100 Variances: (a) Material cost variance (MCV) =4–1 = 73,60,000 – 71,42,000 = ` 2,18,000 (F)

Std. qty of Material A = 1,02,222.22 ×

Standard Costing and Variance Analysis

(b) Material price variance (MPV) =2–1 = 71,00,000 – 71,42,000 = ` 42,000 (A) (c) Material mix variance =3–2 = 72,00,000 – 71,00,000 = ` 1,00,000 (F) (d) Material yield variance (MYV) =4–3 = 73,60,000 – 72,00,000 = ` 1,60,000 (F) (e) Material usage variance (MUV) =4–2 = 73,60,000 – 71,00,000 = ` 2,60,000 (F) Verification: (1) MCV = MPV + MUV 2,18,000 (A) = 42,000 (A) + 2,60,000 (F) 2,60,000 (F) = 2,60,000 (F) (2) MUV = MMV + MYV 2,60,000 (F) = 1,00,000 (F) + 1,60,000 (F) Labour variances 2,60,000 (F) = 2,60,000 (F) 7. Find out different labour variances from the following particulars: Standard Output - 2,000 units

Actual Output - 2,500 units

Rate of wages: ` 12 per unit Standard time - 150 hours

Wages paid - ` 25,000 Time taken - 140 hours.

Solution: Calculations: (1) Actual wages paid - ` 25,000 (given) (2) Standard wages for actual hours = Act. time × Std. rate = 140 × 160 = ` 22,400 Note: Total standard wages = 2,000 × 12 = ` 24,000 24,000 = ` 160 150 (3) Not applicable - No idle time (4) Not applicable - No labour mix

Std. rate per hour =

499

500 Cost Accounting

(5) Standard wages for standard time for actual output = Std. time for actual output × Std. rate = 187.5 × 160 = ` 30,000 Note: Standard time for 2,000 units = 150 hours 150 Std. time for 2,500 units (Actual output) = × 2,500 2,000 = 187.5 hours Variances: (1) Labour cost variance (LCV) =5–1 = 30,000 – 25,000 = ` 5,000 (F) (2) Labour rate variance (LRV) =2–1 = 22,400 – 25,000 = ` 2,600 (A) (3) Labour efficiency variance =5–2 = 30,000 – 22,400 = ` 7,600 (F) Verification: LCV = LRV + LEV 5,000 (F) = 2,600 (A) + 7,600 (F) 5,000 (F) = 5,000 (F) 8. A group of workers consisting 30 men above 30 years of age, 15 females above 30 years of age and 10 youths of age between 20-30 are paid standard hourly rate as follows: Males

– ` 80 per hour

Females

– ` 60 per hour

Youth

– ` 40 per hour

In a normal working week of 40 hours, the group is expected to produce 2,000 units of output. During a week, the group consisting of 40 males, 10 females and 5 youth produced 1,600 units. They were paid wages at ` 70 for males, ` 65 for females and ` 30 for youth per hour. 4 hours were lost due to abnormal idle time. Calculate: (a) Wage variance; (b) wage rate variance; (c) labour efficiency variance; (d) labour mix variance; (e) labour idle time variance. (ICWA, Inter)

Standard Costing and Variance Analysis

Solution: Calculations: (1) Actual wages for actual hours: = Act. no. of workers × Act. time × Act. Rate = ` 1,12,000

Male = 40 × 40 × 70 Female = 10 × 40 × 65

= ` 26,000

Youth = 5 × 40 × 30

=`

6,000

= ` 1,44,000

Total

(2) Standard wages for actual hours: = Act. no. of workers × Act. time × Std. rate = ` 1,28,000

Male = 40 × 40 × 80 Female = 10 × 40 × 60

= ` 24,000

Youth = 5 × 40 × 40

=`

Total

8,000

= ` 1,60,000

(3) Std. wages for actual hours utilised = Act. no. of workers × Act. hours utilised × Std. rate Male = 40 × 36 × 80

= ` 1,15,200

Female = 10 × 36 × 60

=`

21,600

Youth = 5 × 36 × 40

=`

7,200

= ` 1,44,000

Total

(4) Std. wages for Revised Std. time = Std no. of workers × Act. hours utilised × Std. rate Male = 30 × 36 × 80

=`

86,400

Female = 15 × 36 × 60

=`

32,400

Youth = 10 × 36 × 40

=`

14,400

= ` 1,33,200

Total

(5) Standard wages for actual production: Std. hours for act. production × Std. rate (or) = Standard labour cost per unit × actual production = 74 × 1,600 = `1,18,400 Note: Standard labour cost per unit = =

Total std. labour cost Standard production

1, 48,000 = ` 74 2,000

501

502 Cost Accounting

Total standard labour cost: = Std. no. of workers × Std. time × Std. rate Male = 30 × 40 × 80

= ` 96,000

Female = 15 × 40 × 60

= ` 36,000

Youth = 10 × 40 × 40

= ` 16,000

Total

= ` 1,48,000

Variances: (a) Labour cost variance (LCV) (or) Wage Variance =5–1 = 1,18,400 – 1,44,000 = 25,600 (A) (b) Labour rate variance (LRV) =2–1 = 1,60,000 – 1,44,000 = 16,000 (F) (c) Labour efficiency variance (LEV) =5–2 = 1,18,400 – 1,60,000 = 41,600 (A) (d) Labour mix variance (LMV) =4–3 = 1,33,200 – 1,44,000 = 10,800 (A) (e) Labour idle time variance (LITV) =3–2 = 1,44,000 – 1,60,000 = 16,000 (A) 9. The standard time and rate for a unit component A are given below: Standard hours – 18 Standard rate

– ` 10 per hour

The actual data and related information are as under: Actual production

- 1,000 units

Actual hours

- 18,400 hours

Actual rate

- ` 9.75 per hour

Calculate: (i) Labour cost variance; (ii) Labour rate variance (iii) Labour efficiency variance.

