Costing Problems
Costing Problems
QUESTION 1:- A company has an opening stock of 6,000 units of output. The production planned for
the current period is 24,000 units and expected sales for the current period amount to 28,000 units. The selling
price per unit of output is Rs.10. Variable cost per unit is expected to be Rs. 6 per unit while it was only Rs. 5
per unit during the previous period. What is the Break Even volume for the current period if the total fixed
costs for the current period is Rs. 86,000? Assume that the first In first out system is followed. Assume that the
Last in first out system is followed.
SOLUTION:-
Statement of Break Even Point (FIFO)
Nature Quantity contribution per unit Total contribution
Opening stock 6000 5/- 30,000
Current 14,000 4/- 56.000 (B.f.)
production
∴ Break event 20,000 unit fixed cost 86.000
point
Hence, Under FIFO System is covered by selling of 20000 units. There fore. The sale of 20.000 units is the
break even point.
Contribution
(f) P.V. Ratio =
Sales
20 x 110% - 12
=
20 x 110%
22 x 12
= = 10
22 22
∴ P.V. Ratio = 10 x 100 %
22
= 45.45%
Fixed cost
(g) Break Even Sales (At increase S.P.) =
P.V. cost
20.000
= %
45.45
∴ Required sales = 40.004
Solution
Change in profit
(a) P.V. Ratio =
Change in sales
14.000 - 10.000
= = 4000
90.000 - 80.000 10.000
4
∴ P.V. Ratio = x 100 % = 40%
10
(b) Calculation of Break Even Point
Sales x P.V. Ratio – Fixed cost = Profit
80.000 x 40%n – Fixed cost = 10.000
∴ Fixed cost = 80.000 x 40% - 10.000 = Rs. 22.000
Break Even Sale = Fixed cost
P.V. Ratio
22.000
= = 55.000
40%
Fixed cost
Group Break Even Sale (Unit) =
Group contribution per unit*
Total contribution
* Group contribution per unit =
Total Qty gold
1,20,000
=
48,000
= 2.5
30.000
∴Group Break Even Point = = 12.000 units
2.5
Total contribution
Group contribution per unit =
Total Quantity
1,20,000
=
18.000
= 6.66
Fixed cost
Group Break Even Point =
Group contribution per unit
30.000
=
6.6
= 4500 units
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QUESTION11:- From the following data, calculate composite P/V ratio, composite contribution per
unit of mix and break –even point by using P/V ratio and contribution per unit:
Fixed cost: Products Units Selling price Variable cost per Rs. 50,000.
Answer. per unit Rs. unit Rs.
Sales A 2,000 10 6 of A: Rs. 12,500
Sales of B 4,000 15 12 A: 1,250 units
Sales C 6,000 20 10 of B: Rs. 37,500
B: 2,500 units
Sales of C: Rs. 75,000 C: 3,750 units
Rs. 1,25,000 7,500 units
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QUESTION 12:-The budgeted results of A Ltd. are as under:
Product Sales P/V Sales
Values Ratio Mix
(Rs.) (% (%)
)
X 2,50,000 2050
Y 4,00,000 3240
Z 6,00,000 4830
12,50,000 100
Fixed overheads for the period Rs. 5,02,200.
The management is worried about the results.
You are required to prepare
(a) A statement showing the amount of loss, if any, being incurred at present and recommend a change
in the sale value of each product as well as in the total sales value maintaining same sales-
mix, which will eliminate the said loss.
(b) Recommend the additional sales of any individual product to recover the loss.
SOLUTION:-
Statement showing profit and loss
Product Sales P.V. Ratio Contribution Break Even Additional
Sale (Rs.) Sale
X 2,50,000 50E% 1,25,000 2,70,000 20.000
Y 4,00.000 40% 1,60,000 4,32,000 32,000
Z 6.00.000 30% 1,80,000 6,48,000 48,000
Total 12,50.000 4,65,000 13,50,000 1,00,000
(-) Fixed cost 502200
profit (37,200)
Total contribution
Group P.V. Ratio =
Total sales
465.000
= x 100 %
12,50,000
= 37.2%
502200
Break Even Sales (Rs.) =
37.2%
Existing Sale = 12,50,000
∴Addition at Sale = 1,00.000
(b) Individual sale to be increased.
Additional contribution 37.200
For x = =
P.V. Ratio 50%
= Rs. 74.400
Or
Additional contribution 37.200
For Y = =
P.V. Ratio 40%
= Rs. 93.000
Additional contribution 37.200
For Z = =
P.V. Ratio 30%
= 1,24,000
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QUESTION 13:- Hewtax manufactures two products- tape recorder and electronic calculators- and sell
them nationally. The Hewtax management is very pleased with the company’s performance for the current
fiscal year. Projected sales through January 1,1987, indicate that 70,000 tape recorders and 1,40,000 electronics
calculators will be sold this year. The projected earning statement, which appears below shows that Hewtax,
will exceed its earning goal of 9 per cent on sales after taxes.
Hewtax Electronics Projected Earnings Statement for the year ended December 31, 1987.
Tape recorder Electronic
Calculator
Total Per Unit Total Rs. Per Total
Amount(000) Amount unit amount
(000) (000)
Sales Rs. 1050 Rs.15.00 Rs. 3150 22.50 Rs. 4200.00
Production Cost
Material 280 4.00 630 4.50 910.00
Direct labour 140 2.00 420 3.00 560.00
Variable 140 2.00 280 2.00 420.00
Overhead
Fixed Overheads 70 1.00 210 1.50 280.00
Total production 630 9.00 1540 11.00 2170.00
Cost
Gross margin 420 Rs.6.00 Rs.1610 Rs. 11.50 Rs. 2030
Rs.
Fixed selling and 1040.00
Administrative
Net income before 990.00
Income taxes
Income Taxes 544.50
(55%)
Net Income Rs. 445.50
The tape recorder business has been fairly stable the last few years and the company does not intend to
change the tape recorder price. However the competition among manufactures of electronic calculators has been
increasing. Hewtax’s calculators have been popular with consumers. In order to
sustain the interest in their calculators and to meet the price reductions expected from competitions
management has decided to reduce the wholesale price of its calculator from 22.50 to 20.00 per unit effective
January 1,1988. At the same time the company plans to spend an additional Rs. 57,000 on advertising during
fiscal year 1988. As a consequence of this action, management estimates that 80 per cent of its total revenue
will be derived from Calculators sales as compared to 75 per cent in 1987.
The total fixed production overhead costs will not change in 1988 nor will the variable overhead cost rates
(applied on a direct labour hour base). However, the cost of material and direct labour is expected to change.
The cost of solid state electronic components will be cheaper in 1988. Hewtax estimated that material costs will
drop by 10 per cent for the tape recorders and 20 per cent for the calculators in 1988. However direct labour
costs for both products will increase by 10 per cent in the coming year.
Required A. How many tape recorder and electronic calculator units did Hewtax Electronic have to sell in
1987 to break even?
Required B. What value of sales i.e. required if Hewtax Electronics is to earn a profit in 1988 equal to 9 per
cent on sales after taxes?
Tutorial Notes: -
B.E.P. of a multiple product firm:
1. If break Even Point is to be calculate in units, find weighted average contribution
per unit. Weights being ratio between units sold.
2. If break Even point is to be calculate in amount, find weighted average of P.V.
Ratio: Weights being ratio between amount of sales.
SOLUTION:-
(A) Statement of Break Even in 1987.
Product Quantity Contribution Total Contribution Break Even Sale
Tape Recorder 70.000 7 4,90,000 40,000
Electronic calculator 1,40,000 13 18,20,000 80.000
2,10,000 23,10,000 1,20,000
Total contribution
Group contribution per unit =
Total quantity
23,10,000
= = Rs. 11
2,10,000
Fixed cost
Group Break Even Pint (unit) =
Group contribution per unit
2,80.000 + 10.40.000
= = 13.20.000
11 11
= 1.20.000 unit
(B) Let X be required Sales
then
Fixed cost + Profit
Sales =
P.V. Ratio (W.N- 2)
13,77,000 + 20% of x
X=
54%
54% x X = 13,77,000 + 20% of X
54% X – 20% x X = 13,77,000
13,77,000
∴X=
34%
∴ X =40,50.000
Hence Required Group Sales = Rs. 40,50,000/-
W.N-1
Calculation of profit before Tax. Rate
PBT – Tax Ant. = PAT
PBT – PBT x Rate = PAT
∴ PBT = PAT
1 - Rate
9%
= = 9%
1 - 0.55% 45
= 20%
W.N – 2
Calculation of Group P.V. Ratio
Product Selling price Variable cost Contribution P/V Sales value Ratio
Tape Recorder 15 7.80 7.2 48% 20%
Electronic 20 8.90 11.1 55.5% 80%
Calculator
Basis of allocation
Patient days Bed Capacity
Rs. Rs.
