Test Series: March, 2019

MOCK TEST PAPER – 1

INTERMEDIATE (IPC): GROUP – I
PAPER – 3: COST MANAGEMENT ACCOUNTING
Suggested Answers/ Hints

FixedCost
1. (a) (i) Break-even sales =
P / VRatio
ChangeinPr ofit Rs. 37,50,000
P/V Ratio = 100 or, 100
ChangeinSales Rs. 7,80,60,000  Rs. 5,93,10,000
Rs.37,50,000
Or,  100 or, 20%
Rs.1,87,50,000
Rs.98,50,000
Break-even sales = = Rs.4,92,50,000
20%
(ii) Profit/ loss = Contribution – Fixed Cost
= Rs.8,20,00,000 × 20% - Rs.98,50,000
= Rs.1,64,00,000 – Rs.98,50,000 = Rs.65,50,000
(iii) To earn same amount of profit in 20X8-X9 as was in 20X7-X8, it has to earn the same
amount of contribution as in 20X7-X8.
Sales – Variable cost = Contribution equal to 20X7-X8 contribution
Contribution in 20X7-X8 = Sales in 20X7-X8 × P/V Ratio in 20X7-X8
= Rs.5,93,10,000 × 20% = Rs.1,18,62,000
Let the number of units to be sold in 20X8-X9 = X
Sales in 20X8-X9 – Variable cost in 20X8-X9 = Desired Contribution
90 X – 80 X = Rs.1,18,62,000
Or, 10 X = 1,18,62,000
Or, X = 11,86,200 units
Therefore, Sales amount required to earn a profit equals to 20X7-X8 profit
= Rs. 90 × 11,86,200 units = Rs. 10,67,58,000
2D S
(b) (i) Optimum run size or Economic Batch Quantity (EBQ) =
C
Where, D = Annual demand i.e. 1.15% of 8,00,00,000 = 9,20,000 units
S = Set-up cost per run = Rs. 3,500
C = Inventory holding cost per unit per annum
= Rs. 1.5 × 12 months = Rs. 18
2  9,20,000units Rs.3,500
EBQ = = 18,915 units
Rs.18

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 (ii) Calculation of Total Cost of set-up and inventory holding
Batch size No. of set- Set-up Inventory holding Total Cost
ups Cost (Rs.) cost (Rs.) (Rs.)
23 80,500 3,60,000
40,000 units  9,20,000  (23 × Rs.  40,000  Rs.18  4,40,500
 40,000  3,500)  
   2 
B 49 1,71,500 1,70,235 3,41,735
 9,20,000  (49 × Rs.  18,915  Rs.18 
18,915 units  18,915  3,500)  
   2 

Extra Cost (A – B) 98,765

(c) Calculation of Cost of Production and Profit for the month ended March, 20X9:
Particulars Amount (Rs.) Amount (Rs.)
Materials consumed:
- Opening stock 6,06,000
- Add: Purchases 28,57,000
34,63,000
- Less: Closing stock (7,50,000) 27,13,000
Direct wages 37,50,000
Prime cost 64,63,000
Factory expenses 21,25,000
85,88,000
Add: Opening W-I-P 12,56,000
Less: Closing W-I-P (14,22,000)
Factory cost 84,22,000
Less: Sale of scrap (26,000)
Cost of Production 83,96,000
Add: Opening stock of finished goods 3,59,000
Less: Closing stock of finished goods (3,09,000)
Cost of Goods Sold 84,46,000
Office and administration expenses 10,34,000
Selling and distribution expenses 7,50,000
Cost of Sales 1,02,30,000
Profit (balancing figure) 31,70,000
Sales 1,34,00,000
(d) Memorandum Reconciliation Accounts
Dr. Cr.
(Rs.) (Rs.)
To Net Loss as per Costing 3,47,000 By Administration overheads over 60,000
books recovered in cost accounts

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 To Factory overheads under 40,000 By Interest on investment not included in 96,000
absorbed in Cost Accounts Cost Accounts
To Depreciation under charged in 50,000 By Transfer fees in Financial books 24,000
Cost Accounts
To Income-Tax not provided in 54,000 By Stores adjustment 14,000
Cost Accounts (Credit in financial books)
To Interest on Loan Funds in 2,45,000 By Dividend received in financial 32,000
Financial Accounts books
By Net loss as per Financial books 5,10,00
0
7,36,000 7,36,00
0

2. (a) Process-I A/c

Particulars Qty. Amount ) Particulars Qty. Amount
(kgs) (kgs) (Rs.)

