TOPPER S INSTITUTE [COSTING] RTP 16 TOPPER S INSTITUE CA INTER COST MGT. ACCOUNTING - RTP Q1. is compulsory, Attempt any Five questions from the remaining Six questions Working Notes should form part of the Answers Q.1 Answer the following: [4 5 = 20 Marks] (a) A Company manufactures a product, currently utilising 80% capacity with a turnover of ` 8,00,000 at ` 25 per unit. The cost data are as under: Material cost ` 7.50 per unit, Labour cost ` 6.25 per unit Semi-variable cost (Including variable cost of ` 3.75) per unit ` 1, 80,000. Fixed cost ` 90,000 upto 80% level of output, beyond this an additional ` 20,000 will be incurred. Calculate: (i) Activity level at Break-Even-Point (ii) Number of units to be sold to earn a net income of 8% of sales (iii) Activity level needed to earn a profit of ` 95,000 (iv) What should be the selling price per unit, if break-even point is to be brought down to 40% activity level? (b) A company uses three raw materials A, Band C for a particular product for which the following data apply: Raw Material Usage per Unit of Re-order Quantity Price per kg. Delivery period (in weeks) Re-order level product (Kg.) Minimum Average Maximum (kg.) A 10 10,000 0.10 1 2 3 8,000? B 4 5,000 0.30 3 4 5 4,750? C 6 10,000 0.15 2 3 4? 2,000 Weekly production varies from 175 to 225 units, averaging 200 units of the said product. What would be the following quantities:- (i) Minimum Stock of A? (ii) Maximum Stock of B? (iii) 'Re-order level of C? (iv) Average stock level of A? Minimum level (Kg.) (c) (d) STATE the advantages of Zero-based budgeting. DESCRIBE Operation costing with two examples of industries where operation costing is applied. Q.2(a) ABC LLP, contractors and civil engineers, are building a new wing to a school. The quoted fixed price for the contract is Rs. 30,00,000. Work commenced on 1 st January 2014 and is expected to be completed on schedule by 30 June 2015. Data relating to the contract at the year ended 31 st March 2015 is as follows.
TOPPER S INSTITUTE [COSTING] RTP 17 Plant sent to site at commencement of contract Hire of plant and equipment Materials sent to site Materials returned from site Direct wages paid Wage related costs Direct expenses incurred Supervisory staff salaries - Direct - Indirect Regional office expenses apportioned to contract Head office expenses apportioned to contract Surveyor's fees Progress payments received from school Amount 2,40,000 77,000 6,62,000 47,000 9,60,000 1,32,000 34,000 90,000 20,000 50,000 30,000 27,000 18,00,000 Additional information: 1. Plant is to be depreciated at the rate of 25% per annum following straight line method, with no residual value. 2. Unused materials on site at 31 st March are estimated at ` 50,000. 3. Wages owed to direct workers total ` 40,000 4. No profit in respect of this contract was included in the year ended 31 st March 2014. 5. Budgeted profit on the contract is ` 8,00,000 6. While the contract is expected to be completed by the scheduled date without encountering difficulties, it is obvious to the management that the budgeted profit will not be realised. However, to calculated the attributable profit to date you are to assume that further costs to completion will be ` 3,00,000. 7. Value of work certified by the surveyor is ` 24,00,000. 8. The surveyor has not certified the work costing ` 1,80,000 You are required to prepare the account for the school contract for the fifteen months ended 31 st March 2015, and calculate the attributable profit to date. (b) G-2010 Ltd. is a manufacturer of a range of goods. The cost structure of its different products is as follows: Product Product Product Particulars A B C Direct Materials 50 40 40 `/u Direct Labour @ ` 10/ hour 30 40 50 `/u Production Overheads 30 40 50 `/u Total Cost 110 120 140 `/u Quantity Produced 10,000 20,000 30,000 Units G-2020 Ltd. was absorbing overheads on the basis of direct labour hours. A newly appointed management accountant has suggested that the company should introduce ABC system and has identified cost drivers and cost pools as follows:
TOPPER S INSTITUTE [COSTING] RTP 18 Activity Cost Pool Cost Driver Associated Cost Stores Receiving Purchase Requisitions 2,96,000 Inspection Number of Production R`uns 8,94,000 Dispatch Orders Executed 2,10,000 Machine Setup Number of Setups 12,00,000 The following information is also supplied: Details Product A Product B Product C No. of Setups 360 390 450 No. of Orders Executed 180 270 300 No. of Production Runs 750 1,050 1,200 No. of Purchase Requisitions 300 450 500 Required CALCULATE activity based production cost of all the three products. [2 8 = 16 Marks] Q.3 (a) Arnav Ltd. manufactures a variety of chemicals which pass through a number of processes. One of these products, F9, passes through process A, Band C before being transferred to the finished goods warehouse. You are required, from the details given below, to prepare accounts for the month of September 2015 for: (i) Process C (ii) Abnormal loss/ gain (iii) Finished goods. Data for process C for the month of September 2015 is as follows: Work in process, 1 st September, 2015: 6,000 units Degree of completion: Direct materials 60% Direct wages and Production overhead 40% Transferred from process B: 48,000 units at ` 2.30 per unit Transferred to finished goods: 46,500 units Costs Incurred: Direct materials added Direct wages Production overhead Work-in-process, 30 th September, 2015: 4,000 units Degree of completion: Direct materials added 50% Direct wages and production overhead 30% Normal loss in process: 6% of units in opening stock plus transfers from process B less closing stock Amount 19,440 27,180 18,240 36,480
