Costing Group 1 Important Questions for IPCC November 2017 (Chapters 6 9)

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1 Costing Group 1 Important Questions for IPCC November 2017 (Chapters 6 9) CHAPTER 6 CONTRACT COSTING 1. M/s Manholes and Sewers Ltd. Undertook for erecting a sewerage treatment plant for a municipality for a total value of 24 lakhs. It was expected that the contract would be completed by 31 st March You are required to prepare the contract account for the year ending 31 st March, 2001 from the following particulars: Wages 6,00,000 Special Plant 2,00,000 Materials 3,00,000 Overheads 1,20,000 10% to be provided on plant Materials lying at site on ,000 Work certified was to the extent of 16,00,000 and 80% of the same was received in cash. 5% of the value of materials issued and 6% of the wages incurred may be taken for the portion of work completed but not yet certified Overheads are charged as a % of direct wages SOLUTION Ignore depreciation on plant for use on uncertified portion of the work Ascertain the amount to be transferred to profit and loss account on the basis of realised profit. Contract Account for the year ending 31 st March, 2001 Particulars Amount Particulars Amount To Wages 6,00,000 By Work in progress To Special Plant 2,00,000 Work Certified 16,00,000 To Materials 3,00,000 Work Uncertified (WN 16,58,200 1) 58,200 To Overheads 1,20,000 By Materials at site 40,000 By Plant at site 2,00,000 Less: depreciation (10%) 20,000 1,80,000 To Notional Profit 6,58,200 18,78,200 18,78,200 To Profit and Loss 3,51,040 By Notional Profit b/d 6,58,200 A/c (WN2) To Reserve Profit 30,760 6,58,200 6,58,200 1

2 WN1: Calculation of Work Uncertified Materials (5% * 3,00,000) = 15,000 Wages (6% * 36,000) = 36,000 Overheads (20% * 36,000) = 7,200 Total 58,200 WN2 : Calculation of profit to be transferred to Costing P&L A/c % of completion = (Work Certified / Contract Price)* = 16,00,000 / 24,00,000 = 66.67% Profit to be transferred to P&L A/c = 2/3 * Notional Profit * (Cash Recd / Work certified) Profit to be transferred = 2/3 * 6,58,200 * 80% = 3,51, Giant Construction Ltd. has been constructing a flyover for 15 months and is under progress. The following information relating to the work on the contract has been prepared for the period ended 31st March, Particulars Amount(Rs) Contract price 65,00,000 Value of work certified at the end of the year 57,20,000 Cost of work not yet certified at the end of the year 1,20,000 Opening balances: 8,00,000 Cost of work completed 80,000 Materials on site Costs incurred during the year: Material delivered to site Wages Hire of plant Other expenses 15,90,000 14,95,000 2,86,000 2,30,000 Closing balance: Material on site 40,000 As soon as materials are delivered to the site, they are charged to the contract account. A record is kept on actual use basis, periodically a stock verification is made and any discrepancy between book stock and physical stock is transferred to a general contract material discrepancy account. The stock verification at the year end revealed a stock shortage of Rs. 15,000. In addition to the direct charges listed above, general overheads are charged to contracts at 5% of the value of work certified. General overheads of Rs. 35,000 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 Rs. 5,72,000. This estimate includes the cost of materials on site at the end of the year ( ) and also a provision for rectification. Required: (i) Determine profitability of the above contract and recommend how much profit should be taken for the year just ended. (Provide a detailed schedule of costs). (ii) State how your recommendation in (i) would be affected if the contract price was Rs. 80,00,000 (rather than Rs. 65,00,000) and if no estimate has been made of costs to completion. 2

3 SOLUTION: (i) SCHEDULE OF COSTS PARTICULARS AMOUNT AMOUNT (Rs) (Rs.) Cost incurred: Opening Balance 8,00,000 Material consumed during the year: Opening Balance Add: Material delivered during the year Total balance: Less: Closing stock 80,000 15,90,000 16,70,000 40,000 16,30,000 Wages 14,95,000 Hire of Plant 2,86,000 Other Expenses 2,30,000 Material discrepancy (Actual) 15,000 General overheads (5% of Rs. 57,20,000) 2,86,000 Less: Absorbed at the beginning of the year 35,000 2,51,000 Cost Incurred to date (A) 47,07,000 Estimated further cost to complete (B) 5,72,000 Estimated Total Cost (C) =(A) + (B) 52,79,000 Contract Price (D) 65,00,000 Estimated Total Profit (E) = (D) (C) 12,21,000 Profit to be transferred to Profit and loss account: Estimated Profit x Value of work certified x 12 months Contract price 15 months = Rs. 12,21,000 x 57,20,000 x 12 65,00, = Rs. 8,59,584 (ii) If contract price was Rs. 80 lakhs and if no estimate has been made of costs to completion. Value of work certified at the end of year = Rs. 57,20,000 i.e. 71.5% of contract value. In such a case notional profit has to be calculated instead of estimated profit. PARTICULARS AMOUNT Value of Work Certified Rs. 57,20,000 Add: Cost of work not certified Rs. 1,20,000 Rs. 58,40,000 Less: Cost of work up to the end of year (47,07,000) NOTIONAL PROFIT Rs. 11,33,000 Recommendation in (i) above would be affected as follows: Profit to be credited to Profit and loss A/c. for the year just ended. (2/3) * Notional Profit * (12 months/ 15 months) 3