Dietary 42952
Janitorial 12800
Laundry 28000
Laboratory 47800
Pharmacy 33800
Repairs 5200
General services 131760
Rent 275320
Billing & collections 87000
Other expenses 18048 80,120
--------------------------------------------------------------
262800 5,00,000
For the first range the management of Skin department always suffer loss because the maximum contribution
form the first range
= 14000 x 50
= 7,00.000
and the cost for range = 7,95,000
W.N.-1
Calculation of per patient per day contribution
Here, Revenue = Rs. 11,38,800/65 = 17520 per day
Patient days =
Total variable cost = 262800
Patient days = 17,520
262800
Variable cost/patient per day = = Rs. 15/-
17,520
∴ contribution/patient per day = 65 – 15 = 50/-
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Question 15: -Navbharat Commerce College, Bombay has six sections of B.Com and two sections of
M.Com with 40 and 30 students per section respectively. The college plans one day pleasant trip around the city
for the students once in an academic session during winter break to visit park, Zoo. Planetarium and aquarium.
A Transporter used to provide the required number of buses at a flat rate of Rs. 700 per bus for the
aforesaid purpose. In addition a special permit fee of Rs. 50 per bus is required to be deposited with city
Municipal Corporation. Each bus is 52 seater. Two seats are reserved for teachers who accompany in each bus.
Each teacher is paid daily allowance of Rs. 100 for the day, No other costs in respect of teachers are relevant to
the trip.
The approved caterers of the college supply breakfast, lunch and afternoon tea respectively at Rs. 7, Rs.
30 and Rs. 3 per student.
No entrance fee is charged at the park. Entrance fees come to Rs.5 per student both for the Zoo and the
aquarium. As regards planetarium the authorities charge block entrance fee as under for group of students of
educational institutions depending upon the number of students in group:
Number of Students in a Group Block Entrance Fee Rs.
Upto 100 200
101-200 300
201 & above 450
Cost of prizes to be awarded to the winners in different games being arranged in the park depend upon
the strength of students in a trip. Cost of prizes to be distributed are:
Number of Students in a Trip Cost of Prizes
Rs.
Upto 50 900
51-125 1,050
126-150 1,200
151-200 1,300
201-250 1,400
251 & above 1,500
To meet the above costs the college collects Rs. 65 from each student who wish to join the trip. The college
release subsidy of Rs. 10 per student the trip towards it.
W.N-1
Calculation of contribution per unit
For first 10,000 For Next 5000 For Next 5000
Selling price 245 245 245
Less: Material cost 70 70 70
Labour cost - 80 120
Variable cost 50 50
Contribution 125 45 5
W.N 2
Calculation of fixed cost
I case II case III case
Production over Selling 1,00.000 1,00.000 1,00.000
Selling over head 1,.00.000 3,95.000 6,00.000
Labour cost 8,00.000 8,00.000 8,00.000
Total fixed cost 10,00.000 12,95.000 15,00.000
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Question No: 19
(i) Break Even Point (only including fixed cost) = Fixed cost
Contribution
= 2000 = 2000
50 - 25 25
= 80 Unit
80
(ii) Semi variable cost for 80 units = x 50
20
= 200
Hence, It indicates at the level of 10% the management suffer loss. (101 x 25 = 2900)
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Question25:- A Company manufactures two products namely product A and product B. The Price and
cost data are as under for 1991 :
A (Rs.) B (Rs)
Selling Price 200 100
Variable Costs 120 40
Total fixed costs are Rs. 23,00,000 per annum.
The company sells the two products in the sales value ratio of 7 : 3 and is operating at a margin of safety
of 20%, during the next year, 1992 the company anticipates that the variable costs of product A and B will go
up 5% and 2 ½% respectively. The fixed expenses will also go up by 5%.
Required:
( 1) Find the quantity of products A and B sold in 1991.
( ii) Evaluate the following proposals which are under consideration for implementation in 1992
(a) If the company desires to sell the same quantity of product A as in 1991, how many Units of product
B should be sold to earn the same profit as in 1991 ?
(b) If the selling price of product A is reduced by 5% as compared to 1991, and the Quantity sold is
increased to 24,000 units, how many units of product B should be sold to earn the same profit as in 1991.
(c ) If product A is discontinued, how many units of product B should be sold to earn the same profit as
in 1991.
(d) If product A is discontinued and the quantity of product B is to be restricted to 37,375 units what
percentage increase in selling price of product B is necessary to earn the same profit as in 1991.
SOLUTION:- Computation of Sales for the Year 1901
Product A Product B
(Rs.) (Rs.)
Selling Price 200 100
Less: Varaible Costs 120 40
Contribution 80 60
P/V Ratio 40% 60%
Sales volumeRatio 70% 30%
40X70 60X30
Weighted Profit Volume Ratio ------- = 28% ------- = 18%
100 100
Composite Profit Volume Ratio 46%
Fixed Expenses Rs. 23,00,000 per annum.
Fixed expenses 23,00,000
BEP= ---------------------- = ------------- X 100 = Rs. 50,00,000 (Sales Value)
Composite P/Vratio 46
Margin of Safety is 20%
Hence Break-even Salesare quivalentto 80% of toal Sales
Bep Sales of Rs. 50 Lakhs = 80%
50,00,000
Hence Total Sales = ------------- X 100 = Rs.62,50,000
80
Sales of A : 70% of 62,50,000 =Rs. 43,74,000/ Sp 200=21,875units
Sales of B: 30% of 62,50,000 = Rs.18,75,000/ Sp100=18,750 units.
Computation of Contribution and Profit in 1901
Rs.
Product A (21,875 X 80) 17,50,000
Product B (18,750 X 60) 11,25,000
Question28:- You have been approached by a friend who is seeking your advice as to whether he should
give up his job as an engineer, with a current salary of Rs. 14,800 per month and go into business on his own,
assembling and selling a component which he has invented. He can procure the parts required to manufacture
the component from a supplier.
It is very difficult to forecast the sales potential of the component, but after some research, your friend has
estimated the sales as follows:
Between 600 to 900 components per month at a selling price of Rs. 250 per components.
Between 901 to 1,250 components per month at a selling price of Rs. 220 per. Component for the entire lot.
The costs of the parts required would be Rs. 140 for each completed component . However if more than 1,000
components are produced in each month, a discount of 5% would be received from the supplier of parts on all
purchases.
Assembly costs would be Rs. 60,000 per month upto 750 components .Beyond this level of activity assembly
costs would increase to Rs.70,000 per month.
Your friend has already spent Rs. 30,000 on development ,which he would write-off over the first five years of
the venture.
Required: Calculate for each of the possible sales levels at which your Friend could expect to benefit by going
into the venture on his own.
Calculate the break-even point of the venture for each of the selling price.
Advise your Friend as to the viability of the venture.
SOLUTION:-
Statement of Break Even Point
Range 600-750 757-900 901-1000 1001-1250
Rs. Rs. Rs. Rs.
Cost 60.000 70.000 70.000 701.000
Opportunity cost 14.800 14.500 14.800 14.800
Relevant cost 74.800 84.800 84.800 84.800
Selling price 250 250 220 220
Variable cost (140) (140) 140) (133)
Contribution 110 110 80 87
Break Even Point 680 771 1060 975
Recommendation:-
(1) It you are interested to incur assembly cost (fixed cost) upto Rs. 60.000 with selling price Rs. 250 then your
forget output should be atleast 680 units.
(ii) It you are interested to incur assembly cost upto Rs. 70.000 then your forget out put should be atleast 771
unity (Along with selling price Rs. 250)
(iii) For third and fourth range the above break even does not provide the correct result because at the level of
1060 units, we are eligible to avail the benefit for discount but we have not consider the benefit of discount
invariable cost.
