Paper - 3: Cost and Management Accounting: © The Institute of Chartered Accountants of India
Paper - 3: Cost and Management Accounting: © The Institute of Chartered Accountants of India
MM Ltd. has adopted the policy of classifying the items constituting 15% or above of Total
Inventory Cost as 'A' category, items constituting 6% or less of Total Inventory Cost as 'C'
category and the remaining items as 'B' category.
You are required to:
(i) Rank the items on the basis of % of Total Inventory Cost.
(ii) Classify the items into A, B and C categories as per ABC Analysis of Inventory Control
adopted by MM Ltd.
(b) SNS Trading Company has three Main Departments and two Service Departments. The
data for each department is given below:
Departments Expenses Area in (Sq. Mtr) Number of
Main Department: (in `) Employees
Purchase Department 5,00,000 12 800
Packing Department 8,00,000 15 1700
Distribution Department 3,50,000 7 700
Service Departments:
Maintenance Department 6,40,000 4 200
Personnel Department 3,20,000 6 250
The cost of Maintenance Department and Personnel Department is distributed on the basis
of ‘Area in Square Metres’ and 'Number of Employees' respectively.
You are required to:
(i) Prepare a Statement showing the distribution of expenses of Service Departments to
the Main Departments using the "Step Ladder method" of Overhead Distribution.
(ii) Compute the Rate per hour of each Main Department, given that, the Purchase
Department, Packing Department and Distribution Department works for 12 hours a
day, 24 hours a day and 8 hours a day respectively. Assume that there are 365 days
in a year and there are no holidays.
(c) AUX Ltd. has an Annual demand from a single customer for 60,000 Covid-19 vaccines.
The customer prefers to order in the lot of 15,000 vaccines per order. The production cost
of vaccine is ` 5,000 per vaccine. The set-up cost per production run of Covid-19 vaccines
is ` 4,800. The carrying cost is ` 12 per vaccine per month.
You are required to:
(i) Find the most Economical Production Run.
(ii) Calculate the extra cost that company incurs due to production of 15,000 vaccines in
a batch.
(d) LR Ltd. is considering two alternative methods to manufacture a new product it intends to
market. The two methods have a maximum output of 50,000 units each and produce
identical items with a selling price of ` 25 each. The costs are:
Method-1 Method-2
Semi-Automatic Fully-Automatic
(`) (`)
Variable cost per unit 15 10
Fixed costs 1,00,000 3,00,000
Answer
(a) (i) Statement of Total Inventory Cost and Ranking of items
Item Units % of Total Unit Total % of Total Ranking
code no. units cost Inventory cost Inventory cost
(`) (`)
101 25 3.33 50 1,250 16.67 2
102 300 40.00 1 300 4.00 6
103 50 6.67 80 4,000 53.33 1
104 75 10.00 8 600 8.00 4
105 225 30.00 2 450 6.00 5
106 75 10.00 12 900 12.00 3
750 100 153 7,500 100
(b) (i) Schedule Showing the Distribution of Expenses of Service Departments using
Step ladder method.
Main Department Service Department
Purchase Packing Distribution Maintenance Personnel
(`) (`) (`) (`) (`)
Expenses 5,00,000 8,00,000 3,50,000 6,40,000 3,20,000
Distribution of
Maintenance
Department
(12:15:7:-:6) 1,92,000 2,40,000 1,12,000 (6,40,000) 96,000
Distribution of
Personnel
Department
(800:1700:700:-:-) 1,04,000 2,21,000 91,000 - (4,16,000)
Total 7,96,000 12,61,000 5,53,000 - -
(ii) Calculation of Expenses rate per hour of Main Department
Purchase Packing Distribution
Total apportioned expenses (`) 7,96,000 12,61,000 5,53,000
Total Hours worked 4,380 8,760 2,920
(12 x 365) (24 x 365) (8 x 365)
Expenses rate per hour (`) 181.74 143.95 189.38
(c) (i) Calculation of most Economical Production Run
2 × 60,000× ` 4,800
= = 2,000 Vaccine
12×12
(ii) Calculation of Extra Cost due to processing of 15,000 vaccines in a batch
When run size is When run size is
2,000 vaccines 15,000 vaccines
Total set up cost 60,000 60,000
= × ` 4,800 = × ` 4,800
2,000 15,000
= ` 1,44,000 = ` 19,200
Total Carrying cost ½ × 2,000 × ` 144 ½ × 15,000 × ` 144
= ` 1,44,000 = ` 10,80,000
Total Cost ` 2,88,000 ` 10,99,200
Thus, extra cost = ` 10,99,200 – ` 2,88,000 = ` 8,11,200
Interpretation of Results
At activity level below the indifference points, the alternative with lower fixed costs
and higher variable costs should be used. At activity level above the indifference
point, alternative with higher fixed costs and lower variable costs should be used.