TOPPER S INSTITUTE [COSTING] RTP 19 At a certain stage in the process, it is convenient for the quality control inspector to examine the product and where necessary reject it. Rejected products are then sold for ` 0.80 per unit. During September 2015 an actual loss of 7% was incurred, with Product F9 having reached the following stage of production: Direct material added 80% Direct wages and Production overheads 60%. Company is following FIFO method of inventory valuation. (b) Arnav Confectioners (AC) owns a bakery which is used to make bakery items like pastries, cakes and muffins. AC use to bake at least 50 units of any item at a time. A customer has given an order for 600 cakes. To process a batch, the following cost would be incurred: Direct materials - ` 5,000 Direct wages - ` 500 (irrespective of units) Oven set- up cost - ` 750 (irrespective of units) AC absorbs production overheads at a rate of 20% of direct wages cost. 10% is added to the total production cost of each batch to allow for selling, distribution and administration overheads. AC requires a profit margin of 25% of sales value. Required: i. DETERMINE the price to be charged for 600 cakes. ii. iii. CALCULATE cost and selling price per cake. DETERMINE what would be selling price per unit if the order is for 605 cakes. [2 8 = 16 Marks] Q.4 Arnav Ltd. manufactures and sells three products namely A, B and C. The organizational structure of the company is as follows: CEO Board of Directors Production Dept. Administration Dept. Sales & Distribution Marketing Planning Manufacturing Stores Personnel Finance Legal General Admin. Sales Dept. Warehouse Distribution Customer Support The work of Board of Directors and CEO is also known as General Management. The extract from the budget for the next financial year is as follows: Explanations Raw Material Cost ` 4,25,00,000 Consumed in manufacturing of all three products in the ratio of 2:3:2 Indirect material cost ` 10,36,000 Manufacturing - ` 6,00,000, Stores - ` 10,000, Planning - ` 6,000, General administration - ` 3,20,000, Personnel - ` 80,000 and Sales - ` 20,000 Salary & wages ` 3,40,00,000 It includes direct wages paid to manufacturing workers
TOPPER S INSTITUTE [COSTING] RTP 20 (not on roll) ` 1,40,00,000. Rent & Property tax ` 1,00,000 Warehouse rent of ` 80,000 and Property tax ` 20,000. Depreciation on non- ` 22,50,000 It includes ` 9,00,000 for factory and office building, current assets (on ` 1,50,000 on Air Conditioner, ` 12,00,000 on Machinery. WDV basis) Power & Fuel ` 4,10,000 It consists of ` 4,00,000 for manufacturing activities and others related with fuel cost of delivery vans. Insurance premium on machinery 4% of the opening written down value of the machinery. Insurance premium on employees group insurance (excluding direct workers and General management) ` 2,50,000 Premium amount depends on the gross salary of the employees on roll. Printing & Stationery ` 7,00,800 Planning Dept.- ` 4,800, Marketing - ` 12,000, Finance- ` 4,80,000, Legal- ` 24,000 and Sales Dept. ` 1,80,000 Audit fee ` 1,20,000 For statutory and concurrent audit. Electricity expenses ` 3,20,000 Each division has separate meters. The expected electricity consumption (in units, 1 unit = 1,000 kwh) will be as follows: Production Dept.- 4,800, Administration Dept.- 9,600, Sales & Distribution- 3,600 and General Management - 1,200. Telephone & Mobile expenses ` 4,23,000 Marketing- ` 1,10,000, Personnel- ` 42,000, General Management - ` 26,000, Sales Dept. ` 65,000 and Customer support - ` 1,80,000 Travelling ` 20,33,000 Marketing - ` 4,80,000, General Management ` 10,25,000, expenses Sales Dept. ` 5,28,000. Subsidy for meal ` 1,83,000 It is given uniformly to all employees on roll @ ` 3,000. coupons Software licence renewal fee Planning - ` 7,20,000, Finance - ` 3,000. 1,20,000, Store- ` 14,24,000 ` 24,000, Customer support - ` 5,60,000. Other miscellaneous expenditure ` 8,05,085 Other Information: No. of employees on roll Average Gross Salary Building floor area Air Conditioner Rate of Depreciation Other miscellaneous expenditure Production Dept. 18; Administration Dept. 19 and Sales & Distribution Dept. 24 Production Dept. ` 6,00,000, Administration Dept. ` 3,50,000, Sales & Distribution ` 3,00,000 and General Management ` 2,50,000. Production dept- 9,000 sq. mtr., Administration dept- 3,000 sq. mtr., S & D - 2,500 sq. mtr., General management- 1,500 sq. mtr. Production dept- 6,000 RT, Administration dept- 3,000 RT, S & D - 2,800 RT General management- 1,200 RT Building- 5%, Air Conditioner-15%, Machinery-10% It may be apportioned on the basis of direct allocated expenses. General Management devotes their 70% time for Sales strategy, 20% for Production and marketing and 10% for internal administration.