(iv) At the level of 975 units we are not eligible to avail the benefit of discount but we have consider variable
cost with discount
Now we can say for the third range the maximum contribution would be Rs. 80.000, but the cost for the range
comes to 84,,800.
At fourth range At the level of 1001 unit he will be in a position to active the benefit due to benefit of discount.
Level 1001
= 1001 x 220 – 1001 x 133 – 84.800<
Profit 2287
Level 1000
= 100 x 220 – 100 x 140 – 84.800
= loss — 4800
Hence, we can say the target output should be 1001 unit (i.e. the level availing discount.
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Decision Making
Question1:- Paramount Food Products is a new entrant in the market for chocolates. It has
introduced a new product-Sweetee. This is a small rectangular chocolate bar. The bars are wrapping
aluminum foil and packed in attractive cartons, containing 50 bars. A carton is therefore, considered the basic
sales unit. Although management had made detailed estimates of costs and volumes prior to undertaking
this venture, new projections based on actual cost experience are now required. Income Statements for the
last two quarter are each thought to be representing of the costs and productive efficiency we can expect in
the next few quarter. There were virtually no inventories on hand at the end of each quarters. The income
statements reveal the following:
First Second
Quarter Quarter
Rs. Rs.
Sales:
50,000 * Rs. 24 12,00,000 -
70,000 * Rs. 24 — 16,80,000
Cost of Goods Sold 7,00,000 8,80,000
(60,000) 44,000
Net Income (Loss) (90,000) 66,000
The firm’s overall marginal and average income-tax rate is 40% figure has been used to estimate
the tax liability arising from the chocolate operations.
Required:
(a) Management would like to know the breakeven point in terms of quarterly carton sales for
the chocolates.
(b) Management estimates that there is an investment of Rs. 30,00,000 in this product line. What
quarterly carton sales and total revenue are required in each quarter to earn an after-tax
return of 20% per annum on investment?
(c ) The firm’s marketing people predict that if the selling price is reduced by Rs. 1.50 per
carton (Re. 0.03 off per chocolate bar) and a Rs. 1,50,000 advertising campaign among
school children is mounted, sales will increase by 20% over the second quarter sales.
Should the plan be implemented?
Solution:-
(a) We need to estimate the fixed & variable cost. The variable manufacturing cost per carton:-
Change in costs/Change in Activity = Rs. (88000 – 7,00,000)/(70,000 – 50,000) cartoons
Rs. 1,80,000/20,000 Cartoons Rs. 9 per cartoon
So the total variable costs per cartoon is Rs. (9 + 2) = Rs. 11 per cartoon.
Total Fixed costs are Rs. (2,50,000 + 5,50,000) or Rs. 8,00,000 per quarter.
Given sale price of Rs. 24 per carton and variable costs of Rs. 11 per carton, the contributionper cartoon is Rs.
13 (Rs. 24 – Rs. 11)
The increase in advertising costs will push fixed costs up by Rs. 1,50,000 to Rs. A 20% increase over second
quarter’s sales would increase sales from 70,000, 84,000 cartoons.
The expected earnings before taxes will be:
= Contribution – Fixed cost
= 184000 x Rs 11.51 = 950,000
= Rs. (966000 – 950,000) = 16,000
After deduction tax at 40% the net Income will be Rs. 9600 (16000 - 6000).
Since we earned Rs. 66000 before the change this plan should not be implemented.
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Question2:- The management of Kabra Limited is alarmed at the high under utilization of installed
capacity. The workers of Kabra Ltd. have a very strong union. Any attempt by management to increase
production is opposed by the union on the ground that the workers are working as per normal standards and that
extra unit produced does not fetch any rewards to workers. The management having realized that there is
capacity puts forth incentive scheme, which rewards the workers, staff as well as management.
As per the proposed scheme, the after –tax incremental profit will be shared by all as follows:
30% to be ploughed back.
40% to be shared by workers, and
30% to be shared by staff.
In case there is a loss, no reward will be given to anyone. The changes in capacity due to off. Loading, make or
buy decision, replacement of conventional machines by highly productive machine etc. will be adjusted for
calculating excess production during the currency of the scheme.
Presently the company is producing 1 lakh units. The current cost structure is as follows:
Rs. Per 1,000 units
Prime Cost 15,003
Works Overheads 7,490
Administrative overhead 2,650
Selling overheads 99
Sale value 25,150
The above figures include fixed cost to the extent of 20% works overheads. 30% administration
overheads and 100% selling expenses.
The Company pays 50% tax. However the reward under the scheme given to workers (not staff) is tax
deductible.
You are required to calculate the annual share in absolute amounts for each of the beneficence at various levels
at an interval of 1% from 1% to 8% increase in production over present target.
Solution2:-
Statement of allocation of profit
Level PBT Tax Worker Management Staff
(W.N 2) (W.N 3)
37.5% 25% 18.75% 18.75%
1,05,000 2300 862.5 575 431.25 431.25
106000 4600 1725 1150 862.5 862.5
10700 6900 2300 1725 1093.75 1383.75
10800 9200 3450 2300 1725 1815
Working notes:
Breakeven point = Fixed cost/Contribution P.V
Statement of cost
Per 1000
Total Variable Fixed
(Rs.) (Rs.) (Rs.)
Prime cost 15003 15003 --
Works overhead 7490 5992 1498
Administration 2650 1855 795
overhead
Selling overhead 99 -- 99
22850 2392
Fixed cost per unit = Rs. 2392/1000 = Rs. 2.392 P.U
Total fixed cost = Rs. 2.392 x 1,00,000
= 2,39,200
Variable cost = Rs. 22850/1000 = Rs. 22.85 Per Unit
BEPT (Unit) = (FC)/Contribution P. V
= 239200/25.15 – 22.83 = 1,04,000 units
Supplier X Y Z
Transport cost (per kg.) 30 paise 25 paise 25 paise
Fixed transport cost would be Rs. 1,00,000 per annum irrespective of the supplier to be contracted. The
output of the finishing process can be sold to there prospective customers, their offer being as follows:
Customer Price per kg. Of Trade discount Conditions
output (%)
A Rs. 32.50 2 Maximum quantity 40,000 kgs.
B Rs. 32.00 2 Maximum quantity 80,000 kgs.
C Rs. 30.90 - Provide for entire output is sold to him.
In case of supplies to Customer A and B, the fixed delivery costs will be Rs. 1,500 per month and the
variable delivery costs will be 65 paise and 36 paise per kg. Respectively.
Customer C will collect the entire output from the warehouse of the company.
You are required: to indicate with reasoning:
1. Choice of supplier with comparative cost tables.
2. Choice of customer with comparative tables of net 33ackson33tion.
Also prepare the statement showing prices costs and overall results.
Solution . Choice of suppliers :
Comparative Cost Table of Suppliers
Particulars X Y Z
Quantities to be supplied Up to 60,000 Kg. Up to 80,000kg. Less than 1,00,000 1,00,000kg
Purchase (price) kg.
Variable transport cost (per kg) Rs. 5.00 Rs. 5.60 Rs. 5.80 Rs. 5.30
0.30 0.25 0.25 0.25
5.30 5.85 6.05 5.55
Alternative available
First – To purchase 6,000 kg . form X and balance 40,000 kgs form Y
Second – To purchase 1,00,000 kg form Z.
Cost of purchase for above alternatives:
Supplier Quantity (kg.) Rate First alternative Second alternative
X 60,000 Rs. 5.30 Rs. 3,18,000 ---
Y 40,000 0.85 2,34,000 ---
Z
1,00,000 5.55 - 5,55,000
Total
5,52,000 5,55,000
Recommendation : First alternative should be opted i.e., purchase 60,000 kg form X and 40,000 kgs. Form
Y , as the cost of purchase of first alternative is less then the cost of purchase of second alternative .
Note: Fixed transportation cost of Rs. 1,00,000 as to be ignored because it is not influenced by any alternative
.
(ii) Choice of Customer
Output to be sold:
Input in factory process 1,00,000 kg.
Less normal scrap 10% of input 10,000 kg.
Output of factory process 90,000 kg.
Less normal scrap in finishing process 4,500 kg.
85,500 kg.