Standard Costing and Variance Analysis

503

Solution (1) Actual wages paid for actual hours = Act. hours × Act. rate = 18,400 × 9.75 = ` 1,79,400 (2) Standard wages for actual hours = Act hours × Std. rate = 18,400 × 10 = ` 1,84,000 (3) Not applicable – No idle time (4) Not applicable – No labour mix (5) Std. wages for Std. time for actual output = Std. time for actual output × Std. rate = 18,000 × 10 = ` 1,80,000 Note: Std. time for actual output = 18 × 1,000 = 18,000 hrs. Variances: (i) Labour cost variance (LCV) =5–1 = 1,80,000 – 1,79,400 = ` 600 (F) (ii) Labour rate variance (LRV) =2–1 = 1,84,000 – 1,79,400 = ` 4,600 (F) (iii) Labour efficiency variance (LEV) =5–2 = 1,80,000 – 1,84,000 = ` 4,000 (A) Verification: LCV = LRV + LEV 600 (F) = 4,600 (F) + 4,000 (A) 600 (F) = 600 (F) 10. The details regarding composition and weekly wage rate of labour force engaged on a job scheduled to be completed in 30 weeks are as under: Category of workers

Skilled

Standard No. of labourers Weekly wage rate ( ) 75 60

Actual No. of labourers Weekly wage rate ( ) 70 70

Semi-skilled

45

40

30

50

Unskilled

60

30

80

20

The work is actually completed in 32 weeks. Calculate various labour variances.

504 Cost Accounting

Solution: Calculation: (1) Actual wages for actual time = Act. no. of workers × Act. time × Act. rate Skilled

= 70 × 32 × 70

= ` 1,56,800

Semi-skilled

= 30 × 32 × 50

= ` 48,000

Unskilled

= 80 × 32 × 20

= ` 51,200

Total

= ` 2,56,000

(2) Std. wages for Act. time = Act. No. of workers × Act. time × Std. rate Skilled

= 70 × 32 × 60

= ` 1,34,400

Semi-skilled

= 30 × 32 × 40

= ` 38,400

Unskilled

= 80 × 32 × 30

= ` 76,800

Total

= ` 2,49,600

(3) Not applicable - No. idle time. (4) Std. wages for Revised standard time = Std. No. of workers × Actual hours × Std. rate. Skilled

= 75 × 32 × 60 = ` 1,44,000

Semi-skilled

= 45 × 32 × 40 = ` 57,600

Unskilled

= 60 × 32 × 30 = ` Total

57,600

= ` 2,59,200

(5) Std. wages for Std. time for actual output = Std. No. of workers × Std. time × Std. Rate. Skilled

= 75 × 30 × 60

= ` 1,35,000

Semi-skilled

= 45 × 30 × 40

= ` 54,000

Unskilled

= 60 × 30 × 30

= ` 54,000

Total

= ` 2,43,000

Variances: (1) Labour cost variance (LCV) =5–1 = 2,43,000 – 2,56,000 = ` 13,000 (A) (2) Labour rate variance (LRV) =2–1 = 2,49,600 – 2,56,000 = ` 6,400 (A) (3) Labour efficiency variance (LEV) =5–2 = 2,43,000 – 2,49,600 = ` 6,600 (A)

Standard Costing and Variance Analysis

505

(4) Labour mix variance =4–2 = 2,59,200 – 2,49,600 = ` 9,600 (F) (5) Labour yield variance (or) Labour revised – Efficiency variance (LREV) =5–4 = 2,43,000 – 2,59,200 = ` 16,200 (A) Verification: (1) LCV = LRV + LEV 13,000 (A) = 6,400 (A) + 6,600 (A) 13,000 (A) = 13,000 (A) (2) LEV = LMV + LREV 6,600 (A) = 9,600 (F) + 16,200 (A) 6,600 (A) = 6,600 (A)

Material and Labour Variances: 11. From the following particulars of a manufacturing company, compute material and labour variances: An input of 100 kg of material yields a standard output of 10,000 units. Standard price per kg. of material ` 20. Actual quantity of material issued and used by production department 10,000 kg. Actual price per kg. of material ` 21 per kg. Actual output 9,00,000 units. Number of employees 200. Standard wage rate per employee per day ` 40. Standard daily output per employee - 100 units. Total number of days worked 50 days. Idle time paid and included in the above half day for each employee. Actual wage rate per day ` 45. Solution: Calculations: Materials variances (1) Actual cost of actual quantity = Act. qty × Act. price = 10,000 × 21 = ` 2,10,000 (2) Standard cost of actual quantity = Act. qty × Std. price = 10,000 × 20 = ` 2,00,000 (3) Not applicable – No material mix

506 Cost Accounting

(4) Std. cost of standard quantity for actual output = Std. qty. for actual output × Std. price = 9,000 × 20 = ` 1,80,000 100 Note: Standard quantity for actual output = ¥ 9,00,000 10,000 = 9,000 kg. Variance: (1) Material cost variance (MCV) =4–1 = 1,80,000 – 2,10,000 = ` 30,000 (A) (2) Material price variance (MPV) =2–1 = 2,00,000 – 2,10,000 = ` 10,000 (A) (3) Material usage variance (MUV) =4–2 = 1,80,000 – 2,00,000 = ` 20,000 (A) Verification: MCV = MPV + MUV 30,000 (A) = 10,000 (A) + 20,000 (A) 30,000 (A) = 30,000 (A) Calculations for labour variances: (1) Actual wages for actual time Actual no. of workers × Act. time × Act. rate = 200 × 50 × 45 = ` 4,50,000 (2) Standard wages for actual time = Act no. of workers × Act. time × Std. rate = 200 × 50 × 40 = ` 4,00,000 (3) Standard wages for actual time utilised = Act. No. of workers × Act time utilised × Std. rate = 200 × 49.5 × 40 = ` 3,96,000 (4) Not applicable – no labour mix (5) Std. wages for actual production = Actual production × Std. labour cost per unit = 9,00,000 × 0.40 = ` 3,60,000