4 (2/3) * Rs. 11,33,000 * (12/15) = Rs. 6,04, 267 [It has been assumed that cash received is equals to value of work certified] CHAPTER 7 PROCESS COSTING 1. Star Ltd. manufactures chemical solutions for the food processing industry. The manufacturing takes place in a number of processes and the company uses a FIFO process costing system to value workinprocess and finished goods. At the end of the last month, a fire occurred in the factory and destroyed some of the paper files containing records of the process operations for the month. Star Ltd. needs your help to prepare the process accounts for the month during which the fire occurred. You have been able to gather some information about the months operating activities but some of the information could not be retrieved due to the damage. The following information was salvaged: Opening workinprocess at the beginning of the month was 800 litres, 70% complete for labour and 60% complete for overheads. Opening workinprocess was valued at Rs. 26,640. Closing workinprocess at the end of the month was 160 litres, 30% complete for labour and 20% complete for overheads. Normal loss is 10% of input and total losses during the month were 1,800 litres partly due to the fire damage. Output sent to finished goods warehouse was 4,200 litres. Losses have a scrap value of Rs.15 per litre. All raw materials are added at the commencement of the process. The cost per equivalent unit (litre) is 39 for the month made up as follows: Particulars Amount Raw Material 23 Labour 7 Overheads 9 Total 39 Required: i. Calculate the quantity (in litres) of raw material inputs during the month. ii. Calculate the quantity (in litres) of normal loss expected from the process and the quantity (in litres) of abnormal loss / gain experienced in the month. iii. Calculate the values of raw material, labour and overheads added to the process during the month. Prepare the process account for the month. SOLUTION: i. Calculation of Raw material inputs during the month Quantities entering the process Litres Quantities Leaving the process Litres 4

5 Opening WIP 800 Transfer to finished goods 4,200 Raw Material input (Balancing figure) 5360 Process Loss Closing WIP 1, ii. Calculation of Normal Loss and Abnormal Loss/Gain Particulars Litres Total process losses for month 1,800 Normal Loss (10% of input) 536 Abnormal Loss (Balancing figure) 1,264 iii. Calculation of values of raw material, labour and overheads added to the process Particulars Material Labour Overheads Cost per equivalent unit Rs. 23 Rs. 7 Rs. 9 Equivalent units (Litre) WN1 4,824 4,952 5,016 Cost of Equivalent units Rs. 1,10, 952 Rs. 34, 664 Rs. 45, 144 Add: Scrap value of normal Rs. 8,040 loss (536 units * Rs. 15) Total Value added Rs. 1,18,992 Rs. 34,664 Rs. 45, 144 WN1: Statement of Equivalent units (Litres) Equivalent Production Input Units Output Units Material Labour Overheads Units % Units % Units % Opening WIP 800 Units completed Units Introduced 5,360 opening WIP Fresh units ,400 3,400 3,400 Normal 536 5

6 Loss Abnormal 1,264 1,264 1,264 1,264 Loss Closing WIP ,160 4,824 4,952 5,016 iv. Process Account for month Particulars Litres Amount Particulars Litres Amount To opening WIP ,640 By Finished 4,200 1,63,800 goods To Raw Materials 5,360 1,18,992 By normal loss 536 8,040 To wages 34, 664 By Abnormal 1,264 49, 296 Loss To Overheads 45,144 By Closing WIP 160 4,304 6,160 2,25,440 6,160 2,25, The following data are available in respect of ProcessI for October 2014: Opening stock of work in process: 600 units at a total cost of 4,200. Degree of completion of opening work in process: Material % Labour 60% Overheads 60% Input of materials at a total cost of 55,200 for 9,200 units. Direct wages incurred 18,600 Overheads 8,630 Units scrapped 200 units. The stage of completion of these units was: Materials % Labour 80% Overheads 80% Closing work in process; 700 units. The stage of completion of these units was: Material % Labour 70% Overheads 70% 8,900 units were completed and transferred to the next process. Normal loss is 4% of the total input (opening stock plus units put in) Scrap value is ` 6 per unit. You are required to: (a) Compute equivalent production, (b) Calculate the cost per equivalent unit for each element. 6

