Suggested Answers: Questions

SUGGESTED ANSWERS
TO
QUESTIONS
SET AT THE
INSTITUTES EXAMINATIONS
MAY, 2004 NOVEMBER, 2013
A COMPILATION
INTERMEDIATE (IPC) COURSE
PAPER 3: (PART I) COST ACCOUNTING

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)
NEW DELHI
The Institute of Chartered Accountants of India
The Suggested Answers published in this volume do not constitute the basis for evaluation of
the students answers in the examinations. The answers are prepared with a view to assist the
students in their education. While due care is taken in preparation of the answers, if any errors
or omissions are noticed, the same may be brought to the attention of the Director of Studies.
The Council of the Institute is not responsible in any way for the correctness or otherwise of
the answers published therein.

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CONTENTS
CHAPTER 1 Basic Concepts............................................................................1.1 1.11
CHAPTER 2 Material........................................................................................2.1 2.20
CHAPTER 3 Labour .........................................................................................3.1 3.19
CHAPTER 4 Overheads...................................................................................4.1 4.48
CHAPTER 5 Non Integrated Accounting...........................................................5.1 5.19
CHAPTER 6 Method of Costing (I) ...................................................................6.1 6.30
CHAPTER 7 Method of Costing (II) ..................................................................7.1 7.42
CHAPTER 8 Standard Costing.........................................................................8.1 8.20
CHAPTER 9 Marginal Costing..........................................................................9.1 9.17
CHAPTER 10 Budgets and Budgetary Control ............................................... 10.1 10.12
Question Papers............................................................................... 1 65


1
Basic Concepts
Question 1
Distinguish between Cost control and Cost reduction.
(4 Marks, May 2004; November, 2004; November, 2006; November, 2011)
Answer
Cost Control and Cost Reduction:
Cost control is operated through setting standards or targets and comparing actual
performance therewith, with a view to identify deviation from standards or norms and taking
corrective action in order to ensure that future performance conforms to standards or norms.
Cost reduction is a continuous process of critical cost examination, analysis and discharge of
standards. Each subject of business viz products, process, procedures, methods, origin,
personnel etc is critically examined and reviewed with a view of improving the efficiency &
effectiveness and reducing the costs. Even in an organization where efficient cost control is in
operation, there is always room for cost reduction.
Question 2
Discuss the essentials of a good Cost Accounting system.
(2 Marks, May 2004) (4 Marks, November 2005; November 2010; November 2012)
Answer
Essentials of a good Cost Accounting System: The essential features, which a good Cost
Accounting System should possess, are as follows:
(a) Informative and Simple: Cost Accounting System should be tailor-made, practical,
simple and capable of meeting the requirements of a business concern.
(b) Accuracy: The data to be used by the Cost Accounting System should be accurate;
otherwise it may distort the output of the system.
(c) Support from Management: Necessary cooperation and participation of executives from
various departments of the concern is essential for developing a good system of Cost
Accounting.
(d) Cost- Benefit: The Cost of installing and operating the system should justify the results.
1.2 Cost Accounting
(e) Precise Information: The system of costing should not sacrifice the utility by introducing
meticulous and unnecessary details.
(f) Procedure: A carefully phased programme should be prepared by using network analysis
for the introduction of the system.
(g) Trust: Management should have faith in the Costing System and should also provide a
helping hand for its development and success.
Question 3
Distinguish between Cost audit and statutory audit. (2 Marks, November, 2004)
(Out of Syllabus/removed fromthe current Syllabus of Cost Accounting.)
Answer
Cost audit and Statutory audit
Cost audit offers valuable assistance to the management in its decision-making process by
examining the reliability of cost accounting data and information. Due to the assistance
provided by cost audit, management is in a position to know what price is to be fixed for a
product, whether the wastages are avoidable, whether to reorganise sales or inventory system
to make work more efficient and effective. Cost audit, apart from all the normal ingredients of
audits. i.e. vouching, verification etc has within its domain elements of efficiency audit and
proprietary audit.
Statutory audit of accounts is to examine whether P/L a/c and Balance Sheet of a company
provides a true and fair view of profits (in the relevant financial period) and financial position
on a particular date.
Question 4
Discuss cost classification based on variability and controllability. (4 Marks, November 2004)
Answer
Cost classification based on variability
Fixed cost these are costs, which do not change in total despite changes of a cost driver. A
fixed cost is fixed only in relation to a given relevant range of the cost driver and a given time
span. Rent, insurance, depreciation of factory building and equipment are examples of fixed
costs where the final product produced is the cost object.
Variable costs- these are costs which change in total in proportion to changes of cost driver.
Direct material, direct labour are examples of variable costs in cases where the final product
produced is the cost object.
Semi-variable costs These are partly fixed and partly variable in relation to output e.g.
telephone and electricity bill.

Basic Concepts 1.3
Cost classification based on controllability
Controllable costs are incurred in a particular responsibility center and relate to a defined
time span. They can be influenced by the action of the executive heading the responsibility
center e.g. direct costs.
Uncontrollable costs are costs which are not influenced by the action of the responsibility
manager e.g. expenditure incurred by the tool room is controllable by the foreman in charge of
that section, but the share of tool room expenditure which is apportioned to the machine shop
is not controllable by machine shop foreman.
Question 5
Explain Sunk cost. (3 Marks, May 2005)
Answer
Sunk Cost: These costs are the costs of resources already acquired which will be unaffected
by choice between various alternatives. These are historical costs, which are incurred in the
past and not relevant to the particular decision making problem, being considered. While
considering the replacement of a plant, the depreciated book value of the old asset is
irrelevant as the amount is a sunk cost, which is to be written off at the time of replacement.
Another example of sunk cost is that of development cost already incurred.
Question 6
Explain the area of cost reduction at product design stage. (3 Marks, May 2005)
Answer
Products design offers the greatest scope of cost reduction of a permanent nature. The
impact of a decision made at the beginning stage on costs can be revealed at every stage of
manufacture or processing of the product in the factory. The design function, therefore, offers
an extremely important area for cost reduction action.
Before making new designs, a design policy has to be settled by top management. The
design policy may be selected towards objectives such as:
(a) Low cost and functional efficiency
(b) Widest possible application
(c) Quality and life and
(d) Appearance.
Any attempt to achieve cost reduction through design economies may come into conflict with
the overriding design policy and hence a firm policy concerning design has to be settled by
overcoming, as far as possible, conflicts.
Potential areas for cost reduction in the field of design are:
(i) Introduction of new designs
1.4 Cost Accounting
(ii) Improvement in the existing designs and
(iii) Standardisation and simplification.
Question 7
Discuss the area of activity in respect of which cost accounting records are to be maintained.
(4 Marks, May 2005)
Answer
The areas of activity in respect of which cost accounting records are to be maintained under
cost accounting record rules are:
Raw materials, components, stores and spare parts
Salaries and wages
Service department expenses
Utilities
Depreciation
Other overheads
Conversion cost
R & D expenses
Interest
Joint products and by products
Work-in-progress and finished goods stocks
Cost statements
Record of physical verification
Packing
Production records.
Question 8
Distinguish between Explicit and Implicit cost (3 Marks, May 2005) (2 Marks, May 2007)
Answer
Explicit costs, which are also known as out of pocket costs, refer to costs involving immediate
payment of cash. Salaries, wages, interest on capital, etc. are some of the examples of explicit
costs. They can be easily measured.
Implicit costs (also known as economic costs) do not involve any immediate cash payment.
The main points of difference between Explicit and Implicit costs are:
Implicit costs do not involve immediate cash payment whereas Explicit costs involves
Basic Concepts 1.5
immediate outgo of cash.
Implicit costs are not recorded in the book of account whereas explicit costs are entered
in the books of Accounts.
Question 9
Discuss the circumstances under which a Cost Audit is ordered and the purpose of Cost Audit.
(4 Marks, November, 2005)
(Out of Syllabus/removed fromthe Current Syllabus of Cost Accounting.)
Answer
Circumstances under which Cost Audit is ordered
(i) Price Fixation The need for fixation of retention price in case of materials of national
importance like steel, cement etc., may cause a necessity for cost audit.
(ii) Cost variation within an industry: Cost audit may be necessary to find reasons for
such differences.
(iii) Inefficient Management Where a factory is run inefficiently and uneconomically,
institution of cost audit may be necessary.
(iv) Tax assessment Where a duty or tax is levied on products based on cost of
production, the levying authorities may ask for cost audit to determine the correct cost of
production.
Purposes of Cost Audit
Protective purpose To examine that there is no undue wastage or losses and the costing
system brings out the correct cost of production or processing.
Constructive purpose Cost Audit provides information to management useful in regulating
production, choosing economical methods of operation and reducing operations cost.
Question 10
Distinguish between
(i) Profit Centres and Investment Centres.
(ii) Product Cost and Period Cost. (4 Marks, May 2006)
Answer
(i) Profit Centres and investment centres
A profit centre is a centre where the manager has the responsibility of generating and
maximising profits. In such centres, the manager is responsible for revenue and cost.
Investment centres are those centres which are concerned with earning an adequate
ROI. In such centres, the manager is responsible for investment, revenue and cost.
1.6 Cost Accounting
(ii) Product costs and period costs
Product costs are costs which are associated with purchase and sale of goods. These
are costs are used for inventory valuation and incurred up to factory stage.
Period costs are costs, which are not assigned to the products but are charged as
expenses against revenues of the period in which they are incurred e.g. Selling, General
Administrative and Distribution overheads.
Question 11
Distinguish between Controllable costs and Uncontrollable costs. (2 Marks, November, 2006)
Answer
Controllable costs are the costs which can be influenced by the action of a specified member
of an undertaking. Controllable costs incurred in a particular Responsibility centre can be
influenced by the action of the executive heading that Responsibility centre.
Uncontrollable costs are those costs which cannot be influenced by the action of a specified
member of an undertaking. The distinction between controllable and uncontrollable cots is not
very sharp and is sometimes left to individual judgement. In fact, no cost is controllable; it is
only in relation to a particular individual that we may specify a particular cost to be either
controllable or non-controllable.
Question 12
Discuss the various reports provided by Cost Accounting Department. (4 Marks, November, 2006)
Answer
Various reports provided by Cost Accounting Department
(i) Cost sheet setting out the total cost, analysed into various elements.
(ii) Consumption of material statements.
(iii) Labour utilization statements.
(iv) Overheads incurred compared with the budget and overheads actually charged to
production.
(v) Sales effected compared with budgets.
(vi) Reconciliation of actual profits earned with budgeted profits.
(vii) The total cost of abnormally spoiled work in factory and abnormal losses.
(viii) Labour turnover, cost of recruitment and training new employees.
(ix) Expenses incurred on R & D as compared with those budgeted.
Question 13
Briefly discuss, how the synergetic effect helps in reduction in costs. (2 Marks, May, 2007)
Basic Concepts 1.7
Answer
Two or more products are produced and managed together.
The result of combined efforts is higher than sum of the results of individual products.
Analysis of synergetic effect is helpful in cost control.
Question 14
What items are generally included in good uniform costing manual? (3 Marks, May, 2007)
(Out of Syllabus/removed fromthe Current Syllabus of Cost Accounting.)
Answer
Uniform costing manual includes essential information and instructions to implement
accounting procedures.
(a) Introduction: It includes objects and scope of the planning.
(b) Accounting procedure and planning includes rules, and general principle to be followed.
(c) Cost accounting planning includes methods of costing, relation between cost and
financial accounts and methods of integration.
Question 15
Discuss briefly the relevant costs with examples. (2 Marks, November, 2007)
Answer
Relevant costs are those expected future cost which are essential but differ for alternative
course or action.
(a) Historical cost or sunk costs are irrelevant as they do not play any role in the decision
making process.
(b) Variable costs which will not differ under various alternatives are irrelevant.
Question 16
What are the main objectives of cost accounting? (2 Marks, November, 2007)
Answer
The Main objectives of Cost Accounting are
1. Ascertainment of cost.
2. Determination of selling price.
3. Cost control and cost reduction.
4. Ascertaining the project of each activity.
5. Assisting management in decision-making.
1.8 Cost Accounting
6. Determination of break- even point.
Question 17
Explain controllable and non-controllable cost with examples. (2 Marks, May, 2008)
Answer
Controllable costs are those which can be influenced by the action of a specified member of
an undertaking. A business organization is usually divided into a number of responsibility
centres and each such centre is headed by an executive. Controllable costs incurred in a
particular responsibility centre can be influenced by the action of the executive heading that
responsibility centre. Direct costs comprising direct labour, direct materials, direct expenses
and some of the overhead are generally controllable by the shop level management.
Non-controllable costs are those which cannot be influenced by the action of a specified
member of an undertaking. For example, expenditure incurred by the tool room is controllable
by the tool room manager but the share of the tool room expense which is apportioned to the
machine shop cannot be controlled by the machine shop manager. It is only in relation to a
particular individual that a cost may be specified as controllable or not.
Note: 1. A supervisor may be unable to control the amount of managerial remuneration
allocated to his department but for the top management this would be a
controllable cost.
2. Depreciation would be a non-controllable cost in the short-term but controllable in
the long terms.
Question 18
State the unit of cost for the following industries
(a) Transport
(b) Power
(c) Hotel
(d) Hospital (2 Marks, November, 2008)
Answer
Industry Unit of Cost
(a) Transport Per passenger k.m. or per tonne. k.m.
(b) Power Per Kilo watt (kw) hour
(c) Hotel Per room day / or per meal
(d) Hospital Per patient day

Basic Concepts 1.9
Question 19
Distinguish between product cost and period cost. (2 Marks, May, 2009)
Answer
Product Cost vis--vis Period cost
Product costs are associated with the purchase and sale of goods. In the production scenario,
such costs are associated with the acquisition and conversion of materials and all other
manufacturing inputs into finished product for sale. Hence under absorption cost, total
manufacturing costs constitute inventoriable or product cost.
Periods costs are the costs, which are not assigned to the products but are charged as expense
against revenue of the period in which they are incurred. General Administration, marketing, sales
and distributor overheads are recognized as period costs.
Question 20
Define the following:
(a) Imputed cost
(b) Capitalised cost (2 Marks, November, 2009)
Answer
(a) Imputed Cost: These costs are notional costs which do not involve any cash outlay.
Interest on capital, the payment for which is not actually made, is an example of Imputed
Cost. These costs are similar to opportunity costs.
(b) Capitalised Cost: These are costs which are initially recorded as assets and
subsequently treated as expenses.
Question 21
Distinguish between engineered cost and differential cost. (2 Marks, May, 2010)
Answer
Engineered costs are costs that result specifically from a clear cause and effect relationship
between inputs and outputs. The relationship is usually personally observable. Examples of
inputs are direct material cost, direct labour cost. Examples of output are car, computer etc.
Differential costs represent the change in total cost due to change in activity level, technology,
process or method of production, etc. Example, if total cost under alternative I is ` 30,000
and alternative II is ` 50,000, then differential cost is ` 20,000 (` 50,000- ` 30,000).
Question 22
Distinguish between cost units and cost centres. (4 Marks, May 2011)

1.10 Cost Accounting
Answer
Cost units: It is a unit of product, service or time (or combination of these) in relation to which
costs may be ascertained or express. A batch which consists of a group of identical items and
maintain its identity through one or more stages of production may also be considered as a
cost unit. Cost units are usually the units of physical measurement like number, weight, area,
volume, length, time and value.
Cost centre: It is defined as a location, person or an stress of equipment (or group of these)
for which cost may be ascertained and used for the purpose of cost control. Cost centres are
of two types, viz., personal and impersonal. A personal cost centre consists of a person or
group of persons and an impersonal cost centre consists of a location or an item of equipment
(or group of these).
Question 23
State the types of cost in the following cases:
(i) Interest paid on own capital not involving any cash outflow.
(ii) Withdrawing money from bank deposit for the purpose of purchasing new machine for
expansion purpose.
(iii) Rent paid for the factory building which is temporarily closed
(iv) Cost associated with the acquisition and conversion of material into finished product.
(4 Marks, May, 2012)
Answer
Type of costs
(i) Imputed Cost
(ii) Opportunity Cost
(iii) Shut Down Cost
(iv) Product Cost
Question 24
Cost of a product or service is required to be expressed in suitable cost unit. State the cost
units for the following industries:
(i)
Steel
(ii) Automobile
(iii) Transport
(iv) Power
(b) Distinguish between cost allocation and cost absorption. (4 Marks , May 2013)
Basic Concepts 1.11
Answer
Industry Cost Unit
(i) Steel Tonne
(ii) Automobile Numbers
(iii) Transport Passenger Kilo-meter/ Tonne Kilo-meter
(iv) Power Kilo-watt hour (Kwh)