Relevant Cost Data of selling price
Customers A B C
Quantities Up to 40,000 kg. Up to 80,000 kg. Up to 85,500 kg.
Selling price per kg. 32.50 32.00 30.90
Less trade discount (2%) 0.65 0.64 -----
Net price 31.85 31.36 30.90
Less: variable cost of delivery per kg. 0.65 0.36 -----
Net realisation except fixed cost of A and B 31.20 31.00 30.90
Alternative available : Rates of A and B are favourable when compared to C , but selling to A and B will
result in fixed cost . Therefore , following two alternative are available :
First:-- 40,000 kg. to A and 45.000 kg to B
Second :-- 85,000 kg to C
Net realisaton based on above prices.
First alternative
Customer Quantity kg. Rate (Rs.) Amount (Rest.)
A 40,000 31.20 Rs. 12,48,000
B 45,500 31.00 14,10,500
26,58,500
Less fixed delivery cost(Rs. 1,500 × 12) 18,000
Net realesition 26,40,500
Second alternative
Customer Quantity kg. Rate (Rs. ) Amount (Rs.)
C 85,500 30.90 26,41,950
Recommendation :-- Entire output should be should to C as the net relestion as per second alternative is
batter than that under the first alternative .
(iii) Statement showing the process cost
Factory process:
Quantity (Kg.) Rate Amount (Rs.)
(Rs.)
1,00,000 5,52,000
Raw material 6,00,000
Direct wages 2,28,000
Overheads 1,00,000
Fixed overheads . 14,80,000
1,00,000 40,000
Less wastage 10%@ Rs. 4 per kg. 10,000 14,40,000
Cost of factory process transferred to finishing 90,000 16.00 **
process
*As per decision ; ** Rs. 14,40,000 ÷ 90,000 = Rs.
16.00
Finishing process :
Quantity Rate (Rs.) Amount (Rs.)
(Kg.)
Transfer form factory process 90,000 16.00 14,40,000
Direct wages 5,50,000
Overheads . . 4,22,000
90,000 16.00 24,12,900
Less wages 5% @ Rs. 4 per kg. 4,500 -- 36,000
Cost of output 85,500 27,80* 23,76,000
*Rs. 2376,990÷85,500 kg. = Rs. 27.80
Rs.
Direct Material 7.80
Direct Labour 2.10
Variable Overhead 2.50
Fixed Overhead 4.00
Product cost(per unit) 16.40
Each unit(tin) of the product is sold for Rs.21 with variable selling and administration expenses
of 60 paise per tin.
During the next quarter only 10,000 units can be produced and sold. Management plans to shut down the plant
estimating that the fixed manufacturing cost can be reduced to Rs. 74,000 for the quarter.
When the plant is operating, the fixed overheads are incurred at a uniform rate throughout the
year. Additional costs of plant shut-down for the quarter are estimated at Rs. 14,000.
You are required:
To express your opinion, along with the calculations as to whether the plant should be shut down
during the quarter, and
To calculate the shut-down point for quarter in units of products (i.e., in terms of number of tins).
Solution:-
Statement of Comparative Result
I: Contribution Rs. II. Shut Down Rs.
Contribution 80,000 Contribution --
( 8 X 10,000)
Fixed 1,26,000 - Fixed Cost Extra 14,000
Cost(Average)
Loss 46,000 Loss 14,000
Let x be the level of out put where total loss in both are same.
Shut down point = Total costI = Total costII
or 8x – 12600 = o – 14000
or 8x = 126000 – 14000
∴ x = 14,000 units
Working notes:
Total Fixed cost = 4 x 2,00,000
= 8,00,000 P.A
Fixed per quarter = 800,000/12 x 3
= 2,00,000
Un Avoidable = 74000
Avoidable = 126000
Extra = 14000.
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Question5:- A company owns a large number of hardware stores located throughout the country. In one
provincial town, there are 2 stores; the accounts of one show a modest profit, but the other Reports a loss as
shown by the accounts for the year 1971:
Rs.
Sales 4,00,000
Opening Stock 65,000
Purchases 3,32,000
3,97,000
Closing Stock 69,000 3,28,000
Gross profit 72,000
Assistant’s Salary 55,000
Drivers wages 3,000
Manager’s Wages 8,000
Staff Bonus 4,000
Rent 13,000
Heating & Lighting 2,000
Postage 1,300
Wrapping Material 2,000
National Advertising 4,000
Motor running expenses 1,600
Depreciation on Motor van 1,600
Regional office charge 3,000 98,500
Net Loss -26,500
Additional information :
1: There are two motor vans and drivers for the delivery of goods to customers of the two stores and the
total costs of this service are apportioned between the stores on the basis of turnover.
2: one manager is responsible for the both the stores and this salary Rs. 16,000 is apportioned equally.
3: The staff bonus is calculated for each store as a percentage on its turnover.
4: The charge for national advertising is allotted to the stores by the H.O.
Give the recommendation either to Discountinue the shop forever or not.
Ans. Net saving in shut down Rs. 6,900 (sales foregone 4,06,900 avoidable cost )
------------------------------------------------------------------------------------------------------------------------------
Question6:- Fitwell Ltd. manufacturing company has three factories namely factory “A”, factory”B”,
factory “C” . All the three factories produce the same product which is sold at RS. 375 per unit. The
factory wise estimates of operating results for 1998 are as under:
(Rs. In lacs)
A B C Total
Sales 300 1,200 600 2100
Costs:
Raw materials 75 350 145 570
Direct Labour 75 280 140 495
Factory overheads
Variable 20 110 55 185
Fixed 40 120 60 220
The above statement shows that as a result of renewal of lease of factory A the total profit getsreduced from Rs.
160 lacs to Rs. 148 lacs. However factory A is still contributing towards meeting the head Office Expenses.
Hence is may not be advisable to discontinue the lease.
Working Notes:
(a) Fixed and variable costs when the production of Factory A is transferred to Factory B:
(Rs. Lacs)
Sales Variable Costs Fixed Costs
B 1,200 810,00 310
A 300 810 X Rs. 300 202.50 --
-----------------
1200
(80,000 X Rs.
Additional 25) 20.00 50
costs 1,500 1,030.50 360
Total
(b) Fixed and Variable Costs When the Production of Factory A is Transferred To Factory C:
Transferred To Factory B
Rs. Lacs
Sales Variable Fixed
Costs Costs
C 600 380.00 160
A (380/600 X Rs. 190.00 --
300)
Additional (80,000 X Rs. 35) 28.0 40
Costs
Total 900 598 200
Statement showing the contribution and the profit for Danida, Danima and for the company C when
Danima’s production is cut by 25,000 litres. Danida’s production is increased by 25,000 litres.
Danida Danima Total
Production (litres) 1,25,000 50,000 1,75,000
Rs. Rs. Rs.
Production (liters) 1,25,000 50,000 1,75,000
Rs. Rs. Rs.
Contribution per litre 4.02 3.25 --
Total contribution 5,02,500 1,62,500 6,65,000
Less: Group incentive 10,000 ---- 10,000
payable
4,92,500 1,62,500 6,65,000
Less: Fixed Costs 1,53,500 91,000 2,44,500
3,39,000 71,500 4,10,500
Less: Transport Cost 10,000 --- 10,000
Profit 3,29,000 71,500 4,00,500
Budgeted Profit 2,48,500 1,52,750 4,01,250
Comment: The proposal if implement if implemented will result in a drop in overall profit by 750 (Rs.
4,01,250 – Rs. 4,00,500).
(a) (ii) Proposal 2:- Statement showing the contribution and the profit for Danida Danima and for the
company as a whole when Danima’s production is cut by 50,000 litres and Danida’s production is
increased by 50,000 litres.
Comments: The implementation of the proposal will increase profits for the company as a whole by Rs. 8.500
(ie Rs. 409,750 – Rs. 4,01,250) though Danima will be reporting loss.
(i) Statement showing the contribution and the profit for Danida, Danima and the company as a whole
when break-even production is retained and the balance is transferred Danida.
The overall profit will increase by Rs. 7,390 (i.e. Rs. 4,08,640 – Rs. 4,01,250) transferring 47,000 litres of
production of Danida.
Working note:
Danida Danima
Rs. Rs.