No. of Product Alternative to be Chosen
Product ≤ 40,000 units Method-1, Semi-Automatic
Product ≥ 40,000 units Method-2, Automatic
(ii) Break Even point (in units)
Method-1 Method-2
Question 2
(a) The following data relates to manufacturing of a standard product during the month of
March, 2021:
Particulars Amount (in `)
Stock of Raw material as on 01-03-2021 80,000
Work in Progress as on 01-03-2021 50,000
Purchase of Raw material 2,00,000
Carriage Inwards 20,000
Direct Wages 1,20,000
Cost of special drawing 30,000
Alternative Solution
(considering Hire charges paid for Plant as indirect expenses)
Statement of Cost for the month of March, 2021
Particulars Amount Amount
(`) (`)
Cost of Material Consumed:
Raw materials purchased (` 2,00,000 – ` 40,000) 1,60,000
Carriage inwards 20,000
Add: Opening stock of raw materials 80,000
Less: Closing stock of raw materials (30,000) 2,30,000
Direct Wages 1,20,000
Direct expenses:
Cost of special drawing 30,000 30,000
Prime Cost 3,80,000
Hire charges paid for Plant 24,000
Carriage on return 6,000
Store overheads (10% of material consumed) 23,000
Factory overheads (20% of Prime cost) 76,000
Additional expenditure for rectification of defective products
(refer working note) 2,160 1,31,160
Gross factory cost 5,11,160
Add: Opening value of W-I-P 50,000
Less: Closing value of W-I-P (24,000)
Works/ Factory Cost 5,37,160
Less: Realisable value on sale of scrap (5,000)
Cost of Production 5,32,160
Add: Opening stock of finished goods -
Less: Closing stock of finished goods -
Cost of Goods Sold 5,32,160
Administrative overheads:
Maintenance of office building 2,000
Salary paid to Office staff 25,000
Legal Charges 2,500 29,500
Selling overheads:
Expenses for participation in Industrial exhibition 8,000 8,000
Distribution overheads:
Depreciation on delivery van 6,000
Warehousing charges 1,500 7,500
Cost of Sales 5,77,160
Working Notes:
1. Number of Rectified units
Total Output 8,000 units
Where,
Total Joint cost = ` 40,000
Total sales at split off point (S, P, N and A) = 20,000 + 12,000 + 28,000 + 20,000
= ` 80,000
Alternative Solution
Decision for further processing of Product S, P and N
Products S (`) P (`) N (`)
Sales revenue after further processing 1,20,000 40,000 48,000
Less: sales value at split-off point 20,000 12,000 28,000
Incremental Sales Revenue 1,00,000 28,000 20,000
Less: Further Processing cost 80,000 32,000 36,000
Profit/ loss arising due to further processing 20,000 (-)4,000 (-)16,000
25
= 100 = 5%
500
50 + 25
= 100 = 15%
500
(ii) Equivalent Employee Turnover rate:
5
Using Separation method = ×365 = 30.42%
60
5
Or, = × 360 = 30%
60
5
Or, = × 12 = 30%
2
15
Using Flux method = 365 = 91.25%
60
15
Or, = × 360 = 90%
60
15
Or, = × 12 = 90%
2
Question 3
(a) The Profit and Loss account of ABC Ltd. for the year ended 31 st March, 2021 is given
below:
Profit and Loss account
(for the year ended 31st March, 2021)
To Direct Material 6,50,000 By Sales 15,00,000
(15000 units)
To Direct Wages 3,50,000 By Dividend received 9,000
To Factory overheads 2,60,000
To Administrative overheads 1,05,000
To Selling overheads 85,000
To Loss on sale of investments 2,000
To Net Profit 57,000
15,09,000 15,09,000
(iii) Cost sheet and Computation of Sales value per quarter of product ‘S’ using ABC
system
Particulars (`)
1500 units of product ‘S’ to be delivered per quarter
Initial design cost per quarter (` 30,000 / 8 quarters) 3,750
Direct Material Cost 18,000
Direct Labour Cost (1,500 Labour hours x ` 10) 15,000
Direct Costs (A) 36,750
Set up Cost (15 Production runs × ` 300) 4,500
Inspection Cost (250 Inspections × ` 30) 7,500
Indirect Costs (B) 12,000
Total Cost (A + B) 48,750
Add: Mark-up (20% on cost) 9,750
Sale Value 58,500
Selling Price per unit ‘S’ (` 58,500/1500 units) 39
Question 4
(a) A Manufacturing unit manufactures a product 'XYZ' which passes through three distinct
Processes - X, Y and Z. The following data is given:
Process X Process Y Process Z
Material consumed (in `) 2,600 2,250 2,000
Direct wages (in `) 4,000 3,500 3,000
• The total Production Overhead of ` 15,750 was recovered @ 150% of Direct wages.