7 (c) Calculate the cost of abnormal loss (or gain), closing work in process and the units transferred to the next process using the FIFO method. SOLUTION: 1. (a) Statement of Equivalent Production (FIFO Method) Input Output Equivalent Production Materials Labour Overheads Details Units Details Units % Units % Units % Units Opening Stock Fresh inputs 600 9,200 Finished goods transferred to next process: from opening stock From fresh materials Closing WIP Normal loss Less: Abnormal Gain 600 8, , ,992 9,000 9,030 9,030 (192) (192) (192) (192) , ,300 9,800 9,800 8,808 8,838 8, (b) Statement of Cost per equivalent units Elements ( ) Material Cost 55,200 Less: Scrap realisation 392 ` 6/ p.u. Cost ( ) Equivale nt units Cost per equivale nt Unit ( ) 2,352 52,848 8, Labour cost 18,600 8, Overheads 8,630 8, Total Cost 80, (c) Cost of Abnormal Gain 192 Units ( ) ( ) Material cost of 192 ` 6.00/ p.u. 1, Labour cost of 192 ` 2.10/ p.u Overheads of 192 ` 0.98/ p.u , Cost of closing WIP 700 Units Material cost of 700 equivalent 6.00/ p.u. 4, Labour cost of 490 equivalent 2.10/ p.u. 1, Overheads of / p.u

8 Cost of 8,900 units transferred to next process ( ) ( ) (i) Cost of opening WIP Stock b/f 600 units 4, (ii) Cost incurred on opening WIP stock Material cost Labour cost 240 equivalent 2.10 p.u Overheads 240 equivalent 0.98/ p.u (iii) Cost of 8,300 completed units 8, p.u. 75, Total cost [(i) + (ii) + (iii))] 80,303.2 CHAPTER 8: JOINT AND BY PRODUCT COSTING 1. Oleum Refinery Ltd. refines crude oil and produces two joint product Gasoline and HSD in the ratio of 4:6. The refining is done in three processes. Crude oil is first fed in ProcessA, from where the two products Gasoline and HSD are get separated. After separation from ProcessA, Gasoline and HSD are further processed in Process B and Process C respectively. During the month of July, 2014, 4,50,000 Ltr. of crude oil were processed in ProcessA at a total cost of Rs. 1,71,99,775. In ProcessB, Gasoline is further processed at a cost of Rs. 10,80,000. In Process C, HSD is further processed at a cost of Rs. 1,35,000. The Input output ratio for the each process is as follows: Process A 1 : 0.80 Process B 1 : 0.95 Process C 1 : 0.90 The details of sales during the month are: Gasoline HSD Quantity sold (Ltr.) 1,32,000 1,88,000 Sales price per Ltr.(Rs.) There were no opening stocks. If these products were sold at splitoff point, the selling price of Gasoline and HSD would be Rs. 64 and Rs. 41 per Ltr. respectively. Required: (i) (ii) Prepare a statement showing the apportionment of joint cost to Gasoline and HSD in proportion of sales value at split off point. Prepare a statement showing the cost per Ltr. of each product indicating joint cost, processing cost and total cost separately. (iii) Prepare a statement showing the product wise profit or loss for the month. 8

9 SOLUTION: Calculation of quantity produced Process A (Ltr.) Process B (Ltr.) Process C (Ltr.) Input 4,50,000 1,44,000 2,16,000 Normal Loss (90,000) (7,200) (21,600) (20% of 4,50,000 ltr.) (5% of 1,44,000 ltr.) (10% of 2,16,000 ltr.) 3,60,000 1,36,800 1,94,400 Production of 1,44, ,800 Gasoline Production of HSD 2,16,000 1,94,400 (i) Statement of apportionment of joint cost on the basis of sale value at splitoff point Gasoline HSD Output at splitoff point 1,44,000 2,16,000 (Ltr.) Selling price per Ltr. (Rs.) Sales value (Rs.) 92,16,000 88,56,000 Share in Joint cost (128:123) 87,71,200 84,28,575 (ii) Statement of cost per Litre. Gasoline HSD Output (Ltr.) 1,36,800 1,94,400 Share in joint cost (Rs.) 87,71,200 84,28,575 Cost per Ltr. (Rs.) (Joint cost) Further processing cost (Rs.) 10,80,000 1,35,000 Further processing cost per Ltr. (Rs.) Total cost per Ltr. (Rs.) (iii) Statement of profit Gasoline HSD Output (Ltr.) 1,36,800 1,94,400 Sales (Ltr.) 1,32,000 1,88,000 Closing stock (Ltr.) 4,800 6,400 (Rs.) (Rs.) Rs.68 and Rs.46 for Gasoline 89,76,000 86,48,000 and HSD respectively Add: closing stock (Ltr.) (at full cost) 3,45,600 2,81,920 Value of production 93,21,600 89,29,920 Less: Share in joint cost 87,71,200 84,28,575 Further processing 10,80,000 1,35,000 Profit/ (Loss) (5,29,600) 3,66,345 9

