Operating Costing

Question No 1
From the following information relating to a hotel, calculate the room rent to be charged to give
a profit of 25% on cost excluding interest.
a. Salary to staffs – Rs. 1,022,000 per annum.
II. Wages of the room attendant – Rs. 40 per day. There is a room attendant for each room.
He is paid wages only when the room is occupied.
III. Lighting and Heating power per month:
i. Lighting expenses for each room are Rs. 1,000 when occupied.
ii. Heating power is used only in winter and the charges are Rs. 400 for a room
when occupied.
IV. Repairs to buildings – Rs. 100,000 per annum.
V. License – Rs. 48,000 per annum.
VI. Sundries – Rs. 66,000 per annum.
VII. Interior decoration and furnishing – Rs. 100,000 per annum.
VIII. Depreciation @ 5% is to be charged on building costing Rs. 4,000,000 and @ 10% on
equipment
IX. Interest to be charged @ 20% on investment on buildings and equipment amounting to Rs.
5,000,000.
There are 100 rooms in the hotel. 80% of the rooms are generally occupied in summer and
30% in winter. The period of summer and winter may be considered to be of 6 months in
each case and a month may be assumed of 30 days.

Question No 2
Your company operates for 300 days a year on average. It is facing severe problem of electric
power cut in its day to day operation. The electricity supply is not available for nearly 4 hours
per day in average during total working hours of 7 hours per day for whole the year. This
situation is expected to prevail for nearly five more years. To cope with this situation, you are
considering the alternative sources of power generation, i.e. 140 KVA Generator Set and you
desire to know the cost per unit of electricity generated.

The following estimations are available:

a) Number of units to be generated per month is 10,000.
b) Cost of Gen Set with installation charges is Rs.5 million. It is to be fully depreciated within
5 years, after that period, it can be disposed off for Rs.250,000.
c) Regular cleaning and repair and maintenance cost per month is Rs.20,000.
d) The Gen Set will consume 22 Ltrs. of diesel per hour. The cost of diesel per liter is Rs.65.
Other fuel charge is Rs.65 per hour.
e) Two staffs are directly involved in operation and maintenance of the Gen Set, who are
paid salary at the rate of Rs.10,000 per month each.
f) Share of administrative charges is Rs.10,000 per month.
1 Costing Notes
Question No 3
Delta Hotel Pvt. Ltd. is operating a star hotel with 180 rooms of different categories since Jan 01,
2002. During the period Jan 01, 2021 to December 31, 2021, average room rate (ARR) per occupied
room was Rs. 10,000 throughout the year. Average variable cost per occupied room is Rs. 3,000
per room. Summary of category of room and the room occupancy during the period Jan 01, 2021
to Dec 31, 2021 (365 Days) is as under:
Room category Number of rooms Occupancy %
Standard 100 80%
Deluxe 50 70%
Club 30 50%
Total 180

Average room rate of deluxe room is 1.5 times the room rate of Standard room and average room
rate of club room is twice the average room rate of standard room and same ratio will continue
for next 3 years.
During the year 2021, following data is also extracted from Hotel books of account.
i) In the hotel premise, hotel also owns restaurant and revenue earned from restaurant is
Rs. 100,000,000/- with a variable cost of 70% of revenue.
ii) Total fixed cost for running the entire hotel operations is Rs. 270,000,000/-
For the next year 2022, hotel's management forecast is as under:
i) Restaurant revenue will be increased by 10% and no changes in the variable cost
percentage.
ii) Fixed cost will go up by Rs. 30,000,000/-
iii) Variable cost per occupied room will be increased by Rs. 500 on average.
iv) Room occupancy will be same as year 2021 for all room categories and entire
hotel.
Required:
v) What is the average occupancy of the entire hotel throughout the year 2021 and
also calculate the total room revenue earned by the hotel?
vi) What is the average room rate of each category of rooms during the year 2021?
vii) Draw out the hotel profitability statement for the year 2021.
viii) What should be the total revenue to be earned from room during the year 2022,
in order to maintain same amount of profit as on 2021? What should be the
average room rate of hotel for year 2022?

2 Costing Notes
Question No 4
Akash Hotel at Sundhara has both single and double deluxe rooms. The tariff of the double rooms
is set at 5/3 times of the rent of the single rooms. The number of the rooms and operational costs
per day per room are estimated as below:

Particulars Single Rooms Double Rooms

No of Rooms 100 50
Normal Occupancy 70% 70%
Variable Costs Rs. 224.78 Rs. 407.97
Fixed costs Rs. 200 Rs. 300

The average occupancy of both the single rooms and double rooms is expected to be around 70%
throughout the year of 365 days. In fixing the room rent, the company desires to maintain a
margin of safety of 20%. The hotel has to pay a 13% Value added Tax on its net tariff and fix the
gross tariff accordingly.

You are required to:

a) Calculate the tariff per day per (i) single room and (ii) double room.
b) The hotel intends to reserve the normal occupancy of 30 single rooms for its privileged
customers at a discount (excluding VAT) of 10% of the net tariff rent. What increase in the
occupancy of the remaining single room days is required to compensate the loss arising from the
discount?

Contract Costing

Question No. 1
At the end of first year on 31st March, 2011 in the books of ABC Constructions Ltd. the Bridge
Contract Account stands debited with the cost of material issued, labour, overheads expended
and plant issued and it stands credited with material at site Rs. 25,000; material returned Rs.
15,000 and plant at site Rs. 476,000 after charging depreciation at 15 percent. The material issued,
labour, overheads and plant issued debited to the contract account, are in the ratio of 5: 4: 2: 4.
The contractee's architect had certified 75 percent of the contract as completed at the end of the
year and 90 percent of the certified work value had been received in cash Rs. 1,620,000. The
accounts department informs that 2/3 of the profit on cash basis credited to Profit and Loss
account on the contract is Rs. 213,600
You are required to prepare the Bridge Contract Account showing the cost of work done but
uncertified.

3 Costing Notes
 Material Control
Valuation of Material Receipts

All cost incurred up to the point of procuring and storing material should be included in the cost
of material, not only the price paid to the supplier.

Trade Discount:

Provided by seller at the time of purchase to attract customer and increase sales.

Reduction in list price allowed by supplier to the consumer while selling the product in bulk
quantities.

Trade discount is deducted from the purchase price if it is not shown as deduction in the invoice.

Likewise quantity discount, subsidy, grant or Incentives received from government or other
sources are deducted from the cost of purchase.

Cash Discount:

Offered at a time when the seller receives payment.

To recover cash debt on time as it motivates the buyer to pay cash early as they are given
discount if they pay within the stipulated time.

Cash Discount is not deducted from the purchase price.

Cash discount is treated as financial gain, so it is kept outside the domain of material cost.

फाइदा हैन त्यो पैसा Bank मा राखेको भए जति व्याज आउथ्यो त्यति Cash Discount दिन्छ ।

Duties and Taxes:

All duties and taxes are included with cost of purchase. It is excluded from the cost of purchase
if credit for the same is available. Any duties will not be added if question specifically mention
it is not added with the cost of purchase.

Penalty and Charges:

Penalty of any type is not included with the cost of purchase.

Other Expenditure:

All other expenses are included with cost of purchase.

E.g. Insurance Charges, Commission or brokerage, Freight,

4 Costing Notes
Cost of Container:

Cost of Container are included to cost of material. In case the containers are returnable, their
resale value is deducted from cost of container.

Shortage or Losses

(Normal Loss: Loss arising from unavoidable causes should to be charged to production)

Either by inflating the cost of remaining material or

Transferring to Factory Overhead.

Abnormal Loss: Cost of Abnormal Loss of material to be charged to costing p/L.

Treatment:

Normal waste abnormal waste

Absorbed in the cost of net output T/F to costing P/L, as loss

Sale of Scrap from:

Normal waste abnormal waste

Deducted in cost Not Deducted in cost.

T/F to costing P/L, as loss

5 Costing Notes
 Calculation of Total Material
Material(a) Container(b)
Purchase Cost xxx Purchase Cost Xxx
(Qty*Rate) (Qty*Rate)
Less: Trade Discount (xxx) Add: Value Added Tax Xxx
Purchase Price After Discount xxx Invoice Value Xxx
Add: Excise Duty/Custom Duty xxx Less: Vat Credit (xxx)
Less: Return amount of
Purchase Price After Duty xxx Container (xxx)
Add: Value Added Tax xxx Net Container Cost Xxx
Invoice Value Xxx
Less: Vat Credit/Excise Credit (xxx)
Less: Scrap of Normal Loss (xxx)
Net Material Cost xxx

(Net Material Cost+Net Container

Net Cost(A+B) Cost) xxx
Add:Transportation/Freight/Octri xxx
Add: Store Overhead/Rent XXX
Total Material Cost A xxx

Calculation of Effective Usable Quanity:

Total Purchase Quantity xxx
Less: Normal Loss in Transit xxx
Quantity Received at the Store/Normal Qty xxx
Less: Provision for normal loss in Store xxx
Effective Quanity B xxx

Rate /kg Total Material Cost(A)

=
Effective Usage Quantity(B)

6 Costing Notes
 Determination of Stock Level

Lead Time: The time taken in placing the order to the time of receipts of goods.
The company shall maintain some inventory for this period.

1. Re-Order Quantity-

How much to Order?

EOQ is the least cost ROQ.

कतहले मगाउने
2. Re-Order Level- When to Order?
Level at which fresh order should be placed.
Re-order Level = Maximum Consumption x Maximum Lead Time

OR

Re-order Level = Minimum Level + Average consumption x Average Lead Time

OR

Re-order Level = Safety Level + Average consumption x Average Lead Time

3. Maximum Stock Level- Upto How much to stock?

Level beyond which raw material should not be exceed. Largest quantity of particular stock
which may be held in store.

Reason to set Maximum stock level is to avoid:

Overstocking
High material cost
More blocking of working capital
More wastage of materials.

Maximum Level = (Re-order Level + Re-order Qty.) – (Min. Cons. x Min.

Re-order Period)

4. Minimum Stock Level or Saftey Stock- At least how much to stock?

The lowest figure of inventory balance which must be maintained in hand at all
times, so that there is no stoppage of production due to non-availability of
inventory.

Re-Order Level-(Normal Consumption*Normal Lead Time)

7 Costing Notes
 5. Average Stock Level- Stock Normally Kept in store
 Arthimetic average of maximum and minimum level .
 Generally Used For,
Stock Insurance Purpose
Submission of stock statement to bank.
Minimum Level + Maximum Level
2

OR,

Minimum Level + 1 EOQ.

2
(Like Maximum)

(2Min+EOQ)/2=(Min+Min+EOQ)/2=(Min+ROL-(Avg Consumption*Avg Lead time)+EOQ) /2

6. Danger Stock Level – Kept for emergency requirement

Level at which emergency issues are only made on special requisition approved by the
competent authority. It is generally below minimum stock level. Levels at which stocks
are issued only priority basis.

(Normal Rate of Consumption*Maximum Lead time for Emergency Purchase)

Maximum Lead time for Emergency purchase will be less than Minimum Lead Time.

IF Max Lead time for emergency purchase is not known, then assume emergency period
to be near to the minimum lead time, giving a assumption.

8 Costing Notes
 Minimum Stock or Safety Stock or Buffer Stock

In order to protect against the stock out arising from usage fluctuations situation,
companies generally maintain some margin of safety stock.

These are those stock which are maintained in excess of average requirement.

Carrying Cost =

(Safety Stock or Min Stock + EOQ/2)*Carrying cost per unit per annum.

When Safety Stock is given is question Calculate ROL as:

Safety Stock+(Avg Consumption*Avg Lead Time)

Stock Out

Stock out said to be occurred when an inventory item could not be supplied due to
insufficient stock in the store. The stock-out situation costs to the entity not only in financial terms
but in non-financial terms also. Due to stock out an entity not only loses overheads costs and profit
but reputation (goodwill) also due to non-fulfilment of commitment. Though it may not be a
monetary loss in short term but in long term it could be a reason for financial loss.

While deciding on the level of inventory, a trade off(arrangement) between the stock out cost and
carrying cost is made so that overall inventory cost can be minimized.

A-B-C Analysis

 System of inventory control.

 Items are divided into three categories according to their importance, namely their value and
frequency of refilling during a period.

Category % in Total Value % in Total Quantity Extent of Control

A 70% 10% High degree of control

is exercised by use of
Consists of those items various techniques
which require large such-Determination of
investments (say 70%)

9 Costing Notes
 but consists a small % EOQ, Setting of various
(say 10%) stock levels etc

B 20% 20% Moderate level of

control is sufficient.
Consists of those items
which require
moderate investments
(say 20%) and also
consists a moderate %
(say 20%)

C 10% 70% Lower degree of

control is sufficient.
Consists of those items
which require low
investments (say 10%)
but consists a large %

1) It ensures effective and high degree of control in costly items

(2) Management time is saved since attention needs to be paid only to some of the items rather than all
the items.
3) It saves time and cost by exercising economic system of control over low value items.

Concepts similar to ABC Technique

2) FSN Analysis:- As per FSN Analysis, inventory are classified into Fast moving, Slow moving, and Non
moving items. The inventory are classified on the basis of their rate of consumption in the company.

b) VED Analysis as per VED Analysis, inventory are classified into Vital, Essential and Desirable. Vital-
whose non-availability cannot be tolerated Essential- whose non-availability can be tolerated only for
few days.

Review of slow and non-moving items

 No new requisition should be made for the purchase of slow moving items, till the existing
stock is exhausted.
 Slow moving and non-moving raw materials blocks the WC.

Ageing schedule of Inventories

 Classification of inventories according to the period (Age) of their holding.
 It helps in identifying slow moving inventories there by helping in effective control and
management of inventories.
10 Costing Notes
Detectives 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.

Inventory Control and its techniques.