TOPPER S INSTITUTE [COSTING] RTP 21 Administration department works 45% for production and 55% for sales department. Required: (i) Prepare a schedule of Cost Allocation for Production Dept., Administration Dept., Sales & Distribution Dept. and General Management. (ii) Prepare a schedule of Cost Apportionment (Primary Distribution) for Production Dept., Administration Dept., Sales & Distribution Dept. and General Management. (iii) Prepare a schedule of Secondary distribution of Administration Dept. and General Management costs. [16 Marks] Q.5 (a) (b) (c) (d) Discuss the accounting treatment of Idle time and overtime wages. Discuss the problems of controlling the selling and distribution overheads. DISCUSS on (a) Discretionary Cost Centre and (b) Investment Centre DESCRIBE the three advantages of Cost-plus contract. [4 4= 16 Marks] Q.6(a) Aditya Ltd. has a monthly requirement for an item of raw material is 1,000 units. The purchase price per unit of material is ` 60. The cost of processing an order is ` 540 and the carrying cost is 20%. There is a single supplier for the material which offers quantity discounts as under: Order Quantity (in units) Less than 2,000 units 2,000 units and less than 4,000 units 4,000 units and less than 6,000 units 6,000 units and less than 8,000 units 8,000 units and above Price per unit 60.00 59.80 59.50 588.90 58.40 The company uses the cash credit facility provided by the company's banker to finance its raw material purchase. The bank due to its own infrastructural constraint, can accommodate a maximum of five fund transfer (NEFTI RTGS) requests for any single beneficiary per annum. The company in short term is unable to arrange any other source of finance. Required: (i) Calculate the optimum purchase order size for the company; (ii) Calculate the order level where the company could have minimised its total cost; (iii) The amount of loss that the company has to bear due to bank's inability to process fund transfer requests. (b) ABC Ltd. had prepared the following estimation for the month of April: Quantity Rate Amount Material-A 800 kg. 45.00 36,000 Material-B 600 kg. 30.00 18,000 Skilled labour 1,000 hours 37.50 37,500 Unskilled labour 800 hours 22.00 17,600 Normal loss was expected to be 10% of total input materials and an idle labour time of 5% of expected labour hours was also estimated. At the end of the month the following information has been collected from the cost accounting department: The company has produced 1,480 kg. finished product by using the followings:
TOPPER S INSTITUTE [COSTING] RTP 22 Quantity Rate Amount Material-A 900 kg. 43.00 38,700 Material-B 650 kg. 32.50 21,125 Skilled labour 1,200 hours 35.50 42,600 Unskilled labour 860 hours 23.00 19,780 Required: CALCULATE: a) Material Cost Variance; b) Material Price Variance; c) Material Mix Variance; d) Material Yield Variance; e) Labour Cost Variance; f) Labour Efficiency Variance and g) Labour Yield Variance [8 2 = 16 Marks] Q.7 Answer any four of the following: (a) Distinguish between Operating Costing and Operation Costing. (b) (i) What is cost plus contract? What are its advantages? (ii) Narrate the objectives of cost accounting. (c) Distinguish clearly Bin cards and Stores ledger. (d) Discuss the treatment of by-product cost in Cost Accounting. (e) State the difference between Cost Accounting and Management Accounting. [4 4 = 16 Marks]
TOPPER S INSTITUTE [COSTING] RTP 23 COST MGT. ACCOUNTING - RTP SOLUTIONS Ans. 1. (a) Working notes: 1. (i) Number of units sold at 80% capacity turnover Rs.8,00,000 32,000units. Selling Pricep. u. Rs.25. (ii) Number of units sold at 100% capacity Rs.32,000units 100 40,000units 80. 2. Component of fixed cost included in semi-variable cost of 32,000 units. Fixed cost = (Total semi-variable cost - Total variable cost) = ` 1,80,000-32,000 units ` 3.75 = ` 1,80,000 - Rs.1,20,000 = ` 60,000 3. (i) Total fixed cost at 80% capacity = Fixed cost + Component of fixed cost included in semi-variable cost (Refer to working note 2) = ` 90,000 + ` 60,000 = ` 1,50,000 (ii) Total fixed cost beyond 80% capacity = Total fixed cost at 80% capacity + Additional fixed cost to be incurred = ` 1,50,000 + ` 20,000 = ` 1,70,000 4. Variable cost and contribution per unit Variable cost per unit = Material cost + Labour cost + Variable cost component in semi variable cost = ` 7.50 + ` 6.25 + ` 3.75 = ` 17.50 Contribution per unit = Selling price per unit - Variable cost per unit = ` 25 - ` 17.50 = ` 7.50 5. Profit at 80% capacity level = Sales revenue - Variable cost - Fixed cost = ` 8,00,000 - ` 5,60,000 (32,000 units ` 17.50) - ` 1,50,000 = ` 90,000 (i) Activity level at Break-Even Point Fixed cos t Break even point( units ) Contribution per unit Rs.1,50,000 20,000units. 7.50 (Refer to working notes 3 & 4) - Activity level at BEP (Refer to working note 1 (ii)) Break Even point( units ) 100 No. of units at100% capcity level