2
Material
Question 1
IPL Limited uses a small casting in one of its finished products. The castings are purchased
from a foundry. IPL Limited purchases 54,000 castings per year at a cost of ` 800 per casting.
The castings are used evenly throughout the year in the production process on a 360-day-per-
year basis. The company estimates that it costs ` 9,000 to place a single purchase order and
about ` 300 to carry one casting in inventory for a year. The high carrying costs result from
the need to keep the castings in carefully controlled temperature and humidity conditions, and
from the high cost of insurance.
Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The
days of delivery time and percentage of their occurrence are shown in the following tabulation:
Delivery time (days): 6 7 8 9 10
Percentage of occurrence: 75 10 5 5 5
Required:
(i) Compute the economic order quantity (EOQ).
(ii) Assume the company is willing to assume a 15% risk of being out of stock. What would
be the safety stock? The re-order point?
(iii) Assume the company is willing to assume a 5% risk of being out of stock. What would be
the safety stock? The re-order point?
(iv) Assume 5% stock-out risk. What would be the total cost of ordering and carrying
inventory for one year?
(v) Refer to the original data. Assume that using process re-engineering the company
reduces its cost of placing a purchase order to only ` 600. In addition, company
estimates that when the waste and inefficiency caused by inventories are considered, the
true cost of carrying a unit in stock is ` 720 per year.
(a) Compute the new EOQ.
(b) How frequently would the company be placing an order, as compared to the old
purchasing policy? (9 Marks, May 2004)

Material 2.2
Answer
(i) Computation of economic order quantity (EOQ) :
(A) Annual requirement = 54,000 castings
(C) Cost per casting = ` 800
(O) Ordering cost = ` 9,000 / order
(c i) Carrying cost per casting p.a. = ` 300
EOQ =
300
9000 54000 2
i c
2AO
=
= 1800 castings

(ii) Safety stock
(Assuming a 15% risk of being out of stock)
Safety stock for one day = 54,000/360 days = 150 castings
Re-order point = Minimum stock level + Average lead time
Average consumption
= 150 + 6 x 150 = 1,050 castings
(iii) Safety stocks:
(Assuming a 5% risk of being out of stock)
Safety stock for three days = 150 x 3 days = 450 castings
Re-order point = 450 castings + 900 castings = 1,350 castings
(iv) Total cost of ordering = (54,000/1,800) x ` 9,000 = ` 2,70,000
Total cost of carrying = (450 + x 1,800) ` 300 = ` 4,05,000
(v) (a) Computation of new EOQ :
EOQ =
720
600 54,000 2
= 300 castings
(b) Total number of orders to be placed in a year are 180. Each order is to be placed
after 2 days (1 year = 360 days). Under old purchasing policy each order is placed
after 12 days.
Question 2
Distinguish between Bin card and Stores ledger. (4 Marks, November 2004)
2.3 Cost Accounting
Answer
Bin card and Stores ledger
Bin card is quantitative record of stores receipt, issue and balance. Control over stock is more
effective, in as much as comparisons of actual quantity in hand at any time with the book
balance are possible. Bin cards are kept attached to the bins or quite near thereto, so as to
assist in the identification of stock.
Stores ledger is quantitative and value record of stores receipts, issue and balance. It is a
subsidiary ledger to the main cost ledger. It is maintained by cost accounting department.
Question 3
Discuss ABC analysis as a system of Inventory control.
(4 Marks, November 2004; November 2005) (3 Marks, May 2008) (4 Marks, November 2011)
Answer
ABC Analysis as a system of inventory control
It exercises discriminating control over different items of stores classified on the basis of
investment involved.
A category of items consists of only a small %age i.e. approximately 10% of total items
handled by stores but requires heavy investment, about 70% of inventory value, because of
their high prices or heavy requirement or both.
B category of items are relatively less important. They may be approximately 20% of the total
items of materials handled by stores. The %age of investment required is approximately 20%
of total investment in inventories.
C category of items do not require much investment. It may be about 10% of total inventory
value but they are nearly 70% of the total items handled by store.
EOQ, re-order level concepts are usually used in case of A category items.
Question 4
RST Limited has received an offer of quantity discount on its order of materials as under:
Price per tone Tones number
` 9,600 Less than 50
` 9,360 50 and less than 100
` 9,120 100 and less then 200
` 8,880 200 and less than 300
` 8,640 300 and above

Material 2.4
The annual requirement for the material is 500 tonnes. The ordering cost per order is ` 12,500
and the stock holding cost is estimated at 25% of the material cost per annum.
Required:
(i) Compute the most economical purchase level.
(ii) Compute EOQ if there are no quantity discounts and the price per tonne is ` 10,500.
(6 Marks, November 2004)
Answer
(i)
Order size
(Q) (Units)

(1)
No. of
orders
A/Q
(Units)
(2)
Cost of
purchase A x
per unit cost

(3)
Ordering cost
A
12500
Q
`

(4)
Carrying cost
% 25 C
2
Q

(5)
Total cost
(3+4+5)

(6)
40 12.5 48,00,000
(5009,600)
1,56,250 48,000
25 . 0 9600
2
40

50,04,250
50 10 46,80,000
(5009,360)
1,25,000 58,500
25 . 9360
2
50

48,63,500
100 5 45,60,000
(5009,120)
62,500 1,14,000
25 . 9120
2
100

47,36,500
200 2.5 44,40,000
( ) 500 8,880
31,250
(2.512,500)
2,22,000
5 . 2 8880
2
200

46,93,250
300 1.67 43,20,000
(5008,640)
20,875
(1.6712,500)
3,24,000
25 . 8640
2
300

46,64,875
The above table shows that the total cost of 500 units including ordering and carrying
cost is minimum (` 46,64,875) where the order size is 300 units. Hence the most
economical purchase level is 300 units.
(ii)
2AO 2 500 12,500
EOQ
c i 10,500 0.25

= = =

69 tonnes.

2.5 Cost Accounting
Question 5
SK Enterprise manufactures a special product ZE. The following particulars were collected
for the year 2004:
Annual consumption 12,000 units (360 days)
Cost per unit ` 1
Ordering cost ` 12 per order
Inventory carrying cost 24%
Normal lead time 15 days
Safety stock 30 days consumption
Required:
(i) Re-order quantity
(ii) Re-order level
(iii) What should be the inventory level (ideally) immediately before the material order is
received? (4 Marks, May 2005)
Answer
(i) How much should be ordered each time i.e., Economic Order Quantity (EOQ)
EOQ =
CS
AB 2

Where A is the annual consumption
B is the ordering cost per order
CS is the carrying cost per unit per annum
=
2 12,000 12
12,00,000
1 (24/100)

=

= 1095.4 units or say 1,100 units.
(ii) When should the order be placed i.e., reordering level
Reordering level = *Safety stock +normal lead time consumption
Reordering level =
12,000 12,000
30 15
360 360

+

= 1,000+500 = 1,500 units.
(iii) What should be the inventory level (ideally) immediately before the material ordered is
received i.e. the Safety Stock.
Material 2.6
*Safety Stock =
12,000
30
360

= 1,000 units.
Question 6
Discuss the treatment of spoilage and defectives in cost accounting
(3 Marks, May 2005; May 2007; May 2009) (2 Marks, November 2007)
Answer
Normal spoilage (which is inherent in the operation) costs are included in costs either by
charging the loss due to spoilage to the production order or charging it to production overhead
so that it is spread over all the products. Any value realized from the sale of spoilage is
credited to production order or production overhead accounts, as the case may be. The cost
of abnormal spoilage is charged to Costing P/L A/C. When spoiled work is the result of rigid
specification, the cost of spoiled work is absorbed by good production while the cost of
disposal is charged to production overhead.
Defectives that are considered inherent in the process and are identified as normal can be
recovered by using the following method.
Charged to goods products
Charged to general overheads
Charged to departmental overheads
If defectives are abnormal, they are charged to Costing Profit and Loss Account.
Question 7
A re-roller produced 400 metric tons of M.S. bars spending ` 36,00,000 towards materials and
` 6,20,000 towards rolling charges. Ten percent of the output was found to be defective,
which had to be sold at 10% less than the price for good production. If the sales realization
should give the firm an Overall profit of 12.5% on cost, find the selling price per metric ton of
both the categories of bars. The scrap arising during the rolling process fetched a realization
of ` 60,000. (6 Marks, November 2006)
Answer
(a) Computation of Selling Price
` `
Cost of Materials 36,00,000
Less: Scrap 60,000 35,40,000
Rolling charges 6,20,000
2.7 Cost Accounting
Total cost 41,60,000
Add Profit (12.5% on cost) 5,20,000
Sales value 46,80,000
Output (effective)
360 tons +
10
9
40 tons = 396 tons
Selling price per MT of good output
= ` 46,80,000 396
= ` 11,818.18
Selling price of defective per MT
= 0.9 ` 11,818.18 = ` 10,636.36
Question 8
PQR Limited produces a product which has a monthly demand of 52,000 units. The product
requires a component X which is purchased at ` 15 per unit. For every finished product, 2
units of Component X are required. The Ordering cost is ` 350 per order and the Carrying
cost is 12% p.a.
Required:
(i) Calculate the economic order quantity for Component X.
(ii) If the minimum lot size to be supplied is 52,000 units, what is the extra cost, the company
has to incur?
(iii) What is the minimum carrying cost, the Company has to incur? (8 Marks, May 2006)
Answer
Demand of X is 1,04,000 units (2 52,000 units) as per instruction that for every finished
product , 2 units of component X are required.
(i)
2AO
EOQ =
c i

0.12 15
350 12) 52,000 (2 2

=
= 22,030 units of component X
(ii) Extra cost incurred by the company
Total cost (when order size is 52,000 units) = Total ordering cost + Total carrying cost
Material 2.8
A Q
= O + C i
Q 2

2 52,000 12 52,000
= 350 + 15 12%
52,000 2

`
= ` 55,200
Total cost (when order size is 22,030 units)
2 52,000 12
350
22,030

= +

` 12% 15
2
22,030

Total cost incurred = 19,828 + 19,827 = 39,655.

Extra cost incurred = ` 55,200 ` 39,655 = ` 15,545.
(iii) Minimum carrying cost, the company has to incur
Q
= C i
2

22,030
= 15 12%
2
`
= ` 19,827.
Question 9
PQR Ltd., manufactures a special product, which requires ZED. The following particulars
were collected for the year 2005-06:
(i) Monthly demand of Zed : 7,500 units
(ii) Cost of placing an order : ` 500
(iii) Re-order period : 5 to 8 weeks
(iv) Cost per unit : ` 60
(v) Carrying cost % p.a. : 10%
(vi) Normal usage : 500 units per week
(vii) Minimum usage : 250 units per week
(viii) Maximum usage : 750 units per week
Required:
(i) Re-order quantity.
(ii) Re-order level.
2.9 Cost Accounting
(iii) Minimum stock level.
(iv) Maximum stock level.
(v) Average stock level. (10 Marks, November 2006)
Answer
(i)
2AO
Re- order quantity =
C i

=
10 60
500 12 500 , 7 2

= 3,873 units
(ii) Re-order level
= Maximum re-order period Maximum usage
week per units 750 weeks 8 =
= 6,000 units
(iii) Minimum stock level
= Re-order level {Normal usage Average reorder period}
= 6,000 (500 6.5)
= 2,750 units
(iv) Maximum stock level
= Re-order level + Re-order quantity (Minimum usage Minimum re-order period)
= 6,000 + 3,873 (5 250)
= 8,623 units
(v) Average stock level
= (Minimum stock level + Maximum stock level)
= (2,750 + 8,623)
= 5,687 units
Question 10
Discuss the use of perpetual inventory records and continuous stock verification, and its
advantages. (4 Marks, November 2006)
Answer
Use of perpetual inventory records and continuous stock verification: Perpetual
Material 2.10
inventory represents a system of records maintained by the stores department. These are Bin
cards and Stores ledger.
Bin Card is a quantitative record of receipt, issue and closing balance of each item of stores.
Separate bin cards are maintained for each item. Each card is filled up with physical
movement of goods i.e. on receipt and issue.
Stores Ledger is quantitative and value record of receipt, issue and closing balance of each
item of stores. It is filled with the help of goods received note and material issue requisitions.
A perpetual inventory is usually checked by a programme of continuous stock taking.
Continuous stock taking means physical checking of those records with actual stock.
Advantages of perpetual inventory
(1) Physical stocks can be counted and book balances adjusted as and when desired
without waiting for entire stock taking to be done.
(2) Quick compilation of Profit and Loss Account due to prompt availability of stock figures.
(3) Discrepancies are easily located and thus corrective action can be promptly taken.
(4) A systematic review of the perpetual inventory reveals the existence of surplus, dormant,
obsolete and slow moving materials, so that remedial measures may be taken in time.
(5) Fixation of various stock levels and checking of actual balance in hand.
Question 11
The average annual consumption of a material is 18,250 units at a price of ` 36.50 per unit.
The storage cost is 20% on an average inventory and the cost of placing an order is ` 50.
How much quantity is to be purchased at a time? (2 Marks, May 2007)
Answer
Quantity to be purchased
units 500 2,50,000
36.50 of 20%
50 18,250 2
= =

Question 12
Explain, why the Last in First out (LIFO) has an edge over First in First out (FIFO) or any other
method of pricing material issues. (3 Marks, Nov 2007)
Answer
LIFO has following advantages:
(a) The cost of the material issued will be reflecting the current market price.
(b) The use of the method during the period of rising prices does not reflect undue high profit
in the income statement.
(c) In the case of falling price, profit tend to rise due to lower material cost, yet the finished
goods appear to be more competitive and are at market price.
(d) During the period of inflation, LIFO will tend to show the correct profit.
Question 13
ZED Company supplies plastic crockery to fast food restaurants in metropolitan city. One of
its products is a special bowl, disposable after initial use, for serving soups to its customers.
Bowls are sold in pack 10 pieces at a price of ` 50 per pack.
The demand for plastic bowl has been forecasted at a fairly steady rate of 40,000 packs every
year. The company purchases the bowl direct from manufacturer at ` 40 per pack within a
three days lead time. The ordering and related cost is ` 8 per order. The storage cost is 10%
per cent per annum of average inventory investment.
Required:
(i) Calculate Economic Order Quantity.
(ii) Calculate number of orders needed every year.
(iii) Calculate the total cost of ordering and storage bowls for the year.
(iv) Determine when should the next order to be placed. (Assuming that the company does
maintain a safety stock and that the present inventory level is 333 packs with a year of 360
working days.) (8 Marks, May 2008)
Answer
(i) Economic Order Quantity

UI
O C 2
EOQ

=

4
8 40,000 2

=
1,60,000 = = 400 packs.
(ii) Number of orders per year
quantity order Economic
ts requiremen Annual

year per order 100
400
40,000
=

Material 2.12
(iii) Ordering and storage costs
`
Ordering costs : 100 orders ` 8.00 800
Storage cost : (400/2) (10% of 40) 800
Total cost of ordering & storage 1,600
(iv) Timing of next order
(a) Days requirement served by each order.
year a in order of No.
days working of No.
ts requiremen days of Number =
supply days 3.6
100
360
= =
This implies that each order of 400 packs supplies for requirements of 3.6 days
only.
(b) Days requirement covered by inventory
order) an by served t requiremen (Day
quantity order Economic
inventory in Units
=
t requiremen days 3 days 3.6
400
333
=
(c) Time interval for placing next order
Inventory left for days requirement Lead time of delivery
3 days requirements 3 days lead time = 0
This means that next order for the replenishment of supplies has to be placed
immediately.
Question 14
The annual carrying cost of material X is ` 3.6 per unit and its total carrying cost is ` 9,000
per annum. What would be the Economic order quantity for material X, if there is no safety
stock of material X ? (2 Marks, November, 2008)
Answer
Calculation of Economic Order Quantity
unit per Cost Carrying
Cost Carrying Total
Inventory Average =
9,000
2,500 Units
3.60
= =
`
`

Economic Order Quantity = Average Inventory 2
= 2,500 2 = 5,000 units.
Alternative Solution:
2
E.O.Q unit per cost Carrying
Cost Carrying Total

=
2
E.O.Q 3.6
9,000 or

=
unit 5,000
3.6
2 9,000
E.O.Q. or =
=
Question 15
The following information relating to a type of Raw material is available:
Annual demand 2000 units
Unit price ` 20.00
Ordering cost per order ` 20.00
Storage cost 2% p.a.
Interest rate 8% p.a.
Lead time Half-month
Calculate economic order quantity and total annual inventory cost of the raw material.
Answer
EOQ =
unit per Cost Storage
Order per Cost Buying n Consumptio Annual 2