Inventory control is the control mechanism to be followed to achieve maximum efficiency in
production and sales with the minimum investment in inventory following are the techniques of
inventory control.
a) Setting of various stock levels
b) ABC Analysis
c) Two Bin system
d) Budgetary system
e) Perpetual Inventory Records & Continuous Stock Verification
f) Economic Order Quantity
g) Review of slow & non-moving items
h) Use of Control Ratios

Materials Procurement Procedure

 Engineering Department gives a list to produce an item which is called Bill of Material.
 Production Department will start the production.
 Production department request for Store which is called Material Requisition Note.
 If there is no any of the item in store.
 Store will request for Purchase Department for Purchase of Material which is called
Purchase Requisition(माग फारम)
 Request for Proposal
 Quotation will be placed by Vendor.
 Purchase department will give Purchase order out of the quotations received. (खररद आदेश)
 Vendor will send the Performa Invoice with all taxes included.
 Payment by Accounting Department
 Goods will be transferred to Store and Invoice will be sent to Accounting Department.
11 Costing Notes
  Store Department will receipt and inspection of materials and record the material which
is called Goods Receipt Note. (स्टोर दाखिला)

Bill of Material (BOM)

 A specification of materials or list of material with a complete schedule of component parts
and raw materials required for a particular job or work order.
 Prepared by the engineering or planning dept. in a standard form.
 Min. 4 copies. (Stores Department, Cost account Department, Production Department,
Engineering Department)

MRN (Material Requisition Note)

 It is the document for issue of materials from stores to production departments.
 It is one type of voucher of authority as regards issue of material for use in the factory or
in any of its departments.
 Copies: MRN‘s are made out in triplicate to be used by
Stores keeper: for issuing material
Cost department: to account of cost thereof
The department requiring material: for control purposes

Bill of Material Material Requisition Note

It is a comprehensive list of materials It is a formal written demand or request,
with usually from the production department to
exact description and specifications, store for the supply of specified materials,
required stores etc. It authorizes the storekeeper to
for a job or other production units. This issue the requisitioned materials and
also record the same on bin card.
provides information about required
quantities so that if there is any
deviation from the standards, it can
easily be detected. It is prepared by the
Engineering or Planning
Department in a standard form.
The purpose of bill of material is to act The purpose of material requisition note is
as a to draw material from the store by
single authorization for the issue of all concerned departments.
materials and stores items mentioned
in it. It provides an advance intimation
to store department about the
requirements of materials. It reduces

12 Costing Notes
 paper work. It serves as a work
order to the production department
and a document for computing the cost
of material for a particular job or work
order to the cost department.

Goods Received Note (GRN)

 All materials and stores received during the day is recorded by the storekeeper on GRN.
 Serially numbered
 Prepared in triplicate, out of which one copy is kept in store and other two copies are sent
to purchase department.

Illustration: 1
After inviting tenders two quotations are received as follows (a) Rs. 1.20 per unit (b) Rs. 1.10 per
unit plus Rs. 3,000 fixed
charge to be added irrespective of the units ordered.
Advise with your arguments with whom orders should be placed and what quantity is to be
ordered.
The following additional information may be of interest:
Present stock 35.000 units
Average monthly requirement 10.000 units
Maximum level 80,000 units
Minimum level 30.000 units

Sol'n
Order Quantity= Maximum Level- Current Level
=80000-35000
=45000
IF Ordered form A Cost=1.2*45,000=Rs.54,000
IF Ordered form B Cost=1.1*45,000+3000=Rs.52,500

It is advisable to order from vendor B.

Store Record

The store of record may be maintained in three forms:

i. Bin Card
ii. Store Control Card
iii. Store Ledger

13 Costing Notes
Bin card/Store Control Card:
 It maintains a quantitative record of receipts, issues and closing balances of each item of
stores.
 Separate bin /Store control cards are maintained for each item & each bin card is filled up
with the physical movement of goods i.e. on its receipt and issue.
 Kept outside the bin in store.
 Transaction are posted individually only at the time of issue of material.
 Maintained by storekeeper.

Store ledger:
 It records both quantity & value of materials.
 Kept in costing department.
 Transaction can be posted periodically generally after the issue of material.
 Maintained by cost account department.

Bin Card Store Ledger

It is maintained by the storekeeper in the It is maintained in costing department.
store.
It contains only quantitative details of It contains information both in quantity &
materials received, issued & returned to value
stores.
Entries are made when transaction take It is always posted after the transaction.
place.
Each transaction is posted individually. Transactions may be summarized and
then posted.
Inter department transfer do not appear in Material transferred from one job to
bin card. another are recorded for costing purpose.

Two Bin System

Under this system each bin is divided into two parts –
1. Smaller part: This should stock the quantity equal to the minimum stock or even the re-
ordering level, and the other to keep the remaining quantity.

2. Larger Part :Issues are made out of the larger part; but as soon as it becomes necessary to use
quantity out of the smaller part of the bin, fresh order is placed.

Two bin system is supplemental to the bin card and the stores ledger card.

14 Costing Notes
Stock verification (Stock Taking)-
Physical counting of actual stock available and comparing the same with books to know the
discrepancies if any.
There are two methods of stock verification:

Basis of Periodic Stock Verification Perpetual Inventory System

Distinction
When done At the end of specified At regular interval during the year.
period, say a year.
Coverage All items of stocks are In each verification, two or three items are
covered in a single stretch of Covered on random basis. In the entire
verification, say over period, all items are covered on rotation
Two or three days. basis.
Cost It is simple and inexpensive. It is elaborated and expensive.
Effectiveness
Effect of Work Regular stock procedures There is no interference with regular work.
like material receipts, issue
etc may have to stop to
facilitate stock taking.
Control Discrepancies can be known Discrepancies can be known immediately
only at the end of the period. of the
period and corrective action can be taken
Immediately to avoid reoccurrence.

Difference between Continuous Stock taking and perpetual inventory

Basis of Continuous stock taking Perpetual Inventory

Distinction
Concern It is concerned with only It is concerned with both physical
verification of stocks verification of stocks as well as their
with store records. It is valuation.
not concerned with
valuation of stock.
Interdependency Continuous stock taking Perpetual Inventory system cannot be
can take place without practical without continuous stock
perpetual inventory taking.
system.

15 Costing Notes
Perpetual Inventory System:
 It is a system of stock control followed by the stores department.
 Under this system, a continuous record of receipt and issue of material is maintained by
the stores department.
 In other words, in this system, stock control cards or bin cards and the stores ledger show
clearly the receipts, issues and balance of all items in stock at all times.
 This system facilitates planning of production and ensures that production is not
interrupted for want of materials and stores.

Continuous Stock taking:

 It means physical verification of stores items on a continuous basis to reveal the position
of actual balances.
 Such a verification is conducted round the year, thus covering each item of store twice or
thrice. Any discrepancies, irregularities or shortages brought to the notice, as a result of
continuous stock verification are reported to the appropriate authorities for initiating
necessary rectification measures.
 This system works as a moral check as stores staff and acts as a deterrent to dishonesty.

Just in Time
Just in time (JIT) purchases means the purchase of goods or materials such that delivery
immediately precedes their use.
Advantages of JIT purchases:
 The suppliers of goods or materials cooperate with the company and supply requisite
quantity of goods or materials for which order is placed before the start of production.
 JIT purchases result in cost savings for example, the cost of stock out, inventory carrying,
materials handling are reduced.
 Due to frequent purchases of raw materials, its issue price is likely to be very close to the
replacement price. Consequently the method of pricing to be followed for valuing material
issues becomes less important for companies using JIT purchasing.
 JIT purchasing are now attempting to extend daily deliveries to as many areas as possible
so that the goods spend less time in warehouses or on store shelves before they are
exhausted.
Limitation of JIT:
 If supplier does not deliver goods to the company exactly on time and in the correct
amounts the production process will be impacted seriously.
 Natural Calamities could interrupt with the supply of goods.
 A company may not be able to immediately meet the requirement of a massive and
unexpected order, since the company has no or few stocks in hand.

16 Costing Notes
Just in Time manufacturing and Traditional Manufacturing

Just in Time Manufacturing Traditional Manufacturing

It is a demand pull system. It is a production push system.
There is insignificant or zero inventories. There is significant inventories
There is multifunction labor. There is specialized labour.
There is total quality management system. There is acceptable quality labour.

Method of Pricing Material issue to Production

1.First in First Out Method (FIFO)

Features:
a) It is a method of pricing the issues of materials, in the order in which they are purchased.
b) The earliest prices at which materials were received are exhausted first before subsequent
they are purchased.

Advantages (F-F)
 Simple to understand and easy to operate.
 In case of falling prices,(Deflation) the use of this method gives better results.
 Old costs (which are higher than current cost) are matched with current revenue.
 As a result lower income is reported
 As a result Income tax liability is decreases.
 Ending inventory represents cost of later purchases.

2.Last in First Out method :

Features:
a) It is a method of pricing the issues of materials, in the reverse order in which they are
purchased.
b) The prices of the most recently received consignments.(i.e. immediately last available
consignment) are exhausted
before previous consignment prices are taken up.

Advantages
 In case of rising prices, the use of this method gives better result.
 Current costs (which are higher than old cost) are matched with current revenue.
 As a result lower income is reported
 As a result Income tax liability is decreased
 The cost of material issued represents cost of later purchases which enables the matching
of cost of production with current sales revenue.

17 Costing Notes
3.Weighted Average Method
a) It is a method of pricing the issues of materials, which give due weightage to quantities
purchased and the purchase price to determine the issue price.
b) With every receipt of material the price is averaged. This average price is used for issue
till next receipt of material (when average price changes).

Advantages
 Issue prices need not be calculated for each issue unless new lot of materials is received.

Difference between waste, spoilage, salvage, defectives / rejects, rectification, scrap

Waste
 Portion of basic raw materials lost in processing, having no recoverable value and can't
be further processed.
 It may be visible remnant of basic raw materials or invisible disappearance of basic raw
materials through evaporation, smoke, etc.
 Shrinkage of material due to natural causes may also be a form of material wastage.
Reasons:
1. Evaporation of oil, paints, etc.
2. Absorption of moisture as in the case of lime, etc.
3. Natural deterioration i.e. dusting.
4. Losses inherent to breaking the bulk as in the case of coal.

Accounting Treatment:

Normal waste abnormal waste

Absorbed in the cost of net output T/F to costing P/L, as loss

Scrap
Incidental residue from certain types of manufacture, usually of small amount and low value,
recoverable without further processing which may be further processed.
Treatment:-
1. Other income
2. NRV of scrap. :Sales values ( - ) selling & distn cost of scrap is deducted from O/H (OR)
NRV can be reduced from material cost.
3. Specific identification: Cr. to concerned job / process.

18 Costing Notes
Spoilage (बखि सके को सामाि खबखिि)ु
Materials which are badly damaged in manufacturing operations and they cannot be rectified
economically and hence taken out of process to be disposed of in some manner without further
processing.
Salvage
Material retrieved from the spoiled work.
Salvaged units of material are usable in production.
The value of salvaged material may be credited to account to which spoilage is charged.

Accounting Treatment of Spoilage:

Normal spoilage abnormal spoilage

Either charging the loss due to spoilage to Charged to costing P/L A/c
the production / order or charging it to production O/H

Defective work / rejects

Units of production which can be rectified & turned out as good units by application of additional
material, labour or other service.
Treatment of defectives:
(a) Can be brought up to the standard by incurring further costs additional material & labour.
(b) Can be sold as inferior products (seconds) at lower prices, where possible.

Rectification
Bringing back the defective units either to standard units of production or as seconds, by
reworking.
Accounting Treatment:

Normal Abnormal
i) Charged to good products - Charged to costing P/L
ii) Charged to jcb
iii) Charged to Gen. O/H
iv) Charged to Dept. O/H

Obsolescence (Date Expire)

Obsolescence is the state of being which occurs when an object, service, or practice is no longer
maintained or required even though it may still be in good working Condition.

19 Costing Notes
Question 1
1.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 the next should order to be placed. (Assuming that the company
does not maintain a safety stock and that the present inventory level 333 packs with a
year of 360 working days.)

Question 2
The annual demand for an item of raw material is 4,000 units and the purchase price is
expected to be Rs. 90 per unit. The incremental cost of processing an order is Rs. 135 and
the cost of storage is estimated to be Rs. 12 per unit per month.

i) What is the optimal order quantity and total relevant cost of this order quantity?

ii) Suppose that Rs. 135 as estimated to be the incremental cost of processing an order is
incorrect and should have been Rs. 80. All other estimates are correct.
What is the difference in cost on account of this error?

iii) Assume at the commencement of the period that a supplier offers 4,000 units at a price
of Rs. 86. The materials will be delivered immediately and placed in the stores .Assume
that the incremental cost of placing the order is zero and original estimate of Rs. 135 for
placing an order for the economic batch is correct. Should the order be accepted?

Question 3
Zenith Ltd. manufactures iron rods. The purchase manager of the company declared to
place orders for minimum quantity of 225 units of a particular item to get discount of 10%
on the purchase price. From the records it was found that in the last year, 5 orders each
of size 160 units has been placed. The finance manager argues that this is the most
economical purchase that can be made. The following additional information has been
provided:

Ordering cost: NPR 250 per order

Inventory carrying cost: 20% of inventory value per annum Cost per unit: NPR 200
20 Costing Notes
As per cost Accountant, analyze the decision of purchase Manager making assumption
that total material requirement will be as in the last year. What will be financial impact of
this decision? What is your suggestion? Explain.

Question 4
Arnav Ltd. manufactures a product X which requires two raw materials A and B in a ratio
of 1:4. The sales department has estimated a demand of 5,00,000 units for the product for
the year. To produce one unit of finished product, 4 units of material A is required.
Stock position at the beginning of the year is as below:
Product- X 12,000 units
Material A 24,000 units
Material B 52,000 units
To place an order the company has to spend Rs.15,000. The company is financing its
working capital using a bank cash credit @13% p.a.
Product X is sold at Rs.1,040 per unit. Material A and B is purchased at Rs.150 and Rs.200
respectively. Required:
Compute economic order quantity (EOQ):
(i) If purchase order for the both materials is placed separately.
(ii) If purchase order for the both materials is not placed separately.