To Material A 6,000 3,00,000 By Normal loss 500 8,000

To Material B 4,000 4,00,000 By Process-II A/c 9,200 7,38,857
To Labour -- 21,500 By Abnormal loss A/c 300 24,093
To Overhead -- 49,450
 Rs.92,000  430hrs 
 
 800hrs 

10,000 7,70,950 10,000 7,70,950

{(`3,00,000  `4,00,000  `21,500  `49,450)  `8,000} `7,70,950  `8,000
* = = Rs.80.3105
(10,000  500)units 9,500units

Process-II A/c
Particulars Qty. Amount Particulars Qty. (kgs) Amount
(kgs) (Rs.) (Rs.)
To Process-I A/c 9,200 7,38,857 By Normal loss 1,000 --
To Material C 6,600 8,25,000 By Packing 18,000 18,42,496
Dept. A/c
(See the working
notes)
To Material D 4,200 3,15,000 By WIP A/c 1,000 1,00,711
(See the working
notes)
To Flavouring essence -- 3,300
To Labour -- 18,500
To Overheads -- 42,550
 Rs.92,000  370hrs 
 
 800hrs 
20,000 19,43,207 20,000 19,43,207
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 Abnormal loss A/c
Particulars Qty. Amount Particulars Qty. Amount
(kgs) (Rs.) (kgs) (Rs.)

To Process-I A/c 300 24,093 By Bank 300 4,800

By Costing -- 19,293
Profit & Loss A/c
300 24,093 300 24,093
Working Notes:
Calculation of Equivalent Production units
Input Units Output Units Process-I Mat-C & D Labour & OH
(%) Units (%) Units (%) Units

9,200 Transferred to 18,000 100 18,000 100 18,000 100 18,000

Packing.

Mat-C 6,600 Closing WIP 1,000 100 1,000 100 1,000 50 500
Mat-D 4,200 Normal loss 1,000 -- -- -- -- -- --
20,000 20,000 19,000 19,000 18,500

Calculation of Unit cost

Cost component Amount (Rs.) Equivalent units Cost per unit
(Rs.)
Transferred-in 7,38,857 19,000 38.8872
Material-C 8,25,000 19,000 43.4211
Material-D 3,15,000 19,000 16.5789
Flavouring essence 3,300 19,000 0.1737
Total Material Cost 18,82,157 19,000 99.0609
Labour 18,500 18,500 1.0000
Overheads 42,550 18,500 2.3000
Total Cost 19,43,207 102.3609

Value of Materials transferred to Packing Department

= 18,000 unit × Rs.102.3609 = 18,42,496
Value of WIP : For Materials- 1,000 units × Rs.99.0609 = Rs.99,061
For Labour & Overheads 500 units × Rs.3.30 = Rs.1,650
Rs.1,00,711
(b) Calculation of effective wages rate and weekly earnings of the workers A, B and C
Workers A B C
Standard Output 96 units 96 units 96 units
(8 hrs. × 2 units × 6 days) (8 hrs. × 2 units × 6 days) (8 hrs. × 2 units × 6 days)
Actual Output 132 units 108 units 96 units

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 Efficiency (%) 132units 108units 96units
×100= 137.5 ×100= 112.5 ×100= 100
96units 96units 96units
Daily wages
Rs. 360 Rs. 360 Rs. 360
Rate
Incentive system Emerson’s Efficiency Merrick differential Taylor’s differential piece
System piece rate system work system
Rate of Bonus 57.5% of time rate 20% of ordinary piece
25% of ordinary piece rate
(20% + 37.5% ) rate
Effective Wage Rs. 70.875 per hour Rs. 27 per piece Rs. 28.125 per piece
Rate  Rs. 360   Rs.360   Rs.360 
 ×157.5%   ×120%   ×125% 
 8hours   16units   16units 

Total weekly Rs. 3,402 Rs. 2,916 Rs. 2,700

earnings (8 hours × 6 days × Rs. (108 units × Rs. 27) (96 units × Rs. 28.125)
70.875)