Standard Costing and Variance Analysis

Note: Std. labour cost per unit

=

Std. labour cost per day Std. output per day

=

40 = ` 0.40 100

Variances: (1) Labour cost variance (LCV) =5–1 = 3,60,000 – 4,50,000 = ` 90,000 (A) (2) Labour rate variance (LRV) =2–1 = 4,00,000 – 4,50,000 = ` 50,000 (A) (3) Labour efficiency variance (Net) (LEV) =5–2 = 3,60,000 – 4,00,000 = ` 40,000 (A) (4) Labour idle time variance (LITV) =3–2 = 3,96,000 – 4,00,000 = ` 4,000 (A) (5) Labour yield variance (LYV) =5–3 = 3,60,000 – 3,96,000 = ` 36,000 (A) Verification: (1) LCV = LRV + LEV 90,000 (A) = 50,000 (A) + 40,000 (A) 90,000 (A) = 90,000 (A) (2) LEV = LITV + LYV 40,000 (A) = 4,000 (A) + 36,000 (A) 12. The following standards have been set to manufacture a product: Direct Materials: Material X–3 units at ` 8 per unit = ` 24 Material Y–4 units at ` 10 per unit = ` 40 Material Z–5 units at ` 12 per unit = ` 60 Direct labour 5 hours at ` 9 per hour = ` 45 Standard prime cost = ` 169

507

508 Cost Accounting

The company manufactured and sold 5,000 units of the product during the year. Direct materials cost was as follows: Material X – 15,500 units at ` 7.75 per unit Material Y – 19,000 units at ` 11.00 per unit Material Z – 26,000 units at ` 12.50 per unit The company worked for 26,000 direct labour hours during year. For 4,000 of these hours was paid at ` 10 per hour while the remaining were paid at standard rate. Calculate material and labour variances. Solution:

A. Material Variances: Calculations: (1) Actual cost of act. qty = Act. qty × Act. price Materials X = 15,500 × 7.75

= ` 1,20,125

Materials Y = 19,000 × 11.00 = ` 2,09,000 Materials Z = 26,000 × 12.50 = ` 3,25,000 Total = ` 6,54,125 (2) Std. Cost Materials Materials Materials

of act. qty = Act. qty X = 15,500 × 8.00 Y = 19,000 × 10.00 Z = 26,000 × 12.00 Total

× Std. Price = ` 1,24,000 = ` 1,90,000 = ` 3,12,000 = ` 6,26,000

(3) Std. cost of act. qty, had it been used in Std. mix ratio = Total weight of Act. mix × Std mix ratio × Std. price 3 ×8 12 4 × 10 Materials Y = 60,500 × 12

Materials X = 60,500 ×

Materials Z = 60,500 ×

= ` 1,21,000 = ` 2,01,667

5 × 12 12

= ` 3,02,500

Total

= ` 6,25,167

(4) Std. cost of Std. qty for actual output = Std. qty for actual output × Std. rate. Materials X = 15,000 × 8.00 Materials Y = 20,000 × 10.00 Materials Z = 25,000 × 12.00

= ` 1,20,000 = ` 2,00,000 = ` 3,00,000

Total

= ` 6,20,000

Standard Costing and Variance Analysis

Note: Standard qty for actual output: Materials X = 3 × 5,000 = 15,000 units Materials Y = 4 × 5,000 = 20,000 units Materials Z = 5 × 5,000 = 25,000 units Variances: (1) Material cost variance (MCV) =4–1 = 6,20,000 – 6,54,125 = ` 34,125 (A) (2) Material price variance (MPV) =2–1 = 6,26,000 – 6,54,125 = ` 28,125 (A) (3) Material usage variance (MUV) =4–2 = 6,20,000 – 6,26,000 = ` 6,000(A) (4) Material mix variance (MMV) =3–2 = 6,25,167 – 6,26,000 = ` 833 (A) (5) Material yield variance (MYV) =4–3 = 6,20,000 – 6,25,167 = ` 5,167 (A) Verification: (1) MCV = MPV + MUV 34,125(A) = 28,125 (A) + 6,000 (A) 34,125(A) = 34,125(A) (2) MUV = MMV + MYV 6,000 (A) = 833 (A) + 5,167 (A) 6,000 (A) = 6,000 (A)

B. Labour Variances: Calculations: (1) Actual wages for actual time = Act. time × Act. rate = 22,000 × 9.00 = ` 1,98,000 = 4,000 × 10.00 = `

40,000

Total = ` 2,38,000

509

510 Cost Accounting

(2) Std. wages for actual time = Act. time × Std. rate = 26,000 × 9.00 = ` 2,34,000 (3) Not applicable – no idle time (4) Not applicable – no labour fix (5) Std. wages for standard time for actual output = Std. time for actual output × Std. rate = 25,000 × 9.00 = ` 2,25,000 Note: Standard time for actual output = 5,000 units × 5 hours = 25,000 hours. Variances: (1) Labour cost variance (LCV) =5–1 = 2,25,000 – 2,38,000 = 13,000 (A) (2) Labour rate variance (LRV) =2–1 = 2,34,000 – 2,38,000 = 4,000 (A) (3) Labour efficiency variance (LEV) =5–2 = 2,25,000 – 2,34,000 = 9,000 (A) Verification LCV = LRV + LEV 13,000 (A) = 4,000 (F) + 9,000 (A) 13,000 (A) = 13,000 (A) Overhead Variances: 13. From the following data compute fixed overhead variances for the month of March, 2009: Fixed overheads budgeted (`) Budgeted output (units)

