COST AND MANAGEMENT AC-

COUNTING
Answer 1
Introduction :
To compute the various costs requested, we'll follow the traditional cost classifica-
tion into prime cost, factory cost, cost of production, and cost of sale. The given expenses
need to be categorized accordingly.

Concept & Application :

A. Prime Cost:

- Prime cost includes all direct costs associated with the manufacturing of a product.

- Prime Cost =Direct Materials + Direct Wages

- Prime Cost= Opening Stock of Materials+ \Materials Purchased - Closing Stock of Mate-
rials + Direct Wages

- Prime Cost = (2,82,000.00 + 12,48,000.00 - 3,00,000.00) + 3,57,600.00

- Prime Cost = 12,30,600.00

B. Factory Overhead:

- Factory overhead includes indirect costs associated with the manufacturing process.

- Factory Overhead = Indirect Wages + Salaries for Administrative Staff + Freights: In-
wards + Freights: Outwards + Cash Discount Allowed + Bad Debts W/Off + Repairs to
Plant and Machinery + Rent, Rates and Taxes of Factory + Depreciation W/Off: Plant
and Machinery + Depreciation W/Off: Furniture + Electricity Charges: Factory + Fuel
Charges: Boiler + General Charges}

- Factory Overhead = 3,57,600.00 + 60,000.00 + 48,000.00 + 30,000.00 + 21,000.00 +

28,200.00 + 63,600.00 + 18,000.00 + 9,600.00 + 18,600.00 + 50,400.00 + 42,600.00 +
3,600.00

- Factory Overhead = 7,82,200.00

C. Factory Cost:
- Factory cost is the sum of prime cost and factory overhead.

- Factory Cost = Prime Cost + Factory Overhead

- Factory Cost = 12,30,600.00 + 7,82,200.00

- Factory Cost = 20,12,800.00

D. Cost of Production:

- Cost of production includes all costs incurred in the production process.

- Cost of Production = Factory Cost + Director's Fees + Manager's Salary

- Cost of Production = 20,12,800.00 + 3,600.00 + 72,000.00

- Cost of Production = 21,88,400.00

E. Cost of Sale:

- Cost of sale includes all costs related to selling the product.

- Cost of Sale = Cost of Production + Travelling Expenses + Salesmen's Salaries and

Commission

- Cost of Sale = 21,88,400.00 + 18,000.00 + 96,000.00

- Cost of Sale = 23,02,400.00

Conclusion :
In summary, the computed costs for Jewels4All are as follows:
a) Prime Cost: ₹12,30,600.00
b) Factory Overhead: ₹7,82,200.00
c) Factory Cost: ₹20,12,800.00
d) Cost of Production: ₹21,88,400.00
e) Cost of Sale: ₹23,02,400.00

Answer 2
Introduction :
One important indicator of how employees enter and exit an organization is labour
turnover. It offers perceptions of the consistency of the labour force and the efficiency of
HRM. In this case, we will use the data provided for Manas Ltd. for December 2022 to
compute labour turnover using three widely used methods: the Separation Method, the
Replacement Method, and the Flux Method.

Concept & Application :

1. The formula for the Separation Method:

- Separation Method Labor Turnover is equal to (Average Number of Employed Workers -

Number of Separated Workers) × 100.
- Method of Separation Labor Turnover is equal to (Average Number of Employed - Num-
ber of Separated Workers)×100.
- Number of Workers Separated = Workers Left + Workers Discharged = 50 + 80 = 130 is
the calculation.
- Workers Left + Workers Discharged = 50 + 80 = 130 is the number of workers sepa-
rated.
- Total Workers at the Start + Total Workers at the Finish Equals the Average Number of
Workers Employed.
- 2 = 3880 + 4220 2 = 4000
- The average number of workers employed is equal to the sum of the beginning and
ending worker counts, or 2 3800 + 4200 = 4000.
- Method of Separation Labor Turnover = (130 - 4000) × 100 - 3.25 percent
- Labor Turnover by Separation Method = (4000 - 130 )×100 - 3.25%
- Formula: Replacement Method: Replacement Method Labor Turnover is equal to (Aver-
age Number of Employed Workers - Number of Replaced Workers) × 100.

2. Method of Replacement :

- Method of Replacement Labor Turnover is equal to (Average Number of Employed -

Number of Replaced Workers)×100.
- The formula is: Number of Appointed Workers - Number of Replaced Workers = 60.
- Replaced Workers = Appointed Workers = 60
- Method of Replacement Workplace Turnover = (60 4000) × 100 = 1.5%
- Labor Turnover for Replacement Method = ( 4000-60 )×100 = 1.5%

3. Method of Flux:

- Formula: Flux Method Labor Turnover is equal to (Average Number of Workers Em-
ployed - Net Change in Employment) × 100.
- Labour Turnover in the Flux Method is equal to (Average Number of Workers Employed
- Net Change in Employment)×100.
- The computation is as follows: Net Change in Employment = Workers Discharged -
Workers Left + Workers Appointed = 50 + 80 - 60 = 70.
- Workers Left+Workers Discharged−Workers Appointed = 50+80−60=70 is the net
change in employment.
- Labor Turnover for the Flux Method = (70 4000) × 100 = 1.75 %
- Labor Turnover for the Flux Method = ( 4000 70 )×100 = 1.75%

Conclusion :
Manas Ltd. reported a labour turnover of roughly 3.25% for December 2022 when
using the Separation Method, 1.5% when using the Replacement Method, and 1.75%
when using the Flux Method. These metrics offer insightful information about the dynamics
of the workforce and can help the business make wise choices about employee retention
and human resource management.

