BUDGETS AND BUDGETARY CONTROL

Q. No. Questions and Answers

1. During the FY 20X1-X2, P Limited has produced 60,000 units operating at 50%
capacity level. The cost structure at the 50% level of activity is as under:
Particulars (₹)
Direct Material 300 per unit
Direct Wages 100 per unit
Variable Overheads 100 per unit
Direct Expenses 60 per unit
Factory Expenses (25% fixed) 80 per unit
Selling and Distribution Expenses (80% Variable) 40 per unit
Office and Administrative Expenses (100% fixed) 20 per unit
The company anticipates that in FY 20X2-X3, the variable costs will go up by 20% and
fixed costs will go up by 15%. The Selling Price per unit will increase by 10% to ₹880.
Required:
(i) Calculate the Budgeted Profit/Loss for the FY 20X1-X2.
(ii) Prepare an Expenses Budget on marginal cost basis for the FY 20X2-X3 for the
company at 50% and 60% level of activity and. Find out the profits at respective levels.
(ICAI SM, May 2013 RTP, Nov. 2014, Modified Nov. 2019 RTP & Nov. 2020, Modified
MTP May 2020, Modified MTP May 2023)
Ans. (i) Calculation of Budgeted Profit for the FY 20X1-X2:
60,000 units
Particulars
Per unit (₹) Amount (₹)
Sales (A) 800.00 4,80,00,000
Variable Costs:
Direct Material 300.00 1,80,00,000
Direct Wages 100.00 60,00,000
Variable Overheads 100.00 60,00,000
Direct Expenses 60.00 36,00,000
Variable Factory Expenses (75% of ₹80 p.u) 60.00 36,00,000
Variable Selling & Distribution Exp. (80% of ₹40 p.u.) 32.00 19,20,000
Total Variable Costs (B) 652.00 3,91,20,000
Contribution (C)=(A−B) 148.00 88,80,000
Fixed Costs:
Office and Administrative Expenses (100%) --- 12,00,000
Fixed Factory Expenses (25%) --- 12,00,000
Fixed Selling & Distribution Expenses (20%) --- 4,80,000
Total Fixed Costs (D) --- 28,80,000
Profit (C−D) --- 60,00,000
(ii) Expense Budget of P Ltd. for the FY 20X2-X3 at 50% & 60% level
Particulars 60,000 units 72,000 units
p.u. (₹) (₹) p.u. (₹) (₹)
Sales (A) 880.00 5,28,00,000 880.00 6,33,60,000
Variable Costs:
Direct Materials 360.00 2,16,00,000 360.00 2,59,20,000
Direct Wages 120.00 72,00,000 120.00 86,40,000
Variable Overheads 120.00 72,00,000 120.00 86,40,000
Direct Expenses 72.00 43,20,000 72.00 51,84,000
Variable Factory Expenses 72.00 43,20,000 72.00 51,84,000
 Variable Selling & Distribution Exp. 38.40 23,04,000 38.40 27,64,800
Total Variable Cost (B) 782.40 4,69,44,000 782.40 5,63,32,800
Contribution (C)=(A−B) 97.60 58,56,000 97.60 70,27,200
Fixed Costs:
Office & Administrative Exp. (100%) --- 13,80,000 --- 13,80,000
Fixed Factory Expenses (25%) --- 13,80,000 --- 13,80,000
Fixed Selling & Distribution Exp. (20%) --- 5,52,000 --- 5,52,000
Total Fixed Costs (D) --- 33,12,000 --- 33,12,000
Profit (C−D) --- 25,44,000 --- 37,15,200

