PAPER – 3: COST AND MANAGEMENT ACCOUNTING

Question No. 1 is compulsory.

Attempt any four questions out of the remaining five questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and above the
required number, then only the requisite number of questions first answered in the answer
book shall be valued and subsequent extra question(s) answered shall be ignored.
Working notes should form part of the answer
Question 1
Answer the following:
(a) M/s. SJ Private Limited manufactures 20000 units of a product per month. The cost of
placing an order is ` 1,500. The purchase price of the raw material is ` 100 per kg. The
re-order period is 5 to 7 weeks. The consumption of raw materials varies from 200 kg to
300 kg per week, the average consumption being 250 kg. The carrying cost of inventory is
9.75% per annum.
You are required to calculate:
(i) Re-order quantity
(ii) Re-order level
(iii) Maximum level
(iv) Minimum level
(v) Average stock level
(b) A manufacturing concern has provided following information related to fixed overheads:
Standard Actual
Output in a month 5000 units 4800 units
Working days in a month 25 days 23 days
Fixed overheads ` 5,00,000 ` 4,90,000
Compute:
(i) Fixed overhead variance
(ii) Fixed overhead expenditure variance
(iii) Fixed overhead volume variance
(iv) Fixed overhead efficiency variance
(c) Following details have been provided by M/s AR Enterprises:
(i) Opening works-in-progress - 3000 units (70% complete)

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 2 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2018

(ii) Units introduced during the year - 17000 units

(iii) Cost of the process (for the period) - ` 33,12,720
(iv) Transferred to next process - 15000 units
(v) Closing works-in-progress - 2200 units (80% complete)
(vi) Normal loss is estimated at 12% of total input (including units in process in the
beginning). Scraps realise ` 50 per unit. Scraps are 100% complete.
Using FIFO method, compute:
(i) Equivalent production
(ii) Cost per equivalent unit
(d) M/s. SD Private Limited commenced a contract on 1st July 2017 and the company closes
its account for the year on 31st March every year. The following information relates to the
contract as on 31st March 2018.
(i) Material issued `9,48,000
(ii) Direct wages `4,57,200
(iii) Prepaid direct wages as on 31.3.2018 `1,08,000
(iv) Administration charges `7,20,000
(v) A supervisor, who is paid ` 50,000 per month, has devoted two-third of his
time to this contract
(vi) A plant costing `7,85,270 has been on the site for 185 days, its working life is
estimated at 9 years and its scrap value is ` 75,000
The contract price is ` 42 lakhs. On 31st March 2018 two-third of the contract was
completed. The Architect issued certificate covering 50% of the contract price and the
contractor had been paid ` 15.75 lakhs on account.
Assuming 365 days in a year, you are required to:
(i) Prepare a Contract Account showing work cost
(ii) Calculate Notional Profit or Loss as on 31st March 2018 (4 x 5 = 20 Marks)
Answer
(a) Annual consumption 250 kg × 52 weeks = 13,000 kg.
2× A ×O
(i) Re-order Quantity or EOQ =
c ×i
A = Annual Consumption = 13,000 kg
O = Ordering Cost = `. 1,500

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 3

C = Cost per kg = `. 100

i = carrying cost rate = 9.75%
Carrying cost per kg per annum (c× i) = 100 × 9.75% = `. 9.75
2×13,000×1,500
∴ EOQ =
9.75
39000000
= = 2000 kg.
9.75
(ii) Re-order level = Max. re-order period × Max, Consumption
= 7 weeks × 300 kg = 2,100 kg
(iii) Maximum level = Re-order level + Re-order Qty – (Min re-order Period × Min.
Consumption)
= 2100 kg + 2000 kg – (5 × 200) kg = 3100 kg.
(iv) Minimum level = Re-order level – (Avg. re-order period × Avg. Consumption)
= 2,100 kg – (6 × 250) kg = 600 kg.
1
(v) Avg. stock level = (Max. level +Min.level )
2
1
= ( 3100 + 600 ) = 1850 kg
2
OR
1
= Minimum level + ROQ
2
1
= 600 kg. + × 2000 kg. = 1600 kg.
2
(b) Calculation of Variances:
(i) Fixed Overhead Variance: Standard fixed overhead – Actual fixed overhead
= ` [ (5,00,000÷5000) ×4800] – ` 4,90,000 = ` 10,000 (A)
(ii) Fixed Overhead Expenditure Variances:
Budgeted fixed overhead – Actual fixed overhead
= ` 5,00, 000 – ` 4,90, 000 = ` 10,000 (F)
(iii) Fixed Overhead Volume Variance: Standard fixed overhead – Budgeted fixed
overhead

