Cost and Management Accounting
Cost and Management Accounting
Cost and Management Accounting
ACCOUNTING
ANSWER: 1
Profit and loss statement under marginal cost of produc on of 80,000 units
Introduc on: In cost and management accoun ng, the income statement is a vital
financial statement that provides an overview of a company's revenues, costs and
profitability. Marginal cos ng divides costs into fixed and variable components, which helps
in analyzing the impact of changes in produc on volume on profits. This approach separates
fixed costs from the calcula on of cost of goods sold and treats them as period costs. Let's
prepare a marginal cos ng income statement for Office Products Ltd to produce 80,000
units.
Data Given: Sales: Rs. 12,00,000 Variable Costs:
• Material: Rs. 2,40,000
• Labor: Rs. 3,60,000
• Overheads: Rs. 1,80,000 Fixed Costs: Rs. 3,20,000 Total Cost: Rs. 11,00,000 Profit: Rs.
1,00,000
To prepare the income statement, we need to calculate the allowance, fixed costs per unit,
and total fixed costs for 80,000 units. Let's count each of these components step by step.
1. Allowance per unit: Allowance per unit is the difference between the selling price per
unit and the variable cost per unit. It represents the amount available to cover fixed costs
and generate profit.
Selling price per unit = total sales / total units = Rs. 12,00,000 / 60,000 = Rs. 20
Variable cost per unit = total variable cost / total units = (material + labor + overhead) /
60,000 = (Rs. 2,40,000 + Rs. 3,60,000 + Rs. 1,80,000) / 60,000 = Rs. 12
Contribu on per unit = Selling price per unit - Variable cost per unit = Rs. 20 - Rs.12 = Rs. 8
2. Total contribu on for 80,000 units: Total contribu on = Contribu on per unit *
Number of units = Rs. 8 * 80,000 = Rs. 6,40,000
3. Fixed cost per unit: Fixed cost per unit = total fixed cost / total units = Rs. 3,20,000 /
60,000 = Rs. 5.33
4. Total fixed cost for 80,000 units: Total fixed cost = Fixed cost per unit * Number of
units = Rs. 5.33 * 80,000 = Rs. 4,26,400
We will now prepare an income statement under the marginal cost of produc on for 80,000
units.
Income statement under marginal cost of produc on per 80,000 units:
Sales Rs 12,00,000 Variable Costs:
• Material Rs. 2,40,000
• Work of Rs. 3,60,000
• Overheads Rs. 1,80,000 Total Variable Cost Rs. Contribu on 7,80,000 (Sales – Variable
Costs) Rs. 4,20,000 fixed cost Rs. 4,26,400 Profit/(Loss) (Rs. 6,400)
In the above income statement, the sales revenue remains the same as shown in the data.
Variable costs are calculated by mul plying variable costs per unit by the number of units
(80,000). The allowance is derived by subtrac ng total variable costs from sales revenue.
Fixed costs are calculated by mul plying fixed costs per unit by the number of units (80,000).
Finally, the profit/(loss) is obtained by subtrac ng the total fixed costs from the contribu on.
Conclusion:
An income statement prepared on the basis of marginal cos ng for produc on of 80,000
units gives a clear picture of the revenue, costs and profitability of Office Products Ltd. This
approach aids decision-making by highligh ng the contribu on margin, which represents
the amount available to cover fixed costs and generate profit. By separa ng fixed and
variable costs, managers can assess the impact of changes in produc on volume on
profitability and make informed decisions about pricing, produc on levels, and cost
management.
ANSWER: 2
In order to prepare a comprehensive job cost statement for the month of February using
January rates, we need to allocate overhead costs using different absorp on bases. Let's
calculate costs using three different methods: direct labor hours, direct wages percentage,
and machine hourly rate.
Figures given for January: Material used: Rs. 72,000 Direct Wages: Rs. 60,000 Machine
Hours: 20,000 Hours Labor Hours: 24,000 Hours Overheads Charged to Ministry: Rs. 48,000
Data for order in February: Material used: Rs. 4000 Direct Wages: Rs. 3,300 machine
hours: 1,200 hours Working me: 1,650 hours
Conclusion:
In this analysis, we calculated a comprehensive job cost statement for the month of
February using three different methods: direct labor hours, a percentage of direct wages,
and an hourly rate based on January rates. Each method allocated overhead costs
differently, resul ng in different job costs. The choice of absorp on base depends on the
nature of the business, the rela onship between overhead and cost factors, and
management preferences. Using these methods, businesses can beLer understand their
opera ng costs and make informed decisions regarding pricing, resource alloca on, and cost
management.