=
2 2,000 20
2 8
20
100

+

`
=
2
000 , 80
= 200 Units
Total Annual Inventory Cost
Cost of 2,000 Units @ `20 (2,000 20) = ` 40,000
No. of Order
2,000
200
= ` 10
Material 2.14
Ordering Cost 10 20 = ` 200
Carrying cost of Average Inventory
2
200
20
100
10
= ` 200
= ` 40,400
Question 16
Re-order quantity of material X is 5,000 kg.; Maximum level 8,000 kg.; Minimum usage 50 kg.
per hour; minimum re-order period 4 days; daily working hours in the factory is 8 hours. You
are required to calculate the re-order level of material X. (2 Marks, May 2010)
Answer
Re-order Level = Maximum Level [Re-order quantity (Minimum usage per day Minimum
Re-order Period)
= 8,000 kg. [5,000 kg. (400 kg* 4)]
= 8,000 kg. 3,400 kg. = 4,600 kg.
*Minimum usage per day = 50 kg. 8 = 400 kg.
Alternative solution
Let the Re-order level is X
Maximum level= Re-order level + Re-order quantity (Minimum usage per day Minimum Re-
order Period)
Or 8,000 kg. = X + 5,000 kg (400 kg 4 days)
Or 8,000 kg. = X + 5,000 kg. 1,600 kg.
Or X = 8,000 kg. 3,400 kg.
Or X = 4,600 kg.
Hence, Re-order level is 4,600 kg.
Question 17
ABC Limited has received an offer of quantity discounts on its order of materials as under:
Price per tonnes
(`)
4,800
4,680
4,560
4,440
4,320
Tonnes
Nos.
Less than 50
50 and less than 100
300 and above
The annual requirement for the material is 500 tonnes. The ordering cost per order is ` 6,250
and the stock holding cost is estimated at 25% of the material cost per annum.
Required :
(i) Compute the most economical purchase level
(ii) Compute E.O.Q. if there are no quantity discounts and the price per tonne is ` 5,250.
Answer
(i) Calculation of most economical purchase level:
A= Annual requirement = 500 tonnes
Order
size
No. of Orders Cost of
Purchase
Ordering Cost Carrying Cost Total Cost
(Q) Units (A/Q) (A x Cost/total) (A/Q x ` 6,250) (Q/2 x Price/ tonne 25%) `
40 500/40= 12.5 5004,800
= 24,00,000
12.5X6,250
= 78,125
40
4,800.25
2
=24,000

25,02,125
50 500/50= 10 500 X 4,680
= 23,40,000
10X6,250
= 62,500
50
4,680.25
2
=29,250

24,31,750
100 500/100= 5 500 X 4,560
= 22,80,000
5X62,250
= 31,250
100
4,560.25
2
=57,000

23,68,250
200 500/200= 2.5 500 4,440=
22,20,000
2.5
6,250=15,625
200
4,440.25
2
=1,11,000

23,46,625
300 500/300=1.67 500 X 4,320
= 21,60,000
1.67 X 6,250
= 10,437.50
300
4,320.25
2
=1,62,000

23,32,437.50
The total cost of purchase ordering cost and carrying cost of 500 tonnes is minimum
` 23,32,437.50 when the order size is 300 tonnes. Hence most economical purchase
level is 300 tonnes.
(ii) EOQ =
2AO
=
Ci

2500tonnesRs.6250perorder
Rs.5250.25

= 69 tonnes
Material 2.16
A is the annual requirement for the material.
O is the ordering Cost per order
Ci is the carrying Cost per unit per annum.
Question 18
Prepare a Store Ledger Account from the following transactions of XY Company Ltd.
April, 2011
1 Opening balance 200 units @ ` 10 per unit.
5 Receipt 250 units costing ` 2,000
8 Receipt 150 units costing ` 1,275
10 Issue 100 units
15 Receipt 50 units costing ` 500
20 Shortage 10 units
21 Receipt 60 units costing ` 540
22 Issue 400 units
The issues upto 10-4-11 will be priced at LIFO and from 11-4-11 issues will be priced at FIFO.
Shortage will be charged as overhead. (5 Marks, May 2011)
Answer
Store Ledger Account
Name :- Max. Stock Level - Bin No.-
Code No. :- Min. Stock Level - Location Code-
Description:- Re-order level
Re-order quantity-
Date
Receipts Issues Balance
Qty.

Rate Amount Qty.

Rate Amount Qty. Rate Amount
Units ` ` Units ` ` Units ` `
April 1 200 10 2,000
5
250 8 2,000 200 10
4,000
250 8
8
150 8.50 1,275 200 10
5,275 250 8
150 8.50
10 100 8.50 8.50 200 10 4,425
250 8
50 8.50
15
50 10 500 200 10
4,925
250 8
50 8.50
50 10
20
10
(shortage)
10 100 190 10
4,825
250 8
50 8.50
50 10
21
60 9 540 190 10
5,365
250 8
50 8.50
50 10
60 9
22
190 10
3,580
40 8
1,785
(Closing
Stock)
210 8 50 8.50
50 10
60 9
Question 19
Distinguish between bill of material and material requisition note. (4 Marks, May 2012)
Answer
Bills of material Material Requisition Note
1. It is document by the drawing office 1. It is prepared by the foreman of the
consuming department.
2. It is a complete schedule of component
parts and raw materials required for a
particular job or work order.
2. It is a document authorizing Store-
Keeper to issue Material to the
consuming department.
3. It often serves the purpose of a Store
Requisition as it shown the complete
schedule of materials required for a
particular job i.e. it can replace stores
requisition.
3. It cannot replace a bill of material.
4. It can be used for the purpose of quotation 4. It is useful in arriving historical cost
only.
Material 2.18
5. It helps in keeping a quantitative control
on materials draw through stores
Requisition.
5. It shows the material actually drawn
from stores.
Question 20
KL Limited produces product 'M' which has a quarterly demand of 8,000 units. The product
requires 3 kgs. quantity of material 'X' for every finished unit of product. The other information
are follows:
Cost of material 'X' : ` 20 per kg.
Cost of placing an order Carrying Cost : ` 1000 per order
Carrying Cost : 15% per annum of average inventory
You are required:
(i) Calculate the Economic Order Quantity for material 'X'.
(ii) Should the' company accept an offer of 2 percent discount by the supplier, if he wants to
supply the annual requirement of material 'X' in 4 equal quarterly installments ?
Answer
Annual demand of material X
= 8000 units (per quarter) x 4 (No. of Quarter in a year) x 3 kgs. (for every finished product)
= 96,000 kgs.
(i) Calculation of Economic Order Quantity (EOQ) for material X
EOQ =
2 x Annual demand x ordering cost
Carrying cost per unit per annum

=
2 96,000 kg 1000
20 15%

`
`

= 8,000 kg.
(ii) Evaluation of Cost under different options of order quantity.
Particulars When EOQ is ordered When discount of 2% is
accepted and supply is in 4
equal installments
Order size 8,000 kgs.
4
Kgs 000 , 96
= 24,000 kgs
No. of order 96,000 kgs
12
8,000 kgs
=

96000 kgs
4
24,000 kgs
=

Purchase Cost per kg. ` 20 (20-2% ` 20) = ` 19.60
Total Purchase Cost (A) (96,000 kgs. x ` 20)
=`19,20,000
(96,000 kgs x 19.6)=
`18,81,600
Ordering Cost (B) 12 orders x ` 1,000
=`12,000
4 orders x ` 1,000 = `
4,000
Carrying Cost (C) 8,000kgs
15%x 20
2
=

` 12,000
24,000 kgs
2

x 15% 19.6 =
` 35,280
Total Cost (A+B+C) ` 19,44,000 `19,20,880
Advice The total Cost is lower if Company accept an offer of 2 percent discount by the
supplier, when supply of the annual requirement of material X is made in 4 equal
installments.
Question 21
Answer the following:
Primex Limited produces product 'P'. It uses annually 60,000 units of a material 'Rex' costing `
10 per unit. Other relevant information are:
Cost of placing an order : ` 800 per order
Carrying cost : 15% per annum of average inventory
Re-order period : 10 days
Safety stock : 600 units
The company operates 300 days in a year.
You are required to calculated:
(i) Economic Order Quantity for material 'Rex'.
(ii) Re-order Level
(ill) Maximum Stock Level
(iv) Average Stock Level (5 Marks, November 2013)
Answer
(i) Economic Order Quantity (E.O.Q)
=
2Annual requirement of 'Rex' Orderingcost per order
Annual carryingcost per unit per annum

Material 2.20
=

2 60,000units 800
10 15%
`
`
=
9,60,00,000
1.5 `

= 8,000 units
(ii) Re-order Level = Safety Stock + (Normal daily Usage Re-order period)
= 600 + (
60,000units
300days
10 days)
= 600 + 2,000
= 2,600 units
(iii) Maximum Stock Level = E.O.Q (Re-order Quantity) + Safety Stock
= 8,000 units + 600 units
= 8,600 units
(iv) Average Stock Level = Minimum Stock level +
1
2
Re-order Quantity
= 600* +
1
2
8,000 units
= 4,600 units
OR
Average Stock Level =
MaximumStocklevel + MinimumStocklevel
2

=
8,600units +600units
2

= 4,600 units
* Minimum Stock Level = Re-order level (Normal daily usage Re-order period)
= 2,600 (
60,000units
300days
10 days)
= 2,600 2,000
= 600 units
OR
Minimum Stock Level = Safety Stock level = 600 units
Note: Various levels can be calculated in different other ways. However answers will be the
same.
3
Labour
Question 1
ZED Limited is working by employing 50 skilled workers. It is considered the introduction of
incentive scheme-either Halsey scheme (with 50% bonus) or Rowan scheme of wage payment
for increasing the labour productivity to cope up the increasing demand for the product by
40%. It is believed that proposed incentive scheme could bring about an average 20%
increase over the present earnings of the workers; it could act as sufficient incentive for them
to produce more.
Because of assurance, the increase in productivity has been observed as revealed by the
figures for the month of April, 2004.
Hourly rate of wages (guaranteed) ` 30
Average time for producing one unit by one worker at the previous
performance (This may be taken as time allowed)
1.975 hours

Number of working days in the month 24
Number of working hours per day of each worker 8
Actual production during the month 6,120 units
Required:
(i) Calculate the effective rate of earnings under the Halsey scheme and the Rowan
scheme.
(ii) Calculate the savings to the ZED Limited in terms of direct labour cost per piece.
(iii) Advise ZED Limited about the selection of the scheme to fulfill their assurance.
(8 Marks, May 2004)
Answer
Working notes:
1. Computation of time saved ( in hours) per month :
= (Standard production time of 6,120 units Actual time taken by the workers)
= (6,120 units x 1.975 hours 24 days x 8 hrs per day x 50 skilled workers)
Labour 3.2
= (12,087 hours 9,600 hours)
= 2,487 hours
2. Computation of bonus for time saved hours under Halsey and Rowan schemes:
Time saved hours = 2,487 hours
(Refer to working note 1)
Wage rate per hour = ` 30
Bonus under Halsey Scheme = x 2,487 hours x ` 30
(with 50% bonus) = ` 37,305
Bonus under Rowan Scheme =
TimeSaved
TimeAllowed
Time taken Rate per hour
=
2,487 hours
9,600 hours 30
12,087 hours
`
= ` 59,258.38
(i) Computation of effective rate of earnings under the Halsey and Rowan schemes:
Total earnings (under Halsey scheme) = Time wages + Bonus
= 24 days x 8 hours x 50 skilled workers x ` 30 + ` 37,305
= ` 2,88,000 + ` 37,305 = ` 3,25,305
Total earnings (under Rowan scheme) = Time wages + Bonus
= ` 2,88,000 + ` 59,258.38
= ` 3,47,258.38
Effective rate of earnings per hour (under Halsey Plan ` 33.89
(` 3,25,305 9,600 hrs.)
Effective rate of earnings per hour (under Rowan Plan ` 36.17
(` 3,47,258.38 9,600 hrs)
(ii) Savings to the ZED Ltd. in terms of direct labour cost per piece:
`
Direct labour cost (per unit) under time wages system 59.25
(1.975 times per unit ` 30)
Direct labour cost (per unit) under Halsey Plan 53.15
3.3 Cost Accounting
(` 3,25,305 6,120 units)
Direct labour cost (per unit) under Rowan Plan 56.74
(` 3,47,258.38 6,120 units)
Savings of direct labour cost under:
Halsey Plan ` 6.10
(` 59.25 53.15)
Rowan Plan ` 2.51
(` 59.25 56.74)
(iii) Advise to ZED Ltd : (about the selection of the scheme to fulfill assurance)
Halsey scheme brings more savings to the management of ZED Ltd, over the present
earnings of ` 2,88,000 but the other scheme viz Rowan fulfils the promise of 20%
increase over the present earnings of ` 2,88,000 by paying 20.58% in the form of bonus.
Hence Rowan Plan may be adopted.
Question 2
Discuss the Gantt task and bonus system as a system of wage payment and incentives.
Answer
Gantt Task and Bonus System
This system is a combination of time and piecework system. According to this system a high
standard or task is set and payment is made at time rate to a worker for production below the
set standard.
Wages payable to workers under the plan are calculated as under:
Output Payment
(i) Output below standard Guaranteed time rate
(ii) Output at standard Time rate plus bonus of 20% (usually) of time rate
(iii) Output over standard High piece rate on workers output .(It is so fixed ,so
as to include a bonus of 20% of time rate)
Question 3
Discuss the three methods of calculating labour turnover.
(3 Marks, November 2004) (4 Marks, November 2010)

Labour 3.4
Answer
(i) Replacement metho =
No of employees replaced 100
Av no of employees on roll

(ii) Separation method =
No of employees separated during the year 100
Av no of employees on the roll during the year

(iii) Flux method =
( )
period the during rolls on employees of no Av
100 replaced employees of No separated employees of No +

Question 4
The existing Incentive system of Alpha Limited is as under:
Normal working week 5 days of 8 hours each plus 3 late
shifts of 3 hours each
Rate of Payment Day work: ` 160 per hour
Late shift: ` 225 per hour
Average output per operator for 49-hours week i.e.
including 3 late shifts
120 articles
In order to increase output and eliminate overtime, it was decided to switch on to a system of
payment by results. The following Information is obtained:
Time-rate (as usual) : ` 160 per hour
Basic time allowed for 15 articles : 5 hours
Piece-work rate : Add 20% to basic piece-rate
Premium Bonus : Add 50% to time.
Required:
Prepare a Statement showing hours worked, weekly earnings, number of articles produced
and labour cost per article for one operator under the following systems:
(a) Existing time-rate
(b) Straight piece-work
(c) Rowan system
(d) Halsey premium system
Assume that 135 articles are produced in a 40-hour week under straight piece work, Rowan
Premium system, and Halsey premium system above and worker earns half the time saved under
Halsey premium system. (8 Marks, November, 2005)
3.5 Cost Accounting
Answer
Table showing Labour Cost per Article
Method of Payment Hours
worked
Weekly
earnings
Number of
articles
produced
labour cost
per article
Existing time rate 49 ` 8,425.00 120 ` 70.21
Straight piece rate system 40 ` 8,640.00 135 ` 64.00
Rowan Premium System 40 ` 9,007.41 135 ` 66.72
Halsey Premium System 40 ` 8,600.00 135 ` 63.70
Working Notes:
Existing time rate
Weekly wages 40 hrs @ ` 160/hr = ` 6,400
9 hrs @ ` 225/hr = ` 2,025
` 8,425
Piece Rate System
Basic time: 5 hour for 15 articles.
Cost of 15 articles at hourly rate of ` 160/hr
Add 20%
= ` 800
= ` 160
` 960
Rate per article = ` 960 / 15= ` 64
Earnings for the week
= 135 articles ` 64 = ` 8,640.
Rowan Premium System
Basic Time : 5 hours for 15 articles
Add : 50% to time
7.5 hours for 15 articles
Or 30 minutes per article
Time allowed for 135 articles = 67.5 hours
Actual time taken for 135 articles = 40 hours
Earnings = (HWRH) +
RH HW
TA
HW TA