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 4 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2018

= ` 4,80, 000 – ` 5,00, 000 = ` 20,000 (A)

(iv) Fixed Overhead efficiency Variance: Standard fixed overhead – Budgeted fixed
overhead for Actual days
= ` 4,80, 000 – [(` 5,00, 000÷25) ×23] = ` 20,000 (F)
(c) Statement of Equivalent Production Units (Under FIFO Method)
Particulars Input Particulars Output Equivalent
units units Production
(%) Equivalent
units
Opening W-I-P 3,000 From opening W-I-P 3,000 30 900
Units introduced 17,000 From fresh inputs 12,000 100 12,000
Units completed 15,000
(Transferred to next
process)
Normal Loss 2,400 -- --
{12% (3,000 + 17,000
units)}
Closing W-I-P 2,200 80 1760
Abnormal loss 400 100 400
(Balancing figure)
20,000 11,000 15,060
Computation of cost per equivalent production unit :
Cost of the Process (for the period) ` 33,12,720
Less: Scrap value of normal loss (` 50 × 2,400 units) (` 1,20,000)
Total process cost ` 31,92,720

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 5

(d) Contract Account

Particulars (`) Particulars (`)
To Material issued 9,48,000 By Machine (Working note 1)** 7,45,270
” Direct Wages 3,49,200
(4,57,200 – 1,08,000)
” Administrative 7,20,000
charges
” Supervisor’s salary 3,00,000
(` 50,000 × 9 × 2/3)
” Machine** 7,85,270 ” Works cost 23,57,200
(balancing figure)
31,02,470 31,02,470
” Works cost 23,57,200 ” Value of work certified 21,00,000
(50%×42,00,000)
” Costing P&L A/c 3,32,100 ” Cost of work uncertified 5,89,300
(Notional profit) (Working Note 2)
26,89,300 26,89,300
** Alternatively Depreciation on machine can be shown debit side of Contract Account.
Working notes:
1. Written down value of Machine:
`7,85,270 − `75,000 185days
Depreciation= × = ` 40,000
9 years 365days
Hence the value of machine after the period of 185 days = ` 7,85,270 – ` 40,000 =
` 7,45,270
2. The cost of 2/3rd of the contract is ` 23,57,200
` 23,57,200
∴ Cost of 100% " " " " × 3 = ` 35,35,800
2
∴Cost of 50% of the contract which has been certified by the architect is
`. 17,67,900. Also, the cost of 1/3rd of the contract, which has been completed but
not certified by the architect is `. 5,89,300.
Question 2
(a) Following details are provided by M/s ZIA Private Limited for the quarter ending 30
September, 2018:

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 6 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2018

(i) Direct expenses ` 1,80,000

(ii) Direct wages being 175% of factory overheads ` 2,57,250
(iii) Cost of goods sold ` 18,75,000
(iv) Selling & distribution overheads ` 60,000
(v) Sales ` 22,10,000
(vi) Administration overheads are 10% of factory overheads
Stock details as per Stock Register:
Particulars 30.06.2018 30.09.2018
` `
Raw material 2,45,600 2,08,000
Work-in-progress 1,70,800 1,90,000
Finished goods 3,10,000 2,75,000
You are required to prepare a cost sheet showing:
(i) Raw material consumed
(ii) Prime cost
(iii) Factory cost
(iv) Cost of goods sold
(v) Cost of sales and profit (10 Marks)
(b) A manufacturing company is producing a product 'A' which is sold in the market at `45 per
unit. The company has the capacity to produce 40000 units per year. The budget for the
year 2018-19 projects a sale of 30000 units.
The costs of each unit are expected as under:
`
Materials 12
Wages 9
Overheads 6
Margin of safety is ` 4,12,500.
You are required to:
(i) calculate fixed cost and break-even point.
(ii) calculate the volume of sales to earn profit of 20% on sales.