Question 5
EXE Limited has received an offer of quantity discounts on his order of materials as
under:–

Price per tonne Tonnes

Rs.
Nos.
1,200 Less than 500
1,180 500 and less than 1,000
1,160 1,000 and less than 2,000
1,140 2,000 and less than 3,000
1,120 3,000 and above.
The annual requirement for the material is 5,000 tonnes. The ordering cost per order is
Rs. 1,200 and the stock holding cost is estimated at 20% of material cost per annum. You
are required to complete the most economical purchase level. If Order Size is 400 unit,
500 unit, 1000 unit ,2000 unit and 3000 unit.
(b) What will be your answer to the above question if there are no discount offered
and the price per tonne is Rs. 1,500?

21 Costing Notes
Question 6
Past Record gives the following distribution for lead time and daily demand during lead
time.

Demand(Units) Frequency Lead Time(Days) Frequency

0 2 3 2
1 4 4 3
2 5 5 4
3 5 6 4
4 4 7 2
5 2 8 2
6 1 9 2
7 2 10 1

Calculate : ROL & ROQ

Question No 7
M/s Tyretubes trades in four wheelers tyre and tube.It stock sufficient quantities of tyre
of almost every vechile.
In year end 20x1-x2,the report of sales manager revealed that M/s Tyretubes experienced
stock out of tyres.

The stock out data is as follow:

Stock out of tyre No of times

100 2
80 5
50 10
20 20
10 30
0 33

M/S Tyretube loses Rs.150 per unit due to stock out and spends Rs.50 on carrying cost of
inventory. What is the optimal saftey stock level?

Question No 8
M/s Tyretubes trades in four wheelers tyre and tube.It stock sufficient quantities of tyre
of almost every vehicle.
In yearend 20x1-x2,the report of sales manager revealed that M/s Tyretubes experienced
stock out of tyres.

22 Costing Notes
The stock out data is as follow:

Stock out of Units No of times

800 2
600 3
400 5
200 10
0 30
The selling price of each unit is Rs.200.The carrying cost are Rs. 19 per unit. The stock out
cost are Rs. 50 per unit units.
1. If Firm wishes to never miss a sale, what should be its safety stock? What is the
total cost associated with this level saftey stock.
2. What are the cost associated with the safety stock of 800,600,400,200 units and Nil
units, respectively.
3. What is the optimal safety stock level?

Question No 9
The following information is available in respect of a particular item of inventory of a
manufacturing firm.

Daily Usage Probability Lead Time(Days) Probability

2 tones 0.2 25 days 0.2
3 tones 0.6 35 days 0.5
4 tones 0.2 45 days 0.3

Find Out:
a. Optimum Level of Safety Stock and reorder level.
b. Probability of Stock out given that:
I. Carrying cost is Rs.2000 per tone per year.
II.Stock out cost is Rs. 8000 per tone.

Question No 10
The particulars relating to 1200 kg of a certain raw material purchased by company during
March were as follows:
1. Lot prices quoted by supplier and accepted by the company for placing the
purchase order:

 Lot upto 1000 kgs @ 22 per kg

 Between: 1001 - 1500 kgs @ Rs. 20 per kg.
 Between: 1501 - 2000 kg Rs. 18 per kg.
2. Trade discount 20%

23 Costing Notes
 3. Additional charges for containers @ Rs. 10 per drum of 25 kg
4. Credit allowed on return of container @ Rs. 8 per drum
5. Value Added Tax at 10% on raw material and 5% on drums
6. Total freight paid by the purchaser Rs. 219.40
7. Insurance at 2.5% of (Net-Invoice Value) paid by the purchaser
8. Stores overhead applied at 5% on purchase cost of material (excluding stores
overheads)
9. Normal Loss 5% and Abnormal Loss 140 kg
10. Scrap value of loss Rs. 5 per kg.
11. Units issued to production 600 kgs. The containers are returned in due course.
Draw up suitable statements to show:

 Total cost of material purchased

 Unit cost of material issued to production
 Total cost of material issued to production
 Total cost of material in hand
 Total cost of abnormal loss.
Labour Control

Time Study Vs Motion Study:

BASIS FOR TIME STUDY MOTION STUDY

COMPARISON
Meaning Time study is one of the Motion study involves the
techniques of scientific observation of the movement of
management which involves men, machine, materials and
observation and recording of supplies, to find out the wasteful
the time taken in performing actions and eliminate them.
a particular task.
Involves Tracking of the time Ascertainment of total movements
consumed in carrying each of workers while performing a task.
part of the operation.
Purpose To identify the standard time To reduce wastage of time and
required to perform a task. energy in unnecessary movements.
Tools used Stopwatch Surveillance Camera
Focuses on Increase in productivity of Minimization of movement of
labour. workers.
Objective To determine a fair day's To find out the best method of
work. doing a job.

24 Costing Notes
Casual Worker:
Workers who are appointed for a short duration to carry on normal business activities in place
of a regular but temporarily absent worker. Such a worker is also known as daily wager. A casual
worker does not enjoy the facilities available to a regular worker. Remuneration is generally paid
on Daily Basis.

Outworker:
Workers who do not work in the factory premises but either he works in his home or at a site
outside the factory is known as an outworker. An outworker who works in a home is usually
compensated on the basis of his output. He is supplied with raw materials and tools necessary
for carrying out the job. An outworker (outside to factory) is usually engaged on specialized
jobs/contract work. Remuneration is generally paid on monthly Basis/Piece Rate.

Job Evaluation Vs. Merit Rating

Basis Job Evaluation Merit Rating
Assessment Job evaluation is related with the Merit rating is a systematic process or
rating of the job evaluation of the capacities and abilities of
the man doing the job.
Purpose To fix wages for the jobsTo by evaluate the employee for the
considering certain factors such purpose
as of promotion, training, pay
skill, increase or incentives etc.
responsibility etc.
Objective Setting the basis of determining It is utilized for placement and training.
wages.

High Wage Plan: Under this plan a worker is paid a wage rate which is substantially higher than
the rate prevailing in the area or in the industry. In return, he is expected to maintain a very high
level of performance, both quantitative and quality.

Question 1
A, B and C are three industrial workers working in Sports industry and are experts in
making cricket pads. A, B and C are working in Mahi Sports, Virat Sports and Sikhar
Sports companies respectively. Workers are paid under different incentive schemes.
Company wise incentive schemes are as follows:

Company Incentive scheme

Mahi Sports Emerson's efficiency system

Virat Sports Merrick differential piece rate

system

25 Costing Notes
 Sikhar Sports Taylor's differential piece work
system

The relevant information for the industry is as under:

Standard working hours 8 hours a day

Standard output per hour 2

(in units)

Daily wages rate Rs.360

No. of working days in a 6 days

week

Actual outputs for the week are as follows:

A B C

132 units 108 units 96 units

You are required to calculate effective wages rate and weekly earnings of all the three
workers.

Question 2

A company uses an old method of machining a part manufactured for sale. The estimates
of operating details for the year 2013-14 are as under:

No. of parts to be manufactured and sold 30,000

Raw materials required per part: 10 kg@ 2 kg.

Average wage rate per worker : 40 per day of 8 hrs.

Average labour efficiency 60%.

Standard time required to manufacture one part: 2 hrs.

Overhead rate 10 per clock hour.

26 Costing Notes
Material handling expenses - 2% of the value of raw materials.

The company has a suggestion box scheme and an award equivalent to three months'
saving in labour cost is passed on to the employee whose suggestion is accepted. In
response to this scheme, a suggestion has been received from an employee to use a special
Jig in the manufacture of the aforesaid part. The cost of the Jig which has life of one year
is 3,000 and the use of the Jig will reduce the standard time by 12 minutes.

Required:

(i) Compute the amount of award payable to the employee who has given the suggestion

(ii) Prepare a statement showing the annual cost of production before and after the
implementation of the suggestion to use the Jig and indicate the annual savings.

(iii) State the assumptions on which your calculations are based.

Question 3

In a manufacturing concern 20 workmen work in a group. The concern follows a group

incentive bonus system whereby each workman belonging to a group is paid a bonus on
the excess output over the hourly production standard of 250 pieces, in addition to his
normal wage at hourly rate. The excess of production over the standard is expressed as a
percentage and two-thirds of this percentage is considered to be the share of the workman
and is applied on the notional hourly rate of Rs. 6.00 (considered only for the purpose of
computation of bonus). The output data for a week are stated below:

Days Man hours Output (In

worked pieces)

Monday 160 48,000

Tuesday 172 53,000

Wednesday 164 40,000

Thursday 168 52,000

Friday 160 46,000

Saturday 160 42,000

27 Costing Notes
 Total 984 2,81,000

You are required to:

i) Work out the amount of bonus for the week and the average rate at which each
workman is to be paid the same.

ii) Compute the total wages including bonus payable to Hari Yadav who worked for 48
hours at an hourly rate of Rs. 2.50 and to Asim Karki who worked for 52 hours at an
hourly rate of Rs. 3.00.

Question 4

Two fitters, a laborer and a boy undertake a job on piece rate for Rs. 1,290. The time spent
by each of them is 220 ordinary working hours. The rates of pay on time-rate basis are Rs.
1.50 per hour for each of the two fitters, Re. 1 per hour for the laborer and Re. 0.50 per
hour for the boy.

Required:

i) The amount of piece-work premium and the share of each worker, when the piece-
work premium is divided proportionately to the time wages paid.

ii) The selling price of the above job on the basis of the following additional data:

Cost of direct material Rs. 2,010

Works Overhead at 20% of Prime Cost

Selling Overhead at 10% of Work Cost and

Profit at 25% on Cost of Sales.

Question 5

Rolland Limited operates a group incentive scheme in one of its department. A minimum
hourly rate is guaranteed to each of the six employees in the group if actual output for
the week is less than the standard output. If actual output is greater than the standard
output, the hourly rate of each employee is increased by 4% for each additional 600 units
of output produced. The standard output for the group is 12,000 units for a 40 hour week.

28 Costing Notes
During the week ended 31st December, 2010, each employee in the group worked 40
hours; actual output and minimum hourly rates were as follows:

Employee Actual output (units) Minimum hourly rate (Rs.)

Lal 2,500 60

Hari 2,700 100

Mohan 2,400 60

Shyam 2,500 80

Hanuman 2,460 60

Krishna 2,440 40

You are required to:

i) Calculate the earnings of each employee;

ii) Appraise the effectiveness to the company of this group incentive scheme.

Question 6

A manufacturer introduces new machinery into his factory, as a result of which,

production per worker has increased. The workers are paid by results, and it is agreed
that for every 2% increase in average individual output, an increase of 1% on the rate of
wages will be paid. Just after installation of machinery the selling price of the products
falls by 8 1/3 %.

Before New Machinery After New Machinery

(Actual) (Planned)

Number of workers 175 125

Number of articles produced 8,400 7,000

Wages paid Rs. 16,800

Total Sales Rs. 37,800

29 Costing Notes
Show the net saving in production costs which would be required to offset the losses
expected from reduced turnover and bonus to be paid to workers.

Question 7

The Delta Corporation has filed the following income statement for the year ending 31st
March, 2021.

Sales Rs. 24,00,000

Less : Variable costs

Material Rs 6,01,000

Direct labor Rs. 5,1 9,000

Variable factory overheads Rs.3,20,000

Variable selling and distribution O.H. Rs.1,90,000

Contribution Rs.7,70,000

Less : Fixed overheads Rs.5,30,000

Net income before tax Rs.2,40,000

Capital employed Rs.12,00,000

The actual number of hours for direct labour worked in the year under review was
2,06,000. As a consequence of delays in filling vacancies of employees who quit, 6,000
potential direct hours were not worked and included in the actual hours worked were
4,000 hours of trainees, half of which time was unproductive. -The costs incurred in
consequence of re-employment were as follows:

(a) Separation costs Rs. 25,630;

(b) Selection costs Rs. 32,080

(c) Recruitment costs Rs. 23,140 and

(d) Training costs Rs. 31,160.

Calculate the profits lost or forgone on account of labour turnover (round off to the
nearest rupee) and the potential return on capital and sales and turnover ratio.
30 Costing Notes
 Budgetary Control

Basis BUDGET FORECAST

Meaning A budget is a financial plan Forecast means estimation of future
expressed in quantitative trends and outcomes, based on the
terms, prepared by the past and present data.
management in advance for
forthcoming period.
What is it? It is the financial expression ofIt is the prediction of upcoming
a business plan or target. events or trends in business, on the
basis of present business
conditions.
Target Budget sets target. There are no targets.
Updating Annual basis At regular intervals
Estimates What business wants to What business will achieve
achieve
Variance Yes No
Analysis

BASIS FIXED
FOR BUDGET FLEXIBLE BUDGET
COMPARISON
Meaning The budget designed to The budget designed to change
remain constant, regardless of with the change in the activity
the activity level reached is levels is Flexible Budget.
Fixed Budget.
Nature Static Dynamic
Activity Level Only one Multiple
Performance Comparison between actual It provides a good base for making
Evaluation and budgeted levels cannot be a comparison between the actual
done accurately, if there is a and budgeted levels.
distinction in their activity
levels.
Rigidity Fixed Budget cannot be Flexible budget can be easily
modified as per the actual modified in accordance with the
volume. activity level attained.
Estimates Based on assumption Realistic and Practical

31 Costing Notes
Rolling Budget
A rolling budget is continually updated to add a new budget period as the most recent budget
period is completed. Thus, the rolling budget involves the incremental extension of the existing
budget model. By doing so, a business always has a budget that extends one year into the future.
ABC Company has adopted a 12-month planning horizon, and its initial budget is from January
to December. After a month passes, the January period is complete, so it now adds a budget for
the following January, so that it still has a 12-month planning horizon that extends from February
of the current year to January of the next year.

Zero-based budgeting (ZBB)

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for
each new period.
The process of zero-based budgeting starts from a "zero base," and every function within an
organization is analyzed for its
needs and costs. The budgets are then built around what is needed for the upcoming period,
regardless of whether each
budget is higher or lower than the previous one.