16. Savi Limited is currently working at 80% of its capacity level and furnished the
following information for current period:
Production / Sales 96,000 units
Direct Variable Cost ₹20 per unit
Factory Overheads ₹8,40,000
Administrative Overheads (Fixed) ₹20,60,000
Sales Commission 2% of Sales Value
Transportation Expenses ₹4,000 per truck
(Loading Capacity 4,000 units)
The selling price of the product is ₹120 per unit and Factory Overheads are 80%
variable in nature.
The management of Savi Limited has come.to know that there will be high fluctuations
in the demand of the product in upcoming year and it would not be an easy task to
predict the demand. Selling price per unit will not be affected by demand fluctuations.
Savi Limited has decided to prepare a flexible budget for. the product at 60%, 80%
and 100% capacity level.
You are required to prepare the Flexible Budget showing total cost of the product at
each level. (Sept. 2024, May 2004)
Ans. Flexible Budget of Savi Ltd
60% 80% 100%
(72,000 units) (96,000 units) (1,20,000 units)
(₹) (₹) (₹)
Sales (A) 120.00 120.00 120.00
Variable Costs:
- Direct Variable Cost 20.00 20.00 20.00
- Variable Factory 7.00 7.00 7.00
Overheads (WN1)
- Sales Commission (2%) 2.40 2.40 2.40
- Transportation Expenses 1.00 1.00 1.00
Total Variable Cost (B) 30.40 30.40 30.40
Contribution Per Unit 89.60 89.60 89.60
(C) = (A – B)
Total Contribution (D) 64,51,200.00 86,01,600.00 1,07,52,000.00
Fixed Costs:
- Administrative 20,60,000.00 20,60,000.00 20,60,000.00
Overheads (100%)
- Factory Overheads (20%) 1,68,000.00 1,68,000.00 1,68,000.00
Total Fixed Costs (E) 22,28,000.00 22,28,000.00 22,28,000.00
Profit (D-E) 42,23,200.00 63,73,600.00 85,24,000.00
Total Cost 44,16,800.00 51,46,400.00 58,76,000.00
 Working Note:1
Variable factory Overheads = ₹8,40,000 x 80% = ₹6,72,000 Variable
factory Overheads per unit = ₹6,72,000/96,000 units = ₹7
17. The following information relates to Anu Limited, a AI enabled toy manufacturing
company:
The selling price of a toy is ₹3,000, and sales are made on credit and invoiced on the last
day of the month.
Variable costs of production per toy are materials (₹1,000), labour (₹800), and overhead
(₹400)
The sales manager has forecasted the following volumes:
Month No. of Toys
November 1,000
December 1,000
January 1,000
February 1,250
March 1,500
April 2,000
May 1,900
June 2,200
July 2,200
August 2,300
Customers are expected to pay 50% One month after the sale and 50% Two months after
the sale.
The company produces the toys two months before they are sold and the creditors for
materials are paid two months after production.
Variable overheads are paid in the month following production and are expected to
increase by 25 % in April; 75% of wages are paid in the month of production and 25% in
the following month. A wage increase of 25% will take place on 1st March.
The company needs funds for the running the business and purchase of new machine so it
will sell one of its freehold properties in June for
₹20,00,000, and buy a new machine in June for ₹5,00,000. Depreciation is currently
₹10,000 per month, and will rise to ₹15,000 after the purchase of the new machine.
The company’s corporation tax of ₹1,00,000 is due for payment in March.
The company presently has a cash balance at bank on 31 December 2023, of ₹50,000.
You are required to PREPARE a cash budget for the six months from January to June,
2024. (ICAI SM, MTP Jan. 2025 Series I)
Ans. Workings:
(1) Sale receipts
Month Nov Dec Jan Feb Mar Apr May Jun
Forecast sales 1,000 1,000 1,000 1,250 1,500 2,000 1,900 2,200
(S)
(₹) (₹) (₹) (₹) (₹) (₹) (₹) (₹)
S×3000 30,00,000 30,00,000 30,00,000 37,50,000 45,00,000 60,00,000 57,00,000 66,00,000
Debtors pay:
1 month 50% 15,00,000 15,00,000 15,00,000 18,75,000 22,50,000 30,00,000 28,50,000
2nd month - 15,00,000 15,00,000 15,00,000 18,75,000 22,50,000 30,00,000
50%
- 15,00,000 30,00,000 30,00,000 33,75,000 41,25,000 52,50,000 58,50,000

(2) Variable overheads

Month Nov Dec Jan Feb Mar Apr May Jun
Qty 1,000 1,250 1,500 2,000 1,900 2,200 2,200 2,300
produced
(Q)
(₹) (₹) (₹) (₹) (₹) (₹) (₹) (₹)
Var. 4,00,000 5,00,000 6,00,000 8,00,000 7,60,000
 overhead
(Q×400)
Var. 11,00,000 11,00,000 11,50,000
overhead
(Q×500)
Paid one 4,00,000 5,00,000 6,00,000 8,00,000 7,60,000 11,00,000 11,00,000
month later

(3) Wages payments

Month Dec Jan Feb Mar Apr May Jun
Qty 1,250 1,500 2,000 1,900 2,200 2,200 2,300
produced (Q)
(₹) (₹) (₹) (₹) (₹) (₹) (₹)
Wages (Q × 10,00,000 12,00,000 16,00,000
800)
Wages (Q × 19,00,000 22,00,000 22,00,000 23,00,000
1,000)
75% this 7,50,000 9,00,000 12,00,000 14,25,000 16,50,000 16,50,000 17,25,000
month
25% next 2,50,000 3,00,000 4,00,000 4,75,000 5,50,000 5,50,000
month
7,50,000 11,50,000 15,00,000 18,25,000 21,25,000 22,00,000 22,75,000