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 7

(iii) if management is willing to invest ` 10,00,000 with an expected return of 20%,

calculate units to be sold to earn this profit.
(iv) Management expects additional sales if the selling price is reduced to ` 44. Calculate
units to be sold to achieve the same profit as desired in above (iii). (10 Marks)
Answer
(a) Cost Sheet
(for the quarter ending 30 September 2018)
Amount (`)
(i) Raw materials consumed
Opening stock of raw materials 2,45,600
Add: Purchase of materials 12,22,650*
Less: Closing stock of raw materials (2,08,000)
Raw materials consumed 12,60,250
Add: Direct wages (1,47,000×175%) 2,57,250
Direct Expenses 1,80,000
(ii) Prime cost 16,97,500
Add: Factory overheads (2,57,250/175%) 1,47,000
Gross Factory cost 18,44,500
Add: Opening work-in-process 1,70,800
Less: Closing work-in-process (1,90,000)
(iii) Factory cost 18,25,300
Add: Administration overheads (10% of factory overheads) 14,700
Add: Opening stock of finished goods 3,10,000
Less: Closing stock of finished goods (2,75,000)
(iv) Cost of goods sold 18,75,000
Add: Selling & distribution overheads 60,000
Cost of sales 19,35,000
(v) Net Profit 2,75,000
Sales 22,10,000
*(18,75,000 + 2,75,000 – 3,10,000 – (1,47,000 × 10%) + 1,90,000 –1,70,800 – (2,57,250
× 100/175%) - 1,80,000 – 2,57,250 + 2,08,000 – 2,45,600) = 12,22,650
Working notes
Purchase of raw materials = Raw material consumed + Closing stock - opening stock of
raw material
Raw material consumed = Prime cost - Direct wages - Direct expenses

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 8 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2018

Factory Overheads = 2,57,250*100/175

Prime cost = Factory cost + Closing WIP – Opening WIP – Factory overheads
Factory Cost = Cost of Production goods sold + Closing stock of Finished goods – Opening
stock of finished goods – Administrative overheads
Net Profit = Sales - Cost of sales
Alternative solution
Cost Sheet
(for the quarter ending 30 September 2018)
Amount (`)
(i) Raw materials consumed
Opening stock of raw materials 2,45,600
Add: Purchase of materials 12,37,350*
Less: Closing stock of raw materials (2,08,000)
Raw Material consumed 12,74,950
Add: Direct wages (1,47,000×175% 2,57,250
Direct Expenses 1,80,000
(ii) Prime cost 17,12,,200
Add: Factory overheads (2,57,250/175%) 1,47,000
Gross Factory cost 18,59,200
Add: Opening work-in-process 1,70,800
Less: Closing work-in-process (1,90,000)
(iii) Factory cost/works cost/cost of production 18,40,000
Add: Opening stock of finished goods 3,10,000
Less: Closing stock of finished goods (2,75,000)
(iv) Cost of goods sold 18,75,000
Add: Administration overheads (10% of factory overheads) 14,700
Add: Selling & distribution overheads 60,000
Cost of sales 19,49,700
(v) Net Profit 2,60,300
Sales 22,10,000
*(18,75,000 + 2,75,000 – 3,10,000 + 1,90,000 –1,70,800 – 1,47,500 - 1,80,000 –
2,57,250 + 2,08,000 – 2,45,600) = 12,37,350

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 9

Working notes
Purchase of raw materials = Raw material consumed + Closing stock - opening stock of
raw material
Raw material consumed = Prime cost - Direct wages - Direct expenses
Factory Overheads = 257250*100/175
Prime cost = Factory cost + Closing WIP – Opening WIP – Factory overheads
Factory Cost = Cost of Production goods sold + Closing stock of Finished goods – Opening
stock of finished goods
Net Profit = Sales - Cost of sales
Profit
(b) Margin of Safety = = ` 4,12,500
P / V ratio
Profit
= = ` 4,12,500
45 - (12 + 9 + 6)
45
Profit
= = 4,12,500
18
45
Profit = 1,65,000 OR P/V = (18/45) x 100 =40%
(i) Fixed Cost
Profit = (Sales × P/V Ratio) – Fixed Cost
 18 
1,65,000 =  (30,000 × 45) ×  - Fixed Cost
 45 
Or Fixed Cost = 5,40,000 – 1,65,000
= ` 3,75,000
OR
Profit = Contribution – Fixed Cost=` 5,40,000-` 3,75,000 =`.1,65,000
18
P/V Ratio = =40%
45
Break-even Point = Total Sales – Margin of Safety
= ` (30,000 × 45) – 4,12,500
= 13,50,000 – 4,12,500 =` 9,37,500

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 10 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2018