3. (a) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
X = 12,500 units (Rs.40 – Rs.44) = 50,000 (A)
Y = 18,000 units (Rs.30 – Rs.28) = 36,000 (F)
Z = 88,500 units (Rs.10 – Rs.12) = 1,77,000 (A) 1,91,000 (A)
Material Usage Variance = Std. Price (Std. Qty – Actual Qty.)
X = Rs.40 (6,000 × 2 – 12,500) = 20,000 (A)
Y = Rs.30 (6,000 × 3 – 18,000) = Nil
Z = Rs.10 (6,000 × 15 – 88,500) = 15,000 (F) 5,000 (A)
Material Mix Variance = Std. Price (Revised Std. Qty. – Actual Qty.)
1,19,000  2
X = Rs.40 ( – 12,500) = 24,000 (A)
20
1,19,000  3
Y = Rs.30 ( – 18,000) = 4,500 (A)
20
1,19,000 15
Z = Rs.10 ( – 88,500) = 7,500 (F) 21,000 (A)
20
Material Yield Variance = Std. Price (Std. Qty. – Revised Std. Qty.)
1,19,000  2
X = Rs.40 (6,000 × 2 - ) = 4,000 (F)
20
1,19,000  3
Y = Rs.30 (6,000 × 3 - ) = 4,500 (F)
20
1,19,000 15
Z = Rs.10 (6,000 × 15 - ) = 7,500 (F) 16,000 (F)
20
Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)
= 2,500 hours (Rs.55 – Rs.58) = 7,500 (A)
Labour Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)
= Rs.55 (6,000 × 3 – 17,500) = 27,500 (F)
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 (b) Calculation of “Activity Rate”
Cost Pool Cost (Rs.) Cost Driver Cost Driver Rate
(Rs.)
[A] [B] [C] = [A]÷[B]
Machine Department 18,48,000 Machine Hours 14.00
Expenses (1,32,000 hrs.)
Assembly Department 6,72,000 Assembly Hours 16.00
Expenses (42,000 hrs.)
Setup Cost 90,000 No. of Production Runs (450*) 200.00
Stores Receiving Cost 1,20,000 No. of Requisitions Raised on 1,000.00
the Stores (120)

Order Processing and 1,80,000 No. of Customers Orders 48.00

Dispatch Executed (3,750)
Inspection and Quality 36,000 No. of Production Runs (450*) 80.00
Control Cost
Total (Rs.) 29,46,000
*Number of Production Run is 450 (150 + 120 + 180)
Statement Showing “Overheads Allocation”
Particulars of Cost P Q R Total
Cost Driver
Machine Machine Hours 4,20,000 6,72,000 7,56,000 18,48,000
Department (30,000 × Rs.14) (48,000 × Rs.14) (54,000 × Rs.14)
Expenses
Assembly Assembly Hours 2,40,000 --- 4,32,000 6,72,000
Department (15,000 × Rs.16) (27,000 × Rs.16)
Expenses
Setup Cost No. of 30,000 24,000 36,000 90,000
Production Runs (150 × Rs.200) (120 × Rs.200) (180 × Rs.200)
Stores No. of 40,000 30,000 50,000 1,20,000
Receiving Requisitions (40 × Rs.1,000) (30 × Rs.1,000) (50 × Rs.1,000)
Cost Raised on the
Stores
Order No. of 60,000 48,000 72,000 1,80,000
Processing Customers (1,250 × Rs.48) (1,000 × Rs.48) (1,500 × Rs.48)
and Dispatch Orders Executed
Inspection No. of 12,000 9,600 14,400 36,000
and Quality Production Runs (150 × Rs.80) (120 × Rs.80) (180 × Rs.80)
Control Cost
Overhead 8,02,000 7,83,600 13,60,400 29,46,000
(Rs.)

4. (a) Effective machine hours = 200 hours × 75% = 150 hours

Computation of Comprehensive Machine Hour Rate
Per month Per hour
(Rs.) (Rs.)
Fixed cost
Supervision charges 18,000.00
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 Electricity and lighting 9,500.00
Insurance of Plant and building (Rs.18,250 ÷12) 1,520.83
Other General Expenses (Rs.17,500÷12) 1,458.33
Depreciation (Rs.64,800÷12) 5,400.00
35,879.16 239.19
Direct Cost
Repairs and maintenance 17,500.00 116.67
Power 65,000.00 433.33
Wages of machine man 139.27
Wages of Helper 109.41
Machine Hour rate (Comprehensive) 1,037.87