TOPPER S INSTITUTE [COSTING] RTP 24 (ii) 20,000units 100 50% 40,000units Number of units to be sold to earn a net income of 8% of sales Let x be the number of units sold to earn a net income of 8% of sales. Mathematically it means that: (Sales revenue of units) = Variable cost of units + Fixed cost + Net income Or, 25x = ` 17.5x + ` 1,50,000 + 8/100 (` 25x) Or, Rs. 25x = ` 17.5x + ` 1,50,000 + ` 2x or x = (` 1,50,000/` 5.5) units or x = 27,273 units. (iii) Activity level needed to earn a profit of ` 95,000 The profit at 80% capacity level is ` 90,000 which is less than the desired profit of ` 95,000, therefore the needed activity level would be more than 80%. Thus the fixed cost to be taken to determine the activity level needed should be ` 1,70,000 (Refer to Working Note 3 (ii)) Units to be sold to earn a profit of ` 95,000 Fixed cos t Desired profit Contribution perunit 1,70,000 95,000 7.5 = 35,333,33 units Activity level needed to earn a profit of ` 95,000 35,333.33units 100 40,000units = 88.33% (iv) Selling price per unit if break-even point is to be brought down to 40% (16,000 units) activity level Let x be the selling price per unit Units at Break-even point = 16,000 units Break-even-point = At 16,000 units = Or (x - ` 17.50) = Or (x - ` 17.50) = Fixed cost Contribution per unit 1,50,000 ( x 17.50) 1,50,000 16,000units 75 8 units Or 8x - (8 ` 17.50) = ` 75
TOPPER S INSTITUTE [COSTING] RTP 25 Or 8x - ` 140 = ` 75 Or 8x = ` 215 Or x = ` 26.875 Hence, S.P. (per unit) = ` 26.875 (b) (i) Minimum stock of A Re-order level - (Average consumption x Average time required to obtain delivery) = 8,000 kg. - (200 units 10 kg. 2 weeks) = 4,000 kg. (ii) (iii) Maximum stock of B Re-order level (Min. Consumption Min. Re-order period) + Re-order quantity = 4,750 kg. - (175 units 4 kg. 3 weeks) + 5,000 kg. = 9,750 2,100 = 7,650 kg. Re-order level of C Maximum re-order period Maximum Usage = 4 weeks (225 units 6 kg.) = 5,400 kg. OR = Minimum stock of C + (Average consumption Average delivery time) = 2,000 kg. + (200 units 6 kg.) 3 weeks]= 5,600 kg. (iv) Average stock level of A Minimum stock level of A + ½ Re-order quantity = 4,000 kg. + ½ 10,000 kg. = 4,000 + 5,000 = 9,000 Kg. OR Minimum stock Maximum stock = (Re fer toworking Note) 2 4,000 16,250 = 10,125kg. 2 Working note Maximum stock of A = ROL + ROQ (Minimum consumption Minimum re-order period) = 8,000 kg. + 10,000 kg [(175 units 10 kg.) 1 week] = 16,250 kg. (c) The advantages of zero-based budgeting are as follows: (i) It provides a systematic approach for the evaluation of different activities and rank them in order of preference for the allocation of scarce resources. (ii) It ensures that the various functions undertaken by the organization are critical for the achievement of its objectives and are being performed in the best possible way. (iii) It provides an opportunity to the management to allocate resources for various activities only after having a thorough cost-benefit-analysis. The chances of arbitrary cuts and enhancement are thus avoided. (iv) The areas of wasteful expenditure can be easily identified and eliminated. (v) Departmental budgets are closely linked with corporation objectives.
TOPPER S INSTITUTE [COSTING] RTP 26 (vi) The technique can also be used for the introduction and implementation of the system of management by objective. Thus, it cannot only be used for fulfillment of the objectives of traditional budgeting but it can also be used for a variety of other purposes. (d) This product costing system is used when an entity produces more than one variant of final product using different materials but with similar conversion activities. Which means conversion activities are similar for all the product variants but materials differ significantly. Operation Costing method is also known as Hybrid product costing system as materials costs are accumulated by job order or batch wise but conversion costs i.e. labour and overheads costs are accumulated by department, and process costing methods are used to assign these costs to products. Moreover, under operation costing, conversion costs are applied to products using a predetermined application rate. This predetermined rate is based on budgeted conversion costs. The two example of industries are Ready made garments and Jewellery making. Ans.2(a) School