Or
Fixed Cost 3,75,000 3,75,000
BEP = = = =`9,37,500 OR 20833.33 Units
P / V ratio 18 40%
45
(ii) Let’s assume, Sales Volume = S unit so total sales value is 45 S and
Contribution is 45 S - 27 S =18 S
Now, Contribution = Fixed Cost + Desired Profit
18 S = 3,75,000 + 9 S (20% of 45 S)
Or, 9S = 3,75,0000
3,75,000
So, S = Units
9
3,75,000 × 45
Volume of sales = = ` 18,75,000 OR 41666.67 Units
9
So, ` 18,75,000 sales are required to earn profit on 20% of sales
(iii) Contribution = Fixed Cost + Desired Profit
18S = 3,75,000 + Return on Investment
18S = 3,75,000 + 2,00,000
5,75,000
S = Units=31,945 Units(approx.)
18
So,31,945 Units to be sold to earn a return of ` 2,00,000.
(iv) Revised Contribution = Fixed Cost + Desired Profit
17S = 3,75.000 + 2,00,000
5,75,000
S = Units
17
S = 33,824 units (approx.)
∴ Additional Sales to be sold to achieve the same profit is 33,824 Units.
Question 3
(a) XYZ Ltd. has obtained an order to supply 48000 bearings per year from a concern. On a
steady basis, it is estimated that it costs ` 0.20 as inventory holding cost per bearing per
month and the set-up cost per run of bearing manufacture is ` 384.

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You are required to:

(i) compute the optimum run size and number of runs for bearing manufacture.
(ii) compute the interval between two consecutive runs.
(iii) find out the extra costs to be incurred, if company adopts a policy to manufacture
8000 bearings per run as compared to optimum run Size.
(iv) give your opinion regarding run size of bearing manufacture.
Assume 365 days in a year. (10 Marks)
(b) M/s. HMB Limited is producing a product in 10 batches each of 15000 units in a year and
incurring following overheads their on:
Amount (`)
Material procurement 22,50,000
Maintenance 17,30,000
Set-up 6,84,500
Quality control 5,14,800
The prime costs for the year amounted to ` 3,01,39,000.
The company is using currently the method of absorbing overheads on the basis of prime
cost. Now it wants to shift to activity-based costing. Information relevant to Activity drivers
for a year are as under:
Activity Driver Activity Volume
No. of purchase orders 1500
Maintenance hours 9080
No. of set-ups 2250
No. of inspections 2710
The company has produced a batch of 15000 units and has incurred ` 26,38,700 and
` 3,75,200 on materials and wages respectively.
The usage of activities of the said batch are as follows:
Materials orders 48 orders
Maintenance hours 810 hours
No. of set-ups 40
No. of inspections 25
You are required to:
(i) find out cost of product per unit on absorption costing basis for the said batch.

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 12 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2018

(ii) determine cost driver rate, total cost and cost per unit of output of the said batch on
the basis of activity based costing. (10 Marks)
Answer
(a) (i) Optimum batch size or Economic Batch Quantity (EBQ):
2DS 2 × 48,000 × 384
EBQ = = = 3919.18 or 3,920 units
C 2.4
Number of Optimum runs = 48,000 ÷ 3,920 = 12.245 or 13 run
(ii) Interval between 2 runs (in days) = 365 days ÷ 13 = 28 days
Or 365÷12.24=29.82 days
(iii) If 8,000 bearings are manufactures in a run:
Total cost = Set-up cost + Inventory holding cost
= `.384×(48,000÷8,000) + (8,000÷2)×`.2.4
= 2304+9,600 = 11,904
Extra cost = `(11,904 – 9,406*) =` 2,498/-
OR
Extra cost = ` (11,904 – 9,696*) = ` 2,208/-
* Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per unit per
annum
Average Inventory = 3,920 units ÷ 2 = 1,960 units
Carrying Cost per unit per annum = `0.2 × 12 months = `2.4
Minimum Inventory Holding Costs = 1,960 units × `2.4 = `4,704
Total cost = Set-up cost + Inventory holding cost = (12.245×384) + 4704 = ` 9,406
(approx.)
OR
Total cost = Set-up cost + Inventory holding cost = (13×384) + 4704 = ` 9,696
(approx.)
(iv) To save cost the company should run at optimum batch size i.e. 3,920 Units. It saves
` 2,498 or 2208. Run size should match with the Economic production run of bearing
manufacture. When managers of a manufacturing operation make decisions about
the number of units to produce for each production run, they must consider the costs
related to setting up the production process and the costs of holding inventory

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 13

Alternative presentation to part 3(a) (iii)