Sales price computation per litre. Rs. 7,00,000 Rs. 5,25,00
1,00,000 litres 7.00 75000 litres 7.00
Less: Variable costs Rs. 298000
1,00,000 litre 2.98 Rs. 281250
75000 litres 3.75
Contribution per litre 4.02 3.25
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Question7:- Dinesh Dairies Ltd. Has two processing and bottling plants, Danida and Danima, in adjoining
districts. The comparative cost and revenue data budgeted per month are as below:
Danida Danima
Production (Litres) 1,00,000 75,000
Rs. Rs.
Variable Costs:
Bottles 1,00,000 79,000
Closures 90,000 71,500
Crates 14,000 12,500
Milk Loss 30,000 47,000
Electricity 14,000 14,000
Fuel 40,000 46,000
Water 10,000 11,250
2,98,000 2,81,250
Fixed Costs:
Electricity 13,500 11,000
Salaries and Wages 90,000 60,000
Depreciation 50,000 20,000
1,53,500 91,000
Total Costs 4,51,500 3,72,250
Sales Realisation 7,00,000 5,25,000
Profit 2,48,500 1,52,750
Danima’s high cost, low margin status draws management’s attention. It is also observed that Danida
can increase its production by 50 percent with the existing plant capacity and without additional manpower.
Two proposals are under consideration:
(1) Cut down Danima’s production by 25,000 litres and increase Danida’s production by 25,000 litres.
(2) Cut down Danima’s production by 50,000 liters and increase Danida’s production by 50,000 litres.
For the additional quantity produced in excess of 1,00,000 liters, Danida will incur Rs. 0.40 per liter
towards group incentive. Transporting the additional output from Danida to Danima’s region for sale will cost
Rs. 10,000 in both cases.
Prepare a statement to show the contribution and the profit for Danida, Danima and for the company as a whole,
for each proposal. Comment on the results.
(B) The management is keen that the cut in Danima’s production should not result in its reporting loss, as that
would 41ackson41ti its employees. If break-even production is to be retained in Danima and the balance alone
is to be transferred to Danida. Show the contribution and the profit for Danida Danima and the company as a
whole.
Answer:- Statement showing the contribution and the profit forDanida, Danima and for the company A/C when
Danima’s production is cut by 25,000 litres.Danida’s production is increased by 25,000 litres.
Danida Danima Total
Production (litres) 1,25,000 50,000 1,75,000
Rs. Rs. Rs.
Contribution per litre 4.02 3.25 --
Total Contribution 5,02,500 1,62,500 6,65,000
Less: Group incentive payable 10,000 --- 10,000
4,92,500 1,62,500 6,55,000
Less: Fixed Costs 1,53,500 91,000 2,44,500
3,39,000 71,500 4,10,500
Less: Transport cost 10,000 --- 10,000
Profit 3,29,000 71,500 4,00,500
Budgeted Profit 2,48,500 1,52,750 4,01,250
Comment:The proposal if implement if implemented will result in a deop in overall profit by 750 (Rs. 4,01,250
– Rs. 4,00,500).
(a) (ii) Proposal2:- Statement showing the contribution andtheprofit for DanidaDanima and for the company
as a whole when Danima’s production is cut by 50,000 litres and Danida’s production is increased by 50,000
litres.
Danida Danima Total
Production (litres) 1,50,000 25,000 1,75,000
Rs. Rs. Rs.
Contribution per litre 4.02 3.25 --
Total Contribution 6,03,000 81,250 6,84,250
Les: Gropu incentive 20,000 -- 20,000
payable
5,83,000 81,250 6,64,250
Less: Fixed costs 1,53,500 91,000 2,44,500
4,29,500 (9,750) 4,19,750
Less: Transport cost 10,000 ---- 10,000
Profit 4,19,500 (9,750) 4,09,750
Budgeted profit 2,48,500 1,52,750 4,01,250
Comments : The implementation of the proposal will increase profits for the company asawholeby Rs.8,500(ie
Rs. 409,750 – Rs. 4,01,250) though Danima will be reportingloss.
(b) (i)Contribution per litre for Danima Rs. 3.25
Total Fixed costs of Danima Rs. 91,000
Break even production for Danima
Fixed costs Rs. 91,000
--------------- = --------------
Contribution per litre Rs. 3.25
= 28,000 litres
The Production that could be transferred from Danima to Danida, retaining break-even production in Danima is
47,000 litres(i.e. 75,000litres - 28,000 litres)
(i) Statement showing the contribution and the profit for danida, Danima and the company as a whole
when break-even production is retained and the balance is transferred Danida.
Danida Danima Total
Production (litres) 1,47,000 28,000 1,75,000
Rs. Rs. Rs.
Contribution per litre 4.02 3.25 --
Total Contribution 5,90,940 91,000 6,81,940
Les: Gropu incentive 18,800 -- 18,800
payable
5,72,140 91,000 6,63,140
Less: Fixed costs 1,53,500 91,000 2,44,500
4,18,640 ---- 4,18,640
Less: Transport cost 10,000 ---- 10,000
Profit 4,08,640 ---- 4,08,640
Budgeted profit 2,48,500 1,52,750 4,01,200
The overall profit will increase by Rs. 7,390(i.e. Rs. 4,08,640 – Rs. 4,01,250) transferring 47,000 litres of
production toDanida.
Working note: Danida Danima
Rs. Rs.
Rs.7,00,000 Rs. 5,25,00
Sales price computation per litre: ------------- 7.00 -------------- 7.00
1,00,000 litres 75,000 litres
Rs. 2,98,000 Rs.2,81,250
Less: variable costs -------------- 2.98 --------------- 3.75
1,00,000 litres ----- 75,000 litres -----
Contributioin per litre 4.02 3.25
Department B
M& M Other
others
Rs. Rs. Rs.
Plant & Machinery 1,20,000 36,000 84,000
Depreciation 12,000 3,600 8,400
(0.1 X 3 X
12000)
Total attributable value of plant & Machinery production Department A & Department B.
168000 + 36000
F.A = 17,16,000
+ Working capital = 1,24,000
Total Investment = 18,40,000
∴Total relevant capital employed = 18,40,000
Statement of Cost
Material Rs. per unit
Department
A 4kg X Rs. 6 24
B 8 Kg X 2.5 20
Labour
A 2 hr. X 4 8
B 3 hr. X 3 9
Variable Overhead
A 0.80 X 24 19.2
B 2X3 6
Variable Cost 86.20
+ Fixed Cost
A 2.2 X 24 52.80
B 3.00 X 3 9
Total Cost 148.00
Statement of price
Rs.
Variable cost 86.20
+ Contribution (182400 x 30%/12000) 46.00
Minimum price 132.20
Statement of price
Rs.
Variable cost 86.20
This is to be applied only when we have new products
B. Statement of price.
Rs.
Variable cost 86.20
+ Fixed cost 61.80
Total cost 148.00
+ Return 1840000 x 18%/12000 27.6
Minimum price 175.60
-----------------------------------------------------------------------------------------------------------------------------
Question10:-Look Ahead Ltd. want to fix proper selling price for their products ‘A’ and ‘B’ which they
are newly introducing in the market. Both these products will be manufactured in Department D, which is
considered as a Profit Centre.
The estimated data are as under: A B
Annual Production(Units) 1,00,000 2,00,000
Rs. Rs.
Direct Materials per unit 15.00 14.00
Direct Labour per unit
(Direct Labour Hour Rate Rs. 3) 9.00 6.00
The proportion of Overheads other than interest, chargeable to the two products areas under: Factory Overheads
(50%Fixed) 100% of Direct Wages. Administration Over-heads(100% Fixed) 10% of Factory Cost. Selling
and Distribution Overheads (50% variable) Rs. 3 and Rs.4 respectively per unit of products A and
B.The fixed capital investment in the Department is Rs.50 lakhs. The working capital requirement is
equivalent to 6 months stocks of cost of sales of both the products. For this project a term loan
amounting to Rs. 40 lakhs has been obtained from Financial Institutions at an interest rate of 14%
per annum.
Bank Borrowing carrying interest at 18% per annum meets 50% of the working capital needs. The Department
is expected to give a return of 20% on its capital employed. You are required to: (a) Fix the selling prices
of products A and B such that the contribution per direct labour hours is the same for both the products;
(b) Prepare a statement showing in detail the over-all profit that would be made by the Department.