Budgets are created around the monetary needs for each upcoming period, like a month.
Traditional budgeting and zero-based budgeting are two methods used to track expenditures.
Zero-based budgeting helps managers tackle lower costs in a company.

Steps of Zero Based Budgeting

1.Start. Begin at ground zero. Create a new annual budget from scratch without using last year’s
actuals as a baseline.
2.Evaluate. Evaluate every cost area. Eliminate and reduce unnecessary activities or services.
3.Justify. Account for all components of the budget. Identify cost-effective, relevant, and cost-
saving areas.
4.Streamline. Determine what activities should be performed and how. Automate and
standardize processes where possible.
5.Execute. Roll out comprehensive planning and execution processes. Communicate clear plans,
roles, and responsibilities.

Limitation of Budget
1. Inaccuracy
Budgeting is based on a lot of assumptions in estimating expenses and revenues. These
are generally based on trends and the market scenario prevailing when making the
budget. Budgets can also be based on the predictions made for the coming year
considering the data available at the time of budgeting.

2. Time-Consuming & Costly

32 Costing Notes
 Budgeting exercise can be, at times, a very time-consuming exercise. It involves an extra
workforce to get the estimates as accurate as possible. Especially for a big company with
various departments, budgeting exercise takes a huge effort. The time consumed may be
low in cases where the company uses budgeting software, and the employees are well-
trained. If the company uses a zero-based budgeting technique, the time, cost, and effort
involved can be considerably large.

3. Rigidity
The entire focus of senior management is on the budget, and all the strategies revolve
around the budgeted numbers. Any change in the market situation does not generally
evoke the management’s attention to make any drastic change in the strategy due to
budget constraints. Instead, the company should shift as per the market and book more
profit rather than stick to the budget.

4. Excessive Spending
Some managers believe that all the funds that are allocated to their department need to be
spent. It is believed that if they do not use as much as they are authorized to in the current
budget, the funds budgeted for them in the next budget will be reduced. This leads to
unnecessary wastage of funds and proves harmful to the company, affecting its profits.

5. Scope for Manipulation

At times, an experienced manager may deliberately inflate his expenses and try to reduce
the revenue targets to be set in the budget. This way, he can easily get an opportunity to
get the favorable variances against the budgeted numbers, that is, by incurring lower costs
than budgeted cost and achieving higher revenue than the budgeted revenue. This
misleads
the stakeholders and demotivates the employees.

Question No 1
The boilerhouse is one of the service departments of a company. Steam is raised and then
transferred to production departments and other service departments as required.

The basic monthly budget figures for 2016 are as follows

Boiler operating hours: 480
Steam raised: 80,00,000 kg.

Costs:
Fuel (V) Rs.19,200
Chemicals (V) Rs. 960
Wages(F) Rs. 2,400
Sundry overheads(F) Rs. 3,000
33 Costing Notes
 The actual figures for February 2016 are as follows:
Boiler operating hours: 432
Steam raised: 67,50,000kg.
Costs:
Fuel (V) Rs. 18,000
Chemicals (V) Rs. 990
Wages(F) Rs. 2,200
Sundry overhead (F) Rs. 3,000

It is expected that the price of chemicals for all output will fall by 2% where the boiler operates
in excess of 480 hours per month. Sundry fixed (F) costs are expected to fall by Rs. 200 where the
boiler is operated for less than 425 hours and to increase from the normal level by Rs. 250 where
the boiler is operated for more than 480 hours. Variable (V) costs vary in proportion to boiler
hours.
Required:
a. Prepare a budget summary which shows the cost of the boiler house in total and
per „000 kg steam for boiler operating levels of 400, 432, 480,and 540 hours
b. Prepare a control statement which compares budget with actual cost of the
boilerhouse for February where a flexible budgeting system is in operation.
Comment on the variances in the statement.

Question No 2
Action Plan Manufacturers normally produce 8,000 units of their product in a month, in their
Machine Shop. For the month of January, they had planned for a production of 10,000 units.
Owing to a sudden cancellation of a contract in the middle of January, they could only produce
6,000 units in January.
Indirect manufacturing costs are carefully planned and monitored in the Machine Shop and the
Foreman of the shop is paid a 10% of the savings as bonus when in any month the indirect
manufacturing cost incurred is less than the budgeted provision.
The foreman has put in a claim that he should be paid a bonus of Rs. 88.50 for the month of
January. The works manager wonders how any one can claim a bonus when the company has
lost a sizeable contract. The relevant figures are as under:

Indirect manufacturing Expenses Planned for Actual in January

costs for a normal January(Rs.) (Rs.)
month(Rs.)
Salary of foreman 1,000 1,000 1,000
Indirect labour 720 900 600
Indirect material 800 1,000 700
Repairs and maintenance 600 650 600

34 Costing Notes
 Power 800 875 740
Tools consumed 320 400 300
Rates and taxes 150 150 150
Depreciation 800 800 800
Insurance 100 100 100
5290 5875 4990
Do you agree with the Works Manager? Is the Foreman entitled to any bonus for the
performance in January? Substantiate your answer with facts and figures.

Question No 3
A single product company estimated its sale for the next year quarterwise as under:
Quarter Sales (units)
I 30,000
II 37,500
III 41,250
IV 45,000

The opening stock of finished goods is 10,000 units and the company expects to maintain
the closing stock of finished goods at 16,250 units at the end of the year. The production
pattern in each quarter is based on 80% of the sales of the current quarter and 20% of the
sales of the next quarter.
The opening stock of raw materials in the beginning of the year is 10,000 kg. and the
closing stock at the end of the year required to be maintained at 5,000 kg. Each unit of
finished output requires 2 kg. of raw materials.
The company proposes to purchase the entire annual requirement of raw materials in the
first three quarters in the proportion and at the prices given below:

Quarter Purchase of raw Price per kg.

materials % to total annual
requirement in quantity Rs.
I 30% 2
II 50% 3
III 20% 4

The value of the opening stock of raw materials in the beginning of the year is Rs. 20,000.
You are required to present the following for the next year, quarterwise:
i) Production budget (in units).
ii) Raw material consumption budget (in quantity).
iii) Raw materials purchase budget (in quantity and value).
35 Costing Notes
 iv) Priced stores ledger card of the raw material using First in first out method.

Question 4
Peko Electronic manufactures and sales four models of Television sets. The major
components viz. cabinet, High voltage, Transformer and the Speaker are bought out by
the company. Picture tubes for three out of the four models are purchased from other
firms. Four cabinet styles ( A, B, C, and D), two kinds of transformers (X and Y) three kinds
of speakers and three types of picture tubes are assembled in the following ways in the
final product.
Model Cabinet Transformer Speaker Picture Tubes
Standard A @Rs. 200 X @ Rs. 200 5” Cone @ Rs. 300 OWN
Deluxe B @ Rs. 300 X @ Rs. 200 5” Cone @ Rs. 300 BEL @ Rs. 1,200
Aristocrat C @ Rs. 500 Y @ Rs. 300 6” Cone @ Rs. 400 BEL @ Rs. 1,200
Royal D @ Rs. 700 Y @ Rs. 300 12” Cone @ Rs. 6.00 TEL TUBE @ Rs 1600

The company expects the following inventories in hand on 1st July 2002
Finished Sets:
Standard 46; Deluxe 73; Aristocrat 64; Royal 69.
Sub-assemblies:
Cabinet: A-30; B-40; C-20; D-25.
Transformer: X-31, Y-17
Speakers: 5” cone -27. 6” Cone -47; 12” Cone -18
Pictures tubes: OWN -20; BEL -17; TEL TUBE -34.
The sales manager estimates that sales for the quarter July-September 2002 will be:
Model Sales Quantity
Standard 200
Deluxe 600
Aristocrat 500
Royal 300
The following inventory quantities have been budgeted for 30th September, 2002
Finished Sets: 25 in each Model
Sub- assemblies Cabinet- 15 (each type)
Transformers -20 (each type)
Picture Tube –OWN -30; BEL -40;
TEL TUBE -20
You are required to prepare the production and purchase budget for the various items
stated above for the quarter July- September 2002.

36 Costing Notes
 Question 5
Calculate:
a. Efficiency ratio, b. Activity ratio c. Capacity ratio
From the following figures:
Budgeted production 88 units
Standard hours per unit 10
Actual production 75 units
Actual working hours 600

JOB AND BATCH COSTING

Basis Job Costing Batch Costing

Definition The production of products The production of products when
according to the customer’s calculated in a specific unit or batch
demand or specific requirement. and further the cost is determined is
termed to be batch costing.
Applied In Job costing is helpful for those Batch costing is helpful for those
industries that produce or small industries that produce or
manufactures goods as per the manufacture products as per the
customer’s demand. batches.
Calculation Job costing is the method that is Batch costing is the method that is
used to calculate daily. used to calculate it weekly or
monthly.
Example Examples of job costing products Examples of batch costing products
include things such as a include things such as garments,
customized shoe, dress, jewelry, TVs, refrigerators, mobiles, etc.
etc.

Basis JOB COSTING PROCESS COSTING

Meaning Job costing refers to calculating the cost A costing method, in which
of a special contract, work order where the costs which are charged
work is performed as per client's or to various processes and
customer's instructions. operations is ascertained, is
known as Process Costing.
Assignment Calculating cost of each job. First of all, cost is
of cost determined for the process,
thereafter spread over the
produced units.

37 Costing Notes
 Cost Center Job Process
Transfer of No transfer Cost is transferred from
Cost one process to another
Work-in- WIP may or may not exist at the WIP will always be present
progress beginning or at the end of the financial in the beginning or at the
(WIP) year. end of the accounting
period.

Question No-1

Component 'Pee' is made entirely in cost center-100. Material cost is 6 paisa per component and
each component takes 10 minutes to produce. The machine operator is paid 72 paisa per hour,
and the machine hour rate is Rs. 1.50. The setting up of the machine to produce the component
'Pee' takes 2 hours 20 minutes.

On the basis of this information, prepare a cost sheet showing the production and setting up cost,
both in total and per component, assuming that a batch of:

(a) 10 components,

(b) 100 components, and

(c) 1,000 components is produced

Question No-2

A jobbing factory has undertaken to supply 200 pieces of a component per month for the ensuing
six months. Every month a batch order is opened against which materials and labour hours are
booked at actual. Overheads are levied at a rate equal to per labour hour. The selling price
contracted for is Rs.8 per piece. From the following data Calculate the cost and profit per piece
of each batch order and overall position of the order for 1,200 pieces.

Batch Material Cost

Month Direct Wages (Rs.) Direct Labour Hour
Output (Rs.)
January 210 650 120 240
February 200 640 140 280
March 220 680 150 280
April 180 630 140 270
May 200 700 150 300
June 220 720 160 320
The other details are:
38 Costing Notes
 Month Chargeable expenses Direct Labour Hours
January 12,000 4,800
February 10,560 4,400
March 12,000 5,000
April 10,580 4,600
May 13,000 5,000
June 12,000 4,800

Question No-3

The Acme shelving Co. Ltd. manufactures shelving brackets in batches of 300. During May, Batch
No. 23 was machined at a rate of 15 brackets per hour. Sixty of the brackets failed to pass
inspection, but of these, 40 were thought to be rectifiable. The remaining 20 were scrapped, and
the scrap value was credited to the batch cost account. Rectification work took nine hours. The
following details are available for Batch No. 23: Rs.

Raw materials per bracket 160

Scrap value per bracket 86

Machinists' hourly rate 420

Machine hour overhead rate (running time only) 360

Setting up of machine:

Normal machining 2,100

Rectification 1,800

Required:

i. Calculate the cost of Batch No. 23 in total and per unit, if all units pass inspection.
ii. Calculate the actual cost of Batch No. 23 in total and per unit, after crediting the recovery
value of the scrapped components, and including the rectification costs.
iii. Calculate the loss incurred because of defective work.

Question No-4

A shop floor supervisor of a small factory presented the following cost for Job no. 421 to
determine selling price.

39 Costing Notes
 Per unit (Rs.)

Material 70

Direct Wages18 hrs. @ Rs. 2.50 (Dept. X 8 45

hours; Dept. Y6 hours; Dept. Z 4 hours)

Chargeable Expenses (Special stores items) 5

Add: 33 1/3% for Overheads 120

Total Cost 160

Analysis of the Profit/Loss Account for 2014 shows the following:

By, Sales less

To, Material used 150,000 250,000
Returns
To, Direct Wages:
Dept. X 10,000
Dept. Y 12,000
Dept. Z 8,000 30,000
To, Special stores items 4,000
To, Overheads:
Dept. X 5,000
Dept. Y.
9,000
Dept. Z 2,000 16,000
Total Cost 200,000
Gross Profit c/d 50,000
2 50,000 250,000
To, Selling Expenses 20,000
To, Net Profit 30,000 By, Gross Profit b/c50,000
50,000 50,000
It is also noted that average hourly rates for the three departments X, Y, Z are similar. Required:

i) Draw up a job cost sheet.

ii) Calculate the entire revised cost using 2014 actual figures as basis.

iii) Add 20% to total cost to determine selling price.

40 Costing Notes
Question No-5

Auto Ltd. manufactures pistons used in car engines. As per the study conducted by the
Auto Manufacturers Association, there will be a demand of 80 million pistons in the
coming year. Auto Ltd. is expected to have a market share of 1.15% of the total market
demand of the pistons in the coming year. It is estimated that it costs Rs.1.50 as inventory
holding cost per piston per month and that the set-up cost per run of piston manufacture
is Rs. 3,500.

i) What would be the optimum run size for piston manufacturing?

ii) Assuming that the company has a policy of manufacturing 40,000 pistons per run,
how much extra costs the company would be incurring as compared to the optimum run
suggested in (i) above?

Question No-6

Moon Paints Ltd. has an annual demand from a single customer for 50,000 liters of a paint
product. The total demand can be made up of a range of color will be produced in a
continuous production run after which a set-up of the machinery will be required to
accommodate the color change. The total output of each color will be stored and then
delivered to the customer as a single load immediately before production of the next color
commences.