Statement showing Total Cost at Production Run size of 3,600 and 8,000 bearings
A. Annual requirement 48,000 48,000
B. Run Size 3,920 8,000
C. No. of runs (A/B) 12.245 6
D. Set up cost per run ` 384 ` 384
E. Total set up cost (CxD) ` 4,702 ` 2,304
F. Average inventory (B/2) 1,960 4,000
G. Carrying cost per unit p.a. 2.40 2.40
H. Total Carrying cost (FxG) 4,704 9,600
I. Total cost (E+H) 9,406 11,904
Extra cost incurred, if run size is of 8,000= `11,904-9,406= ` 2,498
(b) Working Note:
51,79,300
Overhead Absorption Rate = ×100 =17.18%
3,01,39,000
(i) Cost of Product Under Absorption Costing
Item of Cost Amount (`)
Material 26,38,700
Wages 3,75,200
Prime Cost 30,13,900
51,79,300 5,17,930
Overheads: ×30,13,900
3,01,39,000
Total Cost 35,31,830
Units 15,000
Cost per unit 235.46
(ii) Cost driver rate, total cost and cost per unit on the basis of activity-based
costing method Absorption Costing
Calculation of Cost Driver rate:
Activity `. Activity Cost Driver
Volume Rate
Material Procurement 22,50,000 1500 1500

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 14 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2018

Maintenance 17,30,000 9080 190.53

Setup 6,84,500 2250 304.22
Quality Control 5,14,800 2710 189.96
Calculation of total Cost and cost per unit:
Item of Cost Amount (`)
Material 26,38,700
Wages 3,75,200
Prime Cost 30,13,900
 22,50,000  72,000
Material Purchase  ×48 
 1,500 
 17,30,000  1,54,328
Maintenance  9,080 ×810 
 
 6,84,500  12,169
Setup  2,250 × 40 
 
 5,14,800  4,749
Quality Control  2,710 × 25 
 
Total Cost 32,57,146
Unit 15,000
Cost per unit 217.14
Question 4
(a) The following balances were extracted from a Company's ledger as on 30th June, 2018:
Particulars Debit (`) Credit (` )
Raw material control a/c 2,82,450
Work-in-progress control a/c 2,38,300
Finished stock control a/c 3,92,500
General ledger adjustment a/c 9,13,250
Total 9,13,250 9,13,250
The following transactions took place during the quarter ended 30 th September, 2018:
`
(i) Factory overheads - allocated to work-in-progress 1,36,350

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(ii) Goods furnished - at cost 13,76,200

(iii) Raw materials purchased 12,43,810
(iv) Direct wages - allocated to work-in-progress 2,56,800
(v) Cost of goods sold 14,56,500
(vi) Raw materials - issued to production 13,60,430
(vii) Raw materials - credited by suppliers 27,200
(viii) Raw materials losses - inventory audit 6,000
(ix) Work-in-progress rejected (with no scrap value) 12,300
(x) Customer's returns (at cost) of finished goods 45,900
You are required to prepare:
(i) Raw material control a/c
(ii) Work-in-progress control a/c
(iii) Finished stock control a/c
(iv) General ledger adjustment a/c (10 Marks)
(b) M/s XY Travels has been given a 25 km. long route to run an air- conditioned Mini Bus.
The cost of bus is ` 20,00,000. It has been insured @3% premium per annum while annual
road tax amounts to ` 36,000. Annual repairs will be ` 50,000 and the bus is likely to last
for 5 years. The driver's salary will be `2,40,000 per annum and the conductor's salary will
be ` 1,80,000 per annum in addition to 10% of the takings as commission (to be shared
by the driver and the conductor equally). Office and administration overheads will be
` 18,000 per annum. Diesel and oil will be ` 1,500 per 100 km. The bus will make 4 round
trips carrying on an average 40 passengers on each trip.
Assuming 25% profit on takings and considering that the bus will run on an average 25
days in a month, you are required to:
(i) prepare operating cost sheet (for the month).
(ii) calculate fare to be charged per passenger km. (10 Marks)
Answer
(a) (i) Raw Material Control A/c
(`) (`)
To Balance b/d 2,82,450 By General Ledger Adjustment 27,200
A/c
” General Ledger 12,43,810 ” Work-in-progress Control A/c 13,60,430
Adjustment A/c ” Costing P&L A/c 6,000

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 16 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2018

(Loss) (OR GLA)

” Balance c/d 1,32,630
15,26,260 15,26,260
(ii) Work-in-Progress Control A/c
(`) (`)
To Balance b/d 2,38,300
” Raw Material Control A/c 13,60,430 ” Finished Goods Control A/c 13,76,200
” Wages Control A/c 2,56,800 Costing P&L A/c (OR GLA) 12,300
” Factory OH Control A/c 1,36,350 ” Balance c/d 6,03,380
19,91,880 19,91,880
(iii) Finished Goods Control A/c
(`) (`)
To Balance b/d 3,92,500 By Cost of goods sold 14,56,500
A/c (OR GLA)
General Ledger 45,900
Adjustment A/c
” Work-in-process 13,76,200 ” Balance c/d 3,58,100
Control A/c
18,14,600 18,14,600
(iv) General Ledger Adjustment A/c
(`) (`)
To Costing P&L A/c (sales) 25,68,910 By Balance b/d 9,13,250
(Balancing figure)
” Raw Material Control A/c 27,200 ” Raw Material Control 12,43,810
A/c
” Wages Control A/c 2,56,800
” Factory OH Control 1,36,350
A/c
” Finished Goods 45,900
Control A/c
25,96,110 25,96,110