Contract Account Particulars To Plant To Hire of plant To Materials To Direct wages 9,60,000 Add: Accrued 40,000 To Wages related costs To Direct expenses To Supervisory staff: Direct 90,000 Indirect 20,000 To Regional office expenses To Head office expenses To Surveyors fees To Notional profit c/d To Cost P & L A/c To WIP (reserve) c/d Amount 2,40,000 77,000 6,62,000 10,00,000 1,32,000 34,000 1,10,000 50,000 30,000 27,000 4,80,000 28,42,000 2,40,000 2,40,000 4,80,000 Particulars By Material returned By Plant c/d By Materials c/d By WIP c/d: Value of work certified Cost of work not certified By Notional Profit b/d Amount 47,000 1,65,000 50,000 24,00,000 1,80,000 28,42,000 4,80,000 4,80,000 Working Note: (i) Calculation of percentage of work completion: 24, 00,000 100 80% 30,00,000 (ii) Calculation of profit attributable to the contact: 2 3 18,00,000 4,80,000 2,40,000 24,00,000 (b) The total production overheads are ` 26,00,000: Product A: 10,000 ` 30 = ` 3,00,000 Product B: 20,000 ` 40 = ` 8,00,000 Product C: 30,000 ` 50 = ` 15,00,000 On the basis of ABC analysis this amount will be apportioned as follows:
TOPPER S INSTITUTE [COSTING] RTP 27 Statement Showing Activity Based Production Cost Activity Cost Driver Ratio Total A B C Cost Pool Amount Stores Purchase 6:9:10 2,96,000 71,040 1,06,560 1,18,400 Receiving Requisition Inspection Production 5:7:8 8,94,000 2,23,500 3,12,900 3,57,600 Runs Dispatch Orders 6:9:10 2,10,000 50,400 75,600 84,000 Executed Machine Setups 12:13:15 12,00,000 3,60,000 3,90,000 4,50,000 Setups Total Activity Cost 7,04,940 8,85,060 10,10,000 Quantity Produces 10,000 20,000 30,000 Unit Cost (Overheads) 70.49 44.25 33.67 Add: Conversion Cost (Material + Labour) 80 80 90 Total 150.49 124.25 123.67
TOPPER S INSTITUTE [COSTING] RTP 28 Ans.3(a) Calculation of equivalent units Particulars Units Material 1 Material 2 Wages & Overheads Completed From opening WIP From input Closing work in process Normal loss Abnormal This months s costs Less: Revenue form Normal loss Cost per equivalent unit 46,500 6,000 40,500 4,000 3,000 500 54,000 1,92,300 2,400 1,89,900 Rs. 4.2 % Units % Units % Units - - - - 40 2,400 60 3,600 100 40,500 100 40,500 100 40,500 100 4,000 50 2,000 30 1,200 - - - 100 500 80 400 60 300 45,000 45,300 45,600 ` ` ` ` 1,10,400 27,180 2,400-1,08,000 27,180 Rs. 2.4 Rs. 0.6 Evaluation of September 2015, Output 54,720-54,720 Rs. 1.2 Completed from opening WIP (last month) From opening WIP (this month) From input Finished goods Closing work-in-process Normal loss (revenue) Abnormal loss Total ` 19,440 Material 1 ` Material 2 ` Wages ` Overheads ` Sundries ` 19,440 5,760 1,70,100 97,200 1,440 24,300 1,440 16,200 2,880 32,400 1,95,300 97,200 25,740 17,640 35,280 19,440 12,240 9,600 1,200 480 960 2,400 2,400 1,800 1,200 240 120 240 2,11,740 1,08,000 27,180 18,240 36,480 21,840 Process C Account To Opening WIP To Process B To Direct materials added To Direct wages To Production Overhead Units Units 6,000 48,,000 19,440 1,10,400 27,180 18,240 36,480 By Finished goods By Closing WIP By Normal loss (revenue) By Abnormal loss 46,500 4,000 3,000 500 1,95,300 12,240 2,400 1,800 54,000 2,11,740 54,000 2,11,740 Abnormal loss Account Units Units To Process C 500 1,800 By Process C- revenue for abnormal scrap By Costing Profit and loss account 500 400 1,400 500 1,800 500 1,800
TOPPER S INSTITUTE [COSTING] RTP 29 Finished Goods Account Units Units To Process C 46,500 1,95,300 (b) Statement of cost per batch and per order No. of batch = 600 units 50 units = 12 batches Particulars Cost per batch Total Cost Direct Material Cost 5,000.00 60,000 Direct Wages 500.00 6,000 Oven set-up cost 750.00 9,000 Add: Production Overheads (20% of Direct 100.00 1,200 wages) Total Production cost 6,350.00 76,200 Add: S&D and Administration overheads 635.00 7,620 (10% of Total production cost) Total Cost 6,985.00 83,820 Add: Profit (1/3rd of total cost) 2,328.33 27,940 (i) Sales price 9,313.33 1,11,760 No. of units in batch 50 units (ii) Cost per unit (`6,985 50 units) 139.70 Selling price per unit (9,313.33 50 units) 186.27 If the order is for 605 cakes, then selling price per cake would be as below: Particulars Total Cost Direct Material Cost 60,500 Direct Wages (` 500 13 batches) 6,500 Oven set-up cost (` 750 13 batches) 9,750 Add: Production Overheads (20% of Direct wages) 1,300 Total Production cost 78,050 Add: S&D and Administration overheads 7,805 (10% of Total production cost) Total Cost 85,855 Add: Profit (1/3rd of total cost) 28,618 Sales price 1,14,473 No. of units 605 units Selling price per unit (`1,14,473 605 units) 189.21