CASH BUDGET – SIX MONTHS ENDED JUNE

Jan Feb Mar Apr May Jun
(₹) (₹) (₹) (₹) (₹) (₹)
Receipts:
Sales receipts 30,00,000 30,00,000 33,75,000 41,25,000 52,50,000 58,50,000
Freehold property - - - - - 20,00,000
30,00,000 30,00,000 33,75,000 41,25,000 52,50,000 78,50,000
Payments:
Materials 10,00,000 12,50,000 15,00,000 20,00,000 19,00,000 22,00,000
Var. overheads 5,00,000 6,00,000 8,00,000 7,60,000 11,00,000 11,00,000
Wages 11,50,000 15,00,000 18,25,000 21,25,000 22,00,000 22,75,000
Machine - - - - - 5,00,000
Tax - - 1,00,000 - - -
26,50,000 33,50,000 42,25,000 48,85,000 52,00,000 60,75,000
Net cash flow 3,50,000 (3,50,000) (8,50,000) (7,60,000) 50,000 17,75,000
Balance b/f 50,000 4,00,000 50,000 (8,00,000) (15,60,000) (15,10,000)
Cumulative cash 4,00,000 50,000 (8,00,000) (15,60,000) (15,10,000) 2,65,000
flow
 MARGINAL COSTING
Q. No. Questions and Answers
2. MNP Ltd. Sold 2,75,000 units of its product at ₹37.50 per unit. Variable costs are ₹17.50
per unit (manufacturing costs of ₹14 and selling cost of ₹3.50 per unit). Fixed costs are
incurred uniformly throughout the year & amount to ₹35,00,000 (including depreciation
of ₹15,00,000). There is no beginning or ending inventories.
Required:
(a) Estimate Break-even Sales level quantity and Cash Break-even Sales level quantity.
(b) Estimate the P/V Ratio.
(c) Estimate the number of units that must be sold to earn an income (EBIT) of ₹2,50,000.
(d) Estimate the sales level to achieve an after-tax income (PAT) of ₹2,50,000. Assume
40% corporate income Tax rate.
(ICAI SM, Nov. 2010, Modified RTP Nov. 2019 Modified May 2023)
Ans. (a) Break-even Sales level Quantity = Fixed Cost
=
₹35,00,000
= 1,75,000 units
Contribution per unit ₹20
Cash Fixed Cost ₹20,00,000
Cash Break-even Sales = Contribution per unit = ₹20
= 𝟏, 𝟎𝟎, 𝟎𝟎𝟎 𝐮𝐧𝐢𝐭𝐬
(b) P/V Ratio =
Contribution per unit
× 100 =
₹20
× 100 = 𝟓𝟑. 𝟑𝟑%
Selling Price per unit ₹37.50

(c) Number of units that must be sold to earn an income (EBIT) of ₹2,50,000:
Fixed Cost+Desired EBIT level ₹(35,00,000+2,50,000)
= Contribution per unit
= 20
= 𝟏, 𝟖𝟕, 𝟓𝟎𝟎 𝐮𝐧𝐢𝐭𝐬

(d) After Tax Income (PAT) = ₹2,50,000 and Tax rate = 40%
₹2,50,000
Here, Desired level of Profit before tax = 60
× 100 = ₹4,16,667
Fixed Cost + Desired Profit ₹35,00,000 + ₹4,16,667
∴ Estimate Sales Level = P/V Ratio
= 53.33%
= ₹𝟕𝟑, 𝟒𝟒, 𝟐𝟏𝟎

3. Prisha Limited manufactures three different products & the following information
has been collected from the books of accounts:
Products
Particulars
A B C
Sales Mix 40% 35% 25%
Selling Price ₹300 ₹400 ₹200
Variable Cost ₹150 ₹200 ₹120
Total Fixed Costs ₹18,00,000
Total Sales ₹60,00,000
The company has currently under discussion, a proposal to discontinue the
manufacture of Product C and replace it with Product E, when the following results
are anticipated:
Particulars Products
A B C
Sales Mix 45% 30% 25%
Selling Price ₹300 ₹400 ₹300
Variable Cost ₹150 ₹200 ₹150
Total Fixed Costs ₹18,00,000
Total Sales ₹64,00,000
Required:
 (a) Calculate the total contribution to sales ratio and present break-even sales at existing
sales mix.
(b) Calculate the total contribution to sales ratio and present break-even sales at
proposed sales mix.
(c) State whether the proposed sales mix is accepted or not?
(ICAI SM, May 2021 RTP, Modified MTP Dec. 2021, Modified RTP May 2022)
Ans. (a) Calculation of Contribution to Sales Ratio at existing Sales Mix:
Particulars Products Total
A B C
Selling Price (₹) 300 400 200
Less: Variable Cost (₹) (150) (200) (120)
Contribution per unit (₹) 150 200 80
P/V Ratio 50% 50% 40%
Sales Mix 40% 35% 25%
Contribution per rupee of sales (P/V Ratio×Sales Mix) 20% 17.5% 10% 47.5%
Present Total Contribution (₹60,00,000 × 47.5%) ₹28,50,000
Less: Fixed Costs (₹18,00,000)
Present Profit ₹10,50,000
Present Break-Even Sales (
(₹18,00,000
) ₹37,89,473.68
0.475