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 17

OR
General ledger adjustment account
(`) (`)
To Raw Material Control A/c 27,200 By Balance b/d 9,13,250
” Raw Material control 6,000 ” Raw Material Control A/c 12,43,810
account(loss)
‘’ WIP control Account 12,300 ” Wages Control A/c 2,56,800
(rejection)
“ Finished stock Control 14,56,500 ” Factory OH Control A/c 1,36,350
Account
“” Balance c/d 10,94,110 ” Finished Goods Control 45,900
A/c
25,96,110 25,96,110
Working:
Factory Overhead Control A/c
(`) (`)
To General Ledger 1,36,350 By Work-in-progress A/c 1,36,350
Adjustment A/c
1,36,350 1,36,350
(b) (i) Statement showing the Operating Cost per Passenger-km.
Yearly (`.) Monthly (`.)
(A) Standing Charges:
Insurance Charge `. 20,00,000 × 3% 60,000 5,000
Road Tax 36,000 3,000
Depreciation (20,00,000/5) 4,00,000 33,333.33
Total 4,96,000 41,333.33
(B) Maintenance Charges:
Annual Repairs 50,000 4166.67
Office and administration overheads 3,18,000 26,500
Total 3,68,000 30666.67
(C) Running Cost/Charges:
Driver’s Salary 2,40,000 20,000
Conductor’s Salary 1,80,000 15,000

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 18 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2018

 1,500  9,00,000 75,000

Diesel & Oil  60,000× 
 100 
Total 13,20,000 41,333.33
Total (A+B+C) Cost before commission and 21,84,000 1,82,000
profit
Commission (33,60,000 × 10%) (working note 3,36,000 28,000
2)
Profit (33,60,000 × 25% ) (working note 2) 8,40,000 70,000
Takings (working note 1) 33,60,000 2,80,000
Total Collection/Takings
(ii) Fare per Passenger-km. =
Total Passenger-km (Working note 3)
33,60,000
= = `. 1.40
24,00,000
OR
2,80,000
Fare per Passenger-km. (monthly) = = `.1.40
2,00,000
Working note:
1. Cost before commission (10%) and profit (25%) is 21,84,000 which is 65% of
total takings. So total takings is (21,84000÷65) ×100=` 33,60,000
2. Commission is 10% of ` 33,60,000=` 3,36,000 and Profit is 25% of
` 33,60,000=` 8,40,000
3. Total Km is (4 Round Trips × Days in a month × Month = (4×2×25 ×25×12 ) = 60,000 km
Passenger km is 60,000 km×40 passenger= 24,00,000
Question 5
(a) An electronic gadget manufacturer has prepared sales budget for the next few months. In
this respect, following figures are available:
Months Electronic gadgets' sales
January 5000 units
February 6000 units
March 7000 units
April 7500 units
May 8000 units

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 19

To manufacture an electronic gadget, a standard cost of ` 1,500 is incurred and it is sold

through dealers at an uniform price of ` 2,000 per gadget to customers. Dealers are given
a discount of 15% on selling price.
Apart from other materials, two units of batteries are required to manufacture a gadget.
The company wants to hold stock of batteries at the end of each month to cover 30% of
next month's production and to hold stock of manufactured gadgets to cover 25% of the
next month's sale.
3250 units of batteries and 1200 units of manufactured gadgets were in stock on
1st January.
Required:
(i) Prepare production budget (in units) for the month of January, February, March and
April.
(ii) Prepare purchase budget for batteries (in units) for the month of January, February
and March and calculate profit for the quarter ending on March. (10 Marks)
(b) (i) Following data have been extracted from the books of M/s. ABC Private Limited:
(i) Salary (each employee, per month) ` 30,000
(ii) Bonus 25% of salary
(iii) Employer's contribution to PF, ESI etc. 15% of salary
(iv) Total cost at employees' welfare activities ` 6,61,500 per annum
(v) Total leave permitted during the year 30 days
(v) No. of employees 175
(vii) Normal idle time 70 hours per annum
(viii) Abnormal idle time (due to failure of power 50 hours
supply)
(ix) Working days per annum 310 days of 8 hours