Labour 3.6
= (40 hrs ` 160) +
67.5- 40
40 160
67.5

` = ` 9,007.41

Halsey Premium System
Earnings = HWRH +
100
50
(TA HW) RH
= 40 ` 160
2
1
+ (67.5 40) ` 160 = ` 8,600.
Question 5
Discuss the treatment of Idle time and Overtime premium in Cost Accounting.
(4 Marks, May 2006)
Answer
Treatment of Idle time and Overtime Premium in Cost Accounting
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 labour cost rates. In case of
indirect workers, normal idle time is spread over all the products or jobs through the
process of absorption of factory overheads.
Abnormal idle time cost is not included as a part of production cost and is shown as a
separate item in costing Profit and Loss Account.
Management should aim at eliminating controllable idle time and on a long-term basis
reduce even the normal idle time.
If overtime is resorted to at the desire of the customer, then overtime premium may b
charged to the job directly.
If overtime is required to cope with general production programme or for meeting urgent
orders, the overtime premium should be treated as overhead cost of the particular
department/cost centre.
Question 6
Using Taylors differential piece rate system, find the earning of A from the following
particulars:
Standard time per piece 12 minutes
Normal rate per hour (in a 8 hours day) ` 20
A produced 37 Units
(2 Marks, May 2007)
3.7 Cost Accounting
Answer
Standard output per day units 40
12
60 8
=

Actual output = 37 units
Efficiency percentage 92.5% 100
40
37
=
Under this method lower rate is 83% of the normal piece rate and is applicable if efficiency of
worker is below 100%.
Earning rate per unit = 83% of unit per 3.32 or
* 5
20

Earning = 37 3.32 = `122.84
* In one hour, production will be = units 5
minutes 12 i.e. peice, per time standard
minutes 60
=
Question 7
Enumerate the various methods of Time booking. (2 Marks, May 2007)
Answer
The various methods of time booking are:
(a) Job ticket.
(b) Combined time and job ticket.
(c) Daily time sheet.
(d) Piece work card.
(e) Clock card.
Question 8
Enumerate the remedial steps to be taken to minimize the labour turnover.
(3 Marks, Nov 2007)
Answer
The following steps are useful for minimizing labour turnover:
(a) Exit interview: An interview be arranged with each outgoing employee to ascertain the
reasons of his leaving the organization.
(b) Job analysis and evaluation: to ascertain the requirement of each job.
Labour 3.8
(c) Organisation should make use of a scientific system of recruitment, placement and
promotion for employees.
(d) Organisation should create healthy atmosphere, providing education, medical and
housing facilities for workers.
(e) Committee for settling workers grievances.
Question 9
Standard output in 10 hours is 240 units; actual output in 10 hours is 264 units. Wages rate is
`10 per hour. Calculate the amount of bonus and total wages under Emerson Plan.
(2 Marks, May 2008)
Answer
Efficiency percentage = 110% 100
240
264
=
As per Emerson plan, in case of above 100% efficiency bonus of 20% of basic wages plus 1%
for each 1% increase in efficiency is admissible.
So, new bonus percentage = 20 + (110 100) = 30
Total Bonus = hour) per rate worked (hours
100
30

=
30
10 10 30
100
= `
Total wages = `(10 10) + 30 = `130.
Question 10
Distinguish between Job evaluation and Merit rating. (3 Marks, May 2008)
Answer
Job Evaluation and Merit Rating:
Job evaluation is the assessment of the relative worth of jobs within a company and
merits rating are the assessment of the relative worth of the man behind the job.
Job evaluation and its accomplishment are means to set up a rational wage and salary
structure where as merits rating provides a scientific basis for determining fair wages for
each worker based on his ability and performance.
Job evaluation simplifies wage administration by bringing an uniformity in wage rates
where as merits rating is used to determine fair rate of pay for different workers.
Question 11
Describe briefly, how wages may be calculated under the following systems:
3.9 Cost Accounting
(i) Gantt task and bonus system
(ii) Emersons efficiency system
(iii) Rowan system
(iv) Halsey system
(v) Barth system. (8 Marks, November, 2008)
Answer
(i) Gantt task and bonus system: As per this system a higher standard is set and payment
is made at time rate to a worker for production below the standard. If the standards are
achieved or exceeded, the payment is made at a higher piece rate. The piece rate fixed
also includes an element of bonus to the extent of 20%. Bonus is calculated over the
time rate.
(ii) Emersons Efficiency System: Under this system wages may be calculated as below:
Performance Wages
Below 66% efficiency Time rate without any bonus
66% - 100% efficiency Bonus varies between 1% to 20%*
Above 100% efficiency Bonus of 20% of basic wages plus
1% for every 1% increase in efficiency.
*At 100% efficiency the bonus percentage will be 20%.
(iii) Rowan System: As per this system standard time allowance is fixed for the performance
of a job and bonus is paid if time is saved.
Wages under Rowan System =
Time saved
(Time taken Rate per unit of time )
Time allowed
+ Time taken Rate per unit of time
(iv) Halsey System: Under this system a standard time is fixed for each job. If there is no
saving on this standard time allowance, the worker is paid only his day rate.
Wages under Halsey System = Time taken Time rate + (50% of time saved time rate)
(v) Barth System:
Earnings under Barth System = worked Hours hours Standard rate Hourly
This is particularly suitable for trainees and beginners and also for unskilled workers.
Question 12
Two workmen, A and B, produce the same product using the same material. A is paid bonus
according to Halsey plan, while B is paid bonus according to Rowan plan. The time allowed to
Labour 3.10
manufacture the product is 100 hours. A has taken 60 hours and B has taken 80 hours to
complete the product. The normal hourly rate of wages of workman A is ` 24 per hour. The
total earnings of both the workers are same. Calculate normal hourly rate of wages of
workman B. (2 Marks, May 2009)
Answer
A B
Time Allowed (Hrs.) 100 100
Time Taken (Hrs.) 60 80
Time Saved (Hrs.) 40 20
Let the rate of wages of the worker B is ` x per
hour

Normal Wages 1440 80x
(Time taken Hourly rate of wages) (6024)
Bonus 480 16x

(1/2 40 24)
) x 80 (
100
20

1,920 96x
According to the problem,
Total earnings of A = Total earnings of B
1,920 = 96x
x =
1,920
96
= ` 20
Hourly rate of wages of the worker is ` 20 per hour.
Alternative Solution:
In case of worker B, in place of x, it can be written as 80x hourly rate.
Hence final equation will be
96x hourly rate = 1,920
Hourly rate of B =
1,920
96
= `20
Question 13
Discuss accounting treatment of idle capacity costs in cost accounting. (3 Marks, May 2009)

Answer
Treatment of Idle Capacity Cost
(a) If idle capacity is due to unavoidable reasons such as repairs & maintenance,
changeover of job etc., a supplementary overhead rate may be used to recover the idle
capacity cost. In this case, the costs are charged to production capacity utilized.
(b) If idle capacity cost is due to avoidable reasons such as faulty planning, power failure
etc, the cost should be charged to P/L A/c.
(c) If idle capacity is due to seasonal factors, then the cost should be charged to cost of
production by inflating overhead rates.
Question 14
Standard Time for a job is 90 hours. The hourly rate of guaranteed wages is ` 50. Because of the
saving in time a worker a gets an effective hourly rate of wages of ` 60 under Rowan premium
bonus system. For the same saving in time, calculate the hourly rate of wages a worker B will get
under Halsey premium bonus system assuring 40% to worker. (3 Marks, November 2009)
Answer
Increase in Hourly Rate of Wages (Rowan Plan) is (` 60 ` 50) = ` 10
This is Equal to

Time dard tan S
Saved Time
Hourly rate
Or 10 =
Time dard tan S
Saved Time
50
Or
90
Saved Time
50 = 10
Time Saved =
50
900
= 18 Hours
Time Taken = (90 18) = 72 Hours
Effective Hourly Rate under Halsey System
Time Saved = 18 Hours
Bonus @ 40% = 18 40% 50 = ` 360
Total Wages = (50 72 + 360) = 3,960
Effective Hourly Rate
= 3,960 72 Hours = ` 55
Labour 3.12
Question 15
Which is better plan out of Halsey 50 percent bonus scheme and Rowan bonus scheme for an
efficient worker? In which situation the worker get same bonus in both schemes?
(3 Marks, May 2010)
Answer
Rowan Bonus Scheme pays more bonus if the time saved is below the 50 per cent of time
allowed and if the time saved is more than 50 percent of time allowed then Halsey bonus
scheme pays more bonus. Generally, time saved by a worker is not more than 50 per cent of
time allowed. So, the Rowan bonus scheme is better for an efficient worker. When the time
saved is equal to 50 per cent of time allowed then both plans pays same bonus to a worker.
Question 16
You are given the following information of a worker:
(i) Name of worker : X
(ii) Ticket No. : 002
(iii) Work started : 1-4-11 at 8 a.m.
(iv) Work finished : 5-4-11 at 12 noon
(v) Work allotted : Production of 2,160 units
(vi) Work done and approved : 2000 units
(vii) Time and units allowed : 40 units per hour
(viii) Wage rate : ` 25 per hour
(ix) Bonus : 40% of time saved
(x) Worker X worked 9 hours a day.
You are required to calculate the remuneration of the worker on the following basis:
(i) Halsey plan and
(ii) Rowan plan (5 Marks, May 2011)
Answer
No. of units produced and approved = 2,000
Standard time = 40 units per hour
Hourly Wage Rate = ` 25
Time allowed = 40 units per hour
Time allowed for 2,000 units hours 50
40
2,000
=
(i) Calculation of Remuneration under Halsey Plan:
Standard time allowed for 2,000 units : 50 hours
Actual time taken for 2,000 units : 40 hours
Time saved 10 hours
Basic wages for time taken 40 hours @ ` 25 = ` 1,000
Bonus: 40% of time saved 25 10
100
40
=

` 100
Total ` 1,100
(ii) Calculation of Remuneration Under Rowan Plan:
Wages for time taken 40 hours @ ` 25 = ` 1,000

allowed Time
saved Time
Bonus= x (Time Taken x Hourly Rate)

50
25 10 40

= = ` 200
Total ` 1,200
Question 17
Enumerate the causes of labour turnover. (4 Marks, May 2011)
Answer
Causes of Labour Turnover : The main causes of labour turnover in an organisation/ industry
can be broadly classified under the following three heads :
(a) Personal Causes;
(b) Unavoidable Causes; and
(c) Avoidable Causes.
Personal causes are those which induce or compel workers to leave their jobs; such causes
include the following:
(i) Change of jobs for betterment.
(ii) Premature retirement due to ill health or old age.
(iii) Domestic problems and family responsibilities.
(iv) Discontent over the jobs and working environment.
Unavoidable causes are those under which it becomes obligatory on the part of management
to ask one or more of their employees to leave the organisation; such causes are summed up
as listed below:
Labour 3.14
(i) Seasonal nature of the business;
(ii) Shortage of raw material, power, slack market for the product etc.;
(iii) Change in the plant location;
(iv) Disability, making a worker unfit for work;
(v) Disciplinary measures;
(vi) Marriage (generally in the case of women).
Avoidable causes are those which require the attention of management on a continuous basis
so as to keep the labour turnover ratio as low as possible. The main causes under this case
are indicated below:
(i) Dissatisfaction with job, remuneration, hours of work, working conditions, etc.,
(ii) Strained relationship with management, supervisors or fellow workers;
(iii) Lack of training facilities and promotional avenues;
(iv) Lack of recreational and medical facilities;
(v) Low wages and allowances.
Question 18
X executes a piece of work in 120 hours as against 150 hours allowed to him. His hourly rate
is `10 and he gets a dearness allowance @ ` 30 per day of 8 hours worked in addition to his
wages. You are required to calculate total wages received by X under the following incentive
schemes:
(i) Rowan Premium Plan, and
(ii) Emerson's Efficiency Plan (5 Marks, November 2011)
Answer
(i) Rowan Premium Plan `
Normal wages (10 x 120) 1,200
D.A. for 15 days (30 x 15 ) 450
Bonus :
Bonus hours =
150
30 120
= 24 Hours
Bonus (24 x 10) 240
Total Wages = 1,890
(ii) Emersion`s Efficiency Plan Normal Wages
Normal wages 1,200
D.A. (15 x 30) 450
Bonus : = 100
Taken Time
Allowed Time

Efficiency % = 100
120
150
= 125 %
Rate of Bonus up to 100% = 20%
From 101% to 125% = 25%
45%
Bonus being 45% normal wages
1200
100
45

= 540
Total Wages = 2,190
Question 19
The management of a company wants to formulate an incentive plan for the workers with a
view to increase productivity. The following particulars have been extracted from the books of
company:
Piece Wage rate ` 10
Weekly working hours 40
Hourly wages rate ` 40 (guaranteed)
Standard/normal time per unit 15 minutes.
Actual output for a week:
Worker A 176 pieces
Worker B 140 pieces
Differential piece rate: 80% of piece rate when output below normal and 120% of piece rate
when output above normal.
Under Halsey scheme, worker gets a bonus equal to 50% of Wages of time saved.
Calculate:
(i) Earning of workers under Halseys and Rowans premium scheme.
(ii) Earning of workers under Taylors differential piece rate system and Emersons efficiency
plan. (8 Marks, May 2012)

Labour 3.16
Answer
Calculation of earnings for workers under different incentive plans:
Question 20
Accountant of your company had computed labour turnover rates for the quarter ended 30th
September, 2012 as 14%, 8% and 6% under Flux method, Replacement method and
(i) Halseys Premium Plan: Worker A Worker B
Actual time taken 40 hours 40 hours
Standard time for actual
Production

176 Pcs 15 Min.
60 Min.

= 44 hours

140 Pcs 15 Min.
60 Min.

= 35
hours
Minimum Wages 40 hours x ` 40
= ` 1,600
40 hours x ` 40
= ` 1,600
Bonus 50% (44-40) x `40
= ` 80
No bonus
Earning ` 1,680 ` 1,600
Rowans Premium Plan:
Minimum Wages (as above) ` 1,600 ` 1,600
Bonus
44
4
40 ` 40
= ` 145.45
No bonus
Earning ` 1,745.45 ` 1,600
(ii) Taylors differential Piece rate
Efficiency 176
160
100
= 110%
140
160
100
= 87.5%
Earning `10x120%x176 Pcs
= ` 2,112
`10x80%x140Pcs
` 1,120
Emersons efficiency Plan
Time Wages ` 40x40 hours
= 1,600
` 40x40 hours
= 1,600
Bonus (20%+10%) of (40x40)
= 480
20% of 1,600
= 320
Earning ` 2,080 ` 1,920
Separation method respectively. If the number of workers replaced during 2nd quarter of the
financial year 2012-13 is 36, find the following:
(i) The number of workers recruited and joined; and
(ii) The number of workers left and discharged. (4 Marks, November 2012)
Answer
Labour Turnover Rate (Replacement method) =

No. of worker s replaced
Average No. of worker s

or,
100
8
=

36

or, Average No. of workers = 450
Labour Turnover Rate (Separation method) =
workers of No. Average
separated workers of No.

or,
6
100
=
450
separated workers of No.

or, No. of workers separated = 27
Labour Turnover Rate (Flux Method) =

No. of Separations No. of accession (Joinings)
+

or,
14
100
=
27 No. of accessions (Joinings)
450
+

or, 100 (27 + No. of Accessions) = 6,300
or, No. of Accessions = 36
(i) The No. of workers recruited and Joined = 36
(ii) The No. of workers left and discharged = 27
Question 21
A skilled worker is paid a guaranteed wage rate of ` 120 per hour. The standard time allowed
for a job is 6 hour. He took 5 hours to complete the job. He is paid wages under Rowan
Incentive Plan.
(i) Calculate his effective hourly rate of earnings under Rowan Incentive Plan.
(ii) If the worker is placed under Halsey Incentive Scheme (50%) and he wants to maintain
the same effective hourly rate of earnings, calculate the time in which he should
complete the job. (6 Marks, May 2013)
Labour 3.18
Answer
(i) Effective hourly rate of earnings under Rowan Incentive Plan
Earnings under Rowan Incentive plan =
(Actual time taken wage rate) +
Time Saved
Time Allowed
Time taken Wage rate
= (5 hours `120) +
1 hour
5 hours 120
6 hours

`
= ` 600 + `100 = `700
Effective hourly rate = `700/5 hours = ` 140 /hour
(ii) Let time taken = X
Effective hourly rate =
Earnings under Halsay Scheme
Time Taken

Or, Effective hourly rate under Rowan Incentive plan =
(Time taken Rate) 50% Rate (Timeallowed Timetaken)
TimeTaken
+

Or, `140 =
(X 120) 50% 120 (6 X)
X
+ ` `

Or, 140X = 120X + 360 60X
Or, 80X = 360
Or, X =
360
80
= 4.5 hours
Therefore, to earn effective hourly rate of `140 under Halsey Incentive Scheme worker has to
complete the work in 4.5 hours
Question 22
The rate of change of labour force in a company during the year ending 31st March, 2013 was
calculated as 13%,8% and 5% respectively under 'Flux Method', 'Replacement method' and
'Separation method'. The number of workers separated during the year is 40.
You are required to calculate:
(i) Average number of workers on roll.
(ii) Number of workers replaced during the year.
(iii) Number of new accessions i.e. new recruitment.
(iv) Number of workers at the beginning of the year. (8 Marks, November 2013)
Answer
(i) Labour Turnover Rate (Separation method)
=
No. of workers separated
Average no. of workersonroll