The set-up costs are Rs. 100 per set-up. This service is supplied by an outside company
as required.

The holding costs are incurred on rented storage space which costs Rs. 50 per sq. meter
per annum. Each square meter can hold 250 liters suitably stacked.

You are required to:

i) Calculate the total cost per year where batches may range from 4,000 to 10,000
liters in multiples of 2,000 liters and choose the production batch size which will
minimize total cost.

ii) Use the economic batch size formula to calculate the batch size which will minimize total
cost.

41 Costing Notes
Question No-7

A fire occurred in the factory premises on October 31, 2003. The accounting records have
been destroyed. Certain accounting records were kept in another building. They reveal
the following for the period September 1, 2003 to October 31, 2003.

(i) Direct materials purchased Rs. 2,50,000

(ii) Work in process inventory, 1.9.2003 Rs. 40,000

(iii) Direct materials inventory, 1.9.2003 Rs. 20,000

(iv) Finished goods inventory, 1.9.2003 Rs. 37,750

(v) Indirect manufacturing costs 40% of conversion cost

(vi) Sales revenues Rs. 7,50,000

(vii) Direct manufacturing labour Rs. 2,22,250

(viii) Prime costs Rs. 3,97,750

(ix) Gross margin percentage based on revenues 30%

(x) Cost of Goods available for sale Rs. 5,55,775

The loss is fully covered by insurance company. The insurance company wants to know
the historical cost of the inventories as a basis for negotiating a settlement, although the
settlement is actually to be based on replacement cost, not historical cost.

Required

(i) Finished goods inventory, 31,10,2003

(ii) Work-in-process inventory, 31.10.2003

(iii) Direct materials inventory, 31.10.2003

42 Costing Notes
Question No-8

A firm makes special assemblies to customers‘orders and uses job costing. The data for a
particular period are:

Particulars Job Number AA10 Job Number BB15 Job number CC20
(Rs.) (Rs.) (Rs.)

Opening work in 26,800 42,790 0

progress

Material added in 17,275 0 18,500

period

Labor for period 14,500 3,500 24,600

The budgeted overheads for the period were Rs. 126,000. Required:

I. What is the most logical basis for absorbing the overhead job costs?
II. Calculate the overhead to be added to job number CC20 for the period?
III. Job number BB15 was completed and delivered during the period and the firm
wishes to earn 33% profit on sales. What is the selling price of job number BB15?
IV. What was the approximate value of closing work-in-progress at the end of the
period?

43 Costing Notes
 Marginal Costing

Question 1

A firm produces 500 units. The selling price is Rs. 4 and variable cost is Rs. 2 per unit. Fixed
expenses amount to Rs. 800. Find the profit, and PV ratio.

Question 2

From the following data, calculate cash breakeven point:

Selling price per unit Rs. 10
Variable cost per unit Rs. 6
Fixed cost Rs. 10,000 including
Rs. 3,000 as depreciation
Question 3

The selling price of a product is Rs. 5 per unit. The variable cost is Rs. 3 per unit. The fixed
expenses are Rs. 2,000 per month. Find sales volume required to break-even.

Question 4

Output (units) 10,000 20,000 30,000 40,000

Fixed expenses (Rs.) 5,000 5,000 5,000 5,000
Variable expenses (Rs.) 8,000 16,000 24,000 32,000
Sales (Rs.) 10,000 20,000 30,000 40,000
Find the break-even point by calculation.

Question 5
From the under mentioned figures calculate:
1. P/V ratio and the total fixed expenses;
2. Profit or loss arising from the sales of Rs. 12,000;
3. Sales required to earn a profit of Rs. 2,000;
4. Sales required to break- even.
Sales Profit
Rs. Rs.
First period 14,433 385
Second period 18,203 1,139

44 Costing Notes
Question 6
A company sells its product at Rs. 15 per unit. In a period, if it produces and sells 8,000 units it
in incurs a loss of Rs. 5 per unit.

If the volume is raised to 20,000 units, it earns a profit of Rs. 4 per unit. Calculate break –even
point both in terms of rupees as well as in units.

Question 7
The ratio of variable cost to sales is 70%. The break-even point occurs at 60% of the capacity sales.
Find the capacity sales when fixed costs are Rs. 90,000. also compute profit at 75% of the capacity

Question 8
A company earned a profit of Rs. 30,000 during the year 1998-99. if the marginal cost and selling
price of a product are Rs. 8 and Rs. 10 per unit respectively. Find out the amount of ‘Margin of
Safety’.

Question 9
If Margin of safety of AB Ltd. is Rs.2,40,000 (40% of sales) and P/V ratio is 30% calculate its

(1) Break-even sales and

(2) Amount of profit on sales of Rs. 9,00,000.

Question 10
X Ltd has earned contribution of Rs. 2,00,000 and net profit of Rs. 1,50,000 on sales of Rs. 8,00,000.

What is its margin of safety?

Question 11
(a) A company had incurred fixed expenses of Rs. 4,50,000 with sales of Rs. 15,00,000 and earned
a profit of Rs. 3,00,000 during the first half year. In the second half, it suffered a loss of Rs.
1,50,000.
Calculate
a. The profit-volume ratio, break-even point and margin of safety for the first half year.
b. Expected sales – volume for the second half year assuming that selling price and fixed
expenses remained unchanged during the second half year.
c. The break-even point and margin of safety for the whole year.

45 Costing Notes
Question 12
ABC & Co. has given the following data:-
Rs.
Selling price per unit 20
Direct material and labour cost per unit10
Variable overhead per unit 2
Fixed overhead (Total) 20,000
Find out:-

i) P/V Ratio.
ii) Break-even sales
iii) Margin of safety at a sale level of Rs.1,00,000
iv) Profit if sales are 20% above the break even sales.
v) Sales to make a profit of Rs.5,000
vi) P/V Ratio if the selling price is increased by 10%.
vii) Break-even sales, if the selling price is increased by 10%.
viii)Break-even sales, if the fixed overhead is increased by 20%.

Question 13

A Japanese soft drink company is planning to establish a subsidiary company in India to produce
mineral water.
Based on the estimated annual sales of 40000 bottles of the mineral water, cost studies produced
the following estimates for the Indian Subsidiary.
Total Annual cost % of var. cost.
Material 210000 100
Labour 150000 80
Factory overhead 92000 60
Administrative overhead 40000 35

The Indian production will be sold by manufacturer's representative who will receive a
commission of 8% of the sale price. No portion of the Japanese office expenses is to be allocated
to the Indian Subsidiary.
Required to:
i) Compute the sale price per bottle to enable the management to realize an estimated 10%
profit on sale produced in India.

46 Costing Notes
 ii) Calculate the BEP in Rupee sale as also in no of bottle sales on the assumption that the sale
price is Rs.14 per bottle.
Question 14
A single product company sells its product at Rs.60 per unit. At 1996 the company operated at a
MOS of 40%. The fixed cost amounted to Rs.360000 and the variable cost to sales ratio is 80%.
In 1997 it is estimated that the variable cost will go up by 10% and the fixed cost will be increased
by 5%.
Find the selling price to be fixed in 1997 to earn the same p-v ratios in 1996.
Assuming the same selling price of Rs.60 per unit in 1997, find the no. of units required to be
produced and sold to earn the same profit as in 1996.

Question No.15
SK Lit. is engaged in the manufacture of tyres. Analysis of income statement indicated a profit of
Rs. 150 lakhs on a sales volume of 50,000 units. The fixed costs are Rs. 850 lakhs which appears
to be high. Existing selling price is ` 3,400 per unit. The company is considering to revise the profit
target to Rs. 350 lakhs. You are required to compute -
i) Break - even point at existing levels in units and in rupees.
ii) The number of units required to be sold to earn the target profit.
iii) Profit with 15% increase in selling price and drop in sales volume by 10%.
iv) Volume to be achived to earn traget profit at the revised selling price as calculated in (ii)
above, if a reduction of 8% in the variable costs and Rs. 85 lakhs in the fixed cost is envisaged.

Question 16

PQR Ltd. has furnished the following data for the two years:
1997-98 1998-99
Sales Rs. 8,00,000 ?
Profit/Volume ratio (P/V Ratio) 50% 37.5%
Margin of Safety Sales as a % of Total Sales 40% 21.875%
There has been substantial savings in the fixed cost in the year 1998-99 due to the restructuring
process. The company could maintain its sales quantity level of 1997- 98 in 1998-99 by reducing
selling price.

You are required to calculate the following:

i) Sales for 1998-99 in Rs.
ii) Fixed cost for 1998-99.
iii) Break – even sales for 1998-99 in Rs.
47 Costing Notes
Question 17

From the cost record of the APEX Company for the year 2075 of product A, the information
given is extracted.

This period actual

Sales (unit) 10,000
Profit (loss) Rs. (10,000)
Fixed Cost Rs. 30,000
Variable cost per unit Rs. 8

On the basis of the following information determine:

a. What is present cost structure and break event unit?
b. What increased sales volume is required to cover an extra attractive packaging cost of Rs. 0.5
per unit, to increase the sales at the existing sales price, to yield zero profit?
c. What increase in sales volume is required, at the present sale price, to cover additional publicity
expenses of Rs. 5,000 for that period, while yielding a profit of Rs. 5,000?
d. What increased sales volume is required to reach a profit of Rs. 12,500 while reducing the
selling price by 3% per unit?
e. What impact in profit and loss and BEP if selling price increase to Rs. 12 and fixed cost Rs.
50,000

Question 18

Determine the selling price per unit to earn a return of 12% net on capital employed (net of Tax
@ 40%).
The cost of production and sales of 80,000 units per annum are:
Material Rs. 4,80,000 Labour Rs. 1,60,000
Variable overhead Rs. 3,20,000 Fixed overhead Rs. 5,00,000
The fixed portion of capital employed is Rs. 12 lacs and the varying portion is 50% of sales
turnover.

Question 19

An automobile manufacturing company produces different models of cars. The budget in respect
of model 118 for the month of September, 1996 is as under:

48 Costing Notes
 Budgeted Output 40,000 units
Rs. (in lacs) Rs. (in lacs)
Net Realisation 700
Variable costs:
Materials 264
Labour 52
Direct expenses 124 440

Specified fixed costs 90

Allocated fixed costs 112.50 202.50
Total costs 642.50
Profit 57.50
Sales 700.00
Calculate

1. Profit with 10 percent increase in selling price with a 10 percent reduction in sales volume.
2. Volume to be achieved to maintain the original profit after a 10% rise in material costs at
the originally budgeted selling price per unit.

Question 20

The Lalla Shoe Company sells five different styles of ladies, Chappals with identical purchase
costs and selling price. The company is trying to find out the profitability of opening another
store which will have the following expenses and revenues.

Per Pair (Rs.)

Selling price 30.00
Variable cost 19.50
Salesmen's commission 1.50
Total variable cost 21.00
Annual fixed expenses are: Rs.
Rent 60,000
Salaries 2,00,000
Advertising 80,000
Other fixed expenses 20,000
3,60,000
Required:-

49 Costing Notes
a) Calculate the annual break-even point in units and in value. Also determine the profit or loss
if 35,000 pairs of Chappals are sold.
b) The sales commission is proposed to be discontinued, but instead a fixed amount of Rs.90,000
is to be incurred in fixed salaries. A reduction in selling price of 5% is also proposed. What
will be the break-even points in units?
c) It is proposed to pay the store manager 50 paise per pair as further commission. The selling
price is also proposed to be increased by 5%. What would be the break-even point in units?
d) Refer to the original data. If the store manager were to paid 30 paise commission on each pair
of Chappal sold in excess of the break even point. What would be the store's net profit if 50,000
pairs were sold?

Question 21

A company manufactures a product currently utilizing 80% capacity with a turnover of Rs.800000
at Rs.25 per unit. The cost data are as under:
Material cost Rs.7.50 per unit. Labour cost Rs.6.25 per unit and Semi variable cost Rs.180000
(including 3.75 per unit)
Fixed cost Rs.90000 up to output level of 80% beyond this, additional cost Rs.20000 will be
incurred.
Calculate:
i) Activity level of BEP.
ii) No. of units to be sold to earn a net income of 8% on sales.
iii) Activity level to earn a profit of Rs.95000.
iv) What should be the selling price per unit if BEP is to be brought down to 40% activity
level.
Ans: i) 50%, ii) 27273, iii) 88.33%, iv) Rs.26.875.

Question 22

A company has three factories situated in North. East and south with its Head Office in Mumbai.
The Management has received the following summary report on the operations of each factory
for a period.
(Rs. in ’000)
Sales Profit
Actual Over /(under) Actual Over/(under)
Budget Budget
North 1,100 (400) 135 (180)
East 1,450 150 210 90
50 Costing Notes
 South 1,200 (200) 330 (110)
Calculate for each factory and for the company as a whole for the period;

i) Fixed costs.
ii) Break-even sales.

Question 23

A company has an opening stock of 6,000 units of output. The production planned for the current
period is 24,000 units. Expected sales for the current period amount to 28,000 units.

The selling price per unit of output is Rs.10/-. Variable cost per unit is expected to be Rs.6/- per
unit while it was only Rs.5/- per unit during the previous period. What is the break-even volume
for the current period if the total fixed costs for the current period are Rs.86,000? Assume that the
FIFO System is followed.

Question 24

The Board of Directors of Ray Brand Battery Company Ltd. is working for launching a new re-
chargeable battery. An expert team on preliminary study made breakdown of revenues and costs
for one year projecting Rs. 15,00,000 initial investment.

1st six months (Rs) 2nd six months (Rs)

15000 batteries 25000 batteries

Sales : 12,00,000 20,00,000

Cost of goods sold 8,50,000 12,50,000

Gross profit 3,50,000 7,50,000

Administrative, selling 3,77,000

and 5,37,000
distribution overheads

Pre-tax-profit (27,000) 2,13,000

Tax at 40% - 85,200

PAT (27,000) 1,27,800

Required :

a. Variable cost ratio.

b. Annual fixed costs.
c. BEP sales in number of batteries for a year.
51 Costing Notes
 d. The sales volume in rupee to earn 15% return on investment.
e. Income statement showing annual sales revenue, variable costs, contribution margin,
fixed costs, pre-tax profit, tax on profit and after tax profit by incorporation the recently
conducted consumers opinion survey outcomes that indicated Rs. 60,000 outlay for
advertisement with 3 percent reduction in sales with 20 percent sales volume up.
f. Safety margin under the existing preliminary study outcomes and under the survey
outcomes.
g. Which option is desirable and why ?