TOPPER S INSTITUTE [COSTING] RTP 30 Ans. 4. (i) Schedule of Cost Allocation among the Departments Total Production Dept. Administration Dept. Selling & Distribution Dept. General Management Amount to be apportioned Raw Material Cost 4,25,00,000 4,25,00,000 - - - - Indirect Material 10,36,000 - Cost: Manufacturing 6,00,000 - - - - Stores 10,000 - - - - Planning 6,000 - - - - General admin. - 3,20,000 - - - Personnel - 80,000 - - - Sales - - 20,000 - - Salary & Wages 3,40,00,000 1,40,00,000 - - - 2,00,00,000 Rent & Property 1,00,000 - - 80,000-20,000 tax Depreciation 22,50,000 12,00,000 - - - 10,50,000 Power & Fuel 4,10,000 4,00,000-10,000 - - Insurance Premium on machinery Printing & Stationary 4,80,000 4,80,000 - - - - 7,00,800 Planning 4,800 - - - - Marketing 12,000 - - - - Finance - 4,80,000 - - - Legal - 24,000 - - - Sales - - 1,80,000 - - Audit Fees 1,20,000 - - - 1,20,000 - Telephones & 4,23,000 Mobile Expenses: Marketing 1,10,000 - - - - Personnel - 42,000 - - - General Management - - - 26,000 - Sales - - 65,000 - - Customer Support Travelling Exp. 20,33,000 - - 1,80,000 - - Marketing 4,80,000 - - - - Board of - - - 10,25,000 - Directors & CEO Sales - - 5,28,000 - - Software Licence 14,24,000 renewal fees: Planning 7,20,000 - - - - Planning - 1,20,000 - - - Store 24,000 - - - - Customer - - 5,60,000 -
TOPPER S INSTITUTE [COSTING] RTP 31 support Total 8,54,76,800 6,05,46,800 10,66,000 16,23,000 11,71,000 2,10,70,000 (ii) Schedule of Cost Apportionment (Primary Distribution) Basis Total Production Dept. Administra tion Dept. Selling & Distribution Dept. General Management Allocated Cost Direct 6,44,06,800 6,05,46,800 10,66,000 16,23,000 11,71,000 Salary & Wages Gross Salary 2,00,00,000 80,00,000 46,66,667 40,00,000 33,33,333 (12:7:6:5) Rent & Property Floor Area 20,000 11,250 3,750 3,125 1,875 tax (18:6:5:3) Depreciation -Building Floor area 9,00,000 5,06,250 1,68,750 1,40,625 84,375 -Air Conditioner Insurance Premium or employees Electricity Exp. (18:6:5:3) RT (30:15:14:6) Gross Salary (12:7:6) 1,50,000 69,231 34,615 32,308 13,846 2,50,000 1,20,000 70,000 60,000 - Units 3,20,000 80,000 1,60,000 60,000 20,000 (4:8:3:1) Subsidy for Meal No. of 1,83,000 54,000 57,000 72,000 - coupons employees (18:19:24) Other Direct 8,05,085 7,56,835 13,325 20,287.5 14,637.5 Miscellaneous expenditure expenses (allocated expenses) Total 8,70,34,885 7,01,44,366 62,40,107 60,11,345.5 46,39,066.5 (iii) Schedule of Secondary Distribution: Basis Total Production Dept. Administration Dept. Selling & Distribution Dept. General Management Total 8,70,34,885 7,01,44,366 62,40,107 60,11,345.5 46,39,066.5 Allocated and Apportioned costs General (2:1:7) 46,39,066.5 9,27,813.3 4,63,906.65 32,47,346.55 (46,39,066.5) Management 7,10,72,179.3 67,04,013.65 92,58,692.05 Administration (9:11) 67,04,013.65 30,16,806.14 (67,04,013.65) 36,87,207.51 dept. Total 7,40,88,985.44-1,29,45,899.56 Ans. 5 (a) Accounting treatment of idle time wages & overtime wages in cost accounts: Normal idle time is treated as a part of the cost of production. Thus, in the case of direct workers, an allowance for normal idle time is built into the labour cost rates. In the case of indirect workers, normal idle time is spread over air the products or jobs through the process of absorption of factory overheads. Under Cost Accounting, the overtime premium is treated as follows: If overtime is resorted to, at the desire of the customer, then the overtime premium may be charged to the job directly.
TOPPER S INSTITUTE [COSTING] RTP 32 If overtime is required to cope with general production program or for meeting urgent orders, the overtime premium should be treated as overhead cost of particular department or cost center which works overtime. Overtime worked on account of abnormal conditions should be charged to costing Profit & Loss Account. If overtime is worked in a department due to the fault of another department the overtime premium should be charged to the latter department (b) Problems of controlling the selling & distribution overheads are: (i) (ii) (iii) The incidence of selling & distribution overheads depends on external factors such as distance of market, nature of competition etc. which are beyond the control of management. They are dependent upon customers' behaviour, liking etc. These expenses are of the nature of policy costs and hence not amenable to control. The above problems of controlling selling & distribution overheads can be tackled by adopting the following steps: (a) (b) (c) Comparing the figures of selling & distribution overhead with the figures of previous period. Selling & distribution overhead