Or,
5
100
=
40
Average no. of workerson roll

Or, Average no. of workers on roll = 800
(ii) Labour Turnover Rate (Replacement method)
=
No. of workers replaced
Average no. of workerson roll

Or,
8
100
=
No. of workers replaced
800

Or, No. of workers replaced = 64
(iii) Labour Turnover Rate (Flux Method)
=
No. of Separations +No. of accession (newrecruitments)
Average No. of workerson roll

Or,
13
100
=
40 + No. of accessions (New recruitments)
800

Or, 100 (40 + No. of Accessions) = 10,400
Or, No. of new accessions = 64
(iv) No. of workers at the beginning of the year
Let workers at the beginning of the year were X
Average no. of workers on roll =
Workersat thebegining Workersat theend
2
+

800 =
X (X Newaccessions Separations)
2
+ +

800 =
X (X 64 40)
2
+ +

800 =
X (X 24)
2
+ +

2 X = 1,600 24
X = 788 workers
4
Overheads
Question 1
MST Limited has collected the following data for its two activities. It calculates activity cost
rates based on cost driver capacity.
Activity Cost Driver Capacity Cost
Power Kilowatt hours 50,000 kilowatt hours `2,00,000
Quality Inspections Number of Inspections 10,000 Inspections `3,00,000
The company makes three products, M, S and T. For the year ended March 31, 2004, the
following consumption of cost drivers was reported:
Product Kilowatt Hours Quality Inspections
M 10,000 3,500
S 20,000 2,500
T 15,000 3,000
Required:
(i) Compute the costs allocated to each product from each activity.
(ii) Calculate the cost of unused capacity for each activity.
(iii) Discuss the factors the management considers in choosing a capacity level to compute
the budgeted fixed overhead cost rate. (6 Marks, May 2004)
(Out of Syllabus for the student of Intermediate (IPC), shifted to Advanced Management
Accounting, Chartered Accountancy Final Course)
4.2 Cost Accounting
Answer
(i) Statement of cost allocation to each product
from each activity
Product
M
`
S
`
T
`
Total
`
Power
(Refer to working
note)
40,000 80,000 60,000 1,80,000
(10,000 kwh x ` 4) (20,000 kwh x ` 4)
(15,000 kwh x `
4)

Quality inspections
(Refer to working
note)
1,05,000 75,000 90,000 2,70,000
(3,500 Inspections
x ` 30)
(2,500
Inspections x
` 30)
(3,000
Inspections x
` 30)

Working note:
Rate per unit of cost driver:
Power : (` 2,00,000 50,000 kwh) = ` 4/kwh
Quality inspection : (` 3,00,000 10,000 inspections) = ` 30 per inspection
(ii) Computation of cost of unused capacity for each activity:
`
Power 20,000
(`2,00,000 `1,80,000)
Quality inspections 30,000
(`3,00,000 `2,70,000)
Total cost of unused capacity 50,000
(iii) Factors management consider in choosing a capacity level to compute the budgeted
fixed overhead cost rate :
Effect on product costing & capacity management.
Effect on pricing decisions.
Effect on performance evaluation.
Effect on financial statements.
Regulatory requirements.
Difficulties in forecasting chosen capacity level concepts..
Overheads 4.3
Question 2
Discuss the treatment of under-absorbed and over-absorbed factory overheads in cost
accounting. (4 Marks, May 2004; November 2010) (6 Marks, May 2006) (3 Marks, May 2010)
Answer
Treatment of under absorbed and over absorbed factory overheads in cost accounting:
Factory overheads are usually applied to production on the basis of pre-determined rate
=
period the during units No.of Budgeted
period the for overheads normal Estimated

The possible options for treating under / over absorbed overheads are
Use supplementary rate in the case of substantial amount of under / over absorption
Write it off to the costing profit & loss account in the event of insignificant amount / or
abnormal reasons.
Carry forward to next accounting period if operating cycle exceeds one year.
Question 3
RST Limited specializes in the distribution of pharmaceutical products. It buys from the
pharmaceutical companies and resells to each of the three different markets:
(i) General Supermarket Chains
(ii) Drugstore Chains
(iii) Chemist Shops
The following data for the month of April, 2004 in respect of RST Limited has been reported:
General
Supermarket
Chains
Drugstore
Chains
Chemist
Shops
Average revenue per delivery ` 84,975 ` 28,875 ` 5,445
Average cost of goods sold per delivery ` 82,500 ` 27,500 ` 4,950
Number of deliveries 330 825 2,750
In the past, RST Limited has used gross margin percentage to evaluate the relative
profitability of its distribution channels.
The company plans to use activity-based costing for analysing the profitability of its
distribution channels.
The Activity analysis of RST Limited is as under:
4.4 Cost Accounting
Activity Area Cost Driver
Customer purchase order processing Purchase orders by customers
Line-item ordering Line-items per purchase order
Store delivery Store deliveries
Cartons dispatched to stores Cartons dispatched to a store per delivery
Shelf-stocking at customer store Hours of shelf-stocking
The April, 2004 operating costs (other than cost of goods sold) of RST Limited are ` 8,27,970.
These operating costs are assigned to five activity areas. The cost in each area and the
quantity of the cost allocation basis used in that area for April, 2004 are as follows:
Activity Area Total costs in April, 2004 Total Units of Cost
Allocation Base used
in April, 2004
Customer purchase order processing ` 2,20,000 5,500 orders
Line-item ordering ` 1,75,560 58,520 line items
Store delivery ` 1,95,250 3,905 store deliveries
Cartons dispatched to store ` 2,09,000 2,09,000 cartons
Shelf-stocking at customer store ` 28,160 1,760 hours
Other data for April, 2004 include the following:
General
Supermarket
Chains
Drugstore
Chains
Chemist
Shops
Total number of orders 385 990 4,125
Average number of line items per order 14 12 10
Total number of store deliveries 330 825 2,750
Average number of cartons shipped per store
delivery
300 80 16
Average number of hours of shelf-stocking per
store delivery
3 0.6 0.1
Required:
(i) Compute for April, 2004 gross-margin percentage for each of its three distribution
channels and compute RST Limiteds operating income.
(ii) Compute the April, 2004 rate per unit of the cost-allocation base for each of the five
activity areas.
Overheads 4.5
(iii) Compute the operating income of each distribution channel in April, 2004 using the
activity-based costing information. Comment on the results. What new insights are
available with the activity-based cost information?
(iv) Describe four challenges one would face in assigning the total April, 2004 operating
costs of ` 8,27,970 to five activity areas. (12 Marks, May 2004)
Accounting, Chartered Accountancy Final Course.)
Answer
(i) RST Limiteds
Statement of operating income and gross margin percentage
for each of its three distribution channel
General
Super Market chains
Drugstore
Chains
Chemist
Shops
Total

Revenues: (`) 2,80,41,750 2,38,21,875 1,49,73,750 6,68,37,375
(330 x `84,975) (825 x `28,875) (2,750x `5,445)

Less: Cost of goods
sold: (`)
2,72,25,000 2,26,87,500 1,36,12,500 6,35,25,000
(330 x `82,500) (825 x `27,500) (2,750 x `4,950)

Gross margin: (`) 8,16,750 11,34,375 13,61,250 33,12,375
Less: Other operating costs: (`) 8,27,970
Operating income: (`) 24,84,405

Gross margin % 2.91% 4.76% 9.09% 4.96%
Operating income % 3.72

(ii) Computation of rate per unit of the cost allocation base for each of the five activity
areas for April 2004
`
Customer purchase order processing (` 2,20,000 5,500 orders) 40/ order
Line item ordering (` 1,75,560 58,520 line items) 3/line item order
4.6 Cost Accounting
Store delivery (` 1,95,250 3,905 store deliveries) 50/delivery
Cartons dispatched (` 2,09,000 2,09,000 dispatches) 1/ dispatch
Shelf-stocking at customer store (`) (` 28,160 1,760 hours 16/hour
(iii) Operating Income Statement of each distribution channel in April-2004 (Using the
Activity based Costing information)
General
Supermarket
Chains
Drugstore
Chains
Chemist
Shops
Gross margin (`) : (A) (Refer to (i) part of the answer) 8,16,750 11,34,375 13,61,260
Operating cost (`) : (B) (Refer to working note) 1,62,910 1,90,410 4,74,650
Operating income (`) : (A B ) 6,53,840 9,43,965 8,86,600
Operating income (in %) (Operating income/Revenue) x 100
2.33% 3.96% 5.92%
Comments and new insights: The activity-based cost information highlights, how the
Chemist Shops uses a larger amount of RST Ltds resources per revenue than do the other
two distribution channels. Ratio of operating costs to revenues, across these markets is:
General supermarket chains 0.58%
(`1,62,910 / `2,80,00,750) x 100
Drug store chains 0.80%
(`1,90,410 / `2,38,21,875) x 100
Chemist shops 3.17%
(`4,74,650 / `1,49,73,750) x 100
Working note:
Computation of operating cost of each distribution channel:
General Supermarket
Chains
Drugstore Chains Chemist Shops
` ` `
Customer
purchase order
processing
15,400
(`40 385 orders)
39,600
(`40 990 orders)
1,65,000
(`40 4125 orders)
Line item
ordering
16,170 35,640 1,23,750
Overheads 4.7

(` 3 14 385 orders) (`3 12 990 orders) (`3 10 4125
orders)
Store delivery 16,500
(` 50 330 deliveries)
41,250
(` 50 825 deliveries)
1,37,500
(` 50 2750
deliveries)
Cartons
dispatched
99,000
(` 1 300 cartons 330
deliveries)
66,000
(` 1 80 cartons 825
deliveries)
44,000
(` 1 16 cartons
2,750 deliveries)
Shelf stocking 15,840
(` 16 330 deliveries
3 Av. hrs.)
7,920
(` 16 825 deliveries .
0.6 Av. hrs)
4,400
(` 16 2,750
deliveries 0.1 Av.
hrs)
Operating cost 1,62,910 1,90,410 4,74,650
(iv) Challenges faced in assigning total operating cost of `8,27,970 :
Choosing an appropriate cost driver for activity area.
Developing a reliable data base for the chosen cost driver.
Deciding, how to handle costs that may be common across several activities.
Choice of the time period to compute cost rates per cost driver.
Behavioural factors.
Question 4
MNP suits is a ready-to-wear suit manufacturer. It has four customers: two wholesale-
channel customers and two retail-channel customers.
MNP suits has developed the following activity-based costing system:
Activity Cost driver Rate in 2004
Order processing Number of purchase orders ` 1,225 per order
Sales visits Number of customer visits ` 7,150 per visit
Delivery-regular Number of regular deliveries ` 1,500 per delivery
Delivery-rushed Number of rushed deliveries ` 4,250 per delivery
List selling price per suit is ` 1,000 and average cost per suit is ` 550. The CEO of MNP suits
wants to evaluate the profitability of each of the four customers in 2003 to explore
opportunities for increasing profitability of his company in 2004. The following data are
available for 2003:

4.8 Cost Accounting
Item
Wholesale customers Retail customers
W H R T
Total number of orders 44 62 212 250
Total number of sales visits 8 12 22 20
Regular deliveries 41 48 166 190
Rush deliveries 3 14 46 60
Average number of suits per order 400 200 30 25
Average selling price per suit ` 700 ` 800 ` 850 ` 900
Required:
(i) Calculate the customer-level operating income in 2003
(ii) What do you recommend to CEO of MNP suits to do to increase the companys operating
income in 2004?
(iii) Assume MNP suits distribution channel costs are ` 17,50,000 for its wholesale
customers and ` 10,50,000 for the retail customers. Also, assume that its corporate
sustaining costs are ` 12,50,000. Prepare Income statement of MNP suits for 2003.
Accounting, Chartered Accountancy Final Course)
Answer
(i) Customer Profitability Analysis, Customer cost hierarchy
Item W H R T
Revenues
At list price (`)
` ` ` `
44400 = 17,600
62200 = 12,400
21230 = 6,360
25025 = 6,250
17,6001,000,12,4001,000,
6,3601,000, 6,2501,000

1,76,00,000 1,24,00,000 63,60,000 62,50,000
Discount
1,000-700=300
1,000-800=200
1,000-850=150
1,000-900=100

Overheads 4.9
17,600300,12,400200,
6,360150,6,250100
52,80,000 24,80,000 9,54,000 6,25,000
Revenues at actual prices 1,23,20,000 99,20,000 54,06,000 56,25,000
Cost of Goods Sold
17,600550
12,400550
6,360550
6,250550

96,80,000 68,20,000 34,98,000 34,37,500
Gross Margin 26,40,000 31,00,000 19,08,000 21,87,500

W H R T
Customer level operating
costs:
Order processing
(44,62,212,250) (` 1,225)

53,900

75,950

2,59,700

3,06,250
Sales Visits
(8,12,22,20) (` 7,150)
57,200 85,800 1,57,300 1,43,000

Delivery regular
(41,48,166,190) (` 1,500)
61,500 72,000 2,49,000 2,85,000

Delivery rushed
(3,14,46,60) (` 4,250)
12,750 59,500 1,95,500 2,55,000
Total customer level operating
cost
1,85,350 2,93,250 8,61,500 9,89,250
income
24,54,650 28,06,750 10,46,500 11,98,250
income as %age on revenues
at actual prices
19.92 28.29 19.35 21.30
(ii) Key Challenges facing CEO are
(i) Reduce level of price discounting, especially by W
(ii) Reduce level of customer level costs, especially by R & T
The ABC cost system highlights areas where R&T accounts are troublesome
They have
high number of orders
high number of customer visits,
high number of rushed deliveries
The CEO needs to consider whether this high level of activity can be reduced
without reducing customer revenues.
(iii) Income Statement of MNP suits for 2003 (in `)
Wholesale Customers ` Retail customers
`
Total
`
Customer level
operating income

52,61,400

22,44,750

75,06,150
Less: distribution
channel cost

17,50,000

10,50,000

28,00,000
Distribution channel
level operating income

35,11,400

11,94,750

47,06,150
Less: Corporate
sustaining costs

12,50,000
Operating Income 34,56,150
Question 5
Discuss the step method and reciprocal service method of secondary distribution of
overheads. (4 Marks, November 2004)
Answer
Step method and Reciprocal Service method of secondary distribution of overheads
Step method: This method gives cognisance to the service rendered by service department to
another service dept, thus sequence of apportionments has to be selected. The sequence
here begins with the dept that renders service to the max number of other service dept. After
this, the cost of service dept serving the next largest number of dept is apportioned.
Reciprocal service method : This method recognises the fact that where there are two or
more service dept, they may render service to each other and, therefore, these inter dept
services are to be given due weight while re-distributing the expense of service dept. The
methods available for dealing with reciprocal servicing are:
- Simultaneous equation method
- Repeated distribution method
- Trial and error method.