Question 25

ABC Company produces a single product which is sold by it presently in the domestic market at
Rs 75 per unit. The present production and sales is 20,000 units per month representing 50% of
the capacity available. The cost data of the product are as under:
Variable cost per unit Rs. 50
Fixed Cost per unit Rs. 25 at present production level
To improve the profitability, the management has three proposals on hand as under:
1. To accept an export supply order for 15,000 units per month at a reduced price of Rs 60
per unit, incurring additional variable costs of Rs 5 per unit towards export packing, duties
etc.
2. To increase the domestic market sales by selling to a domestic chain stores 15,000 units at
Rs 55 per unit, retaining the existing sales at the existing price;
To reduce the selling price for the increased domestic sales as advised by the sales department
as under:

Reduced selling price Increase in sales (units)

unit by Rs.
5 5,000
8 15,000
11 17,500

Question 26

VARTS, an art school runs a division of visual arts for providing painting classes to students. For
running classes, it has hired a building at a rent of Rs. 30,000.00 per month.

52 Costing Notes
As per the terms of rent VARTS has to pay additional Rs. 20,000.00 for annual insurance of the
building and undertake minor repairs of the building. For running the painting classes following
staffs are appointed permanently:

i) One Coordinator at salary of Rs. 24,000.00 p.m.

ii) Two artist for salary of Rs. 15,000.00 p.m. each

Capacity of visual arts division is determined by number of seats and number of painting stands
installed in the building. VARTS has 25 painting stands installed in the building and 5 more
painting stands can be hired and installed if the flow of students increases.

Visual arts division remains open for 300 days in a year. During FY 2077/78, 100% capacity was
utilized for 120 days and 60% capacity was utilized for 180 days. But there were occasion when
the capacity were full, extra painting stands were hired at a charge of Rs. 50 per day and this did
not come to more than 5 painting stands extra above the 25 painting stands on any one day. The
total hire charges for extra painting stands incurred for the entire year amounted to Rs. 20,000.00

For training the students, senior artist from outside were engaged on the basis of time spent by
them which worked out to Rs. 30,000.00 per month during FY 2077/78. For the students, VARTS
incurred cost of Rs. 30.00 per student per day for providing tea and snacks in the classes. Other
expenses for the year were:

Colours used by students Rs. 134,000.00

Repairs of building Rs. 16,000.00

Administrative charges allocated to unit Rs. 500,000.00

Required:

i) Calculate profit per student days if the division recovered an overall amount of Rs. 450 per day
on an average from student.

ii) Work out the number of student days of the division required to break-even for FY 2078/79
assuming that the same revenue and expenses prevail during FY 2078/79.

Question 27
Bombay University conducts a special course on "Master of computer application "MCA" for a
month during summer. For the Purpose It invites applications from graduates. An entrance test
is given to the candidates and based on the same a final selection of a hundred candidates is
made. The entrance test consists of four objectives types of examinations and is spread over four
days one examination per day. Each
candidates is charged a fee of Rs. 50 for taking up the entrance test. The following data was
gathered for the past two years.

53 Costing Notes
 2000 2001
Gross Revenue (Fees collection) 1,00,000 1,50,000
Cost of valuation 40,000 60,000
Question Booklets cost 20,000 30,000
Rent (I.e. Rs. 2000 per day) 8,000 8,000
Honorarium to Chief Administrator 6,000 6,000
Supervision charges (on supervisor for
every for every 100 candidates
at the rate of Rs. 50 per day) 4,000 6,000
General administration expenses: 6,000 6,000

Total cost 84,000 1,16,000

Net Revenue 16,000 34,000
You are required to compute for 2002:

1. The budgeted net revenue if 4,000 candidates take up the entrance test
2. The break even number of candidates
3. The number of candidates to be enrolled if the net income desired Rs 20,000

Question 28
Raj Ltd manufactures three product X, Y and Z. The unit selling price of these products are Rs.100,
Rs.160, Rs.75 respectively.
The corresponding unit V.C. are Rs.50, Rs.80 & Rs.30.
The proportion in which these products are manufactured and sold is 20%, 30% and 50%. The
total F.C. is Rs.1480000.

Calculate overall breakdown quantity and the product-wise break up of such quantity.

Question 29
The Budgeted Result of A Ltd are as under:

Products Sales Value P/V Ratio Sales Mix(%)

A 250,000.00 50% 20%

B 400,000.00 40% 32%

C 600,000.00 30% 48%

54 Costing Notes
 Total 1,250,000.00 100%

Fixed Overheads for the period are Rs 502200.

of The management is worried about the results. You are required to prepare:

a) The statement showing the amount of loss, if any, being incurred at present and recommend
a change in the sale value each product as well as in the total sales value maintaining the same
sales-mix, which will eliminate the said loss.

b) Recommend the additional sales of any individual product to recover the loss.

Question 30
The products of a company are as follows:

A B

Units 36,000 12,000

Selling Price 5 10

Variable Cost 4 3

Fixed cost= 30,000.

Required

a. Calculate BEP in units.

b. Find the shift in BEP in units if that company discontinues Products A & substitute,
product C in place.
The quantity of product C is 6000 units & its selling price and variable cost are Rs.12 & 6
respectively.

Question 31
The budgeted income statement by product lines of Hulas Biscuit Factory Private Limited for
2064/065 is as follows:

Amount in Rs.
Particulars Glucose Coconut Cream Cracker
Sales 2,000,000 5,000,000 3,000,000
Variable Costs
Cost of goods sold 900,000 2,700,000 1,500,000
Selling costs 300,000 900,000 450,000

55 Costing Notes
 Fixed Costs
Administrative
360,000 900,000 540,000
costs
Other costs 160,000 400,000 240,000
Profit before tax 280,000 100,000 270,000
Income tax @ 30% 84,000 30,000 81,000
Profit after tax 196,000 70,000 189,000

All products are manufactured in the same facilities under common administrative control. Fixed
costs are allocated among the products in proportion to their budgeted sales volume:

You are required to:

a) Compute the budgeted break-even point of the company from the information provided
above.
b) What would be the effect of budgeted income if half of the budgeted sales volume of
coconut is shifted to glucose and cream cracker in equal rupee amount so that the total
sales in rupee remains the same? What will be new Breakeven Point?

Question No.32
A company manufactures and sells three models of a product. The selling price and cost data are
collected and presented to you for analysis here in below:
Description Model X Model Y Model Z
Unit Selling Price (Rs.) 800 1,200 2,000
Unit Variable Costs:
Direct Materials (Rs.) 160 240 400
Direct Labor (Rs.) 160 320 480
Overhead (Rs.) 80 160 240
Selling (Rs.) 160 160 160
Product Percentage of Total Sales 10% 50% 40%
The following information is also relevant:
 The company incurs advertising cost Rs.8 million, fixed administrative cost Rs.8 million,
and fixed manufacturing cost Rs.16 million in addition.
 The company has the capacity of producing 100,000 units of all models and is currently
utilizing its 80% capacity.
56 Costing Notes
 You are required to calculate/answer the following:
a) The profit from the given data.
b) The total BEP sales from the given data.
c) The company is considering increasing the advertising budget by Rs. 8 million to increase
the total unit sales to full capacity. The product mix would remain same. Is the campaign
desirable?
d) The company is considering of providing additional sales commission to sales force of
each product at the rate of 2% to increase the total unit sales to 90% of its capacity. The
product mix would remain same. Is the commission desirable?
e) The company is considering altering the production process by installing new machine
which will reduce the direct material, direct labor and variable overhead to 75% of their
current level and will increase the fixed manufacturing cost by Rs.16 million. What is the
minimum level of total sales (in units) for which this change would be desirable?
Question 33

Two firms A & Co. and B & Co sell the same type of product in the same market.
Their budgeted P & L Ac for the year ending 31st March 2004 are as below.
A & Co. B & Co.
Sales 500000 600000
Variable cost 400000 400000
Fixed cost 30000 70000
Net profit 70000 130000
Required:

i) Calculate at which sales volume both the firms will warn equal profit?
ii) State which firm is likely to earn greater profits in condition of:
a. Heavy demand of the product.
b. Low demand of the product

Question 34

A company produces and sells five types of dolls for children using one common material, which
is available as per requirements at Rs. 4 per kg. Skilled labour required for production is in short
supply and is currently limited to 17,500 hours per month at Rs. 30 per hour, variable production
overhead is Rs. 10 per labour hour and fixed production costs amount to Rs. 30,000 p.m. variable
selling & distribution overhead is 10% of sales value. While fixed selling, distribution and
administration cost is Rs. 70,000 p.m. Further details are as under:

57 Costing Notes
 Doll Current DemandSelling price perRaw materials required
Direct labour hours
units unit Rs. per unit in kgs required per unit hours
A 4,800 90 5 1.0
B 5,000 80 4 0.9
C 4,000 60 3 0.7
D 6,000 40 2 0.5
E 4,500 100 6 1.2
Required:

i. Optimum product-mix you would recommend.

ii. Profit likely to be earned as per mix suggested by you in (i).
iii. The company has just received an export- order for 5,000 units of E to be supplied within a
month. It will be possible to manufacture this quantity only by engaging labour on overtime
paying double the normal rate. An extra amount of Rs. 12,000 has to be incurred on
production overhead. If the company want 10% profit on sales. What price it should quote?

Question 34

Aggarwal Ltd. owns two factories, one at Bhairahawa and the other at Biratnagar. Both factories
produce and sell same product with the same Selling Price of Rs. 200 Per Unit. The following are
the other cost details:
Bhairahawa Plant Biratnagar Plant
Capacity Operated 75% 83-1/3%
Actual Sales (Rs.) 3,000,000 5,000,000
Total Fixed Cost (Rs.) 1,500,000 810,000
Depreciation (Rs.) 300,000 210,000
Profit/(loss) (Rs.) (300,000) 190,000
Required:
a) Calculate Break-Even-Point for each Plant both in unit and value
b) Calculate Cash Break-Even-Point for each Plant both in unit and value
c) Calculate Cost Indifference Point
d) In case Total Output is to be increased by 7,000 Units, how much output should be
increased from which Plant and why?
e) In case Total Output is to be curtailed by 7,000 Units, from which Plant should it be
curtailed and why?
f) Determine Combined BEP for the company as a whole adopting each of the following
three approaches:
i) Constant Sales-Mix in the ratio of capacities of Plants.

58 Costing Notes
ii) Variable Sales-Mix producing from more profitable Plant first.
iii) Using Actual Sales Ratio as the basis.

Question 35

The relevant data of X Ltd. for its three products, A, B and C are as under:

A B C
Direct Material (Rs. / Unit) 260 300 250
Direct labour (Rs. / Unit) 130 270 260
Variable overheads (Rs. / Unit) 110 230 180
Selling price (Rs. / Unit) 860 1,040 930
Machine Hours Required (per unit)
12 6 3
The estimated fixed overheads at four different levels of 3,600; 6,000; 8,400and 10,800 machine
hours are Rs. 1,00,000, Rs. 1,50,000, Rs. 2,20,00 and Rs. 3,00,000 respectively. The maximum
demand of A, B, C in a cost period are 500; 300 and 1800 units respectfully.

You are required to find out

(1)the cost profitable product –mix at each level and

(ii) the level of activity where the profit would be maximum.

Question 36

A Ltd produce two products for which details are as follows:

Product A(Rs.) Product (b) Rs.
Sales price\ unit 12.00 7.50
Direct materials cost\ unit 6.00 4.00
Direct labour hours \ units 2 hr 1 hr
Standard hourly rate 4 4
Variable overhead \ unit 1 1
Fixed overhead budgeted 1,00,000

Total direct labour hours available 2,00,000 minimum of product A is 30,000 units and B is
1,00,000 units. Assume that material are freely available and direct labour cam ne easily used for
either of the products subject to the minimum production as predicted above.
Suggest best production plan by using the steps with the statement for the purpose and show the
net profit.

59 Costing Notes
Question No.37
Z Ltd. makes a range of five products to which the following standard apply:

Per unit
Particulars A B C D E
Rs. Rs. Rs. Rs. Rs.
Selling Price 500 600 700 800 900
Direct Materials 90 100 170 120 210
Direct Wages 160 200 240 280 320
Variable Production Overheads 80 100 120 140 160
Variable Selling & Distribution Overheads50 60 70 80 90
Fixed Overheads 40 50 60 70 80
Total Cost 420 510 660 690 860

The direct labour wage rate is Rs. 40 per hour. Fixed overheads have been allocated on the basis
of direct labour hours.
The company has commitments to produce a minimum of 400 units of each product per month.
Direct labour hours cannot exceed 13,000 hours per month due to restriction of space.
The Board is now considering an offer of a new three year contract to produce an additional 400
units of product B per month at a selling price of Rs. 580 per unit. The contract would involve an
outlay of Rs. 1,000,000 on the lease of additional factory premises and purchase of new plant and
equipment. There would be no residual value at the end of the contract. Variable production
costs would be in accordance with existing standards and variable selling & distribution costs
would be one-half of the existing rate and cash outflows on fixed costs would be Rs. 200,000 per
annum. There would be no changes to existing production arrangements.
An outside supplier has offered to supply 400 units of product B per month at a price of Rs. 480
per unit. If purchased externally cash outflows on additional fixed costs will be Rs. 250,000 per
annum.
Required:
a) Give recommendations, supported by calculations, to show how direct labour hours in
the existing factory should be utilized in order to maximize profits.
b) Calculate budgeted trading results on the basis of your recommendation in (a).
c) Determine whether or not the proposed contract for product B should be accepted and, if
60 Costing Notes
 so, whether it should be purchased externally or manufactured in the new premises. The
company's cost of capital is 10%. You may take the present value of an annuity of Rs. 1 for
three years at 10% as Rs. 2.49. Ignore taxation and inflation.