Answer 3 (A)

Introduction :
To prepare an income statement based on absorption costing for each year, we
need to calculate the cost of goods sold (COGS) using absorption costing principles and
then determine the operating income.

Concept & Application :

Absorption Costing Principles:
• Absorption costing includes all manufacturing costs (both variable and fixed) in the
cost of goods sold.
• Fixed manufacturing overhead costs are allocated based on the actual production.

Given Data:
• Sales (Units): Year 1 = 1500, Year 2 = 1800
• Production (Units): Year 1 = 2100, Year 2 = 1500
• Variable Manufacturing Cost: Year 1 = Rs. 1050, Year 2 = Rs. 750
• Fixed Manufacturing Cost: Year 1 = Rs. 1050, Year 2 = Rs. 1050
• Variable Marketing and Administration Cost: Year 1 = Rs. 1500, Year 2 = Rs. 1800
• Fixed Marketing and Administration Cost: Year 1 = Rs. 600, Year 2 = Rs. 600
Calculations:

Absorption Costing COGS:

Year 1:
• Fixed Manufacturing Overhead Allocation Rate = Actual Fixed Manufacturing Over-
head Cost / Actual Production
• Fixed Manufacturing Overhead Allocation Rate = Rs. 1050 / 2100 units = Rs. 0.50
per unit
• Absorption Costing COGS = Variable Manufacturing Cost + (Fixed Manufacturing
Overhead Allocation Rate × Production)
• Absorption Costing COGS = Rs. 1050 + (Rs. 0.50 × 2100) = Rs. 1050 + Rs. 1050
= Rs. 2100

Year 2:
• Fixed Manufacturing Overhead Allocation Rate = Actual Fixed Manufacturing Over-
head Cost / Actual Production
• Fixed Manufacturing Overhead Allocation Rate = Rs. 1050 / 1500 units = Rs. 0.70
per unit
• Absorption Costing COGS = Variable Manufacturing Cost + (Fixed Manufacturing
Overhead Allocation Rate × Production)
• Absorption Costing COGS = Rs. 750 + (Rs. 0.70 × 1500) = Rs. 750 + Rs. 1050 =
Rs. 1800
Operating Income:
• Operating Income = Sales - Absorption Costing COGS - Variable Marketing and
Administration Cost - Fixed Marketing and Administration Cost
• For Year 1:
• Operating Income = (1500 × Rs. 3) - Rs. 2100 - Rs. 1500 - Rs. 600 = Rs. 4500 -
Rs. 2100 - Rs. 1500 - Rs. 600 = Rs. 300
• For Year 2:
• Operating Income = (1800 × Rs. 3) - Rs. 1800 - Rs. 1800 - Rs. 600 = Rs. 5400 -
Rs. 1800 - Rs. 1800 - Rs. 600 = Rs. 1200

Income Statement:
Year 1 2
Sales Rs. 4500 Rs. 5400
COGS Rs. 2100 Rs. 1800
Var. M&A Rs. 1500 Rs. 1800
Fixed M&A Rs. 600 Rs. 600
Operating Income Rs. 300 Rs. 1200

Conclusion :
This income statement reflects the operating income for each year based on ab-
sorption costing principles, considering the variable and fixed manufacturing costs along
with marketing and administrative expenses.
Answer 3(B)

Introduction :
Of course! We will compute the variable manufacturing, variable marketing, and
variable administration costs and deduct them from the sales revenue to find the contribu-
tion margin to prepare the income statements for Years 1 and 2 based on variable costing.
To determine the net income, we will subtract the fixed manufacturing, fixed marketing,
and fixed administrative costs. The income statements are shown in the following table for-
mat:

Application :
Year 1 - Variable Costing

| Description | Amount (Rs.) |

|————————————————-|———————|
| Sales | 4500 |
| Variable Manufacturing Cost | -1050 |
| Variable Marketing and Admin Cost | -600 |
|————————————————-|———————|
| Contribution Margin | 2850 |
| Fixed Manufacturing Cost | -750 |
| Fixed Marketing and Admin Cost | -1050 |
|——————————————-——|———————|
| Net Income | 1050 |

Year 2 - Variable Costing

| Description | Amount (Rs.) |

|——————————————— -|—————— |
| Sales | 5400 |
| Variable Manufacturing Cost | -1050 |
| Variable Marketing and Admin Cost | -600 |
|———————————————— -|————— --|
| Contribution Margin | 3750 |
| Fixed Manufacturing Cost | -750 |
| Fixed Marketing and Admin Cost | -1050 |
|———————————————— -|————— --|
| Net Income | 1950 |
Concept :
1. Sales: The total revenue generated from the sale of units.
2. Variable Manufacturing Cost: Calculated by multiplying the number of units by the
variable manufacturing cost per unit.
3. Variable Marketing and Admin Cost: Calculated by multiplying the number of units by
the variable marketing and administration cost per unit.
4. Contribution Margin: The difference between sales revenue and variable costs.
5. Fixed Manufacturing Cost: A predetermined cost for the manufacturing process.
6. Fixed Marketing and Admin Cost: A predetermined cost for marketing and administra-
tion.
7. Net Income: The result of deducting fixed costs from the contribution margin.

Conclusion :
Note that fixed manufacturing costs are not allocated to units produced in variable
costing; instead, they are treated as period costs.