You are required to calculate:

1. Annual cost of each employee
2. Employee cost per hour
3. Cost of abnormal idle time, per employee (5 Marks)

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 20 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2018

(ii) M/s. NOP Limited has its own power plant and generates its own power. Information
regarding power requirements and power used are as follows:
Production Dept. Service Dept.
A B X Y
(Horse power hours)
Needed capacity production 20,000 25,000 15,000 10,000
Used during the quarter ended 16,000 20,000 12,000 8,000
September 2018
During the quarter ended September 2018, costs for generating power amounted to
` 12.60 lakhs out of which ` 4.20 lakhs was considered as fixed cost.
Service department X renders services to departments A, B, and Y in the ratio of 6:4:2
whereas department Y renders services to department A and B in the ratio of 4: 1.
The direct labour hours of department A and B are 67500 hours and 48750 hours
respectively.
Required:
1 Prepare overheads distribution sheet.
2 Calculate factory overhead per labour hour for the dept. A and dept. B.
(5 Marks)
Answer
(a) (i) Preparation of Production Budget (in Units)
January February March April May
Sales 5,000 6,000 7,000 7,500 8,000
Add: Closing stock (25% 1,500 1,750 1,875 2,000
of next month’s sales)
Less: Opening Stock (1200) (1500) (1750) (1875)
Production of electronic 5,300 6,250 7,125 7,625
Gadgets
(ii) Preparation of Purchase budget
January February March April
Consumption/production of Batteries 10,600 12,500 14,250 15,250
(@ 2 per Gadget)
Add: Closing Stock (30% of next 3750 4275 4575
month’s production)

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 21

Less: Opening Stock 3,250 3,750 4275

Purchase of Batteries 11,100 13,025 14,550
Statement Showing Profit
Jan. Feb. March Total
Sales (A) 5,000 6,000 7,000 18,000
Selling Price per `. 2,000 `. 2,000 `. 2,000 `. 2,000
unit*
Less: Discount 300 300 300 300
@15% of selling
price
Less: Standard 1500 1500 1500 1500
cost of
Manufacturing per
gadget Cost
Profit (B) (selling 200 200 200 200
Price-discount-
cost)
Total Profit (A × B) `.10,00,000 `.12,00,000 `.14,00,000 `.36,00,000
(b) (i) 1.
Annual cost of each employee `.
1. Salary (30,000×12) 3,60,000
2. Bonus (25% of Salary) 90,000
3. Employees Contribution to PF (15% of Salary) 54,000
4. Employers welfare (661500/175) 3,780
Total Annual Cost 5,07,780
2.
Effective Working hours (310 days × 8 hours) 2480 hours
Less: Leave days (30 days × 8 hours) 240 hours*
Available Working hours 2240 hours
Less: Normal Loss @ 70 hours
2170 hours

507780
Employee Cost per hour = `. 234
2170

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 22 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2018

*It is assumed 310 working days are without taking leave permitted into
consideration
3. Cost of abnormal idle time per employee = ` 234× 50 hours= ` 11700
Alternative solution for Part (2) and (3)
(2) Calculation of Employee cost per hour:
Working hours per annum 2,480 *
Less: Normal Idle time hours 70
Effective hours 2,410
Employee cost 5,07,780
Employee cost per hour 210.70
*It is assumed 310 working days are after adjusting leave permitted during the year.
(3) Cost of Abnormal idle time per employee:

Abnormal Idle time hours 50

Employee cost per hour 210.70
Cost of Abnormal idle time (210.70 ×50) 10,534.85
(ii)
(1) Overheads distribution Sheet
Item Basis Total Production Service Departments
Amount Departments
(`) A (`) B (`) X (`) Y (`)
Variable overheads Horse Power 8,40,000 2,40,000 3,00,000 1,80,000 1,20,000
(` 12.60 lakhs - hours used
` 4.20 lakhs)
Fixed Overheads Horse power 4,20,000 1,20,000 1,50,000 90,000 60,000
for Capacity
production
Total Overheads 12,60,000 3,60,000 4,50,000 2,70,000 1,80,000

Service dept X As per the (2,70,000) 1,35,000 90,000 45,000

allocated to A, B & Y ratio given
6:4:2
Service dept Y As per the (1,80,000+4 1,80,000 45,000
allocated to A & B ratio of 4:1 5000 =
2,25,000)