Question No.38
HB Ltd. is a small manufacturing company which produces a range of three special cashmere
sweaters under the brand-names of Alpine, Border and Island.
For the month of Shrawan, the management accountant has prepared the following forecast of
trading results:

Alpine Border Island Total

Rs. Rs. Rs. Rs.
Sales 1,000,000 960,000 320,000
2,280,000

Variable costs
Direct materials 350,000 300,000 100,000 750,000
Direct labour 50,000 80,000 30,000 160,000
Works overhead 200,000 180,000 110,000 490,000
Fixed overhead 300,000 270,000 100,000 670,000
(Apportioned)
Net profit/ (Loss) 100,000 130,000 (20,000) 210,000

The following information is also available:

 Although there are other materials which are required for the manufacture of
sweaters, the major material is cashmere, purchased directly from China.
Unfortunately, due to delaysin shipment from China, production for the month of
Shrawan will be limited by the availability of cashmere supplies. The purchasing
manager believes that he will be able to increase the current stockholding of 61,000
kg by a delivery of 31,000 kg in mid- Shrawan. There are no substitute suppliers in
the short term.
 The production manager advises that the different products absorb different
quantities of cashmere: Alpine- 8 kg per unit, Border- 4 kg per unit and Island- 1 kg

61 Costing Notes
 per unit.
 The sales manager confirms that the current unit prices of the products are: Alpine-
Rs.100, Border- Rs.120 and Island- Rs.80. He is convinced that sales of the Border
product could be substantially increased beyond the current forecast, although he
is unableto quantify the effect. Extra advertising of Rs. 80,000 would be required to
achieve this increase, together with a 10% reduction in the price of the Alpine
product. The current forecast of trading results does not include the view.
 The managing director has reviewed the forecast for Shrawan and believes that
results can be improved immediately through stopping the manufacture of the
Island product. Neitherthe sales manager nor the production manager agrees with
his view, but they are not certain why they disagree.
 Fixed overhead is apportioned over the product lines on the basis of an allocation
by spaceoccupied on the factory floor.

The managing director is confused by the different proposals being put forward and
he seeks your services as the company‘s external financial consultant to assist him in
drawing up a sensible plan of action.
You are required to do the following:
a) Assuming that the full sales forecast for Shrawan can be achieved, assess the impact
of themanaging director‘s proposal to drop the entire Island range and advise on its
desirability.
b) In view of the shortage of cashmere, assist the company by preparing an optimal
production plan and a revised forecast of trading results for Shrawan.
c) In light of (b) above, assess the viability and effects of the sales manager‘s
plans toincrease sales of the Border range through extra advertising expenditure.
d) What other points of commercial interest would you wish to draw to the attention
of themanaging director?

Question No.39

A company having its head office in Centown has three factories situated at Uptown,
Middletown and Downtown. The operations of Middletown have been unprofitable for a
number of years. The leasehold of Middletown will also expire by the end of current year. In
view of continued losses the management has decided to close down the said factory rather than
renew the lease. The factory's plant and machinery can be sold at a price higher than the written
down value and the surplus funds will be sufficient to cover all termination costs.

62 Costing Notes
Projected profitability of the factories for the next year is as under: (Rs. in lakhs)

Particulars Uptown Middletown Downtown Total

Rs. Rs. Rs. Rs.

Sales 400 100 300 800

Variable costs 220 75 195 490

Fixed costs:

Factory 80 30 40 150

Selling & administration 30 5 15 50

Head office expenses apportioned25 15 25 65

Profit 45 (25) 25 45

a) The company however would like to continue to serve the customers now being served
by the Middletown factory if it could do so economically. Accordingly following
proposals were put forward for consideration based on a selling price of Rs. 250 per unit.
Close down Middletown factory and expand the operations of Downtown factory for
which surplus capacity exists. This proposal will involve the following changes:
i. Sales revenue of Downtown factory will increase by 25%.
ii. Factory fixed costs of Downtown factory will increase by 10%.
iii. Fixed selling and administration cost of Downtown factory will increase by 5%.
iv. Variable distribution costs of additional output will increase by Rs. 4 per unit.

b) Close down Middletown factory and expand the operations of Uptown factory subject to
the following changes in case of later:
I. Sales revenue will increase by Rs. 80 lakhs.
II. Factory fixed costs will increase by 20%.
III. Fixed selling and administration cost will increase by 10%.
IV. Variable distribution costs in respect of the additional units will increase by Rs. 5 per unit.

c) Close down Middletown factory and enter into a long term contract with an independent
manufacturer to serve the customers of Middletown factory. The manufacturer will pay a
royalty of Rs. 5 per unit to the company. In that event the sales of the area served by the
Middletown factory will fall by 25%.
d) Close down Middletown factory and discontinue serving the present customers of that
63 Costing Notes
 area.
You are required to evaluate each of these proposals and advise the management of the action to
be taken in the interest of improving profitability of the company.

Question No.40
Alpha Limited has prepared the following budget estimates for the coming year:

Product A Product B
Sales (in units) 6,000 16,000
Rs./Unit Rs./Unit
Selling Price 400 640
Direct Materials 120 220
Direct Wages @ Rs. 10 per hour 80 120
Variable Overheads 40 60
Fixed Overhead 80 120
Total Cost 320 520
Profit 80 120
After finalization of the above budget estimates, it is observed that 1/3rd of the production
capacity are still idle. In order to improve the performance, the following proposals are under
consideration:

a) Product A will be discontinued and the capacity so released will be used for product B.
The selling price of product B will, however, have to be reduced by Rs. 20 per unit in order
to increase the volume of sales.
b) Product B will be discontinued and the capacity so released will be diverted to the
production of product C. The particulars relating to per unit of product C are as under:
Selling Price Rs. 520 Direct Wages Rs. 100
Direct Materials Rs. 150 Variable Overheads Rs. 50
c) The idle capacity will be utilised for meeting an export demand for product D. The
particulars relating to per unit of product D are as under:
Selling Price Rs. 720 Direct Wages Rs. 200
Direct Materials Rs. 400 Variable Overheads Rs. 100
d) The idle capacity will be hired out by fixing a price in such a way that the same rate of
profit per direct labour hour as obtained in the budget estimates is achieved.
Required:

I. Prepare a statement showing the profitability of the products A & B as envisaged in the
budget estimates.
II. Evaluate each of the above four proposals separately showing the profitability under each
64 Costing Notes
 proposal.
III. Recommend most profitable proposal for Alpha Limited.

Question No.41

Electronic Equipment's Limited manufactures CD players. The management accountant of the

company has prepared the following provisional operating statement for a period:

Rs. Rs.

Sales (30,000 CD players) 375,000

Less: Other Costs (32,000 CD players)

Direct materials 128,000

Direct labour 96,000

Production overhead (64% variable and 36% fixed) 50,000

S & D overhead (75% variable with sales and 25% fixed) 20,000

294,000

Net profit for the year (prior to stock adjustment) 81,000

The following additional information was also available:

a. Fixed production overhead contained Rs. 2,500 of depreciation relating to plant & equipment
which is surplus to current requirements.

b. Over the period, 32,000 units were manufactured.

c. There was no opening stock for current period. In the preparation of the provisional operating
statement, no account has been taken of the closing stock at the end of current period. For the
purposes of internal management accounting, stocks of finished goods are valued at variable
manufacturing cost only.

The management is currently beginning to prepare the budget for the next period. There are
several factors to be considered:

(i) To make better use of the surplus plant & equipment, the company‘s technical manager has
suggested commencing manufacture of disk drives and modems for personal computers. Disk
65 Costing Notes
drives will absorb Rs. 1,500 of the depreciation charge with modems allocated the remaining Rs.
1,000.

(ii) The manufacturing and sales managers have estimated that the surplus plant & equipment
will be sufficient to produce 5,000 disk drives and 10,000 modems; and these quantities can be
sold in the current market. However, the sales manager has insisted that, by the end of the period,
the company should be carrying minimum buffer stocks of 10% of annual production for both
disk drives and modems.

(iii) Stock levels of CD players should be unchanged, but production levels are expected to
remain at the same as in the current period. The sales manager believes that the demand for CD
players will continue to grow.

(iv) The purchasing manager has forecasted that the direct materials costs of CD players will
increase by Re.1 per unit. All other variable costs of CD players will remain at the unit cost levels
incurred in the current period.

(v) For the new products, the following estimates have been made and assembled at the projected
manufacturing volume levels:

Total variable costs: Disk Drives (Rs.) Modems (Rs.)

Direct materials 15,000 10,000

Direct labour 10,000 25,000

Factory overhead 2,500 15,000

Additional fixed overhead, excluding depreciation:

Factory overhead 8,000 13,500

Selling & distribution overhead 2,250 6,750

(vi) The production manager has projected a 60% increase in the fixed element of selling &
distribution overheads (for CD players only) in the budget period. Variable selling and
distribution overheads will be incurred at 2% of sales value for both disk drives and modems.

(vii) The market will sustain the following prices for the products for the next period: CD Players:
Rs. 15.00 /unit, Disk Drives: Rs. 12.00 /unit, and Modems Rs. 10.00 /unit

66 Costing Notes
(viii) The management accountant has estimated that the investment in fixed assets and working
capital for next period in the three product lines will be as follows:

CD Players: Rs. 325,000; Disk Drives: Rs. 80,000; and Modems: Rs. 60,000.

You are required to:

a) Compute the break-even number of CD players for the current period.

b) Prepare a budgeted Profit and Loss Account for the next period incorporating the impact of
the introduction of the new products and identifying product profitability.

c) Compute the return on investment for each product for the next period.

Question No.42

Wonder Ltd. manufactures a single product ZEST. The following figures relate to ZEST for one-
year period.

Activity Level 50% 100%

Sales and production (units)400 800

Rs (Lakh) Rs (Lakh)

Sales 8.00 16.00

Production costs:

Variable 3.2 6.4

Fixed 1.6 1.6

Selling and administration costs

Variable 1.6 3.2

Fixed 2.4 2.4

The normal level of activity for the year is 800 units. Fixed costs are incurred evenly throughout
the year, and actual fixed costs are the same as budgeted. There were no stocks of ZEST at the
beginning of the year.

67 Costing Notes
In the first quarter, 220 units were produced and 160 units were sold.

Required

a) What would be the fixed production costs absorbed by ZEST if absorption costing were
used?
b) What would be the under/over-recovery overheads during the period?
c) What would be the profit using absorption costing?
d) What would be the profit using marginal costing?
e) Why is there a difference between the answers to (c) and (d)?

Question 43

A new subsidiary of a group of companies was established for the manufacturer and sale of
product X. During the first year of operations 90,000 units were sold at Rs.20 per unit. At the end
of the year, the closing stock were 8,000 units in finished goods store and 4,000 units in work-in-
progress which were complete as regards material content but only half complete in respect of
labour and overheads. You are to assume that there were no opening stocks.

The work-in-progress account had been debited during the year with the following costs:
Direct materials Rs.7,14,000
Direct labour Rs.4,00,000
Variable overhead Rs.1,00,000
Fixed overhead Rs.3,50,000

Selling and administrative costs for the year were:

Variable cost per unit sold Fixed cost

Selling Rs.1.50 Rs.2,00,000
Administration Rs.0.10 Rs.50,000
The accountants of the subsidiary company had prepared a profit statement on the absorption
costing principle, which showed a profit of Rs.11,000.

You are required to:

a) Prepare a statement showing the equivalent units produced and the production of one unit
of product X by: element of cost and in total:
b) Prepare a profit statement on the absorption costing principle which agrees with the economy
accountant's statement.
68 Costing Notes
c) prepare a profit statement on the marginal costing basis;
d) Explain the differences between the two statements given for (b) and (c) above to the director
in such a way as to eliminate his confusion and state why both statements may be acceptable.s

Question 44 2021 June(20 Marks)

G Ltd. is manufacturer of office cabinets. During the FY 2076/77, it sold 12,000 units of cabinets
at the price of Rs.15,000 per unit. At the beginning of the year there were 1,500 units of finished
goods in stock which was 800 units at the end of the year. Similarly there was work in progress
of 400 units in the beginning of the year and 700 units at the end of the year. Opening WIP was
100% complete in respect of materials and 40% complete in respect of labour and overhead.
Closing WIP was 100% complete in respect of materials and 50% complete in respect of labour
and overhead.

During the year following expenses were incurred:

Expenses Amount in

Rs. Direct Material 81,200,000

Direct Labour 13,788,000

Variable Overhead 11,490,000

Fixed Overhead 22,980,000

In comparison to last year, the cost per unit have increased as follows:

Direct Material 11%

Direct Labour 7%

Variable Overhead 5%

Fixed Overhead 44%

Selling Administration cost of Rs. 1,500 per unit sold is incurred by G Ltd. and it incurs fixed
selling and administration cost of Rs. 700,000 per year.

Required:

a) Profitability Statement as per Absorption Costing

b) Profitability Statement as per Marginal Costing

c) Statement showing element wise cost per unit assuming FIFO basis

69 Costing Notes
Question 45

Nepa Engineering produces one of the component―Metal Shaft ‖ from a single raw material in
economic lots of 2,000 units. The raw material cost is Rs. 2 per Metal Shaft. Average annual
demand is 20,000 units. The annual holding cost of material is Re. 0.25 per unit and the minimum
stock level is set at 400 units. Direct labour costs for the component are Rs. 6 per unit, fixed
manufacturing overhead is charged at a rate of Rs. 3 per unit based on normal activity of 20,000
units. The company also hires a machine on which the components are produced at a rate of Rs
200 per month.

Required:

i. What will be the total annual manufacturing cost of 20,000 units of Metal Shaft?

ii. Nepa Engineering is considering the possibility of purchasing from a supplier the components
now it makes. The supplier will provide necessary components at a unit price of Rs. 9.
Transportation and storage cost would be negligible. Should the company purchase the
component instead of manufacturing?