ANSWER: 3A
To calculate the economic order quan ty (EOQ), we need to take into account the cost of the
order, the carrying cost of the inventory and the annual consump on of the product. EOQ
helps determine the op mal quan ty to order and strike a balance between minimizing
ordering costs and inventory holding costs.
Specified Data for Product A: Order Price: Rs. 50 per order Inventory carrying cost: 10% per
annum Product A cost: Rs. 500 per unit Annual consump on of product A: 5000 units
The formula for calcula ng EOQ is: EOQ = √((2 * Annual Consump on * Order Cost) /
Inventory Carrying Cost)
Now let's calculate the EOQ for product A:
EOQ = √((2 * 5000 * 50) / 0.10) = √((500,000) / 0.10) = √ (5,000,000) = 2,236 units (approx.)
Thus, the economic order quan ty for product A is 2,236 units.
Now let's consider a scenario where a company maintains an inventory of 200 units. In this
case, we can calculate the change order point (ROP) to determine when to place a
replenishment order.
Reorder Point (ROP) = EOQ - Safety Stock Safety Stock is a buffer stock maintained to
account for varia ons in demand, lead mes or other uncertain es.
Assume safety stock of 10% EOQ: Safety stock = 10% EOQ = 10% of 2,236 = 223.6 units
(approx) ≈ 224 units
ROP = EOQ – Safety stock = 2,236 – 224 = 2,012 units
So, if the company maintains an inventory of 200 units, the reorder point would be 2,012
units. This means that when inventory reaches 2,012 units, the company should place a
restocking order.
It is important to note that the calcula ons of EOQ and reorder points are based on certain
assump ons and simplifica ons. Actual demand paLerns, lead mes and other factors may
vary, requiring adjustments to further op mize inventory management.
Effec ve inventory management helps minimize costs associated with ordering and
transpor ng inventory while ensuring sufficient inventory to meet customer demand. By
u lizing techniques such as EOQ and seQng appropriate reorder points, companies can
strike a balance between inventory costs and customer service levels, leading to improved
efficiency and profitability.
ANSWER: 3B
Figures given for New Corp Ltd: Fixed Costs: Rs. 5,00,000 per annum Sales budget: 70,000
units Selling price per unit: Rs. 300 Variable cost per unit: Rs. 280
The break-even point can be calculated using the following formula: Break-even point (in
units) = fixed costs / contribu on margin per unit
Contribu on margin per unit = selling price per unit - variable cost per unit
Let's calculate the breakeven point for New Corp Ltd:
Contribu on surcharge per unit = Rs. 300 - Rs.280 = Rs. 20
Breakeven point (in units) = Rs. 5,00,000 / Rs 20 = 25,000 units
Therefore, the breakeven point for New Corp Ltd is 25,000 units.
The importance of the pivot point lies in its ability to provide valuable insights into the
financial health and risks of a company. Here are some key points highligh ng the
importance of the pping point:
1. Determining Profitability: The break-even point allows companies to assess the level
of sales needed to cover all costs. By knowing this point, management can determine if their
current sales levels are sufficient to generate a profit, or if adjustments need to be made.
2. Se7ng sales targets: Understanding the break-even point helps in seQng realis c
sales targets. It provides a yards ck against which to measure actual sales performance. By
trying to achieve sales above the break-even point, companies can ensure profitability.
3. Cost Structure Evalua on: Breakeven analysis helps in assessing the cost structure of
the company. By dis nguishing between fixed and variable costs, management can iden fy
opportuni es for cost reduc on, efficiency improvements, and beLer cost management
prac ces.
4. Decision Making: The pping point is a valuable decision making tool. It can help in
evalua ng the financial impact of changes in selling price, variable costs or fixed costs. By
analyzing various scenarios, management can make informed decisions regarding pricing
strategies, cost control ini a ves, or produc on volume.
5. Risk assessment: The pping point highlights the level of risk associated with the
company's opera ons. If the current sales volume is significantly below the break-even
point, this means a higher risk of losses. On the other hand, if sales volume exceeds the
break-even point, it provides a cushion to cover fixed costs and generate profit.
In conclusion:
The break-even point is a cri cal tool in cost and management accoun ng because it helps
to understand the minimum level of sales that a company needs to cover its costs. It
provides an insight into profitability, helps in seQng sales targets, helps to evaluate the cost
structure, helps in decision-making and evaluates the risks associated with the company's
opera on. By regularly monitoring the breakeven point, companies can improve their
financial performance, improve cost management prac ces and make informed strategic
decisions.