6,000 2,500

Actual production (units)

2,700

Actual fixed overheads incurred (`)

6,000

Solution: Calculations: (1) Actual fixed overheads – ` 6,000 (2) Budgeted fixed overheads – ` 5,000 (3) No applicable – budgeted days not given (4) Not applicable – budgeted hours not given

Standard Costing and Variance Analysis

511

(5) Recovered fixed overheads = Budgeted FOH rate per unit × Actual output = 2 × 2,700 = ` 5,400 Note: Bud. FOH. Rate Per unit = =

Bud. FOHS Bud. output

5,000 = `2 2,500

Variances: (1) Fixed OHS. Cost variance =5–1

= 5,400 – 6,000 = ` 600 (A) (2) Fixed OHS expenditure variance =2–1 = 5,000 – 6,000 = ` 1,000 (A) (3) FOHs Volume variance =5–2 = 5,400 – 5,000 = ` 400 (F) Verification: FOH Cost variance = Exp. variance + Volume variance 600 (A) = 1,000 (A) + 400 (F) 600 (A) = 600 (A) 14. Kolkata Furniture manufactures modular tables, chairs and office desks. The standard labour times required per unit of table, chair and desks are 4 hours, 2 hours and 8 hours respectively. The budgeted production per week is 140 standard hours and budgeted fixed overheads per week is ` 70,000. During a particular week the firm achieved the following output: Tables – 8 nos. Chairs – 8 nos. Desks – 9 nos. The actual fixed overheads amounted to ` 75,000. Calculate: (i) Fixed overhead total variance (ii) Fixed overhead expenditure variance (iii) Fixed overhead volume variance (ICWA, Inter)

512 Cost Accounting

Solution: Calculations (1) Actual fixed overheads – ` 75,000 (2) Budgeted fixed overheads – ` 70,000 (3) No applicable – working days not given (4) Not applicable – working hours not given (5) Recovered fixed overheads = Budgeted FOH rate per hour × Budgeted hours for actual output. = 500 × 120 = ` 60,000 Note: (1) Budgeted hours for actual output: Tables 8 × 4 = 32 hours Chairs 8 × 2 = 16 hours Desks 9 × 8 = 72 hours Total = 120 hours (2) Bud. Fixed overhead per hour = =

Bud. FOHs Bud. hours

70,000 = ` 500 140

Variances: (1) Fixed OH. Cost variance =5–1

= 60,000 – 75,000 = ` 15,000 (A) (2) Fixed OHS expenditure variance =2–1 = 70,000 – 75,000 = ` 5,000 (A) (3) FOHs Volume variance =5–2 = 60,000 – 70,000 = ` 10,000 (A) Verification: Cost variance = Exp. variance + Volume variance 15,000 (A) = 5,000 (A) + 10,000 (F) 15,000 (A) = 15,000 (A) 15. ABC Enterprises has normal monthly machine hour capacity of 100 machines working 8 hours per day for 25 working days in a month. The standard time required to manufacture one unit of the product is 4 hours. The budgeted fixed overhead is ` 1,50,000.

Standard Costing and Variance Analysis

513

In a month just concluded, the company worked for average 750 machine hours per day. The production was 4,500 units. The actual fixed overhead was ` 1,60,000. Actual days worked during the month 24 days. You are required to compute: (a) Efficiency variance (b) Capacity variance (c) Calendar variance (d) Expenses variance (e) Volume variance (f) Total fixed overhead variance (ICWA, Inter) Solution: Calculations: (1) Actual fixed overheads - ` 1,60,000 (2) Budgeted fix overheads - ` 1,50,000 (3) Budgeted fixed overheads for actual days = Bud. FOH. rate per day × Act. days = 6,000 × 24 = ` 1,44,000 Note: Bud. FOH rate per day = =

Bud. FOHs Bud. days

1,50,000 = ` 6,000 25

(4) Standard fixed overheads = Standard FOH rate per hour × Actual hours = 7.50 × 18,000 = ` 1,35,000 Note: (i) Std. fixed overhead rate per hour = =

Bud. FOHs Bud. Hours

1,50,000 = ` 7.50 20,000

(ii) Bud. hours = 100 × 8 × 25 = 20,000 hrs (iii) Act. hours = 750 × 24 = 18,000 hrs (5) Recovered overheads = Std. FOH rate per unit × Act. output = 30 × 4,500 = ` 1,35,000

514 Cost Accounting

Note: (i) Std. FOH rate per unit =

Bud. FOHs Bud. output 1,50,000 = ` 30 5,000

(ii) Bud. output = Total Budgeted hours ÷ Budgeted hours per unit. 20,000 ÷ 4 = 5,000 unit Variances: (a) Efficiency variance =5–4 = 1,35,000 – 1,35,000 = Nil (b) Capacity variance =4–3 = 1,35,000 – 1,44,000 = ` 9,000 (A) (c) Calender variance =3–2 = 1,44,000 – 1,50,000 = ` 6,000 (A) (d) Expenses variance =2–1 = 1,50,000 – 1,60,000 = ` 10,000 (A) (e) Volume variance =5–2 = 1,35,000 – 1,50,000 = ` 15,000 (A) (f) Total fixed overhead variance =5–1 = 1,35,000 – 1,60,000 = ` 25,000 (A) Verification: (1) Total FOH variance = Exp. variance + Volume variance 25,000 (A) = 10,000 (A) + 15,000 (A) 25,000 (A) = 25,000 (A) (2) Volume variance = Calendar variance + Capacity variance + Efficiency variance 15,000 (A) = 6,000 (A) + 9,000 (A) + Nil 15,000 (A) = 15,000 (A)