• 15,000 units at ` 2 each were introduced to Process 'X'.
• The output of each process passes to the next process and finally, 12,000 units were
transferred to Finished Stock Account from Process 'Z'.
• No stock of materials or work in progress was left at the end.
The following additional information is given:
Process % of wastage to normal input Value of Scrap per unit ( `)
X 6% 1.10
Y ? 2.00
Z 5% 1.00
• The expenditure incurred related to material purchase, wages and other chargeable
expenses were ` 5,10,000
• Materials of the value of ` 20,000 were lying on the site.
• A special plant was purchased specifically for this contract at ` 40,000 and after use
on this contract till 31st March, 2021, it was valued at ` 25,000.
You are required to compute the value of Work Certified, Cash received for certified work
and Notional profit of the contract for the year ended on 31st March, 2021. (5 Marks)
Answer
(a)
Dr. Process-X Account Cr.
Particulars Units (`) Particulars Units (`)
To Material 15,000 30,000 By Normal Loss A/c 900 990
introduced [(6% of 15,000 units)
x ` 1.1]
” Additional -- 2,600 ” Process-Y A/c 14,100 41,610
material (` 2.951* × 14,100
units)
” Direct wages -- 4,000
” Production OH -- 6,000
15,000 42,600 15,000 42,600
*Cost per unit of completed units
` 42,600 - ` 990
= Total Cost − Re alisable value from normal loss = = ` 2.951
Inputs units − Normal loss units 15,000 units - 900 units
Alternative Solution
Dr. Process-X Account Cr.
Particulars Units (`) Particulars Units (`)
To Material 15,000 30,000 By Normal Loss A/c 900 990
introduced [(6% of 15,000 units) x
` 1.1]
units) x ` 2]
” Additional material -- 2,250 ” Process-Z A/c 12,631 50,524
(` 4 × 12,631 units)
@
2938 – 2B + 4B = 2,086
2B = - 852 => B = - 426 units
Since, the figure of B is in negative, it is an abnormal gain of 426 units.
Further, A (i.e. normal loss) = 1,469 + 426 = 1,895 units
1,895 units
#3. % of wastage in Process Y Account = = 13.44%
14,100 units
Dr. Process-Z Account Cr.
Particulars Units (`) Particulars Units (`)
To Process-Y A/c 12,631 50,524 By Normal Loss A/c 631 631
[(5% of 12,631 units)
x ` 1]
” Additional material -- 2,000
” Direct wages -- 3,000
” Production OH -- 4,500 ” Finished Stock A/c 12,000 59,393
(` 4.9494$ × 12,000
units)
12,631 60,024 12,631 60,024
$Cost per unit of completed units
` 60,024 - ` 631
= Total Cost -Realisable value from normal loss = = ` 4.9494
Inputs units-Normal loss units 12,631 units - 631 units
d. Support functions
- Postage and logistics 32,40,000
- Facilities cost 46,75,000
- Employees cost 16,20,000
- Office administration cost 48,00,000 1,43,35,000
Total Cost 7,00,00,000
* IT cost
= (` 3,500 crores x 0.002) – ` 4,79,00,000 = ` 2,21,00,000
= 3,800 × 6 - 3,840 × 6
3,800
=0
Answer
(a)
Particulars Types of
Responsibility Centre
(i) Purchase of bonds, stocks, or real estate property. Investment Centre
(ii)Ticket counter in a Railway station. Revenue Centre
(iii)
Decentralized branches of an organization. Profit Centre
(iv)Maharatna, Navratna and Miniratna public sector Investment Centre
undertaking (PSU) of Central Government.
(v) Sales Department of an organization. Revenue Centre
(b) Margin of Safety: The margin of safety can be defined as the difference between the
expected level of sale and the breakeven sales.
The larger the margin of safety, the higher is the chances of making profits.
The Margin of Safety can be calculated by identifying the difference between the projected
sales and breakeven sales in units multiplied by the contribution per unit. This is po ssible
because, at the breakeven point all the fixed costs are recovered and any further
contribution goes into the making of profits.
Margin of Safety = (Projected sales – Breakeven sales) in units x contribution per
unit
It also can be calculated as:
Profit
Margin of Safety =
P / V Ratio
(c) Rowan Premium Plan: According to this system a standard time allowance is fixed for the
performance of a job and bonus is paid if time is saved.
Under Rowan System, the bonus is that proportion of the time wages as time saved bears
to the standard time.
Time Saved
Bonus = × Time taken × Rate per hour
Time Allowed
Example explaining highly efficient worker and less efficient worker obtaining same
bonus:
Time rate (per Hour) ` 60
Time allowed 8 hours.
Time taken by ‘X’ 6 hours.