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 23

Total Overheads of 6,75,000 5,85,000

Production
departments

(2) Calculation of Factory overhead per labour hour

Item Production Departments
A (`) B (`)
Total overheads 6,75,000 5, 85,000
Direct labour hours 67,500 48,750
Factory overheads per hour 10 12
Question 6
Answer any four of the following:
(a) Mention and explain types of responsibility centres.
(b) Explain obsolescence and circumstances under which materials become obsolete. State
the steps to be taken for its treatment.
(c) State the bases of apportionment of following overhead costs:
(i) Air-conditioning
(ii) Time keeping
(iii) Depreciation of plant and machinery
(iv) Power/steam consumption
(v) Electric power (Machine operation)
(d) How are By-products treated in Costing?
(e) Explain 'Activity Based Budgeting'. (4 x 5 = 20 Marks)
Answer
(a) There are four types of responsibility centres:
(i) Cost Centres: The responsibility centre which is held accountable for incurrence of costs
which are under its control. The performance of this responsibility centre is measured
against pre-determined standards or budgets. The cost centres are of two types:
(a) Standard Cost Centre and (b) Discretionary Cost Centre
(ii) Revenue Centres: The responsibility centres which are accountable for generation of
revenue for the entity. Sales Department for example, is the responsible for achievement
of sales target and revenue generation. Though, revenue centres does not have control
on the all expenditures it incurs but some time expenditures related with selling activities
like commission to sales person etc. are incurred by revenue centres.

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 24 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2018

(iii) Profit Centres: These are the responsibility centres which have both responsibility
of generation of revenue and incurrence of expenditures. Since, managers of profit
centres are accountable for both costs as well as revenue, profitability is the basis for
measurement of performance of these responsibility centres. Examples of profit
centres are decentralised branches of an organisation.
(iv) Investment Centres: These are the responsibility centres which are not only
responsible for profitability but also has the authority to make capital investment
decisions. The performance of these responsibility centres is measured based on
Return on Investment (ROI) besides profit.
(b) Obsolescence: Obsolescence is defined as “the loss in the intrinsic value of an asset due
to its supersession”.
Materials may become obsolete under any of the following circumstances:
(i) where it is a spare part, or a component of a machinery used in manufacture and
that machinery becomes obsolete;
(ii) where it is used in the manufacture of a product which has become obsolete;
(iii) where the material itself is replaced by another material due to either improved
quality or fall in price.
Treatment:In all three cases, the value of the obsolete material held in stock is a total loss
and immediate steps should be taken to dispose it off at the best available price. The
loss arising out of obsolete materials on abnormal loss does not form part of the cost
of manufacture.
(c)
Overhead Cost Bases of Apportionment
(i) Air- conditioning Floor area, or volume of department
(ii) Time keeping Number of workers
(iii) Depreciation of plant and Capital values
machinery
(iv) Power/steam consumption Technical estimates
(v) Electric power (machine Horse power of machines, or Number of machine
operation) hour, or value of machines or units consumed.
Kilo-watt hours.
(d) Treatment of by-product cost in Cost Accounting:
By-product cost can be dealt in cost accounting in the following ways:
(a) When they are of small total value: When the by-products are of small total value,
the amount realised from their sale may be dealt in any one the following two ways:

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 PAPER – 3 : COST AND MANAGEMENT ACCOUNTING 25

1. The sales value of the by-products may be credited to the Costing Profit and
Loss Account and no credit be given in the Cost Accounts. The credit to the
Costing Profit and Loss Account here is treated either as miscellaneous income
or as additional sales revenue.
2. The sale proceeds of the by-product may be treated as deductions from the total
costs. The sale proceeds in fact should be deducted either from the production
cost or from the cost of sales.
(b) When the by-products are of considerable total value: Where by-products are of
considerable total value, they may be regarded as joint products rather than as by-
products. To determine exact cost of by-products the costs incurred upto the point of
separation, should be apportioned over by-products and joint products by using a
logical basis.
(c) Where they require further processing: In this case, the net realisable value of the
by-product at the split-off point may be arrived at by subtracting the further processing
cost from the realisable value of by-products.
(e) Activity Based Budgeting (ABB)
• Activity based budgeting analyse the resource input or cost for each activity.
• It provides a framework for estimating the amount of resources required in
accordance with the budgeted level of activity.
• Actual results can be compared with budgeted results to highlight both in financial
and non-financial terms those activities with major discrepancies from budget for
potential reduction in supply of resources.
• It is a planning and control system which seeks to support the objectives of continuous
improvement.
• It means planning and controlling the expected activities of the organization to derive
a cost-effective budget that meet forecast workload and agreed strategic goals.
• ABB is the reversing of the ABC process to produce financial plans and budgets.

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