(b) Calculation of Contribution to Sales Ratio at proposed Sales Mix:

Particulars Products Total
A B E
Selling Price (₹) 300 400 300
Less: Variable Cost (₹) (150) (200) (150)
Contribution per unit (₹) 150 200 150
P/V Ratio 50% 50% 50%
Sales Mix 45% 30% 25%
Contribution per rupee of sales (P/V Ratio×Sales Mix) 22.5% 15% 12.5% 50%
Proposed Total Contribution (₹64,00,000 × 50%) ₹32,00,000
Less: Fixed Costs (₹18,00,000)
Proposed Profit ₹14,00,000
(₹18,00,000
Proposed Break-Even Sales ( 0.50 ) ₹36,00,000

(c) Decision: The proposed sales mix increases the total contribution to sales ratio from
47.5% to 50% and the total profit from ₹10,50,000 to ₹14,00,000. Thus, the proposed
sales mix should be accepted.
4. A Company manufactures a product, currently utilizing 80% capacity with a
turnover of ₹8,00,000 at ₹25 per unit. The cost data are as under:
(i) Material cost ₹7.50 per unit, Labour cost ₹6.25 per unit. Semi-variable cost (including
variable cost of ₹3.75 per unit) ₹1,80,000.
(ii) Fixed cost ₹90,000 up to 80% level of output, beyond this an additional ₹20,000 will
be incurred.
Calculate:
(a) Activity level at Break-Even Point.
(b) Number of units to be sold to earn a net income of 8% of sales.
(c) Activity level needed to earn a profit of ₹95,000.
 (d) What should be the selling price per unit, if break-even point is to be brought down
to 40% activity level?
(Nov. 2000, Modified Nov. 2017, MTP July 2021, Modified MTP May 2019)
Ans. (a) Activity level at Break-Even Point:
Fixed Cost ₹1,50,000
Here, Break-even point (units) = Contribution per unit = ₹7.50
= 20,000 units
Break Even Point (units)
∴ Activity level at Break-even Point = {No.of units at 100% capacity level × 100}
20,000 units
= 40,000 units × 100 = 𝟓𝟎%

(b) Number of units to be sold to earn a net income of 8% of sales:

Let X be the number of units sold to earn a net income of 8% sales. Mathematically, it
means that:
∴ Sales Revenue of X units = Variable cost of X units + Fixed Cost + Net Income
8
⇒ ₹25 X = ₹17.5 X + ₹1,50,000 + 100 × (₹25X)
⇒ ₹25 X = ₹17.5 X + ₹1,50,000 + ₹2X ⇒ 5.5X = ₹1,50,000
₹1,50,000
∴X=( ) units = 27,273 units
₹5.5

(c) Activity level needed to earn a profit of ₹95,000:

The profit at 80% capacity level, is ₹90,000 which is less than the desired profit of ₹95,000,
therefore the needed activity level would be more than 80%. Thus the fixed cost to be
taken to determine the activity level needed should be ₹1,70,000. Units to be sold to earn
Fixed Cost + Desired Profit ₹1,70,000 + ₹95,000
a profit of ₹95,000 = = = 35,333,33 units.
Contribution per unit ₹7.5
35,333,33 units
∴ Activity level needed to earn a profit of ₹95,000 = 40,000 units
× 100 = 𝟖𝟖. 𝟑𝟑%