------------------------------------------------------------------------------------------------------------------------------
Question11:- Prompt Printers Ltd. uses a scheme of pricing based on cost plus. All the overheads
are charged based on direct labour and based on the total cost arrival at the selling price is fixed: The
following figures are from the annual budget for 1984 prepared by the company:
Sales Rs.10,00,000
Direct Material 1,80,000
Direct Labour 3,20,000
Factory Superintendent’s Salary 30,000
Commission Paid On Sales 50,000
Foremen’s Salaries 60,000
Insurance 10,000
Advertisement 20,000
Depreciation On Assets 30,000
Administration Expenses 90,000
Variable Factory Costs:
Repairs and Maintenance 60,000
Tools Consumed 40,000
Miscellaneous Supplies 10,000
The company has submitted a tender quotation Rs.10,000 on a large order with cost of Rs.1,800 direct
material and Rs. 3,200 direct labour. The customer strikes the business at Rs. 8,900 on a ‘take it or leave
it’ basis. If the company accepts the order, the total sales for 1984 would be Rs.10,08,900. The company is
reluctant to accept the order, as it would be against its policy of accepting an order below cost:
As a Cost Accountant of the company, you are required to give your recommendation with supporting
figures to explain that the price offered would not be below cost and a sizable profit also could be
made.
[Answer:- Profit = 1,00,000 Rs., Price to be quoted =10,000 Rs., Surplus = 2,355 Rs.
Question12:- SM Ltd. is engaged in the manufacture of a range of consumer products. The sales are made
through its own 47ackson47ti agents who are paid a commission of 20 per cent on the selling price of the
product. The company has prepared the following budget for 1990.
Rs. Lakhs
Sales 225.00
Production Costs:
Prime cost and variable overheads 78.75
Fixed overheads 36.25
Selling Cost:
Agents Commission( 20%) 45.00
Sales office expenses (Fixed) 2.00
Administration costs (Fixed) 30.00
Total Costs 192.00
Profit 33.00
The company after the finalisation of the above budget is faced with a demand .From its agents for an
increase in their commission to 22 per cent of selling price. The company is therefore contemplating to dispense
with the services of agents and instead employ its own sales force in that event the company expects to incur the
following costs:-
Rs. Lakhs
Sales Manager’s Salary and Expenses 7.50
Salesman expenses, including traveling expenses 2.00
Sales office costs (in addition to the present costs) 5.00
Interest & dep. On sales dept. Vehicles 3.50
Total 18.00
In addition to the above it will be necessary to hire 40 salesman at a salary of Rs. 40,000 per annum each
plus a commission of 5 per cent on sales plus car allowance of Rs. 1 per kilometer to cover vehicle costs except
interest and depreciation which has already been considered above.
Assuming that the company decides in favour of employing its own sales force, you are required to answer the
following questions.
(1) For the same volume of sales as envisaged in the budget what is the maximum average kilometer per
annum that the salesman could travel if the company is to achieve the same budgeted profit as it who
have obtained by retaining the agents and granting them the increased commission which they had
demanded.
(2) At what level of sales would the original budgeted profit be achieved if each salesman were to travel
an average of 14,000 Km per annum. Assume all assumption inherent in the budget are maintained.
What is maximum level of commission on sales that the company could afford to pay if it wished to achieve a
16 per cent increase in its original budgeted profit and expected a 16 per cent increase in sales at the budgeted
selling prices and an average of 16000 km per annum of travel by each salesman.
Question13:- Texomat Private Limited has been manufacturing track suits for athletes. Currently its
output is around 70 per cent of its rated capacity of 19,000 units per annum. One exporter has approved the
sample and has offered to buy 5,000 units at a special price of Rs.150 per suit. At present, the Company has
been selling the tracksuit @ Rs. 210 the standard cost per unit is as under:
I:- Cloth and other material Rs. 82
ii:- Labour 25
iii:- Fixed cost 42
iv:- Administration, variable cost 11
Total cost 160
Should the Company accept the offer?
What would be your advice if the exporter offers to buy 10,000 units instead of 5,000 units?
What is the minimum quotation for accepting the order?
If order is offer by Local Market Consumer at Rs. 118 for 5,700 units could the order be accepted.
Solution:- Statement of lost benefit. (5000)
Rs.
Incremental Revenue (5000 x 150) 75,0000
- Cost 5000 x 118 5,90,000
Net benefit 160,000
Statement of cost benefit (10,000)
Rs.
Incremental Revenue (10,000 x 150) 15,00,000
- Incremental cost:
Cost to be incurred 5700 x 118 6,72,600
Cost to be incurred 4700 x 118 5,07,400
- Benefit loss 4300 x 92 (W.N 1) 3,95,600
Net benefit (75,600)
It is better to accept the offer.
Let FoB = x
Working notes
Import utilization
100 x 10% = Rs. 10
Cost = 10
+ Duty –
T.C 10
Profit 30% 3
S.P 13 - Benefit = 3
∴ Benefit as % of FoB = 3/100 x 100 = 3%
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Question15:- Profitability arising out of discontinuance of product, export total production and replacing
existing machinery). Shiplon Products ltd. Manufactures 3 different products. The relevant data of these
products are as under:
Name of the Product Cream Pomade Jelly
Production capacity (units) 5,000 7,000 8,100
Machine hours per unit 1 3 4
Variable cost per unit Rs. 3.00 2.50 3.50
Selling price –Rs. / Unit 4.00 5.50 6.00
The total fixed overheads at current capacity level are Rs. 40,000 per annuam.
The company has various alternatives for improving profitability as given below:
To stop the production of Jelly and use the released capacity for producing Pomade. The machine for both the
products are common. However cream is produced on a special purpose machine.
To export the total production of Jelly at current price. On export the following additional revenue is
expected:8% Duty Drawback on export price.
12% Cash Compensatory Support against an export scheme of government.
5% Replenishment License which can be sold in market at a premium of 80%.
To replace the conventional machine used for Jelly by a special purpose machine, which will reduce the
production time from 4 hours to 3 hours per unit. Due to this change Rs. 0.50 per unit will reduce the variable
cost of Jelly. The released machine will be used for producing Pomade. This proposal will entail an additional
burden of fixed cost to the tune of Rs. 32,000 per annum.
Please advise the management about the right choice of an
Alternative so as to maximize profits.
Solution:- SHIPLON PRODUCTS LTD.
Profitability under the existing production schedule
Details Cream Pomade Jelly Total
No. of Units 5,000 7,000 8,100
Selling Price (Rs./units) 4,00 5.50 6.00
Variable Cost (Rs./units) 3.00 2.50 3.50
Contribution per unit 1.00 3.00 2.50
P/V Ratio 25% 54.55% 41.67%
Total Contribution 5,000 21,000 20,250 46,250
Less: Fixed Cost 40,000
Net Profit 6,250
No. of machine hours per 1 3 4
unit
Contribution per machine 1.00 1.00 0.625
(Rs.)
Total machine hours 5,000 21,000 32,400
required
Note: Cream is produced on a special purpose machine. However Pomade and Jelly are produced on a common
machine. Under the present scheme Jelly is yielding lower P/V Ration than Pomade. The contribution per
machine of Jelly is even lower than that of Cream. Therefore production of Jelly should be completely stopped
and that of 32,400 machine hours are diverted to manufacture of pomade. The revised production of pomade
will be as under:
Additional production of Pomade by utilizing additional 32,400 machine hours (3 hours are needed to produce
one unit of pomade) 10,800 units
17,800 units
Profitability under the revised production schedule
(Production of Jelly to be discontinued)
Details Cream Pomade Total
Production (units) 5.000 17,800
Contribution per unit 1.00 3.00
(Rs.)
Total Contribution 5,000 53,400 Rs. 58,400
Less: Fixed Cost 40,000
Net profit 18,400
It should be noted the released machine will be used for producing Pomade. So the production of Pomade in the
multi purpose machine will be 17,800 units.
It is better to introduce second shift working without subjecting the benefit of discounting policy.
Let x be the addition units over & above 8,00,000 where introduction of second shift is justified (we can say the
required level of out put should be less than 4,00,000).
Hence we can say the benefit of discount would not be available on addition units. i.e over & above.