Standard Costing and Variance Analysis

515

16. The following data is taken from the books of X Ltd, relating to standard and actual VOHs for a period: Budget Actual Output (units)

400

360

Production hours

8,000

7,000

Variable OHs (`)

10,000

9,150

Calculate variable overhead variances. Solution: Calculations: (1) Actual VOHs = ` 9,150 (2) Std VOHs = Bud. VOHs per hour × Act. hours = 1.25 × 7,000 = ` 8,750 Note: Bud. VOH Rate per hour = =

Bud. VOHs Bud. hours 10,000 = `1.25 8,000

(3) Recovered variable overheads = Bud. VOHs per unit × Act. output = 25 × 360 = ` 9,000 Note: Bud. VOHs per unit =

Bud. FOHs 10,000 = = ` 25. Bud. output 400

Variances: (1) VOH. cost variance =3–1 = 9,000 – 9,150 = ` 150 (A) (2) VOH. exp. variance =2–1 = 8,750 – 9,150 = ` 400 (A) (3) VOH. efficiency variance =3–2 = 9,000 – 8,750 = ` 250 (F) Verification: VOH cost variance = VOH. exp. variance + VOH. efficiency variance 150 (A) = 400 (A) + 250 (F) 150 (A) = 150 (A)

516 Cost Accounting

17. A manufacturer operating a standard costing system had the following data in respect of a month: Standard Actual Number of working days 25 27 Man hours per month 5,000 5,400 Output in units 500 525 Fixed overheads (`) 2,500 2,400 Calculate overhead variances Solution: Calculations: (1) Actual fixed overheads – ` 2,400 (2) Bud. fixed overheads – ` 2,500 (3) Bud. fixed overheads for actual days = Bud. FOHs Per day × Act days = 100 × 27 = ` 2,700 Note: Bud. FOHs per day =

Bud. FOHs 2,500 = = ` 100 Bud. days 25

(4) Standard fixed overheads = Bud. FOHs per hour × Act. hours = 0.50 × 5,400 = ` 2,700 Note: Bud. FOHs per hour =

Bud. FOHs 2,500 = = Re. 0.50 Bud. hours 5,000

(5) Recovered FOHs = Bud. FOHs per unit × Act. output = 5 × 525 = ` 2,625 Note: Bud. FOHs per unit =

Bud. FOHs 2,500 = = `5 Bud. output 5,00

Variances: (1) FOH cost variance =5–1 = 2,625 – 2,400 = ` 225 (F) (2) FOH. exp. variance =2–1 = 2,500 – 2,400 = ` 100 (F)

Standard Costing and Variance Analysis

517

(3) FOH volume variance =5–2 = 2,625 – 2,500 = ` 125 (F) (4) FOH. calender variance =3–2 = 2,700 – 2,500 = ` 200 (F) (5) FOH. capacity variance =4–3 = 2,700 – 2,700 = Nil (6) FOH. efficiency variance =5–4 = 2,625 – 2,700 = ` 75 (A) Verification: (1) FOH cost variance = Exp. + Volume variance 225 (F) = 100 (F) + 125 (F) 225 (F) = 225 (F) (2) FOH volume variance = Calender + Capacity + Efficienty variances 125 (F) = 200 (F) + Nil + 75 (A) 125 (F) = 125 (F) Sales Variances: 18. The following data relating to budgeted and actual sales figures for the month of Jan 2009, of X Ltd are as follows: Product

Budgeted Quantity (units) Selling Price ( )

Actual Quantity (units) Selling Price ( )

M

2,000

15

2,200

17

N

1,000

20

900

18

O

3,000

10

3,500

8

Calculate sales variances: Solution: Calculations: (1) Actual sales value = Act. qty × Act. price Product M = 2,200 × 17

= ` 37,400

Product N = 900 × 18

= ` 16,200

518 Cost Accounting

Product O = 3,500 × 8 Total

= ` 28,000 = ` 81,600

(2) Budgeted Sales value for act. Qty = Act. qty × Bud. price Product M = 2,200 × 15

= ` 33,000

Product N = 900 × 20

= ` 18,000

Product O = 3,500 × 10 Total

= ` 35,000 = ` 86,000

(3) Budgeted sales value, had actual sales been made in bud. mix ratio = Total weight of Act. mix × Bud. mix ratio × Bud. price Product M = 6,600 ×

20 × 15 60

= ` 33,000

Product N = 6,600 ×

10 × 20 60

= ` 22,000

Product O = 6,600 ×

30 × 10 60 Total

= ` 33,000 = ` 88,000

(4) Bud. Sales value of budgeted quantity = Bud. qty × Bud. price Product M = 2,000 × 15

= ` 30,000

Product N = 1,000 × 20

= ` 20,000

Product O = 3,000 × 10

= ` 30,000

Total

= ` 80,000

Variances: (1) Sales value variance =4–1 = 80,000 – 81,600 = ` 1,600 (F) (2) Sales price variance =2–1 = 86,000 – 81,600 = ` 4,400 (A) (3) Sales volume variance =4–2 = 80,000 – 86,000 = ` 6,000 (F) (4) Sales mix variance =3–2 = 88,000 – 86,000 = ` 2,000 (A)

Standard Costing and Variance Analysis

519

(5) Sales quantity variance =4–3 = 80,000 – 88,000 = ` 8,000 (F) Verification: (1) Value variance = Price variance + Volume variance 1,600 (F) = 4,400 (A) + 6,000 (F) 1,600 (F) = 1,600 (F) (2) Volume variance = Mix variance + Quantity variance 6,000 (F) = 2,000 (A) + 8,000 (F) 6,000 (F) = 6,000 (F) 19. The budgeted sales for one month and the actual results obtained are as under: Product

Budget

Actual

Qty (Nos.)