budgets may be used to control such overhead expenses by making a comparison of budgetary figures with actual figures of overhead expenses, ascertaining variances and finally taking suitable actions, Standards of selling & distribution expenses may be set up for salesmen, territories, products etc. The laid down standards on comparison with actual overhead expenses will reveal variances, which can be controlled by suitable action. (c) (i) (ii) (d) Discretionary Cost Centre: The cost centre whose output cannot be measured in financial terms, thus input-output ratio cannot be defined. The cost of input is compared with allocated budget for the activity. Example of discretionary cost centres are Research & Development department, Advertisement department where output of these department cannot be measured with certainty and co - related with cost incurred on inputs. Investment Centres: These are the responsibility centres which are not only responsible for profitability but also has the authority to make capital investment decisions. The performance of these responsibility centres are measured on the basis of Return on Investment (ROI) besides profit. Examples of investment centres are Maharatna, Navratna and Miniratna companies of Public Sector Undertakings of Central Government. Cost plus contracts have the following advantages: (i) The Contractor is assured of a fixed percentage of profit. There is no risk of incurring any loss on the contract. (ii) It is useful specially when the work to be done is not definitely fixed at the time of making the estimate. (iii) Contractee can ensure himself about the cost of the contract, as he is empowered to examine the books and documents of the contractor to ascertain the veracity of the cost of the contract. Ans.6. (a) (i) Calculation of optimum purchase order size or Economics Order Quantity (EOQ): EOQ = 2 A O C i
TOPPER S INSTITUTE [COSTING] RTP 33 Where, A = Annual requirement for inventory = 1,000 units 12 months = 12,000 units O = Ordering Cost = ` 540 C = Cost per unit = ` 60 C I = Carrying cost per unit per annum = 20% ` 60 = ` 12 EOQ = 212,000540 1,29,60,000 1,039.23 Rs.12 12 or 1,039 units. (ii) Order Size (in units) 1,500 2,000 4,000 6,000 8,000 No. of order 8 6 3 2 1.5* Cost per order 540 540 540 540 540 Average inventory 750 1,000 2,000 3,000 4,000 Cost per unit 60.00 59.80 59.50 58.90 58.40 Carrying cost per unit 12.00 11.96 11.90 11.78 11.68 @20% (a) Ordering Cost 4,320 3,240 1,620 1,080 810 (b) Carrying Cost 9,000 11,960 23,800 35,340 46,720 (c) Material cost 7,20,000 7,17,600 7,14,000 7,06,800 7,00,800 Total Cost {(a) + (b) + (c)} 7,33,320 7,32,800 7,39,420 7,43,220 7,48,330 * (This may also be taken as 2 orders) At order level of 2,000 units, the total cost to the company is least. (iii) Calculation of amount of loss due to bank s inability to process more than five fund transfer requests: No. of orders 5 Purchase quantity per order (12,000 units 5) 2,400 units Cost per unit ` 59.80 (a) Ordering cost (` 540 5 orders) ` 2,700 (b) Carrying cost (20% of ` 59.80 1,200 units) ` 14,352 (c) Material cost (` 59.80 12,000 units) ` 7,17,600 Total Cost {(a) + (b) + (c)} ` 7,34,652 Minimum cost at 2,000 units order level ` 7,32,800 Loss ` 1,852 (b) Material Variances: Material SQ (WN-1) SP SQ SP RSQ RSQ SP AH AH SR AR AH AR A 940 kg. 45.00 42,300 886 kg. 39,870 900 kg. 40,500 43.00 38,700 B 705 kg. 30.00 21,150 664 kg. 19,920 650 kg. 19,500 32.50 21,125 1645 kg 63,450 1550 kg 59,790 1550 kg 60,000 59,825 WN-1: Standard Quantity (SQ):
TOPPER S INSTITUTE [COSTING] RTP 34 800kg. Material A - 1,480kg. 0.9 1,400kg. = 939.68 or 940 kg. 600kg. Material B - 1,480kg. 0.9 1,400kg. = 704.76 or 705 kg. WN- 2: Revised Standard Quantity (RSQ): Material A - 800kg. 1,550kg. 1,400kg. Material B - 600kg. 1,550kg. 1,400kg. = 885.71 or 886 kg. = 664.28 or 664 kg. (i) Material Cost Variance (A + B) = {(SQ SP) (AQ AP)} = {63,450 59,825} = 3,625 (F) (ii) Material Price Variance (A + B) = {(AQ SP) (AQ AP) = {60,000 59,825} = 175 (F) (iii) Material Mix Variance (A + B) = {(RSQ SP) (AQ SP)} = {59,790 60,000} = 210 (A) (iv) Material Yield Variance (A + B) = {(SQ SP) (RSQ SP)} = {63,450 59,790} = 3,660 (F) Labour Variances: Labour SH (WN-3) SR SH SR RSH RSH SR AQ AQ SP Skilled 1,116 hrs 37.50 41,850 1144 42,900 1,200 45,000 35.50 42,600 Unskilled 893 hrs 22.00 19,646 916 20,152 860 18,920 23.00 19,780 2,009 hrs 61,496 2,060 63,052 2,060 63,920 62,380 AP AQ AP WN- 3: Standard Hours (SH): Skilled labour- Unskilled labour- 0.951,000hr. 1,480kg. 0.901,400kg. 0.95800hr. 1,480kg. 0.901,400kg. =1,115.87 or 1,116 hrs. = 892.69 or 893 hrs.