Overheads 4.11
Question 6
Explain: Single and multiple overhead rate. (2 Marks, May 2005)
Answer
Single and multiple overhead rate: A single overhead rate, when computed for the entire
factory is known as the blanket rate.
Blanket rate = Overhead cost of entire factory / total quantum of the base selected
The blanket rates can be utilised in the following cases;
Where only one major product is being produced.
Where several products are produced but: (a) all products pass through all departments
and (b) all products require the same length of time in each department.
When the above conditions are not applicable, separate departmental rates should be used.
Multiple rates involve computation of separate rates for each production department, service
department, cost-centre, each product or line and each production factor.
Question 7
Discuss the treatment of research and development expenditures in cost accounting.
(3 Marks, May 2005)
Answer
If research is conducted in the methods of production, the expenses should be charged to
production overhead. If the research relates to administration, the expenses are charged to
administration overheads. If it is related to market research, the expenses are charged to
S&D overheads. Development costs incurred in connection with a particular product should
be charged directly to that product. Such expenses are usually treated as deferred revenue
expenditure and recovered as cost per unit of the product when production is fully established.
Routine nature research expenses are charged to general overheads.
Question 8
A manufacturing unit has purchased and installed a new machine of ` 12,70,000 to its fleet of
7 existing machines. The new machine has an estimated life of 12 years and is expected to
realise ` 70,000 as scarp at the end of its working life. Other relevant data are as follows:
(i) Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This includes
300 hours for plant maintenance and 92 hours for setting up of plant.
(ii) Estimated cost of maintenance of the machine is ` 25,000 (p.a.).
(iii) `The machine requires a special chemical solution, which is replaced at the end of each
week (6 days in a week) at a cost of ` 400 each time.
(iv) Four operators control operation of 8 machines and the average wages per person
amounts to ` 420 per week plus 15% fringe benefits.
(v) Electricity used by the machine during the production is 16 units per hour at a cost of ` 3
per unit. No current is taken during maintenance and setting up.
(vi) Departmental and general works overhead allocated to the operation during last year
was ` 50,000. During the current year it is estimated to increase 10% of this amount.
Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is
productive. (5 Marks, May 2005)
Answer
Computation of Machine hour Rate
Per year Per hour
(unproductive)
Per hour
(productive)
Standing charges
Operators wages
4 420 54 90,720
Add: Fringe Benefits 15% 13,608
1,04,328
Departmental and general overhead
(50,000 + 5,000) 55,000
Total Std. Charging for 8 machines 1,59,328
Cost per Machine 1,59,328/8 19,916
Cost per Machine hour 19,916/2,200 9.05
19,916/2,292 8.69
Machine hours:
Setting time unproductive (2,592-300-92)= 2200
Setting time productive (2,592-300) = 2,292
Machine expenses
Depreciation (12,70,000 -70,000)/(12 2,200) 45.45
(12,70,000-70,000)/(12 2,292) 43.63

Electricity (16 3) 48.00
(1632,200)/2,292) 46.07
Special chemical solution (40054)/2,200/ 2,292 9.82 9.42
Overheads 4.13
Maintenance (25,000/2,200) 11.36
(25,000/2,292) 10.91
Machine Hour Rate 123.68 118.72
Question 9
An engine manufacturing company has two production departments: (i) Snow mobile engine
and (ii) Boat engine and two service departments: (i) Maintenance and (ii) Factory office.
Budgeted cost data and relevant cost drivers are as follows:
Departmental costs: `
Snow mobile engine 6,00,000
Boat engine 17,00,000
Factory office 3,00,000
Maintenance 2,40,000
Cost drivers:
Factory office department: No. of employees
Snow mobile engine department 1,080 employees
Boat engine department 270 employees
Maintenance department 150 employees
1,500
Maintenance department: No. of work orders
Snow mobile engine department 570 orders
Boat engine department 190 orders
Factory office department 40 orders
800
Required:
(i) Compute the cost driver allocation percentage and then use these percentage to allocate
the service department costs by using direct method.
(ii) Compute the cost driver allocation percentage and then use these percentage to allocate
the service department costs by using non-reciprocal method/step method.
( 5 Marks, May 2005)
Answer
(i) Cost Driver Allocation percentage
Factory office dept. Number of employees Percent used
Snowmobile engine 1,080 80%
Boat engine 270 20%
Total 1,350 100%
Maintenance dept Number of work orders
Snowmobile engine 570 75%
Boat engine 190 25%
760 100
Service department allocation:
Factory
office dept.
Maintenance
dept.
Snowmobile
engine
Boat engine
Departmental Cost ` 3,00,000 ` 2,40,000 ` 6,00,000 ` 17,00,000
Allocated costs (`):
Factory office Dept. (3,00,000) - 2,40,000 60,000
Maintenance Dept. - (2,40,000) 1,80,000 60,000
Total 0 0 10,20,000 18,20,000
(ii) Cost Driver allocation percentage
Factory office dept Number of employees Percent used
Snowmobile engine 1,080 72%
Boat engine 270 18%
Maintenance dept 150 10%
1,500 100%
Maintenance dept Work order Percent used
Snowmobile engine 570 75%
Boat engine 190 25%
760 100%

Overheads 4.15
Service department allocation:
Factory
office Dept.
Maintenance
Dept.
Snowmobile
engine
Boat engine
Departmental costs ` 3,00,000 ` 2,40,000 ` 6,00,000 ` 17,00,000
Allocated costs (`):
Factory office (3,00,000) 30,000 2,16,000 54,000
Maintenance dept - (2,70,000) 20,2500 67,500
Total cost 0 0 10,18,500 18,21,500
Question 10
A B C D Co. Ltd. produces and sells four products A, B, C and D. These products are similar
and usually produced in production runs of 10 units and sold in a batch of 5 units. The
production details of these products are as follows:
Product A B C D
Production (Units) 100 110 120 150
Cost per unit:
Direct material (`) 30 40 35 45
Direct labour (`) 25 30 30 40
Machine hour (per unit) 5 4 3 4
The production overheads during the period are as follows:
` `
Factory works expenses 22,500
Stores receiving costs 8,100
Machine set up costs 12,200
Cost relating to quality control 4,600
Material handling and dispatch 9,600 57,000
The cost drivers for these overheads are detailed below:
Cost Cost drivers
Factory works expenses Machine hours
Stores receiving costs Requisitions raised
Machine set up costs No. of production runs
Cost relating to quality control No. of production runs
Material handling and dispatch No. of orders executed
The number of requisitions raised on the stores was 25 for each product and number of orders
executed was 96, each order was in a batch of 05 units.
Required:
(i) Total cost of each product assuming the absorption of overhead on machine hour basis;
(ii) Total cost of each product assuming the absorption of overhead by using activity base
costing; and
(iii) Show the differences between (i) and (ii) and comment.
(12 Marks, May, 2005)
Answer
(i) Statement showing total cost of each product assuming absorption of overheads on
Machine Hour Rate Basis.
Particulars A B C D Total
Output (units) 100 110 120 150 480
Direct material (`) 30 40 35 45 150
Direct Labour (`) 25 30 30 40 125
Direct labour- Machine hrs 5 4 3 4
Overhead @ ` 30/- per
Machine hr
150 120 90 120 480
Total cost per unit (`) 205 190 155 205 755
Total cost (`) 20,500 20,900 18,600 30,750 90,750

Total Overhead Cost 57,000
Overhead Rate = = =
Total MHrs . 1,900
`
` 30 per unit
(ii)
Total Overheads `
Factory works expenses 22,500 Factory exp per unit 22,500 / 1,900
= ` 11.84
Stores receiving cost 8,100 Stores receiving cost 8100 / 100
= ` 81
Machine set up costs 12,200 Machine set-up cost 12,200 / 48
= ` 254.1
Costs relating to quality
control
4,600 Cost relating to QC 4,600/48
=` 95.83
Expense relating to material 9,600 Material handling & 9,600 / 96
Overheads 4.17
handling & dispatch dispatch = ` 100/-
Total
57,000/-

Statement showing total cost of each product assuming activity based costing.
Particulars A B C D Total
Output (Units) 100 110 120 150 480
No. of production runs 10 11 12 15 48
No. of stores requisition 25 25 25 25 100
No. of sales orders 20 22 24 30 96
Unit costs - Direct material (`) 30.00 40.00 35.00 45.00
Unit costs - Direct labour (`) 25.00 30.00 30.00 40.00
Unit costs - Factory works expenses
(`)
59.20 47.36 35.52 47.36
Unit costs - Stores receiving cost (`) 20.25 18.41 16.88 13.50
Unit costs - Machine set-up cost (`) 25.42 25.42 25.42 25.42
Unit costs QC (`) 9.58 9.58 9.58 9.58
Unit costs Material Handling (`) 20.00 20.00 20.00 20.00
Unit cost (`) 189.45 190.77 172.40 200.86
Total cost (`) 18,945 20,984.7 20,688.00 30,129
(iii) Statement showing differences (in `)
Particulars A B C D
Unit cost MHR 205 190 155 205
Unit cost ABC 189.45 190.77 172.40 200.86
Unit cost - difference 15.55 -0.77 -17.40 4.14
Total cost MHR 20,500 20,900 18,600 30,750
Total cost ABC 18,945 20,985 20,688 30,128
The difference is that A consumes comparatively more of Machine hours.
The use of activity based costing gives different product costs than what were arrived at
by utilising traditional costing. It can be argued that Product costs using ABC are more
precise as overheads have been identified with specific activities.
Question 11
From the details furnished below you are required to compute a comprehensive machine-hour
rate:
Original purchase price of the machine (subject to
depreciation at 10% per annum on original cost)
` 3,24,000
Normal working hours for the month
(The machine works to only 75% of capacity)
200 hours
Wages of Machine man ` 125 per day (of 8 hours)
Wages for Helper (machine attendant) ` 75 per day (of 8 hours)
Power cost for the month for the time worked ` 15,000
Supervision charges apportioned for the machine
centre for the month
` 3,000
Electricity & Lighting for the month ` 7,500
Repairs & maintenance (machine) including
Consumable stores per month
` 17,500
Insurance of Plant & Building (apportioned) for
the year
` 16,250
Other general expense per annum ` 27,500
The workers are paid a fixed Dearness allowance of ` 1,575 per month. Production bonus
payable to workers in terms of an award is equal to 33.33% of basic wages and dearness
allowance. Add 10% of the basic wage and dearness allowance against leave wages and
holidays with pay to arrive at a comprehensive labour-wage for debit to production.
(14 Marks, May 2005)
Answer
Computation of Comprehensive Machine Hour Rate
Per month(`) Per hour(`)
Fixed cost
Supervision charges 3,000
Electricity and lighting 7,500
Insurance of Plant and building
(16,2501/12)
1,354.17
Other General Expenses (27,5001/12) 2,291.67
Depreciation (32,4001/12) 2,700
16,845.84 112.31
Variable Cost
Repairs and maintenance 17,500 116.67
Power 15,000 100.00
Wages of machine man 44.91
Overheads 4.19
Wages of Helper 32.97
Machine Hour rate (Comprehensive) ` 406.86
Effective machine working hours p.m.
200 hrs. 75% = 150 hrs.
Wages per machine hour
Machine man Helper
Wages for 200 hours
(` 125 25) ` 3,125
(` 75 25) ` 1,875
D.A. ` 1,575 ` 1,575
` 4,700 ` 3,450
Production bonus (1/3 of above) 1,567 1,150
6,267 4,600
Leave wages (10%) 470 345
6,737 4,945
Effective wage rate per machine hour (150 hrs in all) ` 44.91 ` 32.97
Question 12
ABC Limited manufactures two radio models, the Nova which has been produced for five
years and sells for ` 900, and the Royal, a new model introduced in early 2004, which sells for
` 1,140. Based on the following Income statement for the year 2004-05, a decision has been
made to concentrate ABC Limiteds marketing resources on the Royal model and to begin to
phase out the Nova model.
ABC Limited
Income Statement for the year ending March 31, 2005
Royal Model Nova Model Total
` ` `
Sales 45,60,000 1,98,00,000 2,43,60,000
Cost of Goods sold 31,92,000 1,25,40,000 1,57,32,000
Gross margin 13,68,000 72,60,000 86,28,000
Selling & Administrative Expenses 9,78,000 58,30,000 68,08,000
Net Income 3,90,000 14,30,000 18,20,000
Unit Produced and sold 4,000 22,000
Net Income per unit sold 97.50 65
The standard unit costs for the Royal and Nova models are as follows:
Royal Model Nova Model
` `
Direct materials 584 208
Direct Labour
Royal (3.5 hrs x ` 12) 42
Nova (1.5 hrs x ` 12) 18
Machine usage
Royal (4 hrs x ` 18) 72
Nova (8 hrs x ` 18) 144
Manufacturing overheads (applied on the basis of
machine hours at a pre-determined rate of ` 25 per hour)

100

200
Standard Cost 798 570
ABC Ltd.'s Controller is advocating the use of activity-based costing and activity-based cost
management and has gathered the following information about the company's manufacturing
overheads cost for the year ending March 31, 2005.
Activity centre (Cost driver) Traceable
Costs
Number of Events
` Royal Nova Total
Soldering (Number of solder joints) 9,42,000 3,85,000 11,85,000 15,70,000
Shipments (Number of shipments) 8,60,000 3,800 16,200 20,000
Quality control (Number of Shipments) 12,40,000 21,300 56,200 77,500
Purchase orders (Number of orders) 9,50,400 1,09,980 80,100 1,90,080
Machine Power (Machine hours) 57,600 16,000 1,76,000 1,92,000
Machine setups (Number of setups) 7,50,000 14,000 16,000 30,000
Total Traceable costs 48,00,000
Required:
(i) Prepare a Statement showing allocation of manufacturing overheads using the principles
of activity-based costing.
(ii) Prepare a Statement showing product cost profitability using activity-based costing.
(iii) Should ABC Ltd. continue to emphasize the Royal model and phase out the Nova model?
Discuss. (10 Marks, November, 2005)
(Out of Syllabus for the student of Intermediate (IPC), shifted to Advanced
Management Accounting, Chartered Accountancy Final Course.)
Overheads 4.21
Answer
(i) Statement Showing Allocation of Manufacturing Overheads Using Principles of
Activity Based Costing.
Cost Allocation
Activity Center Traceable
cost `
Cost allocation
basis
Royal
`
Nova
`
Soldering 9,42,000 385:1185 2,31,000 7,11,000
Shipments 8,60,000 38:162 1,63,400 6,96,600
Quality control 12,40,000 213:562 3,40,800 8,99,200
Purchase
orders
9,50,400 109980:80100 5,49,900 4,00,500
Machine lower 57,600 16:176 4,800 52,800
Machine set ups 7,50,000 14:16 3,50,000 4,00,000
48,00,000 16,39,900 31,60,100

Units produced
and sold
4,000 22,000
Manufacturing
Overheads Cost
per unit
` 409.98 ` 143.64

(ii) Statement Showing Product Cost and Profitability using Activity Based Costing
Royal Nova Total
Per Unit Cost ` Per Unit Cost ` `
Standard cost other than
manufacturing OHs cost
698 370
Manufacturing OHs using
activity-based costing
409.98 143.64
Cost 1,107.98 513.64
Selling Price/unit 1,140 900
Gross Margin / unit 32.02 386.36
Gross Margin 1,28,080 84,99,920 86,28,000
Selling & Adm. Expenses 9,78,000 58,30,000 68,08,000
Net Income (8,49,920) 26,69,920 18,20,000
(iii) Novo Model should continue to be bread and butter product and Royal model should not
be over-emphasized; rather its pricing is required to be corrected.
Question 13
Discuss the accounting of Selling and Distribution overheads. (4 Marks, May 2006)
Answer
Accounting of Selling and Distribution Overheads
It is difficult to determine an entirely satisfactory basis for computing the overhead rate for
absorbing selling and distribution overheads. The basis usually adopted is:
Sales value of goods
Cost of goods sold
Gross profit on sales
Number of orders or units sold
Expenses Basis for allocation
Salaries in Sales Department. Estimated time devoted to the sale of various
products.
Advertisements Actual amount incurred for each product
Show room expenses Average space occupied by each product
Rent of finished goods, go downs and
expenses on own delivery vans.
Average quantities delivered during a period
Question 14
ABC Bank is examining the profitability of its Premier Account, a combined Savings and
Cheque account. Depositors receive a 7% annual interest on their average deposit. ABC
Bank earns an interest rate spread of 3% (the difference between the rate at which it lends
money and rate it pays to depositors) by lending money for home loan purpose at 10%.
The Premier Account allows depositors unlimited use of services such as deposits,
withdrawals, cheque facility, and foreign currency drafts. Depositors with Premier Account
balances of ` 50,000 or more receive unlimited free use of services. Depositors with
minimum balance of less than ` 50,000 pay ` 1,000-a-month service fee for their Premier
Account.
ABC Bank recently conducted an activity-based costing study of its services. The use of
these services in 2005-06 by three customers is as follows:

Overheads 4.23
Activity- Based
Cost Per
Transaction
Account Usage
Customer
X
Customer
Y
Customer
Z
Deposits/withdrawal with teller ` 125 40 50 5
Deposits/withdrawal with
automatic teller machine (ATM)

` 40

10

20

16
Deposits/withdrawal on pre-
arranged monthly basis

` 25

0

12

60
Bank Cheques written ` 400 9 3 2
Foreign Currency drafts ` 600 4 1 6
Inquiries about Account balance ` 75 10 18 9
Average Premier Account balance
for 2005-06
` 55,000 ` 40,000 ` 12,50,000
Assume Customer X and Z always maintains a balance above ` 50,000, whereas Customer Y
always has a balance below ` 50,000.
Required:
(i) Compute the 2005-06 profitability of the customers X, Y and Z Premier Account at ABC
Bank.
(ii) What evidence is there of cross-subsidisation among the three Premier Accounts? Why
might ABC Bank worry about this Cross-subsidisation, if the Premier Account product
offering is Profitable as a whole?
(iii) What changes would you recommend for ABC Banks Premier Account?
(11 Marks, May 2006)
Answer
(i) Customer Profitability Analysis
ABC Bank Premier Account
Activity
Activity
based cost
Customers
X Y Z
` ` ` `
teller
125 5,000
(40 125)
6,250
(40 125)
625
(5 125)
ATM
40 400
(10 40)
800
(20 40)
640
(16 40)
Deposits/withdrawal on
prearranged monthly basis
25 0
(0 25)
300
(12 25)
1,500
(60 25)
Bank cheques written 400 3,600
(9 400)
1,200
(3 400)
800
(2 400)
Foreign currency drafts 600 2,400
(4 600)
600
(1 600)
3,600
(6 600)
Inquiries about Account
balance
75 750
(10 75)
1,350
(18 75)
675
(9 75)
Customer cost (A) 12,150 10,500 7,840
Spread on Average
balance maintained
3% 1,650
(3% 55,000)
1,200
(3%
40,000)
37,500
(3%
12,50,000)
Service fee ` 1,000 p.m. 12,000
Customer benefit 1,650 13,200 37,500