Rate ( )

Amount ( )

Qty (Nos.)

Rate ( )

Amount ( )

A

1,000

100

1,00,000

1,200

125

1,50,000

B

700

200

1,40,000

800

150

1,20,000

C

500

300

1,50,000

600

300

1,80,000

D

300

500

1,50,000

400

600

2,40,000

2,500

–

5,40,000

3,000

–

6,90,000

Total

Calculate: (a) Sales value variance (b) Sales price variance (c) Sales volume variance (d) Sale mix variance (B.Com., Madras University) Solution: Calculations: (1) Actual sales value ` 6,90,000 (given) (2) Budgeted sales value for act. quantity = Act. qty × Bud. price Product A = 1,200 × 100

= ` 1,20,000

Product B = 800 × 200

= ` 1,60,000

Product C = 600 × 300

= ` 1,80,000

Product D = 400 × 500

= ` 2,00,000

Total

= ` 6,60,000

520 Cost Accounting

(3) Budgeted sales value, had actual sales been made at budgeted mix ratio = Total weight of actual mix × Budgeted mix ratio × Bud. price 10 Product A = 3,000 × × 100 = ` 1,20,000 25 7 × 200 = ` 1,68,000 Product B = 3,000 × 25 5 × 300 = ` 1,80,000 Product C = 3,000 × 25 3 Product D = 3,000 × × 500 = ` 1,80,000 25 Total = ` 6,48,000 (4) Bud. sales value of bud. qty = ` 5,40,000 (given) Variances: (a) Sales value variance =4–1 = 5,40,000 – 6,90,000 = ` 1,50,000 (F) (b)

Sales price variance =2–1 = 6,60,000 – 6,90,000 = ` 30,000 (F)

(c) Sales volume variance =4–2 = 5,40,000 – 6,60,000 = ` 1,20,000 (F) (d) Sales mix variance =3–2 = 6,48,000 – 6,60,000 = ` 12,000 (F) (e) Sales quantity variance =4–3 = 5,40,000 – 6,48,000 = ` 1,08,000 (F) Verification: (1) Value variance = Price + Volume variance 1,50,000 (F) = 30,000 (F) + 1,20,000 (F) 1,50,000 (F) = 1,50,000 (F) (2) Volume variance = Mix + Quantity variance 1,20,000 (F) = 12,000 (F) + 1,08,000 (F) 1,20,000 (F) = 1,20,000(F)

Standard Costing and Variance Analysis

521

20. The budgeted and actual sales of a concern manufacturing and marketing a single product are furnished below: Budgeted sales – 10,000 units at ` 4 per unit Actual sales – 5,000 units at 3.50 per unit – 8,000 units at ` 4.00 per unit. Calculate sales variance: Solution: Calculations: (1) Actual sales value = Act. qty × Act. price = 5,000 × 3.50 = ` 17,500 = 8,000 × 4.00 = ` 32,000 Total = ` 49,500 (2) Bud. sales value of Act. qty = Act. qty × Bud. price = 13,000 × 4 = ` 52,000 (3) Not applicable – No sale mix (4) Bud. sales value of bud. qty = Bud. qty × Bud. price = 10,000 × 4.00 = ` 40,000 Variance: (1) Sales value variance =4–1 = 40,000 – 49,500 = ` 9,500 (F) (2) Sales price variance =2–1 = 52,000 – 49,500 = ` 2,500 (A) (3) Sales volume variance =4–2 = 40,000 – 52,000 = ` 12,000 (F) Verification: Value variance = Price variance + Volume variance 9,500 (F) = 2,500 (A) + 12,000 (F) 9,500 (F) = 9,500 (F) 21. From the following details relating to a product calculate: (a) Total overhead cost variance (b) Efficiency variance

522 Cost Accounting

Budget

Actual

Overhead (`)

1,800

2,000

Period ( Hours)

4,300

4,000

Number of days

22

20

–

425

production (Units) Standard hours per unit – 10 hours Standard overhead per hour – ` 0.50 Solution: Calculations:

(1) Actual FOHs – ` 2,000 (2) Bud. FOHs = 1, 800 (3) Bud. FOHs for actual days = Bud. FOH rate per day × Act. days = 81.82 × 20 = ` 1,636 Note: Bud. FOH rate per day =

Bud. FOHs 1,800 = = ` 81.82 Bud. days 22

(4) Standard fixed OHS = Bud. FOH. rate per hour × Actual hours = 0.50 × 4,000 = ` 2,000 (5) Recovered FOHs = Bud. FOH. rate per unit × Act. output = 4.186 × 425 = ` 1,779 Note: (i) Bud. output =

Total bud. hrs 4,300 = = 430 units Bud. hrs per unit 10

(ii) Bud. FOH rate p/u =

Bud. FOHs 1,800 = = ` 4.186 Bud. output 430

Variances: (a) Total over head cost variance =5–1 = 1,779 – 2,000 = ` 221 (A) (b) Efficiency variance =5–4 = 1,779 – 2,000 = ` 221 (A) All variances: 22. Z E D has a standard costing system for its single output. Their standard cost for 100 units produced are as follows:

Standard Costing and Variance Analysis

Materials – 100 kg at ` 10 per kg Labour – 40 hours at ` 20 per hour Variable factory overhead at ` 10 per standard direct labour hour Fixed factory overhead at ` 5 per Standard director labour hour