Incremental Revenue = Incremental cost
X x 25 = 8X + 5.50X + 2X + 3350,000
25X – 15.50X + 3350,000.
X = 3350,000/9.5
= 352 632 unit
This is minimum quantity to satisfy the demand.
--------------------------------------------------------------------------------------------------------------------------------------------
Question18:- Makeshift Manufactures produce a single product. The company’s annual normal
production is 5 lakhs units of input on a single shift eight hour a day basis in terms of a standard
input of 1 lakh direct labour hours. Last year’s income statement is given below:
Rs.
Sales ( 7 Lakh of units @ Rs. 2.50) 17,50,000
Variable Expenses
Direct Material 2,80,000
Direct Labour 4,90,000
(1,40,000 hrs. @ Rs. 3.50)
Factory Overhead:
Overtime Premium 1,40,000
Miscellaneous 2,10,000
11,20,000
Contribution Margin 6,30,000
Fixed Expenses 5,30,000
Net income 1,00,000
Management is concerned about the Overtime working done last year (Overtime is paid at
double the normal rate) and wants to investigate the possibility of working a second shift. The Cost
Accountant of the Company estimates that a second shift would increase costs as follows: an additional
factory supervisor at Rs. 30,000 per annum, a night shift allowance of 60 paise per direct labour hour and
an increase in security and administrative costs of Rs. 40,500 a year. Management required you as their
consultant to answer these questions with supporting figures:
(a) If instead of working overtime, a second shift had been introduced at the beginning of last
year itself, would profits have been better? If so by how much?
At what capacity levels it would be advantageous to the company to change from overtime working to
a second shift ?
This year it is estimated that there will be, on last year’s figures 20% increase in units sold, 10%
increase in selling price, 5% increase in direct material cost per unit and a direct labour rate increase
of Re. 0.30 per hour. Assuming that the overtime working would be continued prepare an income
statement for the year based on the current estimates;
If a second shift working were to be introduced, with an increase in night shift allowance of 6
paise per direct labour hour, what would have been the saving in cost?
-----------------------------------------------------------------------------------------------------------------------------
Question19:- A company operates its plant on single shift basis. It can produce upto 8,000 units of output
per month without overtime. The fixed costs on single shift basis of operation amount to Rs. 30,000 per month.
The average variable cost per unit is Rs.10.
The output can be increased upto 15,000 units per month by working overtime. This entails no increase
in fixed costs, but the variable costs per unit during overtime will be Rs. 12 in excess of 8,000 units upto the
capacity of 15,000 units. If a second shift is worked, the maximum capacity of the second shift is 8,000 units
per month. The variable cost on second shift operation is Rs. 10.50 per unit and the incremental fixed cost
involved in the second shift is Rs. 6,000 per month. Required:
1: If the company’s demand for the product is 10,000 units, should the company work overtime or second
shift?
2: At what level of output will the company consider working second shift instead
of working overtime? State the range of output for overtime working and second shift operation.
3: During a particular month, the company predicted its demand to be 14,000 units and worked second
shift. At the end of the month it was discovered that the company’s demand was only 11,000 units and
the company accordingly Produced only 11,000 units. Calculate the cost of prediction error.
Solution:- Statement of Comparative cost
Second step Overtime working
Night shift 1000 Overtime 4,000
allowance 0.5 premium
X 2000 2 X 2000
Extra Fixed 6,000
Cost
Total Cost 7,000 Total Cost 4,000
Decision: It is better to introduce overtime working instead of second shift working further we can say that
basis variable cost Rs. 10 on additional 2000 unit to be termed as irrelevant cost and existing fixed cost Rs.
30,000 to be termed as Sunk cost
(2) At what level of
Let x be Addition units
Total cost = Total cost
Second shift Over time
or, 0.5x + 6000 = 2x + nil
6000 – nil/2 – 0.5 = x
x = 4000 units
Statement of Range.
Additional level Preference
0 – 3999 Overtime
4000 Overtime/Second shift
4001 to 8000 second shift
Store ledger (F I F O)
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Qty Rate Amount Qty Rate Amount Qty Rate Rate Amount Rs. Qty Rate Am
Rs. Rs. Rs
Opening 10,000 2 20,000 41500 2 83000 122500 3 367500 38500 3 11
lock
+ 94500 2 189000 15700 3 472500 63000 4 252000 63000 4 25
Purchase
- Issue to (a) 2 20,000 (a) 2 83000 84000 3 252000 (a) 3 11
production 10,000 41500 38500
(b) 2 106000
(b) 35000 3 105000 - -
(b) 58000 4 232000
53000 126000 76500 188000 84000 252000 96500 347500
63000
Closing (a) - (a) - (a) 3 115500 (a) – O
stock 38500 st
(b) 2 83000 (b) 122500 3 367500 (b) 252000 (b) 4 20,000
41500 63000
x4
Question 3
Solution:-
Statement of Contribution per unit
ACB MCB OP
Rs. Rs. Rs.
Selling price 520 500 350
cost;
Material
B. Board 60 (1 x 60) 60 (1 x 60) 60 (1 x 60)
ICO 8 160 (8 x 20) 40 (2 x 20) 40 (2 x 20)
IC 12 48 (4 x 12) 120 (10 x 120) 48 (4 x 12)
IC 26 16 (2 x 8) 48 (6 x 8) 64 (8 x 8)
Labour:
A 40 (8 x 5) 30 (6 x 5) 20 (4 x 5)
B 64 (16 x 4) 48 (12 x 4) 32 (8 x 4)
Variable 36 24 24
overhead
Contribution 96 130 62
P.U.
------------------------------------------------------------------------------------------------------------------------------
Question 4
Solution:-
Statement of flexible budget
Level 5500 6000 6500
Rs. Rs. Rs.
Material list:
A 66000 (5500 x 12) 72000 (6000 x 12) 78000 (6500 x 12)
B 60500 (5500 x 11) 66000 (6000 x 11) 71500 (6500 x 11)
Wages:-
Variable 111375 (20.25 x 5500) 121500 (20.25 x 6000) 131625 (20.25 x 6500)
Fixed 57915 57915 57915
Premium - 5062.5 (10.125 x 500) 10125 (10.125 x 1000)
Factory overhead:
Variable 16500 (3 x 5500) 1800 (3 x 6000) 19500 (3 x 6500)
Fixed 83400 (69500 x 1.2) 83400 (69500 x 1.2) 69500 x 1.2)
Selling & Distribution
Variable 110000 (20 x 5500) 120,000 (20 x 6000) 130,000 (20 x 6500)
Fixed 96250 96250 96250
Total cost 601940 940127.5 668190
Sales 522500 570000 617500
Profit (79440) (70127.5) (50690)
230240
Selling price – = Rs. 90.9 P.V.
200
Working Notes:-
Capital employed
Return = 20% C.E.
= 20% (F A + Working Capital)
= 20% (nil + 80% of sale)
= 20% (181845 x 80%)
= 29095
Working notes:-
1,00,000
(1) Raw material cost = 10,000
= 10
Increment = 5%
∴new price = 10.5
(2) Labour = 1.92 lacs = 16
12000
Increment = 3%
New Labour rate = 16 + 3% = 16.48
Efficiency = 4 % decrease = 16.48 x 100 = 17.16
96
(3) Over head
650000 - 600000
Variable over head = = 25 P. Hr
12000 - 10,000
Inflation = 6%
New rat = 25 + 6% = 26.5
Efficiency effect = 25.5 x 100 = 27.6042
96
Out of total production over head = 600,000
VC 25 x 10,000 F.C
= 250,000 350000
+ 10% inflation upto 80%
385000
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Question No:- 6
(Working Notes)
1. Direct Material Cost
A. Rs. 60,000 ÷ 10,000 = Rs. 6 per units
B. Rs. 50.000 ÷ 10,000 = Rs. 6 per units
2. Fixed and variable cost of production labour cost: (in both the Quarter Production in less than 19,000 units
and overtime is not relevant)
Quarter I Quarter II Quarter III
Production (Units) 10,000 15,000 5,000
Production labour (Rs.) 1,80,000 2,30,000 50,000
Variable cost (per units) = Charge in production labour cost/change in production units
= Rs. 50,000/5,000 = 10 per units
Fixed labour cost for quarter = Rs. 1,80,000 – (10,000 units x Rs. 10) = Rs. 80,000
For quarter III. (production 20,000 units and hence overtime is relevant).