Question 46

Dokomo makes and sells a single product, Product "X". It is currently producing 112,000 units
per month, and is operating at 80% of full capacity. Total monthly costs at the current level of
capacity are Rs. 611,000. At 100% capacity, total monthly costs would be Rs. 695,000. Fixed costs
would be the same per month at all levels of capacity between 80% and 100%. At the normal
selling price for Product X, the contribution/sales ratio is 60%. A new customer has offered to
buy 25,000 units of Product X each month, at 20% below the normal selling price. Dokomo
estimates that for every five units that it sells to this customer, it will lose one unit of its current
monthly sales to other customers.

Required:

iv) Calculate the variable cost per unit of Product X and total fixed costs per month.

v) Calculate the current normal sales price per unit, and the contribution per unit at this price.

vi) Calculate the effect on total profit each month of accepting the new customer‘s offer, and
selling 25,000 units per month to this customer. Recommend whether the customer‘s offer should
be accepted.

Question 47

70 Costing Notes
A company is at present working at 90% of its capacity and producing 13,500 units per annum.
It operates a Flexible Budgetary Control System. The following figures are obtained from its
budget:

Capacity utilization 90% 100%

Sales Rs. 1,500,000 Rs. 1,600,000

Fixed expenses 300,500 300,600

Semi fixed expenses 97,500 100,500

Variable expenses 145,000 149,500

Units manufactured 13,500 15,000

Material and labour costs per unit are constant under the present conditions. Current profit
margin is 10% on sales.

Required:

i) Determine the differential cost of producing 1,500 units by increasing capacity utilization to
100 percent.

ii) What would you recommend as an export price per unit for these 1,500 units after considering
that overseas prices are much lower than inland prices?

Question 48

A telecom company in Nepal has total GSM prepaid active subscriber base of around 5 million.
Its Average Revenue Per User (ARPU) is Rs.238.50 per month. Assuming that its variable cost
and profit are 35% and 40% respectively of total revenue in this segment of operation, you are
required to calculate the number of subscriber to be added to justify the 20% reduction in average
call tariff which is currently Rs.1.50 per minute. Also assume that the proposed reduction in tariff
will increase call duration by 20%.

Quetion 49

Perfect Piston Ltd. produces 60,000 pistons per annum for its parent company Perfect Motor Ltd.
The pistons are sold to Perfect Motors at NRs. 200 per unit. The variable cost per piston is NRs.
180. The annual fixed cost of Perfect Piston Ltd is NRs. 15 lakhs and it is currently operating at
60% capacity.

The company desires to respond to an export enquiry for 30,000 pistons of the type of it is
currently manufacturing. The company's aim is to improve capacity utilization and avoid loss.

71 Costing Notes
You have to take note of the following benefits that will occur in the export transactions while
determining the F.O.B. price to be quoted.

a) Export incentive by way of cash assistance at 10% of F.O.B. value of exports.

b) Reimbursement of excise duty on manufacturing inputs by way of 5% drawback of duty on

F.O.B. value of exports.

c) Entitlement of import license to the extent of 10% on F.O.B. value of exports. The import license
can either be sold at a premium of 100% or it can be utilized to import certain critical auto
components that will yield a 30% profit on cost.

Recommend the bare minimum price that the company should quote, in order to breakeven,
assuming:

i) It sells the import license in the market.

ii) It imports components against the license and sells them for profit.

Question No.50

Raj Limited manufactures 'X' Lubricant. The accounts of the Company showed a profit Rs.
14,00,000 from the manufacture of 'X' after charging fixed costs of Rs. 10,00,000. The item is sold
for Rs. 80 per unit and has a variable cost of Rs. 50 per unit. Market sensitivity tests suggest the
following responses to price changes:

Alternatives Selling Price reduced by Quantity Sold increased by

A 5% 10%

B 7% 15%

C 10% 20%

D 12% 30%

E 15% 35%

Evaluate the alternatives and recommend the best alternative.

JOINT AND BY PRODUCT

Question 1
72 Costing Notes
C Ltd. operates a process which produces three joint products. In the period just ended
costs of production totaled Rs. 509,640. Output from the process during the period was:

Product - W 276,000 kilos

Product - X 334,000 kilos

Product - Y 134,000 kilos

There were no opening stocks of the three products. Products W and X are sold in this
state. Product Y is subjected to further processing. Sales of products W and X during the
period was:

Product - W 255,000 kilos at Rs. 0.945 per kilo

Product – X 312,000 kilos at Rs. 0.890 per kilo

128,000 kilos of product Y were further processed during the period. The balance of the
period production of the three products W, X and Y remained n stock at the end of the
period. The value of closing stock of individual products is calculated by apportioning
costs according to weight of output.

The additional costs in the period of further processing product Y, which is converted
into produc Z were:

Direct labour Rs. 10,850

Production overhead Rs. 7,070

96,000 kilos of product Z were produced from the 128,000 kilos of product Y A by-product
BP is also produced which can be sold for Rs. 0.12 per kio. 8,000 kios of BP were produced
and sold during the period.

Sales of product Z during the period were 94,000 kilos, with total revenue of Rs 100,110
Opening stock of product Z was 8,000 kilos, valued at Rs 8,640 The FIFO method is used
for pricing transfers of product Z to cost of sales.

Selling and administration costs are charged to all main products when sold, at 10% of
revenue Required:

73 Costing Notes
 i) Prepare a profit and loss account for the period, identifying separately the
profitably of
each of the three main products W, X and Z).

ii) C Ltd has now received an offer from another company to purchase the total
output of
product Y (i.e. before further processing) for Rs. 0.62 per kilo. Calculate the viability of
this alternative.
Question 2
The Management Team of Exe Ltd. is considering the possibility of undertaking a single
Production process which jointly produces four products in standard proportions. The
output from each 10 kg. Batch of raw material input in the process, together with net
realizable value per kg. of output immediately after the split-off point, is as under:

Material Output per 10 kg of Net realizable value

input per kg. of output (Rs.)

A 4 8
B 3 4
C 2 10
D 1 2

The costs of processing each 10 kg. input batch are Rs. 12 and the cost of the raw material
input is Rs. 4 per kg.

For each of the four material jointly produced there s the possibility of further processing
before sale. The further processing will entail manual operation and mechanical
processing as well as incurring some costs directly attributable to each product. Details
of the resources used in, and cost incurred by, the further processng as we as the fina
price per kg. as under:

Material Machin Labour hours Other direct Sales price

e hours
A 2 1 cost
4 17
B 6 1 2 13
C 4 5 3 36
D 2 2 2 9

74 Costing Notes
―Other direct costs are variable costs but exclude the cost of labour, also a variable cost,
at Rs 3 per labour hour. Apart from ―other direct costs and labour costs , al other costs of
the further processing are fixed and are expected amount to Rs. 3,40,000 per annum.

Exe Ltd. has the opportunity to process 1,00,000 kg. of the basic raw material per year
and machine capacity s capable of fully processing this amount.

The Managing Director feels that all products which are subjected to further processing
must be treated as joint products and all products to be sod immediately after the split -
off point without further processing are to be treated as by-products of the original
process. The net costs of the joint process are allocated to the joint products in the
proportion to the contribution of each product line, after considering the marginal costs
after the split-off point and the sales revenue.

However the Managing Director is uncertain whether the Rs 340,000 fixed production
costs of the further processing should be allocated to products in accordance with
machine or labour hours.Required:

a) Specify which of the jointly produced materials should be subject to further

processing i the joint process is carried out.

b) Produce a product profitably report for the joint products, utilizing the
Managing Director‘s approach to the determination of joint and by-products, for each of
the methods of allocating fixed production overhead he has mentioned. You may assume
all the production will be sold.

Question 3

A Pharmaceutical Company purchases a Raw Material, which is then processed to yield three
chemicals: Anarol, Estyl end Betryl.

In October the Company purchased 10,000 gallons of the raw material at a cost of Rs.12,50,000

and incurred additional joint conversion costs of Rs.7,50,000. The sales and production
information for the month are as follows -

75 Costing Notes
 Gallons Price at split Further Processing
Product Eventual Sales Price
produced off (per Gallon)Cost
Anarol 2,000 Rs.350 - -
Estyl 3,000 Rs.240 - -
Betryl 5,000 Rs.200 Rs.30 Rs.360

Anarol and Estyl are sold to other pharmaceutical companies at the split off point. Betryl can be
sold at the split-off point or processed further and packaged for sale as an asthma medication.

Required:

a) Allocate the Joint Cost to the three products using - (a) Physical Units Method, (b) Sales-
Value at Split-Off Method, and (c) Net Realizable Value method.
b) Suppose that half of October production of Estyl could be purified and mixed with all of
the Anarol to produce a Veterinary Grade Anaesthetic.All further processing costs amount
to Rs.2,25,000. The Selling Price of the Veterinary Grade Anarol is Rs.650 per gallon.
Should the pharmaceutical Company further process the Anarol into Anaesthetic?
Assume that the resultant quantity of Veterinary Grade Anarol produced is 2,000 gallons
only.
Question 4
A Company processes a Raw Material into five products. In Process 1, products AXE and
BXE are produced in the ratio of 1 : 1. Product AXE then passes on to Process 2 where it
is processed into CXE and DXE. Product BXE is used in Process 3 to produce the product
EXE.

Product AXE yields products CXE and DXE in the ratio of 7 3 CXE is processed further
in Process 4 after which it is sold Rs.18 per unit. DXE may be sold immediately at Rs.14.40
per unit or it may be processed further in Process 5 after which it can be sold for Rs.20.80
per unit.

EXE is processed in Process 6 where normal spoilage of 5% occurs. The spoiled units are
disposed of at a price of Rs.2 per unit. EXE sells at Rs.15.20 per unit.

The costs incurred during a period are as under:

Process 1 2 3 4 5 6
Output (units) 1,00,000 50,000 50,000 35,000 15,000 47,500
Costs Rs.) 5,41,500 1,50,000 1,08,000 1,30,000 1,00,000 97,000

76 Costing Notes
The output of Process 6 represents good units. The process costs are variable costs.

a) State with supporting calculations whether the Product DXE should be processed
in Process 5 or not.
b) Prepare a statement showing apportionment of joint costs to Products AXE and
BXE & Products CXE and DXE.
c) Prepare a statement of profit for the period based on your decision at (a) above.

Question 5
A Chemical Factory processes Raw Material R and produces three similar products P1,
P2 and P3 out of a joint process. The joint costs of processing 5,000 kg of R are:

Labour — Rs.6,000 and Overheads — Rs.2,000.

Raw Material R is purchased at Rs.2.40 per kg. This rate is after a trade discount of 20%
on list price. Normal Loss is estimated at 10% of input weight. The scrap generated from
processing R is recovered to the extent of 25% (by weight) and sold as such in the market
at Rs.4. The products P1, P2 and P3 can be sold at Rs.5.00, Rs.6.00 and Rs.6.50 per kg
respectively without any further processing.

However, Product P1 and P2 can also be further jointly processed at an additional cost of
Rs.2 per kg of input to get product J1. The further processing cost of J1 will be Re 1 per
kg of output weight. Similarly, products P2 and P3 can be jointly processed to get a
product J2 at an additional cost of Rs.5 per kg of input. The further processing cost of J2
will be Rs.2 per kg of output weight. The normal loss of processing J1 out of P1 and P2
will be 5% of input weight. No processing loss is expected on processing J2. The selling
rices of J1 and J2 including the input composition is given below —

Input Output J1 Output J2 Outputweight

P1 40% - 3ratio
P2 60% 50% 4
P3 - 50% 2
Price per kg Rs.10 Rs.12

Required:

1. Ascertain the profitability of processing P1, P2 and P3 from 5,000 kg of R assuming

sale at split-off point.
77 Costing Notes
 2. Compute the profits after both J1 and J2 are further processed and marketed using
P2 in the ratio of 3:2 for J1 and J2 respectively.
3. Recommend whether the Company can use the whole output of P-2 for processing
J-1 instead of using it in the ratio of 3 : 2 for both products J-1 and J-2 as in (2)
above.

PROCESS COSTING

Question No.1

Exclusive Cable Ltd. manufactures plastic pipes (Normal) from a material which gets
completed in two processes; Fabrication and Finishing. The details of material used and
expenses for production of the Normal Product for the month of Chaitra 2068 were as below:

Fabrication Process:

15,000 kgs of material were used during the month and out of the same, 13,500 kgs were
fabricated and transferred to Finishing Process and 1,500 kgs remained as work- in- progress.
The closing work-in-progress was 1/3rd completed in respect of labour and overheads. There
was no work-in-progress at the beginning of the month. The cost of material used was
Rs.1,800,000 and cost of labour and overheads incurred in the process was Rs. 414,000.

Finishing Process:

There were 900 kgs of product in work-in-progress at the beginning of the month. The opening
work-in-progress was 1/3rd completed in respect of labour and overheads. The cost of work-
in-progress was Rs. 141,000. At the end of the month there were 600 kgs of product as work-in-
progress. The closing work-in-progress was 25% complete in respect of labour and overheads.
The company incurred Rs. 273,000 for labour and overheads in this process during the month.

The finished product (Normal) produced after completion of Finishing Process is sold at Rs. 200
per kg.

Seeing the demand for durable products to be used in buildings, the management of the
company is considering production of more durable and better plastic pipes (Advanced) by
further treatment of the finished product (Normal) of Finishing Process. This Advanced
product could be sold at Rs. 235 per kg in the market. The treatment plant installation costs Rs.
8,000,000 and the cost for treating the quantity produced by Finishing Process in the month is
estimated to be Rs. 345,000. For the implementation of this plan, the management desires a
minimum return on investment of 25% per annum.
78 Costing Notes
Required:

a) Prepare equivalent unit statement for both processes and show the cost of closing stock
and completed units.
b) Prepare process accounts.
c) Prepare profitability statement of the Normal Product.
d) Determine whether the implementation of the management's plan to produce Advanced
Product is acceptable.

79 Costing Notes