523

1,000 800 400 200 2,400

The following operating data were taken for May, 2005. (i) 500 units were manufactured (ii) Normal volume is 220 direct labour hours. (iii) 520 kg of material at ` 11.00 were consumed (iv) 190 labour hours at ` 19.00 were used. (v) Actual variable overheads ` 2,090 (vi) Actual fixed overheads ` 1,150 You are required to calculate the different cost variances. (ICWA, Inter) Solution:

A. Material Variances Calculations: (1) Actual cost of actual quantity = Act. qty × Act. price = 520 × 11 = ` 5,720 (2) Standard cost of act. qty = Act. qty × Std price = 520 × 10 = ` 5,200 (3) Not applicable - No material mix (4) Std. cost of std. qty for actual output = Std. qty for actual output × Std. price = 500 × 10 = ` 5,000 Note: Std. qty for actual output =

100 × 500 = 500 kg 100

Variances: (1) Material cost variance (MCV) =4–1 = 5,000 – 5,720 = ` 720 (A)

524 Cost Accounting

(2) Material price variance (MPV) =2–1 = 5,200 – 5,720 = ` 520 (A) (3) Material usage variance (MUV) =4–2 = 5,000 – 5,200 = ` 200 (A) Verification: MCV = MPV + MUV 720 (A) = 520 (A) + 200 (A) 720 (A) = 720 (A)

B. Labour Variances Calculations: (1) Actual wages of actual time = Act. time × Act. rate = 190 × 19 = ` 3,610 (2) Standard wages of act. time = Act. time × Act. rate = 190 × 20 = ` 3,800 (3) Not applicable – no idle time (4) Not applicable – no labour mix (5) Std. wages for actual production = Std. labour cost per unit × Act. output = 8 × 500 = ` 4,000 Note: Std. labour cost per unit =

Bud. labour cost 800 = = `8 Bud. output 100

Variances: (1) Labour cost variance (LCV) =5–1 = 4,000 – 3,610 = ` 390 (F) (2) Labour rate variance ( LRV) =2–1 = 3,800 – 3,610 = ` 190 (F) (3) Labour efficiency variance (LEV) =5–2 = 4,000 = 3,800 = ` 200 (F)

Standard Costing and Variance Analysis

Verification: LCV = LRV + LEV 390 (F) = 190 (F) + 200 (F) 390 (F) = 390 (F)

C. Variable Overhead Variance Calculations: (1) Actual VOHs = ` 2,090 (2) Standard VOHs = Std. VOH rate per hour × Act. hours = 10 × 190 = ` 1,900 Note: Variable OH Rate per hour =

Bud. VOHs 400 = = ` 10. Bud. hours 40

(3) Recovered VOHs = Std. VOHs rate per unit × Act. output = 4 × 500 = ` 2,000 Note: Std. VOH Rate per unit =

Bud. VOHs 400 = = ` 4. Bud. output 100

Variances: (1) VOH. cost variance =3–1 = 2,000 – 2,090 = ` 90 (A) (2) VOH exp. variance =2–1 = 1,900 – 2,090 = ` 190 (A) (3) VOH. efficiency variance =3–2 = 2,000 – 1,900 = ` 100 (F) Verification: VOH. cost variance = VOH exp. Variance + VOH eff. variance 90 (A) = 190 (A) + 100 (F) 90 (A) = 90 (A)

525

526 Cost Accounting

D. Fixed OH Variances (1) Actual fixed OHs = ` 1,150 (2) Bud. fixed OHs (for normal volume) =

200 × 220 = ` 1,100 40

(3) Not applicable - No workings days (4) Standard FOHs = Std OH rate per hour × Act. hrs = 5 × 190 = ` 950 Bud. VOHs 200 = = ` 5. Bud. hrs 40 (5) Recovered FOHs = Std OH rate per unit × Act. output

Note: Std. FOH rate per hour =

= 2 × 500 = ` 1,000 Note: Std. FOH rate per unit =

Bud. FOHs 200 = = ` 2. Bud. output 100

Variances: (1) FOH. cost variance =5–1 = 1,000 – 1,150 = ` 150 (A) (2) FOH. expenditure variance =2–1 = 1,100 – 1,150 = ` 50 (A) (3) FOH volume variance =5–2 = 1,000 – 1,100 = ` 100 (A) (4) FOH capacity variance =4–2 = 950 – 1,100 = ` 150(A) (5) FOH efficiency variance =5–4 = 1,000 – 950 = ` 50 (F) Verification: (1) FOH cost variance = FOH exp. variance + FOH volume variance 150 (A) = 50 (A) + 100 (A) 150 (A) = 150 (A)

Standard Costing and Variance Analysis

527

(2) FOH volume Variance = FOH capacity variance + FOH efficiency variance 100 (A) = 150 (A) + 50 (F) 100 (A) = 100 (A) 23. The following information is available from the cost records of a company for February, 2009. Material purchased : 20,000 pieces Materials consumed : 19,000 pieces Actual wages paid for 4,950 hours Factory overhead incurred Factory overhead budgeted Units produced

88,000 24,750 40,000 40,000 1,800

Standard rates and prices are: Direct material rate ` 4 per piece Standard input 10 pieces per unit Direct labour Rate – ` 4 per hour Standard requirements 2.5 hour per unit. Overhead ` 8 per labour hour. Required: (a) Show the standard cost card (b) Compute all material, labour and overhead variances (CA, Inter) Solution: (a) Standard cost card – per unit Direct Material – 10 pieces at ` 4 per unit Direct Labour – 2.5 hours at ` 4 per hour Over heads – 2.5 hours at ` 8 per hours Total standard cost (b) Material cost variances: Calculations: (1) Actual cost of Act. quantity = Act. qty × Act. price = 19,000 × 4.40 = ` 83,600 Note: Act. cost per piece =