10 2. A company manufactures one main product (M 1 ) and two byproducts B 1 and B 2. For the month of January 2017, following details are available: Total Cost upto separation Point 2,12,400 M 1 B 1 B 2 Cost after separation 35,000 24,000 No. of units produced 4,000 1,800 3,000 Selling price per unit ` ` 40 ` 30 Estimated net profit as 20% 30% percentage to sales value Estimated selling expenses as percentage to sales value 20% 15% 15% There are no beginning or closing inventories. Prepare statement showing: a. Allocation of joint cost; and b. Productwise and overall profitability of the company for January SOLUTION: Statement showing allocation of Joint Cost Particulars B 1 B 2 No. of units Produced 1,800 3,000 Selling Price Per unit ( ) Sales Value ( ) 72,000 90,000 Less:Estimated Profit (B 1 20% & B 2 30%) (14,400) (27,000) Cost of Sales 57,600 63,000 Less: Estimated Selling Expenses (B 1 15% (10,800) (13,500) & B 2 15%) Cost of Production 46,800 49,500 Less:Cost after separation (35,000) (24,000) Joint Cost allocated 11,800 25,500 Statement of Profitability Particulars M 1 ( ) B 1 ( ) B 2 ( ) Sales Value (A) 4,00,000 72,000 90,000 (4,000x ) Less: Joint Cost 1,75, 11,800 25,500 10

11 (2,12,400 11,800 25,500) Cost after separation 35,000 24,000 Selling Expenses (M 1 20%, B 1 15% & B 2 15%) 80,000 10,800 13,500 (B) 2,55, 57,600 63,000 Profit (A B) 1,44,900 14,400 27,000 Overall Profit = 1,44, , ,000 = 1,86,300 CHAPTER 9: OPERATING COSTING 1. A Transport service company is running 5 buses between two towns which are 50 kms apart. Seating capacity of each bus is 50 passengers. Passengers carried are 75% of the seating capacity. All buses run on all days of the month. Each bus makes one round trip per day. Calculate the number of cost units. SOLUTION Cost Unit Passenger Kms Passenger Kilometres = No. of buses * Distance travelled in one round trip * Seating capacity of each bus * No of days in a month = 5 buses* 50 kms * 2 times * 50 passengers * 75% capacity * 30 days = 5,62,500 Passenger Kilometers 2. S Travels has been promised a contract to run a tourist car on a 20 km. long route for a multinational firm. He buys a car costing Rs. 4,50,000. The annual cost of insurance and taxes are Rs. 7,500 and Rs respectively. He has to pay Rs per month for a garage where he keeps the car when it is not in use. The annual repair costs are estimated at Rs. 12,000. The car is estimated to have a life of 10 years at the end of which the scrap value is likely to be Rs. 50,000. He hires a driver who is to be paid Rs. 3,000 per month plus 10% of the takings as commission. Other incidental expenses are estimated at Rs. 2,000 per month. Petrol and oil will cost Rs. 220 per kms. The car will make 4 round trips each day. Assuming that a profit of 15% on takings is desired and that the car will be on the road for 25 days on an average per month, what should he charge per roundtrip? SOLUTION: Statement of Operating cost. Standing charges: Depreciation [(4,50,000 50,000)/10] Per Annum (Rs.) Per Month (Rs.) 40,000 3,

12 Insurance 7, Taxes 1, Garage (Rs. 2,500 12) 30,000 2, Annual repairs 12,000 1, Driver's Salary (Rs. 3,000 12) 36,000 3, Incidental expenses (Rs. 2,000 24,000 2, ) 1,51,300 12, Variable expenses: Petrol and Oil (4000 kms *1/ kms) * 220 8, Total Cost (without commission) 21, [* 20 km. 2 4 round trips 25 days = 4,000 km.] Let X be the total takings per month Driver's Commission = 10% of X = X/10 Profit = 15% of X = 15X / = 3X /20 Total takings per month = Total cost + Driver's Commission + Profit Or X = Rs. 21, X/10 +3X/20 On Solving for X; X = Rs. 28, Total number of round trips per month: 25 days 4 round trips per day = trips Hence the charge per round trip = = Rs Rs. 28,

Chapter 10 Process Costing Ibrahim Sameer (MBA - Specialized in Finance, B.Com Specialized in Accounting & Marketing)

Chapter 10 Process Costing Ibrahim Sameer (MBA - Specialized in Finance, B.Com Specialized in Accounting & Marketing) The Basic of Process Costing Process costing is a costing method used where it is not