(d) Selling price per unit, if Break-even Point is to be brought down to 40% (16,000
units) activity level:
Let X be the selling price per unit.
Fixed Cost
Break-even-Point =
Contribution per unit
₹1,50,000
∴ 16,000 units = … [Given. Units at Break-even Point = 16,000 units
(X − ₹17.50)
⇒ 16,000(X-17.50) = 1,50,000 ⇒ 16,000X – 2,80,000 = 1,50,000
⇒ 16,000 X = 4,30,000 ∴ X (Sale Price per unit) = ₹26.875
Working Notes:
Turnover ₹8,00,000
1. (a) Number of units sold at 80% capacity = = = 𝟑𝟐, 𝟎𝟎𝟎 𝐮𝐧𝐢𝐭𝐬
Selling price p.u. ₹25
32,000 units
(b) Number of units sold at 100% capacity = × 100 = 𝟒𝟎, 𝟎𝟎𝟎 𝐮𝐧𝐢𝐭𝐬
80

2. Component of Fixed Cost included in Semi-variable Cost of 32,000 units:

∴ 𝐅𝐢𝐱𝐞𝐝 𝐂𝐨𝐬𝐭 = {Total Semi variable Cost − Total Variable Cost}
= ₹1,80,000 − 32,000 units × ₹3.75 = ₹1,80,000 − ₹1,20,000 = ₹𝟔𝟎, 𝟎𝟎𝟎
3. (a) Total Fixed Cost at 80% Capacity:
= Fixed cost + Component of fixed cost included in Semi-variable Cost
= ₹90,000 + ₹60,000 = ₹1,50,000
(b) Total Fixed Cost beyond 80% Capacity:
= Total fixed cost at 80% capacity + Additional fixed cost to be incurred
= ₹1,50,000 + ₹20,000 = ₹1,70,000
4. Variable Cost and Contribution per unit:
 ∴ Variable cost per unit
= Material Cost + Labour Cost + Variable Cost component in Semi-variable Cost
= ₹7.50 + ₹6.25 + ₹3.75 = ₹17.50
Now, Contribution per unit = Selling price p.u. – Variable cost p.u. = ₹25 – ₹17.50 = ₹7.50
5. Profit at 80% capacity level = Sales Revenue – Variable Cost – Fixed Cost
= ₹8,00,000 – ₹5,60,000 (32,000 units × ₹17.50) – ₹1,50,000
= ₹90,000
5. An Indian soft drink company is planning to establish a subsidiary company in
Bhutan to produce mineral water. Based on the estimated annual sales of 40,000
bottles of the mineral water, cost studies produced the following estimates for the
Bhutanese subsidiary:
Particulars Total Annual Costs Percent of Total Annual
Cost which is variable
Material 2,10,000 100%
Labour 1,50,000 80%
Factory Overheads 92,000 60%
Administration Expenses 40,000 35%
The Bhutanese production will be sold by manufacturer’s representatives who will receive
a commission of 8% of the sale price. No portion of the Indian office expenses is to be
allocated to the Bhutanese subsidiary.
You are required to:
(a) Compute the sale price per bottle to enable the management to realize an estimated
10% profit on sale proceeds in Bhutan.
(b) Calculate the break-even point in rupees sales as also in number of bottles for the
Bhutanese subsidiary on the assumption that the sale price is ₹14 bottle.
(ICAI SM, Modified MTP Nov. 2020, MTP May 2024 Series-I Modified, MTP Jan
2025-II)
Ans. Computation of Sale Price per Bottle [Output: 40,000 Bottles]
(a) Particulars (₹)
Variable Cost:
Material 2,10,000
Labour (₹1,50,000 × 80%) 1,20,000
Factory Overheads (₹92,000 × 60%) 55,200
Administrative Overheads (₹40,000 × 35%) 14,000
Commission (8% on ₹6,00,000) (W.N.1) 48,000
Fixed Cost:
Labour (₹1,50,000 × 20%) 30,000
Factory Overheads (₹92,000 × 40%) 36,800
Administrative Overheads (₹40,000 × 65%) 26,000
Total Costs 5,40,000
Profit (W.N.1) 60,000
Sales Proceeds (W.N.1) 6,00,000
₹𝟔,𝟎𝟎,𝟎𝟎𝟎
Sales Price per bottle (𝟒𝟎,𝟎𝟎𝟎 𝐁𝐨𝐭𝐭𝐥𝐞𝐬) 15

(b) Calculation of Break-even Point if Sale price is ₹14:

₹4,44,000 (W.N.2)
We have, Variable Cost per Bottle = = ₹11.10
40,000 Bottles
and Contribution per Bottle = ₹14 − 11.10 = ₹2.90
Fixed Costs ₹92,800
Break-even Point (in number) = = = 𝟑𝟐, 𝟎𝟎𝟎 𝐁𝐨𝐭𝐭𝐥𝐞𝐬
Contribution per Bottle ₹2.90
 Break-even Point (in sales value) = 32,000 Bottles × ₹14 = ₹𝟒, 𝟒𝟖, 𝟎𝟎𝟎
Working Notes:
1. Computation of Sales Price:
Let the Sales Price be ‘𝑥’.
8𝑥 10𝑥
∴ Commission = and Profit =
100 100
8𝑥 10𝑥
Now, 𝑥 = 4,92,000 + + ⇒ 100𝑥 − 8𝑥 − 10𝑥 = 4,92,00,000
100 100
⇒ 82𝑥 = 4,92,00,000 ⇒ 𝒙 = ₹4,92,00,000/82 = ₹𝟔, 𝟎𝟎, 𝟎𝟎𝟎
2. Computation of Total Variable Cost:
Total Variable Cost (₹)
Material 2,10,000
Labour 1,20,000
Factory Overheads 55,200
Administrative Overheads 14,000
Commission [(40,000 Bottles × ₹14) × 8%] 44,800
4,44,000

20. Moon Ltd. produces products 'X', 'Y' and 'Z' and has decided to analyse its
production mix in respect of these three products 'X', 'Y' and 'Z'.
You have the following information:
X Y Z
Direct Materials ₹(per unit) 160 120 80
Variable Overheads ₹(per unit) 8 20 12
Direct Labour:
Departments Rate per Hr (₹) Hours p.u. (X) Hours p.u. (Y) Hours p.u. (Z)
Department-A 4 6 10 5
Department-B 8 6 15 11
From the current budget, further details are as below:
X Y Z
Annual Production at present (in units) 10,000 12,000 20,000
Estimated Selling Price per unit (₹) 312 400 240
Sales departments estimate of possible sales in the
coming year (in units) 12,000 16,000 24,000
There is a constraint on supply of labour in Department-A and its manpower cannot be
increased beyond its present level.
Required:
(i) Identify the best possible product mix of Moon Ltd.
(ii) Calculate the Total Contribution from the best possible product mix.
(Nov. 2020, ICAI SM)
Ans. Statement Showing “Calculation of Contribution per unit”
(i) Particulars X (₹) Y (₹) Z (₹)
Selling Price (A) 312 400 240
Variable Cost:
Direct Material 160 120 80
Direct Labour:
Dept. A (Rate × Hours) 24 40 20
Dept. B (Rate × Hours) 48 120 88
Variable Overheads 8 20 12
Total Variable Cost (B) 240 300 200
 Contribution per unit (C = A - B) 72 100 40
Hours in Dept. A (D) 6 10 5
Contribution per hour (C ÷ D) 12 10 8
Rank I II III
Existing Hours = 10,000 × 6hrs. + 12,000 × 10 hrs. + 20,000 × 5 hrs. = 2,80,000 hrs.
Best possible product mix (Allocation of Hours on the basis of ranking)
Produce ‘X’ = 12,000 units
Hours Required = 72,000 hrs (12,000 units × 6 hrs.)
Balance Hours Available = 2,08,000 hrs (2,80,000 hrs. – 72,000 hrs.)
Produce ‘Y’ (the Next Best) = 16,000 units
Hours Required = 1,60,000 hrs (16,000 units × 10 hrs.)
Balance Hours Available = 48,000 hrs (2,08,000 hrs. – 1,60,000 hrs.)
Produce ‘Z’ (Balance) = 9,600 units (48,000 hrs./ 5 hrs.)

(ii) Statement Showing Contribution

Products Units Contribution/ Unit (₹) Total Contribution (₹)
X 12,000 72 8,64,000
Y 16,000 100 16,00,000
Z 9,600 40 3,84,000
Total 28,48,000
22. M/s. Gaurav Private Limited is manufacturing and selling two products: ‘BLACK’ and
‘WHITE’ at selling price of ₹20 and ₹30 respectively. The following sales strategy has
been outlined for the financial year 20X1-X2:
(i) Sales planned for the year will be ₹81,00,000 in the case of ‘BLACK’ and ₹54,00,000
in the case of ‘WHITE’.
(ii) The selling price of ‘BLACK’ will be reduced by 10% and that of ‘WHITE’ by 20%.
(iii) Break-even is planned at 70% of the total sales of each product.
(iv) Profit for the year to be maintained at ₹8,26,200 in the case of ‘BLACK’ and ₹7,45,200
in the case of ‘WHITE’. This would be possible by reducing the present annual fixed
cost of ₹42,00,000 allocated as ₹22,00,000 to ‘BLACK’ and ₹20,00,000 to ‘WHITE’.