Wages per machine hour

Machine man Helper
Wages for 200 hours
Machine-man (Rs.400 × 25) Rs.10,000.00 ---
Helper (Rs.275 × 25) --- Rs.6,875.00
Dearness Allowance (DA) Rs.4,575.00 Rs.4,575.00
Rs.14,575.00 Rs.11,450.00
Production bonus (1/3 of Basic and DA) 4,858.33 3,816.67
Leave wages (10% of Basic and DA) 1,457.50 1,145.00
20,890.83 16,411.67
Effective wage rate per machine hour Rs.139.27 Rs.109.41
(b) Contract Account (For the year ended 20X7)
Particulars (Rs.) Particulars (Rs.)
To Materials 6,75,000 By Plant at site c/d 2,25,000
(75% of Rs.3,00,000)
” Wages 6,20,000 ” Work-in-progress c/d:
” Transportation cost 30,000 - Work certified 13,50,000
” Other expenses 30,000 - Work uncertified 15,000 13,65,000
” Plant 3,00,000 ” Costing P&L A/c 65,000
(Loss for the year)
16,55,000 16,55,000
Contract Account (For the year ended 20X8)
Particulars (Rs.) Particulars (Rs.)
To Plant at site b/d 2,25,000 By Plant at site c/d 1,68,750
(75% of Rs.2,25,000)
” Work-in-progress b/d: ” Work-in-progress c/d:
- Work certified 13,50,000 - Work certified 45,00,000
-Work uncertified 15,000 13,65,000 - Work uncertified 75,000 45,75,000

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 ” Materials 10,50,000
” Wages 9,00,000
” Transportation cost 90,000
” Other expenses 75,000
” Costing P&L A/c 10,38,750
(Notional Profit for the year)
47,43,750 47,43,750
Contract Account (For the year ended 20X9)
Particulars (Rs.) Particulars (Rs.)
To Plant at site b/d 1,68,750 By Plant at site c/d 1,26,563
(75% of Rs.1,68,750)
” Work-in-progress b/d: ” Contractee A/c 60,00,000
- Work certified 45,00,000 ” Costing P&L A/c 3,66,187
(Notional Loss for the year)
-Work uncertified 75,000 45,75,000
” Materials 9,00,000
” Wages 7,50,000
” Transportation cost 75,000
” Other expenses 24,000
64,92,750 64,92,750
5. (a) (i) Annual Cost Statement of three vehicles
(Rs.)
Diesel {(1,34,784 km. ÷ 4 km) × Rs. 65) (Refer to Working Note 21,90,240
1)

Oil & sundries {(1,34,784 km. ÷ 100 km.) × Rs. 250} 3,36,960
Maintenance {(1,34,784 km. × Rs. 0.25) + Rs. 6,000} 39,696
(Refer to Working Note 2)

Drivers' salary {(Rs.24,000 × 12 months) × 3 trucks} 8,64,000

Licence and taxes (Rs. 25,000 × 3 trucks) 75,000
Insurance 45,000
Depreciation {(Rs. 29,00,000 ÷ 10 years) × 3 trucks} 8,70,000
General overhead 1,15,600
Total annual cost 45,36,496

(ii) Cost per km. run

Totalannual cos t of vehicles
Cost per kilometer run = (Refer to Working Note 1)
Totalkilometre travelled annually

Rs.45,36,496
= =Rs. 33.66
1,34,784 Kms

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 (iii) Freight rate per tonne km (to yield a profit of 10% on freight)
Total annual cos t of three vehicles
Cost per tonne km.= (Refer to Working Note 1)
Total effective tonnes kms. per annum

RsRs. 45,36,496
=  Rs.7.48
6,06,528 kms

 Rs. 7.48 
Freight rate per tonne km.    1 = Rs. 8.31
 0.9 
Working Notes:
1. Total kilometer travelled and Commercial tonnes kilometer (load carried) by three
trucks in one year
Truck One way No. of Total Total Load Total
distance in kms trips distance distance carried effective
covered in covered in per trip / tonnes km
km per day km per day day in
(with load) (up & down) tonnes
a b c =a×b d=c×2 e f = 27/3 ×
c
1 16 4 64 128 6 576
2 40 2 80 160 9 720
3 30 3 90 180 12 810
Total 234 468 27 2,106
Total kilometre travelled by three trucks in one year
(468 km. × 24 days × 12 months) = 1,34,784
Total effective tonnes kilometre of load carried by three trucks during one year
(2,106 tonnes km. × 24 days × 12 months) = 6,06,528 tonne-km
2. Fixed and variable component of maintenance cost:
Difference in maintenanc e cost
Variable maintenance cost per km. =
Difference in distance travelled
Rs. 46,050 –Rs. 45,175
= = Rs. 0.25
1,60,200 kms – 1,56,700 kms
Fixed maintenance cost =Total maintenance cost–Variable maintenance cost
= Rs. 46,050 – 1,60,200 kms × Rs. 0.25= Rs. 6,000
(b) (a) Flexible Budget before marketing efforts:
Product A (Rs.) Product B (Rs.)
6,000 units 9,000 units
Per unit Total Per unit Total
Sales 120.00 7,20,000 78.00 7,02,000
Raw material cost 60.00 3,60,000 42.00 3,78,000
Direct labour cost per unit 30.00 1,80,000 18.00 1,62,000