Customers
X Y Z
Customer Profitability
(Benefits Costs)
` (10,500) ` 2,700 ` 29,660
(ii) Customer Z is most profitable and is cross-subsidising the most demanding customer X.
Customer Y is paying for the services used, because of not being able to maintain
minimum balance. No doubt, Premier Account product offering is profitable as a whole,
but the worry is of not finding customers like customer Z who will maintain a balance
higher than the stipulated minimum. It appears, the minimum balance stipulated is
inadequate considering the services availed by depositors in Premium Account.
(iii) The changes suggested to ABC Banks Premier Account are as follows:
Increase the requirement of minimum balance from ` 50,000 to ` 1,00,000.
Charge for value added services like Foreign Currency Drafts.
Do not allow deposits/withdrawal below ` 10,000 at the teller. Only ATM machine
withdrawal be allowed.
Inquiries about account balance to be entertained only through Phone Banking/ATM.
Question 15
RST Ltd. has two production departments: Machining and Finishing. There are three service
departments: Human Resource (HR), Maintenance and Design. The budgeted costs in these
service departments are as follows:
Overheads 4.25
HR Maintenance Design
` ` `
Variable 1,00,000 1,60,000 1,00,000
Fixed 4,00,000 3,00,000 6,00,000
5,00,000 4,60,000 7,00,000
The usage of these Service Departments output during the year just completed is as follows:
Provision of Service Output (in hours of service)
Users of Service
Providers of Service
HR Maintenance Design
HR
Maintenance 500
Design 500 500
Machining 4,000 3,500 4,500
Finishing 5,000 4,000 1,500
Total 10,000 8,000 6,000
Required:
(i) Use the direct method to re-apportion RST Ltd.s service department cost to its
production departments.
(ii) Determine the proper sequence to use in re-apportioning the firms service department
cost by step-down method.
(iii) Use the step-down method to reapportion the firms service department cost.
Answer
(i) Apportionment of Service Department Overheads amongst production departments
using Direct Method:
Production Deptts. Service Deptts.
Machining Finishing HR Maintenance Design
` ` ` ` `
Overhead as per primary
distribution
5,00,000 4,60,000 7,00,000
Apportionment design
4,500 : 1,500
5,25,000 1,75,000
Maintenance 2,14,667 2,45,333
3,500 : 4,000
HR 4,000 : 5,000 2,22,222 2,77,778
9,61,889 6,98,111

(ii) The proper sequence for apportionment of service department overheads is
First HR
Second Maintenance
Third Design
The sequence has been laid down based on service provided.
(iii) Apportionment of Service Department overheads amongst production departments
using step-down method.
Production Department Service Department
Machining Finishing HR Maintenance Design
` ` ` ` `
Overhead as per
primary distribution
5,00,000 4,60,000 7,00,000
Apportionment HRD 4
: 5 : : 0.5 : 0.5
2,00,000 2,50,000 ()5,00,000 25,000 25,000
Maintenance 7 : 8: : 1 2,12,188 2,42,500 ()4,85,000 30,312
Design 3 : 1 5,66,484 1,88,828 ()7,55,312
9,78,672 6,81,328
Question 16
ABC Ltd. Manufactures two types of machinery equipments Y and Z and applies/absorbs
overheads on the basis of direct-labour hours. The budgeted overheads and direct-labour
hours for the month of December, 2006 are ` 12,42,500 and 20,000 hours respectively. The
information about Companys products is as follows:
Equipment Equipment
Y Z
Budgeted Production volume 2,500 units 3,125 units
Direct material cost ` 300 per unit ` 450 per unit
Direct labour cost
Y : 3 hours @ ` 150 per hour
X : 4 hours @ ` 150 per hour ` 450 ` 600
Overheads 4.27
ABC Ltd.s overheads of ` 12,42,500 can be identified with three major activities:
Order Processing (` 2,10,000), machine processing (` 8,75,000), and product inspection
(` 1,57,500). These activities are driven by number of orders processed, machine hours
worked, and inspection hours, respectively. The data relevant to these activities is as follows:
Orders processed Machine hours worked Inspection hours
Y 350 23,000 4,000
Z 250 27,000 11,000
Total 600 50,000 15,000
Required:
(i) Assuming use of direct-labour hours to absorb/apply overheads to production, compute
the unit manufacturing cost of the equipments Y and Z, if the budgeted manufacturing
volume is attained.
(ii) Assuming use of activity-based costing, compute the unit manufacturing costs of the
equipments Y and Z, if the budgeted manufacturing volume is achieved.
(iii) ABC Ltd.s selling prices are based heavily on cost. By using direct-labour hours as an
application base, calculate the amount of cost distortion (under-costed or over-costed) for
each equipment.
(iv) Discuss, how an activity-based costing might benefit ABC Ltd.
Answer
(i) Overheads application base: Direct labour hours
Equipment- Y Equipment - Z
` `
Direct material cost 300 450
Direct labour cost 450 600
Overheads* 186.38 248.50
936.38 1,298.50
*Pre-determined rate =
Budgeted overheads
Budgeted direct labour hours

=
12,42,500
= 62.125
20,000 hours
`
`
(ii) Estimation of Cost-Driver rate
Activity Overhead cost Cost-driver level Cost driver rate
` `
Order processing 2,10,000 600 350
Orders processed
Machine processing 8,75,000 50,000 17.50
Machine hours
Inspection 1,57,500 15,000 10.50
Inspection hours

Equipment- Y Equipment- Z
` `
Direct material cost 300 450
Direct labour cost 450 600
Prime cost 750 1,050
Overhead cost
Order processing 350 : 250 1,22,500 87,500
Machine processing 23,000 : 27,000 4,02,500 4,72,500
Inspection 4,000 : 11,000 42,000 1,15,500
Total overhead cost 5,67,000 6,75,500
Per unit cost
= 5,67,000/2,500 226.80 ` 216.16
= 6,75,500/3,125
Unit manufacturing cost ` 976.80 ` 1,266.16
(iii)
Equipment- Y Equipment -Z
` `
Unit manufacturing costusing direct labour
hours as an application base

936.38

` 1,298.50
Unit manufacturing costusing activity based
costing

976.80

` 1,266.16
Cost distortion ()40.42 (+)32.34
Overheads 4.29

Low volume product Y is under-costed and high volume product Z is over-costed using
direct labour hours as a basis for overheads absorption. It is due to the limitation of
traditional costing system.
(iv) Activity-based costing system is suitable in case of ABC Ltd because it is a multi-product
company and overheads costs are substantial portion of total cost. The use of activity
based costing will avoid cost distortion as ABC Ltd has a large proportion of non-unit-
level activities such as orders processed and inspection hours.
Question 17
Explain briefly the conditions when supplementary rates are used. (2 Marks, May 2007)
Answer
When the amount of under absorbed and over absorbed overhead is significant or large,
because of differences due to wrong estimation, then the cost of product needs to be adjusted
by using supplementary rates (under and over absorption/actual overhead) to avoid
misleading impression.
Question 18
A company has three production departments (M
1
, M
2
and A
1
) and three service department, one
of which Engineering service department, servicing the M
1
and M
2
only. The relevant informations
are as follows:
Product X Product Y
M
1
10 Machine hours 6 Machine hours
M
2
4 Machine hours 14 Machine hours
A
1
14 Direct Labour hours 18 Direct Labour hours
The annual budgeted overhead cost for the year are
Indirect Wages Consumable Supplies
(`) (`)
M
1
46,520 12,600
M
2
41,340 18,200
A
1
16,220 4,200
Stores 8,200 2,800
Engineering Service 5,340 4,200
General Service 7,520 3,200

`
- Depreciation on Machinery 39,600
-Insurance of Machinery 7,200
-Insurance of Building 3,240 (Total building insurance cost for
M
1
is one third of annual premium
-Power 6,480
-Light 5,400
-Rent 12,675 (The general service deptt. is
located in a building owned by
the company. It is valued at `
6,000 and is charged into cost at
notional value of 8% per annum.
This cost is additional to the rent
shown above)
The value of issues of materials to the production departments are in the same
proportion as shown above for the Consumable supplies.
The following data are also available:
Department Book value
Machinery
(`)
Area
(Sq. ft.)
Effective
H.P. hours %
Production
Direct
Labour
hour
Capacity
Machine
hour
M
1
1,20,000 5,000 50 2,00,000 40,000
M
2
90,000 6,000 35 1,50,000 50,000
A
1
30,000 8,000 05 3,00,000
Stores 12,000 2,000
Engg. Service 36,000 2,500 10
General Service 12,000 1,500
Required:
(i) Prepare a overhead analysis sheet, showing the bases of apportionment of overhead to
departments.
(ii) Allocate service department overheads to production department ignoring the
apportionment of service department costs among service departments.
(iii) Calculate suitable overhead absorption rate for the production departments.
(iv) Calculate the overheads to be absorbed by two products, X and Y. (15 Marks, May 2007)

Overheads 4.31
Answer
(i) Summary of Apportionment of Overheads
(`)

Items
Basis of
Apportion
ment
Total
Amount
Production Deptt. Service Deptt.
M1 M2 A1 Store
Service
Engineeri
ng Service
General
Service
Indirect
wages
Allocation
given
1,25,140 46,520 41,340 16,220 8,200 5,340 7,520
Consumable
stores
Allocation
given
45,200 12,600 18,200 4,200 2,800 4,200 3,200
Depreciation Capital
value of
machine
39,600 15,840 11,880 3,960 1,584 4,752 1,584
Insurance of
Machine
Capital
value of
machine
7,200 2,880 2,160 720 288 864 288
Insurance on
Building
3
1
to MI
Balance
area basis
3,240 1,080 648 864 216 270 162
Power HP Hr% 6,480 3,240 2,268 324 648
Light Area 5,400 1,080 1,296 1,728 432 540 324
Rent Area 12,675 2,535 3,042 4,056 1,014 1,268 760
Rent of
general
service
Direct 8%
of 6,000
480

_______

_____

_____

_____

_____

______
480

______
Total 2,45,415 85,775 80,834 32,072 14,534 17,882 14,318
(ii) Allocation of service departments overheads
Basis of
Apportionment
Production Deptt. Service Deptt.
Service
Deptt.
M1 M2 A1 Store
Service
Engineering
Service
General
Service
Store Ratio of
consumable
value (126 :182 :
42)

5,232

7,558

1,744

(14,534)

Engineering
service
In Machine
hours Ratio of
M1 and M2 (4 :
5)

7,948

9,934

(17,882)

General
service
LHR Basis
20 : 15 : 30

4,406

3,304

6,608

(14,318)
Production
Department
allocated in
(i)

_______

85,775

80,834

32,072

Total 2,45,415 1,03,361 1,01,630 40,424
(iii) Overhead Absorption rate
M
1
M
2
A
1
Total overhead allocated 1,03,361 1,01,630 40,424
Machine hours 40,000 50,000
Labour hours 3,00,000
Rate per MHR 2.584 2.033
Rate per Direct labour .135
(iv) Statement showing overhead absorption for Product X and Y
Machine Deptt. Absorption Rate Product X
Hours `
Product Y
Hours `
M
1
2.584 10 25.84 6 15.50
M
2
2.033 4 8.13 14 28.46
A
1
.135 14 .54 18 2.43

34.51 46.39
Question 19
Explain Blanket overhead rate. (2 Marks, November, 2007)
Answer
Blanket overhead rate refers to the computation of one single overhead rate for the entire
factory. This is also known as plant wise or the single overhead rate for the entire factory. It
is determined as follows:
Blanket overhead rate =
Hours) Machine Hours, (Labour period the for Base
period the for factory entire the for cost Overhead

It is useful in companies producing the main product in continue process, e.g. chemical plant,
glass plant etc.
Question 20
A machine shop cost centre contains three machines of equal capacities. Three operators are
employed on each machine, payable ` 20 per hour each. The factory works for fortyeight
hours in a week which includes 4 hours set up time. The work is jointly done by operators.
The operators are paid fully for the fortyeight hours. In additions they are paid a bonus of 10
Overheads 4.33
per cent of productive time. Costs are reported for this company on the basis of thirteen four-
weekly period.
The company for the purpose of computing machine hour rate includes the direct wages of the
operator and also recoups the factory overheads allocated to the machines. The following
details of factory overheads applicable to the cost centre are available:
Depreciation 10% per annum on original cost of the machine. Original cost of the each
machine is ` 52,000.
Maintenance and repairs per week per machine is ` 60.
Consumable stores per week per machine are ` 75.
Power : 20 units per hour per machine at the rate of 80 paise per unit.
Apportionment to the cost centre : Rent per annum ` 5,400, Heat and Light per annum `
9,720, and foremans salary per annum ` 12,960.
Required:
(i) Calculate the cost of running one machine for a four week period.
(ii) Calculate machine hour rate. (8 Marks, November 2007)
Answer
Computation of cost of running one machine for a four week period
`
Standing charges Per annum
Rent 5,400
Heat and light 9,720
Formans salary 12,960
28,080

`
Total expenses for one machine for four week period =
13 3
4 28,080

2,880
Wages: Hours per week = 48 and hours for 4 weeks = 48 4 = 192
Wages 192 20 3,840
Bonus (192 16) = 176 20 .10 352
Total standing charges 7,072

Machine Expenses:
`

Depreciation =

13
4
10% 52,000
1,600
Repairs and maintenance = (60 4) 240
Consumable stores (75 4) 300
Power (192 16) = 176 20 .80 2,816
(ii) Total machine expenses 4,956
Total expenses (i) + (ii) 12,028
Machine hour rate = 68.34.
176
12,028
=
Question 21
Explain the cost accounting treatment of unsuccessful Research and Development cost.
Answer
Cost of unsuccessful research is treated as factory overhead, provided the expenditure is
normal and is provided in the budget. If it is not budgeted, it is written off to the profit and loss
account. If the research is extended for long time, some failure cost is spread over to
successful research.
Question 22
Discuss the difference between allocation and apportionment of overhead.
(2 Marks, May 2008)
Answer
The following are the differences between allocation and apportionment.
1. Allocation costs are directly allocated to cost centre. Overhead which cannot be directly
allocated are apportioned on some suitable basis.
2. Allocation allots whole amount of cost to cost centre or cost unit where as apportionment
allots part of cost to cost centre or cost unit.
3. No basis required for allocation. Apportionment is made on the basis of area, assets
value, number of workers etc.
Question 23
A machinery was purchased from a manufacturer who claimed that his machine could produce
36.5 tonnes in a year consisting of 365 days. Holidays, break-down, etc., were normally
Overheads 4.35
allowed in the factory for 65 days. Sales were expected to be 25 tonnes during the year and
the plant actually produced 25.2 tonnes during the year. You are required to state the
following figures:
(a) rated capacity
(b) practical capacity
(c) normal capacity
(d) actual capacity
Answer
(a) Rated capacity 36.5 tonnes
(Refers to the capacity of a machine
or a plant as indicated by its manufacturer)
(b) Practical capacity 30 tonnes
[Defined as actually utilised capacity of a plant
i.e. tonnes 65) (365
365
36.5
]
(c) Normal capacity 25 tonnes
(It is the capacity of a plant utilized based
on sales expectancy)
(d) Actual capacity 25.2 tonnes
(Refers to the capacity actually achieved)
Question 24
Following information is available for the first and second quarter of the year 2008-09 of ABC
Limited:
Production (in units) Semi-variable cost (`)
Quarter I 36,000 2,80,000
Quarter II 42,000 3,10,000
You are required to segregate the semi-variable cost and calculate :
(a) Variable cost per unit; and
(b) Total fixed cost. (2 Marks, May 2009)

Answer
Production (Units) Semi Variable Cost (`)
Quarter I 36,000 2,80,000
Quarter II 42,000 3,10,000
Difference 6,000 30,000
Variable Cost per Unit =
oduction Pr in Change
Cost Variable Semi in Change