Variable cost 20,000 unit @ Rs. 10 Rs. 2,00,000
Fixed cost 80,000
Overtime premium 1,000 x Rs. 5* 5,000
Total production labour cost 2,85,000
*Labour cost become 50% higher for activity in excess of 19,000 unit for quarter IV (18,000 unit)
Material production labour cost of 18,000 unit: Rs. 1,62,200
18,000 unit x {Rs. 10 x 0.80 x 1.125}* 90,000
Fixed production labour cost
* Due to 80% learning curve, labour rate rises by 12 1/2%. This factor of rise in rate applies both to variable and
fixed labour.
3. Fixed and variable cost components of manufacture overhead.
Quarter I Quarter II Change
Production (unit) 10,000 20,000 10,000
Manufacture
Overhead excluding 90,000 1,20,000 30,000
depreciation
Variable cost component of manufacturing overhead
= Change in Manufacturing Cost ÷ Change in Production
Unit = Rs. 30,000 ÷ 10,000 units = Rs. 3 per unit.
Hence fixed cost component of manufacturing overhead
= Rs. 90,000 – (10,000 unit x Rs. 3) = Rs. 60,000
For quarter IV
Fixed costs components Rs. 60,000
Add – 20% increase of Rs. 12,000
Total fixed cost 72,000
Variable cost component of selling and Distribution Expenses = Change in selling and Distribution
Expenses/Change in sales units
= Rs. 16,000 ÷ 8,000 units = Rs. 2 per unit
Hence, fixed cost components of selling and distribution expenses
= Rs. 54,000 – (17,000 units x Rs. 2) = Rs. 20,000
Fixed cost component for IVth quarter = Rs. 20,000 x 1.20 = Rs. 24,000
Statement showing variable cost per unit and fixed cost under each cost classification effective
for quarter IV
Particulars Reference of For Quarter IV
working Note
Total fixed cost for the Variable cost per
quarter unit
Direct materials:
A 1 – Rs. 6.00
B 1 – 5.00
Production labour 2 90,000 9.00
Manufacturing overhead 3 72,000 3.00
Depreciation of production – 20,000 –
machinery – 25,000 –
Administrative expenses 4 24,000 2.00
Selling and distribution
expenses
Question 7
Solution:-
Statement of profit for 1986 (20,000 unit)
Rs.
Revenue 125 x 20,000 25,00,000
Less: Variable cost 68 x 20,000 1360,000
Contribution 1140000
– Fixed cost 675000
Profit 465000
Decision:
It is better to select 4000 quantity.
Working notes
(1) Statement of Revised Variable cost
Material = 16 + 10% = 17.6
Wages = (40 + 5%) x 100/112 = 37.5
Variable overhead = (12 + 5%) x 100/112 = 11.25
Total 66.35
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Question 8
Solution:-
Capacity = 20,000 unit
Utilized = 15000 unit
Sport = 5000 unit
Old Rate New Rate
Direct material Rs. 30 Rs. 33
Direct labour Rs. 20 Rs. 25
Variable overhead Rs. 20 Rs. 20
Fixed cost Rs 15 (B. f)
Profit Rs. 15
Selling price 100
∴ F C = 15 x 15000 = 2,25,000
Statement of Comparative Result
Extra 5000 unit (By utilising Extra 10,000 unit (By new
spare) machine)
Revenue 5,00,000 (5000 x 100) 9,00,000 (90 x 10,000)
– Variable cost 390,000 (78 x 5000) 7,80,000 (78 x 10000)
Fixed selling Exp. 50,000 —
Fixed cost Sunk — —
Depreciation — 1,00,000
Fixed administration — 80,000
Profit 60,000 (30,000)
Decision:-
It is better to accept extra 5000 units & reject the alternative due to loss of Rs 30,000.
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Question 9
Solution:-
First Option
Incremental revenue:
Gift shop [(Rs. 48,000/80) x 10] Rs. 6,000
Restaurant [Rs. 64,000/80 x 10] 8,000
Lodge [(1,80,000/90) x 10] 20,000
Total (A) 34,000
Differential costs:
Items of cost Gift shop Restaurant Lodge Total
Cost of sales (26,400/80) x 10 x (35,200/80) x 10 = — 7,700
Supplies Rs. 3,300 Rs. 4,400 (14,400/90) x 10 = 1,600 2,700
Electricity (2,400/80) x 10 = (6,400/80) x 10 = (13,500-9,900)(10/90) 600
300 (960-640) 800 (3,200- = 400 11,000
(10/80) = 40 Total 1,20)(10/80) = 40
(B)
Question 2
Solution:-
Statement of cost pool (Absorption)
Department cost (Rs.) Basis No. of Activity Cost per Activity
I 1,100,000 Labour hours 1,83,333 6
II 15,00,000 machine hours 5,00,000 3
Statement of Comparative
A B C
Cost under 14,96,000 24,94,000 34,10,000
Cost under traditional 11,00,000 2320,000 3930,000
Difference 39,6,000 1,74,000 (5,20,000)
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Question 3
Solution:-
1 (a) Statement of cost pool [Absorption]
Over head cost = Rs. 184,8000
Direct Labour hours = 88000 hrs (40000+40,000+8000]
Overhead cost per labour hours = 21 per hours
Statement of cost
A B C D Total
Rs. Rs. Rs. Rs. Rs.
Material 19200 20,000 9600 28800 77600
Labour 13440 8400 4480 10080 36400
Overhead @ 10 19200 12000 6400 14400 5200
(1920 x 10) (1200 x 10 ) (640 x 10) 1440 x 10)
Cost 51840 40400 20480 53200 166000
Statement of Re conciliation
A B C D Total
ABC (Rs.) 48979 40712 23006 53303 166000
Absorption 51840 40400 20480 53280 166000
(Rs.)
Difference (2861) 312 2526 23 nil
The difference of distribution of the overhead occurred due to the following reasons.
(i) The ratio of difference activity bet the product are different from the ratio of single recovery rate basis.
(ii) The product which consumes high volume of activity as compare to machine working hours. That product
or products co ill absorb high volume of overhead. (The total value of overhead remain same).
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Question 5
Solution:- 1
Statement of cost pool (Absorption)
Cost Amount Basis No. of Activity Cost per
(Rs.) Labour hour
Professional
labour cost
Partner 3,00,000 professional Hr 9000
Associates 2,40,000 professional Hr (25+40+-------) 60/-
Overhead:
Design 7,00,000 professional 9000 [250+ 40 + --] 120/-
Staff 380,000 Labour hours
Question 7
Solution:-
Statement of cost pool (Basis budget)
Cost Amount (Rs.) Basis No. of Activity Cost per Activity
Packing material 1950,000 Composite Ratio 1950 (30:90:75 10,000
W.N)
Other 940,000 Quantity 1,00,000 (30,000 + 9.4
45000 + 25000)
Statement of cost
Iohn Ltd. George Ltd. Raul Ltd.
Quantity 30,000 45000 25000
Packing material Rs. 3,00,000 Rs. 9,00,000 Rs. 750000
(30:90:75)
Other cost Rs. 282000 (9.4 x 30000) Rs. 423000 9.4 x 45000) Rs. 235000 (9.4 x 25000)
Cost Rs. 5,82,000 Rs. 1323000 Rs. 98,5000
Working notes:
Iohn George Paul
1 1 cm 1 cm 1 cm
1 2 3
Qty 30,000 45,000 25,000
Relative composite 30,000 90,000 75,000
Ratio: 30: 90: 75
Question 8
Solution:-
Statement of cost pool
Overhead Amount Rs. Basis No. of Activities Cost per Activity
Stores 278250 + 262500 no. of receipt 1960 (48 + 52 + --) 275.89
Setup 255000 + 11,13,000 Inspection 1280 (30+10+--) 149.41
Working notes
1 30% mm 40% set-up 30% Q-9
Salary of technical stuff 1914250 255000 191250
(637500)
Note: Under recovery and over recovery exist only when actual base are different from budgeted base.
Decision: It’s not better to discontinue the product V4 because unavoidable fixed cost 78750 + 60,000 i.e.
138750 remain constant.
Hence we can say such fixed cost to be termed as fixed cost