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 Variable overhead per unit 12.00 72,000 6.00 54,000
Fixed overhead per unit 8.00 48,000 4.00 36,000
Total cost 110.00 6,60,000 70.00 6,30,000
Profit 10.00 60,000 8.00 72,000
(b) Flexible Budget after marketing efforts:
Product A (Rs.) Product B (Rs.)
7,500 units 9,500 units
Per unit Total Per unit Total
Sales 120.00 9,00,000 78.00 7,41,000
Raw material cost 60.00 4,50,000 42.00 3,99,000
Direct labour cost per unit 30.00 2,25,000 18.00 1,71,000
Variable overhead per unit 13.20 99,000 6.60 62,700
Fixed overhead per unit 6.72 50,400 3.98 37,800
Total cost 109.92 8,24,400 70.58 6,70,500
Profit 10.08 75,600 7.42 70,500
6. (a) Controllable costs and Uncontrollable costs: Cost that can be controlled, typically by a cost,
profit or investment centre manager is called controllable cost. Controllable costs incurred in a
particular responsibility centre can be influenced by the action of the executive heading that
responsibility centre.
Costs which cannot be influenced by the action of a specified member of an undertaking are
known as uncontrollable costs.
(b) Cost plus contract: Under cost plus contract, the contract price is ascertained by adding a
percentage of profit to the total cost of the work. Such types of contracts are entered into when it
is not possible to estimate the contract cost with reasonable accuracy due to unstable condition
of material, labour services etc.
Following are the advantages of cost plus contract:
(i) The contractor is assured of a fixed percentage of profit. There is no risk of incurring any
loss on the contract.
(ii) It is useful specially when the work to be done is not definitely fixed at the time of making
the estimate.
(iii) Contractee can ensure himself about the ‘cost of contract’ as he is empowered to examine
the books and documents of the contractor to ascertain the veracity of the cost of contract.
(c) In integrated accounting system cost and financial accounts are kept in the same set of books.
Such a system will have to afford full information required for Costing as well as for Financial
Accounts. In other words, information and data should be recorded in such a way so as to enable
the firm to ascertain the cost (together with the necessary analysis) of each product, job, process,
operation or any other identifiable activity. It also ensures the ascertainment of marginal cost,
variances, abnormal losses and gains. In fact all information that management requires from a
system of Costing for doing its work properly is made available. The integrated accounts give full
information in such a manner so that the profit and loss account and the balance sheet can be
prepared according to the requirements of law and the management maintains full control over
the liabilities and assets of its business.

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 Since, only one set of books are kept for both cost accounting and financial accounting purpose
so there is no necessity of reconciliation of cost and financial accounts.
(d) The impact of IT in cost accounting may include the followings:
(i) After the introduction of ERPs, different functional activities get integrated and as a
consequence a single entry into the accounting system provides custom made reports for
every purpose and saves an organisation from preparing different sets of documents.
Reconciliation process of results of both cost and financial accounting systems become
simpler and less sophisticated.
(ii) A move towards paperless environment can be seen where documents like Bill of Material,
Material Requisition Note, Goods Received Note, labour utilisation report etc. are no longer
required to be prepared in multiple copies, the related department can get e-copy from the
system.
(iii) Information Technology with the help of internet (including intranet and extranet) helps in
resource procurement and mobilisation. For example, production department can get
materials from the stores without issuing material requisition note physically. Similarly,
purchase orders can be initiated to the suppliers with the help of extranet. This enables an
entity to shift towards Just-in-Time (JIT) approach of inventory management and production.
(iv) Cost information for a cost centre or cost object is ascertained with accuracy in timely
manner. Each cost centre and cost object is codified and all related costs are assigned to
the cost object or cost centre. This process automates the cost accumulation and
ascertainment process. The cost information can be customised as per the requirement. For
example, when an entity manufacture or provide services, it can know information job -wise,
batch-wise, process-wise, cost centre wise etc.
(v) Uniformity in preparation of report, budgets and standards can be achieved with the help of
IT. ERP software plays an important role in bringing uniformity irrespective of location,
currency, language and regulations.
(vi) Cost and revenue variance reports are generated in real time basis which enables the
management to take control measures immediately.
(vii) IT enables an entity to monitor and analyse each process of manufacturing or service
activity closely to eliminate non value added activities.
The above are examples of few areas where Cost Accounting is done with the help of IT.

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