=
30,000
6,000units
`

= `5 per units
Total Fixed Cost = Semi Variable Cost (Production x Variable Cost per Unit)
Total fixed cost in Quarter I :
= 2,80,000 (36,000 5)
= 2,80,000 1,80,000
= 1,00,000
Total fixed cost in Quarter II :
= 3,10,000 (42,000 5)
= 3,10,000 2,10,000
= 1,00,000
Question 25
Distinguish between Fixed overheads and Variable overheads. (2 Marks, May 2010)
Answer
Fixed overheads v/s Variable Overheads
Fixed overheads are not affected by any variation in the volume of activity, e.g., managerial
remuneration, rent etc. These remain the same from one period to another except when they
are deliberately changed. Fixed overheads are generally variable per unit of output or activity.
On other hand the variable overheads that change in proportion to the change in the volume of
activity or output, e.g., power consumed, consumable stores etc. The variable overheads are
generally constant per unit of output or activity
Question 26
What are the methods of re-apportionment of service department expenses over the
production departments? Discuss. (4 Marks, November 2010)
Overheads 4.37
Answer
Methods of re-apportionment of service department expenses over the production
departments
(i) Direct re-distribution method.
(ii) Step method or non-reciprocal method.
(iii) Reciprocal Service method
Direct re-distribution Method: Service department costs under this method are apportioned
over the production departments only, ignoring services rendered by one service department
to another. The basis of apportionment could be no. of workers. H.P of machines.
Step Method or Non-Reciprocal Method
This method gives cognizance to the service rendered by service department to another
service department. Therefore, as compared to previous method, this method is more
complicated because a sequence of apportionments has to be selected here. The sequence
here begins with the department that renders service to the maximum number of other service
departments.
Production Department Service Department
P
1
P P
3
S
1
S
2
S
3

Reciprocal Service Method
This method recognises the fact that where there are two or more service departments they
may render service to each other and, there these inter-departmental services are to be given
due weight while re-distributing the expenses of service department.
The methods available for dealing with reciprocal services are:
Simultaneous equation method
Repeated distribution method
Trial & Error method.
Question 27
You are given the following information of the three machines of a manufacturing department
of X Ltd.:

Preliminary estimates of expenses (per annum)

Total
Machines
A B C
(`) (`) (`) (`)
Depreciation 20,000 7,500 7,500 5,000
Spare parts 10,000 4,000 4,000 2,000
Power 40,000
Consumable stores 8,000 3,000 2,500 2,500
Insurance of machinery 8,000
Indirect labour 20,000
Building maintenance expenses 20,000
Annual interest on capital outlay 50,000 20,000 20,000 10,000
Monthly charge for rent and rates 10,000
Salary of foreman (per month) 20,000
Salary of Attendant (per month) 5,000
(The foreman and the attendant control all the three machines and spend equal time on them)
The following additional information is also available:
Machines
A B C
Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000
Ratio of K.W. Rating 3 2 3
Floor space (sq. ft.) 40,000 40,000 20,000
There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The
manufacturing department works 8 hours in a day but Saturdays are half days. All machines
work at 90% capacity throughout the year and 2% is reasonable for breakdown.
You are required to :
Calculate predetermined machine hour rates for the above machines after taking into
consideration the following factors:
An increase of 15% in the price of spare parts.
An increase of 25% in the consumption of spare parts for machine B & C only.
20% general increase in wages rates. (8 Marks, May 2011)

Overheads 4.39
Answer
Computation of Machine Hour Rate

Basis of
apportionment
Total
Machines
A B C
` ` ` `
(A) Standing
Charges

Insurance Depreciation
Basis
8,000 3,000 3,000 2,000
Indirect Labour Direct Labour 24,000 6,000 9,000 9,000
Building
Maintenance
expenses
Floor Space 20,000 8,000 8,000 4,000
Rent and Rates Floor Space 1,20,000 48,000 48,000 24,000
Salary of foreman Equal 2,40,000 80,000 80,000 80,000
Salary of attendant Equal 60,000 20,000 20,000 20,000
Total standing
charges
4,72,000 1,65,000 1,68,000 1,39,000
Hourly rate for
standing charges
84.75 86.29 71.40
(B) Machine
Expenses:

Depreciation Direct 20,000 7,500 7,500 5,000
Spare parts Final
estimates
13,225 4,600 5,750 2,875
Power K.W. rating 40,000 15,000 10,000 15,000
Consumable
Stores
Direct 8,000 3,000 2,500 2,500
Total Machine
expenses
81,225 30,100 25,750 25,375
Hourly Rate for
Machine expenses
15.46 13.23 13.03
Total (A + B) 553,225 1,95,100 1,93,750 1,64,375
Machine Hour rate 100.21 99.52 84.43

Working Notes:
(i) Calculation of effective working hours:
No. of holidays 52 (Sundays) + 12 (other holidays) = 64
Saturday (52 2) = 50
No. of days (Work full time) = 365 64 50 = 251
Hours
Full days work 251 8 = 2,008
Half days work 50 4 = 200
2,208
Hours
Effective capacity 90% of 2,208 1,987 (Rounded off)
Less: Normal loss of time (Breakdown) 2% 40 (Rounded off)
Effective running hour 1,947
(ii) Amount of spare parts is calculated as under:
A B C
` ` `
Preliminary estimates 4,000 4,000 2,000
Add: Increase in price @ 15% 600 600 300
4,600 4,600 2,300
Add: Increase in consumption @ 25% 1,150 575
Estimated cost 4,600 5,750 2,875
(iii) Amount of Indirect Labour is calculated as under:
`
Preliminary estimates 20,000
Add: Increase in wages @ 20% 4,000
24,000
(iv) Interest on capital outlay is a financial matter and, therefore it has been excluded from
the cost accounts.
Question 28
How do you deal with the following in cost account?
(i) Packing Expenses
(ii) Fringe benefits (4 Marks, May 2011)
Overheads 4.41
Answer
Packing expenses: Cost of primary packing necessary for protecting the product or for
convenient handling, should become a part of the prime cost. The cost of packing to facilitate
the transportation of the product from the factory to the customer should become a part of the
distribution cost. If the cost of special packing is at the request of the customer, the same
should be charged to the specific work order or the job. The cost of fancy packing necessary
to attract customers is an advertising expenditure. Hence, it is to be treated as a selling
overhead.
Fringe benefits: These are the additional payments or facilities provided to the workers apart
from their salary and direct cost-allowances like house rent and city compensatory
allowances. If the amount of fringe benefit is considerably large, it may be recovered as direct
charge by means of a supplementary wage or labour rate; otherwise these may be collected
as part of production overheads.
Question 29
X Ltd. recovers overheads at a. pre-determined rate of ` 50 per man-day. The total factory
overheads incurred and the man-days actually worked were ` 79 lakhs and 1.5 lakhs days
respectively. During the period 30,000 units were sold. At the end of the period 5,000
completed units were held in stock but there was no opening stock of finished goods.
Similarly, there was no stock of uncompleted units at the beginning of the period but at the
end of the period there were 10,000 uncompleted units which may be treated as 50%
complete.
On analyzing the reasons, it was found that 60% of the unabsorbed overheads were due to
defective planning and the balance were attributable to increase in overhead cost.
How would unabsorbed overheads be treated in cost accounts? (8 Marks, November 2011)
Answer
Absorbed overheads = Actual Man days x Rate
= 1,50,000 x 50
= ` 75,00,000
Under absorption of overheads = Actual overheads Absorbed overheads
= 79,00,000 75,00,000
= ` 4,00,000
Reasons for under absorption:
1. Defective Planning 4,00,000 x 60% = `2,40,000
2. Increase in overhead cost 4,00,000 x 40% = `1,60,000

Treatment in Cost Accounts:
(i) The unabsorbed overheads of ` 2,40,000 on account of defective planning to be treated
as abnormal and thus be charged to costing profit & loss account.
(ii) The balance of unabsorbed overheads i.e. ` 1,60,000 be charged as below on the basis
of supplementary overhead absorption rate
Supplementary Rate = ` 1,60,000 (30,000 + 5,000 + 50% of 10,000)
= ` 4 per unit
(a) To cost of sales Account = 30,000 x 4 = ` 1,20,000
(b) To finished stock account = 5,000 x 4 = ` 20,000
(c) To WIP account = 50% of 10,000 x 4 = ` 20,000
` 1,60,000
Question 30
A Machine costing ` 10 lacs was purchased on 1-4-2011. the expected life of the machine is
10 years. At the end of this period its scrap value is likely to be ` 10,000. the total cost of all
the machines including new one was ` 90 lacs.
The other information is given as follows:
(i) Working hours of the machine for the year was 4,200 including 200 non-productive
hours.
(ii) Repairs and maintenance for the new machine during the year was ` 5,000.
(iii) Insurance Premium was paid for all the machine ` 9,000.
(iv) New machine consumes 8 units of electricity per hour, the rate per unit being ` 3.75
(v) The new machine occupies area of the department. Rent of the department is
2,400 per month.
(vi) Depreciation is charged on straight line basis
Compute machine hour rate for the new machine. (5 Marks, May 2012)
Answer
Computation of machine hour rate of new Machine
Total (`) Per hour(`)
A. Standing Charges
I. Insurance Premium 9,000
1
9

1,000

II. Rent
1
10
2,400x12 2,880

3,880 0.97*

Overheads 4.43
B. Machine expenses
I. Repairs and Maintenance [5,000/4,000] 1.25
II. Depreciation
10,00,000 10,000
10 4,000

24.75
III. Electricity 8 units x ` 3.75 30.00
Machine hour rate 56.97
Working Note
Calculation of productive Machine hour rate
Total hours 4,200
Less: Non-Productive hours 200
4,000
* 3,880 4,000 = 0.97
Question 31
The following account balances and distribution of indirect charges are taken from the accounts of
a manufacturing concern for the .year ending on 31st March, 2012:
Item Total
Amount
Production Departments

Service
Departments
(`) X (`) Y (`) Z (`) A (`) B (`)
Indirect Material 1,25,000 20,000 30,000 45,000 25,000 5,000
Indirect Labour 2,60,000 45,000 50,000 70,000 60,000 35,000
Superintendent's Salary 96,000 - - 96,000 - -
Fuel & Heat 15,000
Power 1,80,000
Rent & Rates 1,50,000
Insurance 18,000
Meal Charges 60,000
Depreciation 2,70,000
The following departmental data are also available:
Production Departments Service Departments
X Y Z A B
Area (Sq. ft.) 4,400 4,000 3,000 2,400 1,200
Capital Value of
Assets (`) 4,00,000 6,00,000 5,00,000 1,00,000 2,00,000
Kilowatt Hours 3,500 4,000 3,000 1,500 -
Radiator Sections 20 40 60 50 30
No. of Employees 60 70 120 30 20
Expenses charged to the service departments are to be distributed to other departments by
the following percentages:
X Y Z A B
Department A 30 30 20 - 20
Department B 25 40 25 10 -
Prepare an overhead distribution statement to show the total overheads of production
departments after re-apportioning service departments' overhead by using simultaneous
equation method.' Show all the calculations to the nearest rupee.
Answer
Primary Distribution of Overheads
Item Basis Total
Amount
(`)
Production Departments Service
Departments
X (`) Y (`) Z (`) A (`) B (`)
Indirect Material Actual 1,25,000 20,000 30,000 45,000 25,000 5,000
Indirect Labour Actual 2,60,000 45,000 50,000 70,000 60,000 35,000
Superintendents
Salary
Actual 96,000 - - 96,000 - -
Fuel & Heat Radiator
Sections
{2:4:6:5:3}
15,000 1,500 3,000 4,500 3,750 2,250
Power Kilowatt Hours
{7:8:6:3:0}
1,80,000 52,500 60,000 45,000 22,500 -
Rent & Rates Area (Sq. ft.)
{22:20:15:12:6}
1,50,000 44,000 40,000 30,000 24,000 12,000
Overheads 4.45
Insurance Capital Value of
Assets
{4:6:5:1:2}
18,000 4,000 6,000 5,000 1,000 2,000
Meal Charges No. of
Employees
{6:7:12:3:2}
60,000 12,000 14,000 24,000 6,000 4,000
Depreciation Capital Value of
Assets
{4:6:5:1:2}
2,70,000 60,000 90,000 75,000 15,000 30,000
Total overheads 11,74,000 2,39,000 2,93,000 3,94,500 1,57,250 90,250
Re-distribution of Overheads of Service Department A and B
Total overheads of Service Departments may be distributed using simultaneous equation
method
Let, the total overheads of A = a and the total overheads of B= b
a = 1,57,250 + 0.10 b (i)
or, 10a - b = 15,72,500 [(i) x10]
b = 90,250 + 0.20 a (ii)
or, -0.20a + b = 90,250
10a - b = 15,72,500
-0.20a + b = 90,250
9.8a = 16,62,750
a = 1,69,668
Putting the value of a in equation (ii), we get
b = 90,250 + 0.20 x 1,69,668
b = 1,24,184
Secondary Distribution of Overheads
Production Departments
X (`) Y (`) Z (`)
Total overhead as per primary distribution
Service Department A (80% of 1,69,668)
Service Department B (90% of 1,24,184)
2,39,000
50,900
31,046
2,93,000
50,900
49,674
3,94,500
33,934
31,046
Total 3,20,946 3,93,574 4,59,480

Question 32
Distinguish between cost allocation and cost absorption. (4 Marks, May 2013)
Answer
Distinguish between Cost allocation and Cost absorption:
Cost allocation is the allotment of whole item of cost to a cost centre or a cost unit. In other
words, it is the process of identifying, assigning or allowing cost to a cost centre or a cost unit.
Cost absorption is the process of absorbing all indirect costs or overhead costs allocated or
apportioned over particular cost center or production department by the units produced.
Question 33
Calculate Machine Hour Rate from the following particulars:
Cost of Machine - ` 25,00,000
Salvage Value - ` 1,25,000
Estimated life of the machine - 25,000 Hours
Working Hours (per annum) - 3,000 Hours
Hours required for maintenance - 400 Hours
Setting-up time required - 8% of actual working hours
Additional Information:
(i) Power 25 units @ ` 5 per unit per hour.
(ii) Cost of repairs and maintenance ` 26,000 per annum.
(iii) Chemicals required for operating the machine ` 2,600 per month.
(iv) Overheads chargeable to the machine ` 18,000 per month.
(v) Insurance Premium (per annum) 2% of the cost of machine
(vi) No. of operators - 02 (looking after three other machines also)
(vii) Salary per operator per month ` 18,500 (8 Marks, November 2013)
Overheads 4.47
Answer
Computation of Machine Hour Rate
Particulars
Setting-up time is
Unproductive
(Machine hour-
2,407*)
Setting-up time
is Productive
(Machine hour-
2,600)
(`) (`)
Fixed Charges (Standing Charges):
Overhead Chargeable ` 18,000 12 = ` 2,16,000
(
2,16,000
2,407 hours
s`

); (
2,16,000
2,600 hours
s`

)
89.74

83.08

Operators Salary:

=
18,500 12 2 Operators
1,11,000
4 machines
`
`

(
1,11,000
2,407 hours
`

); (
1,11,000
2,600 hours
`

)
46.12 42.69
Insurance: 2% of ` 25,00,000 = ` 50,000 20.77 19.23
156.63 145.00
Variable Expenses (Machine Expenses) per hour
Depreciation :
25,00,000 1,25,000
25,000 hours
` `

95.00 95.00
Power: ( 25 units ` 5) 125.00 125.00
Repairs and Maintenance : 10.80 10.00
(
26,000
2,407 hours
`

); (
26,000
2,600 hours
`

)

Chemical : (
2,600 12
2,407 hours
s`

);(
2,600 12
2,600 hours
s`

)
12.96 12.00
Machine Hour Rate 400.39 387.00

* (Hours)
Working Hours 3,000
Less: Maintenance hours 400
2,600
Less: Setting-up hours 193
Actual working hours
2,600hours
100
108

2,407

Assumptions:
1. Working hours (i.e. 3,000 hours) are inclusive of maintenance and setting-up time.
2. It is assumed that no power is consumed by the machine during unproductive hours
i.e. during maintenance and unproductive setting-up hours.
3. Depreciation is calculated on the basis of estimated life of the machine hours. Hence
per unit machine hour rate of depreciation will be same.

Note: As this numerical problem does not specifically mention about the nature of setting-
up time; means whether setting-up time is unproductive or productive is not clear. The
problem can be solved assuming setting-up time either as productive or as unproductive.
The question may be solved based on logical assumption regarding the nature of setting-
up time (i.e. unproductive or productive) and for furnishing any one or both the situation.


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