Purchase cost Quantity purchased

= = = =

40 10 20 70

528 Cost Accounting

=

88,000 = ` 4.40 20,000

(2) Std. cost of actual quantity = Act. qty × Std. price = 19,000 × 4 = ` 76,000 (3) Not applicable – No material mix (4) Standard cost of std. qty for actual output. = Std. qty for actual output × Std. price = 18,000 × 4 = ` 72,000 Note: Std. qty for actual output - 10 × 1,800 = 18,000 Variances: (1) Material cost variance (MCV) =4–1 = 72,000 – 83,600 = ` 11,600 (A) (2) Material price variance (MPV) =2–1 = 76,000 – 83,600 = ` 7,600 (A) (3) Material usage variance (MUV) =4–2 = 72,000 – 76,000 = ` 4,000 (A) Verification: MCV = MPV + MUV 11,600 (A) = 7,600 (A) + 4,000 (A) 11,600 (A) = 11,600 (A) (c) Labour cost variances Calculations: (1) Actual wages paid for actual hours = Act. time × Act. rate = ` 24,750 (given) (2) Std. wages for act. hours = Act. time × Std. rate = 4,950 × 4 = ` 19,800

Standard Costing and Variance Analysis

(3) Not applicable – No idle time (4) Not applicable – No Labour mix (5) Std. wages for standard hours for actual production = Std. labour hours for actual output × Std. rate = 4,500 × 4 = ` 18,000 Note: Std. labour hours for actual production = 1,800 × 2.5 = 4,500 hrs Variances: (1) Labour cost variance (LCV) =5–1 = 18,000 – 24,750 = ` 6,750 (A) (2) Labour rate variance (LRV) =2–1 = 19,800 – 24,750 = ` 4,950 (A) (3) Labour efficiency variance (LEV) =5–2 = 18,000 – 19,800 = ` 1,800 (A) Verification: LCV = LRV + LEV 6,750 (A) = 4,950 (A) + 1,800 (A) 6,750 (A) = 6,750 (A)

(D) Overhead variances (Assumed that overheads are fixed) Calculations: (1) Actual FOHs = ` 40,000 (2) Budgeted FOHs = ` 40,000 (3) Not applicable – No working days (4) Standard FOHs = Std. FOH rate per hour × Act. hours. = 8 × 4,950 = ` 39,600 (5) Recovered FOHs = Std. FOH rate per Unit × Act. output = 20 × 1,800 = ` 36,000 Note: Std. FOH rate per unit = 8 × 2.5 = ` 20

529

530 Cost Accounting

Variances: (1) FOH cost variance =5–1 = 36,000 – 40,000 = ` 4,000 (A) (1) FOH exp. variance =2–1 = 40,000 – 40,000 = NIL (3) FOH volume variance =5–2 = 36,000 – 40,000 = ` 4,000(A) (4) FOH capacity variance =4–2 = 39,600 – 40,000 = ` 400 (A) (5) FOH. efficiency variance =5–4 = 36,000 – 39,600 = ` 3,600 (A) Verification: (1) FOH cost variance = FOH exp. variance + FOH. volume variance 4,000 (A) = Nil + 4,000 (A) (2) FOH volume variance = FOH. capacity variance + FOH efficiency variance 4,000 (A) = 400 (A) + 3,600 (A) 4,000 (A) = 4,000 (A)

TM

This book is complementary to the main book ‘Cost Accounting: Theory and Practice’ and all exercises which are given at the end of each chapter are solved in this book. Hence, readers are advised to refer both the books to develop confidence and mastery of the subject. This book will be useful for the students pursuing the courses of B.Com., B.C.S., B.B.A., M.Com., M.C.S., M.B.A., M.C.A., P.G.D.M., P.G.D.F.M., C.A., I.C.W.A. and A.C.S. since problems asked in various universities and professional courses are included. Highlights: • Simple and lucid style of presentation • Self-explanatory notes at appropriate places • Step-by-step approach in solving problems It contains 469 problems and solutions with explanatory notes and hints at appropriate places. By the same authors: – Cost Accounting: Theory & Practice – Cost Accounting: Fundamentals & Elements – Cost Accounting: Methods & Techniques. R. Palaniappan, formerly Head, Department of Commerce, Government Arts College, Salem, has more than 33 years of experience in teaching Financial Accounting, Cost Accounting and Management Accounting both at undergraduate and postgraduate levels. He is a visiting faculty at the Southern Chapter of Cost and Works Accountants of India, and Salem Chapter of the Institute of Company Secretaries of India. He has a wide experience in coaching students for C.A., I.C.W.A. and ACS courses. He is member, board of studies/examiner in various institutes/ autonomous colleges and professional bodies. Dr. N. Hariharan is Senior Fellow – Faculty of Accounting and Finance, Botho University, Gaborone, Botswana. He is the Founder Chairman and Hon. Director of CEAT – Centre for Excellence in Accounting and Taxation. [www.ce-at.in], Pune. He is also Director CIMA Programme, Chartered Institute of Management Accountants, London; and CEAT Study Centre, Pune. He is into academics for more than 18 years, serving in various capacities at various reputed institutes teaching Core Finance and Commerce subjects at undergraduate, postgraduate and professional course levels. He has attended and presented papers at various state-, national- and international-level seminars. He has presented a proposed research paper to Cambridge University, UK. He is a Visiting Faculty at the Institute of Company Secretaries of India, Southern India Regional Council, Chennai, and in various B-Schools in Pune, Maharashtra. He is member, board of studies/examiner in various institutes/autonomous colleges and professional bodies. He is part of the Editorial Committee of various Management Journals published from India and the USA. He specialises in the field of Taxation, Accountancy and Finance. He has also authored two books on Income Tax. 978-93-89633-41-2

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TM