TOPPER S INSTITUTE [COSTING] RTP 35 WN- 4: Revised Standard Hours (RSH): Skilled labour- 1,000hr. 2,060hr. 1,800hr. = 1,144.44 or 1,144 hrs. Unskilled labour- 800hr. 2,060hr. 1,800hr. = 915.56 or 916 hrs. (v) Labour Cost Variance (Skilled + Unskilled) = {(SH SR) (AH AR)} = {61,496 62,380} = 884 (A) (vi) Labour Efficiency Variance (Skilled + Unskilled) = {(SH SR) (AH SR)} = {61,496 63,920} = 2,424 (A) (vii) Labour Yield Variance (Skilled + Unskilled) = {(SH SR) (RSH SR)} = {61,496 63,052} = 1,556 (A) Ans.7 (a) (b) (i) Operating Costing: It is a method of costing applied by undertakings which provide service rather than production of commodities. Like unit costing and process costing, operating costing is thus a form of operation costing. The emphasis under operating costing is on the ascertainment of cost of rendering services rather than on the cost of manufacturing a product. It is applied by transport companies, gas and water works, electricity supply companies, canteens, hospitals, theatres, school etc. Within an organisation itself certain departments too are known as service departments which provide ancillary services to the production departments. For example maintenance department; power house, boiler house, canteen, hospital, internal transport etc. Operation Costing: It represents a refinement of process costing. In this each operation instead of each process of stage of production is separately costed. This may offer better scope for control. At the end of each operation, the unit operation cost may be computed by dividing the total operation cost by total output. Cost plus Contract Under Cost plus Contract, the contract price is ascertained by adding a percentage of profit to the total cost of the work. Such type of contracts are entered into when it is not possible to estimate the Contract Cost with reasonable accuracy due to unstable condition of material, labour services etc.
TOPPER S INSTITUTE [COSTING] RTP 36 Advantages 1. The Contract is assured of a fixed percentage of profit. There is no risk of incurring any loss on the contract. 2. It is useful specially when the work to be done is not definitely fixed at the time of making the estimate. Contractee can ensure himself about the cost of the contract as he is empowered to examine the books and documents of the cost of the contract.
TOPPER S INSTITUTE [COSTING] RTP 37 (ii) The Objective of a Cost Accounting System are as under: 1. Profit Measurement and Analysis Costs should be accurately ascertained and matched with revenues to measure profits of a firm. Further, Cost Accounting is useful for identifying the exact causes for decrease or increase in the profit / loss of the business. 2. Cost Reduction The application of cost reduction techniques, operations research techniques and value analysis technique, helps in achieving the objective of economy in concern's operations. Continuous efforts are being made by the business organisation for finding new and improved methods for reducing costs. 3. Cost Comparison and Cost Control 4. Identification of losses and inefficiencies 5. Financial Decision Making 6. Price Determination 7. Dispute and Issue-solving Cost comparison helps in cost control. Such a comparison may be made from period to period by using the figures in respect of the same firm or of several units in an industry by employing uniform costing and inter-firm comparison methods. A good Cost Accounting System helps in identifying unprofitable activities, losses or inefficiencies in any form, so that appropriate actions are taken. The use of Standard Costing and Variance Analysis techniques points out the deviations from predetermined level and thus demands suitable action to eliminate its recurrence. The cost of idle capacity can be easily worked out, when a concern is not working to full capacity. Managers can obtain relevant information from the Cost Accounting System, to serve as guides in making decisions involving financial considerations. Guidance may also be given by the Cost Accountant on various decision making issues viz. whether to purchase or manufacture a given component, whether to accept orders below cost, which machine to purchase when a number of choices are available. The use of Marginal Costing techniques helps managers in taking short-term decisions. Cost Accounting is quite useful for price fixation. It serves as guide to test the adequacy of selling prices. The price determined may be useful for preparing estimates or filing tenders. A good cost accounting system provides cost figures for the use of Government, Wage Tribunals and other bodies for dealing and solving issues like price taxation, price control tariff protection, wage level fixation. (c) Both bin cards and stores ledger are perpetual inventory records. None of them is a substitute for the other. These two records may be distinguished from the following points of view: (i) Bin cards are maintained by the store keeper, while the stores ledger is maintained by the cost accounting department. (ii) Bin card is the stores recording document whereas the stores ledger is an accounting record. (iii) Bin card contains information with regard to quantities i.e. their receipt, issue and balance while the stores ledger contains both quantitative and value information in respect of their receipts, issue and balance. (iv) In the bin card entries are made at the time when transaction takes place. But in the stores ledger entries are made only after the transaction has taken place. (v) Inter departmental transfer of materials appear only in stores ledger.
TOPPER S INSTITUTE [COSTING] RTP 38 (vi) Bin card record each transaction but stores ledger records the same information in a summarized form (d) (e) Treatment of by-product cost in Cost Accounting: (i) When they are of small total value, the amount realized from their sale may be dealt as follows: Sales value of the by-product may be credited to Costing Profit & Loss Account and no credit be given in Cost Accounting. The credit to Costing Profit & Loss Account here is treated either as a miscellaneous income or as additional sales revenue. The sale proceeds of the by-product may be treated as deduction from the total costs. The sales proceeds should be deducted either from production cost or cost of sales. (ii) When they require further processing: In this case, the net realizable value of the by-product at the split-off point may be arrived at by subtracting the further processing cost from realizable value of by-products. If the value is small, it may be treated as discussed in (i) above. Basis Cost Accounting Management Accounting 1 Nature It records the quantitative aspect only It records both qualitative and quantitative aspect. 2 Objective It records the cost of producing a product and providing a service. It provides information to management for planning and coordination. 3 Area It only deals with cost Ascertainment It is wider in scope as it includes F.A., budgeting, Tax, planning. 4 Recording of Data It uses both past and present figures. It is focused with the projection of figures for future. 5 Development It s development is related to industrial It develops in accordance to the 6 Rules and Regulation revolution. It follows certain principles and procedures for recording cost of different products need of modern business world. It does not follow any specific rules and regulations.