You are required to Calculate:

(a) Number of units to be sold of ‘BLACK’ and ‘WHITE’ to Break-even during the financial
year 20X1-X2.
(b) Amount of reduction in fixed cost product-wise to achieve desired profit mentioned at
(iv) above. (May 2019)
Ans. (a) Statement showing Break-Even Sales
Particulars Black White
Sales Planned (₹) (A) 81,00,000 54,00,000
Selling Price (₹) (B) 18 24
Number of units to be sold (A÷B) 4,50,000 2,25,000
Break Even-Sales (in Units) [70% of Total Sales Unit] 3,15,000 1,57,500
Or Break-Even Sales (In ₹) [70% of Total Sales] 56,70,000 37,80,000

(b) Statement Showing Fixed Cost Reduction

Profit to be maintained ₹8,26,200 ₹7,45,200
Margin of Safety (30% of Sales) ₹24,30,000 ₹16,20,000
P/V Ratio (Profit / Margin of Safety) × 100 34% 46%
Contribution (Sales × 34% or 46%) ₹27,54,000 ₹24,84,000
Less: Profit ₹(8,26,200) ₹(7,45,200)
Revised Fixed Cost (A) ₹19,27,800 ₹17,38,800
Present Fixed Cost (B) ₹22,00,000 ₹20,00,000
Reduction in Fixed Cost (B-A) ₹2,72,200 ₹2,61,200
 STANDARD COSTING
Q. No. Questions and Answers
1. For making 10 kg. of CEMCO, the standard material requirements is:
Material Quantity Rate per kg. (₹)
A 8 kg 6.00
B 4 kg 4.00
During April, 1,000 kg of CEMCO were produced. The actual consumption of
materials is as under:
Material Quantity (kg.) Rate per kg. (₹)
A 750 7.00
B 500 5.00
Calculate:
(a) Material Cost Variance;
(b) Material Price Variance;
(c) Material Usage Variance.
(Modified in ICAI SM, May 2009, RTP May 2013 and May 2018, Nov. 2017, Modified
MTP May 2022 & MTP May 2019, RTP Jan 2025)
Ans. CALCULATION OF VARIANCES:
(a) Material Cost Variance = Standard cost − Actual cost
= ₹6,400 − ₹7,750 = ₹𝟏, 𝟑𝟓𝟎(𝐀)
(b) Material Price Variance = (Standard Price − Actual Price) × Actual Quantity
A = ₹(6 − 7) × 750 = ₹750(A)
B = ₹(4 − 5) × 500 = ₹500 (A)
= ₹𝟏, 𝟐𝟓𝟎 (𝐀)
(c) Material Usages Variance = (Standard Quantity – Actual Quantity) × Standard Price
A = (800 − 750) × ₹6 = ₹300(F)
B = (400 − 500) × ₹4 = ₹400(A)
= ₹𝟏𝟎𝟎 (𝐀)
Workings Notes:
(i) Standard cost for 1,000 Kg:
8
A = 800 kg ( × 1,000) × ₹6 = ₹4,800
10
4
B = 400 kg ( × 1,000) × ₹4 = ₹1,600
10
1,200 kg ₹6,400
(ii) Actual Cost for 1,000 Kg:
A = 750 kg × ₹7 = ₹5,250
B = 500 kg × ₹5 = ₹2,500
1,250 kg ₹7,750
3. XYZ Ltd. has furnished you the following information for the month of August, 20X1:
Particulars Budget Actual
Output (units) 30,000 32,500
Hours 30,000 33,000
Fixed Overheads ₹45,000 50,000
Variable Overheads ₹60,000 68,000
Working days 25 26
Calculate Overhead Variances.
 (ICAI SM modified, Modified in May. 2017, Nov. 2018, May 2014 RTP, MTP May
2020)

Ans. FIXED OVERHEAD VARIANCES:

(i) Fixed Overhead Cost Variance = Recovered Overheads – Actual Overheads
= ₹48,750 – ₹50,000 = ₹1,250(A)
(ii) 𝐅𝐢𝐱𝐞𝐝 𝐎𝐯𝐞𝐫𝐡𝐞𝐚𝐝 Expenditure Variance = Budgeted Overhead − Actual Overhead
= ₹45,000 − ₹50,000 = ₹𝟓, 𝟎𝟎𝟎 (𝐀)
(iii) 𝐅𝐢𝐱𝐞𝐝 𝐎𝐯𝐞𝐫𝐡𝐞𝐚𝐝 Volume Variance = Recovered Overhead − Budgeted Overhead
= ₹48,750 − ₹45,000 = ₹𝟑, 𝟕𝟓𝟎 (𝐅)
(iv) 𝐅𝐢𝐱𝐞𝐝 𝐎𝐯𝐞𝐫𝐡𝐞𝐚𝐝 Efficiency Variance = Recovered Overhead − Standard Overhead
= ₹48,750 − ₹49,500 = ₹𝟕𝟓𝟎 (𝐀)
(v) Fixed Overhead Capacity Variance = Standard Overhead – Revised Budgeted Overhead
= ₹49,500 − ₹46,800 = ₹𝟐, 𝟕𝟎𝟎 (𝐅)
(vi) Calendar Variance = (Actual Days − Budget Days) × Standard rate per day
= (26 − 25) × ₹1,800 = ₹𝟏, 𝟖𝟎𝟎 (𝐅)
VARIABLE OVERHEAD VARIANCES:
(i) Variable Overhead Cost variance = Recovered Overhead − Actual Overhead
= ₹65,000 − ₹68,000 = ₹𝟑, 𝟎𝟎𝟎(𝐀)
(ii) Variable Overhead Expenditure Variance = Standard Overhead – Actual Overhead
= ₹66,000 − ₹68,000 = ₹𝟐, 𝟎𝟎𝟎 (𝐀)
(iii) Variable Overhead Efficiency Variance = Recovered Overhead – Standard Overhead
= ₹65,000 − ₹66,000 = ₹𝟏, 𝟎𝟎𝟎 (𝐀)
Working Notes:
Basic Calculations:
Standard hours per unit =
Budgeted hours
=
30,000
= 𝟏 𝐡𝐨𝐮𝐫
Budgeted units 30,000
Standard hours for actual Output = 32,500 units × 1 hr = 𝟑𝟐, 𝟓𝟎𝟎
Standard overhead rate per hour: =
Budgeted overhead
Budgeted hours
For Fixed Overheads =
45,000
= ₹𝟏. 𝟓𝟎 𝐩𝐞𝐫 𝐡𝐨𝐮𝐫
30,000
For Variable Overheads =
60,000
= ₹𝟐 𝐩𝐞𝐫 𝐡𝐨𝐮𝐫
30,000
Standard 𝐅𝐢𝐱𝐞𝐝 𝐎𝐯𝐞𝐫𝐡𝐞𝐚𝐝 rate per day: = ₹45,000 ÷ 25 days = ₹𝟏, 𝟖𝟎𝟎
Recovered overhead: = Standard hrs for Actual Output × Standard rate
For Fixed Overheads = 32,500 hrs.× ₹1.50 = ₹𝟒𝟖, 𝟕𝟓𝟎
For Variable Overheads = 32,500 hrs.× ₹2 = ₹𝟔𝟓, 𝟎𝟎𝟎
Standard Overheads: = Actual hours × Standard rate
For Fixed Overheads = 33,000 × 1.50 = ₹𝟒𝟗, 𝟓𝟎𝟎
For Variable Overheads = 33,000 × 2 = ₹𝟔𝟔, 𝟎𝟎𝟎
Revised Budget Hours =
Budgeted hours
× Actual days
Budgeted days
30,000
= × 26 = 𝟑𝟏, 𝟐𝟎𝟎 𝐡𝐨𝐮𝐫𝐬
25

Note: *Revised Budgeted Overheads (for Fixed Overheads) = 31,200 × ₹1.50 = ₹𝟒𝟔, 𝟖𝟎𝟎
8. The following information is available from the cost records of Vatika & Co. for the
month of August, 2009:
Material purchased 24,000 kg ₹1,05,600
Material consumed 22,800 kg
 Actual wages paid for 5,940 hours ₹29,700
Unit produced 2160 units
Standard Rates & Prices are:
Direct material rate is ₹4.00 per kg
Direct labour rate is ₹4.00 per hour
Standard input is 10 kg for one unit
Standard requirement is 2.5 hours per unit
Calculate all Material and Labour Variances for the month of August, 2009.
(Modified ICAI SM, Nov. 2009, Modified MTP Nov. 2022)
Ans. MATERIAL VARIANCES
(i) Material Cost Variance = (Standard Qty. × Standard Price) – (Actual Qty. × Actual Price)
= (2,160 × 4 × ₹10) – (22,800 × ₹4.40)
= ₹86,400 – ₹1,00,320 = ₹13,920 (A)
(ii) Material Price Variance = Actual Quantity (Standard Price – Actual Price)
= 22,800 Kg (₹4 – ₹4.40) = ₹9,120 (A)
(iii) Material Usage Variance = Standard Price (Standard Quantity – Actual Quantity)
= ₹4 (21,600 – 22,800) = ₹4,800 (A)
Note: Unit basis for direct material has been taken as kg. hence, direct material rate is ₹4 per
kg.
Verification: MCV = MPV + MUV ∴ 13,920 (A) = 9,120 (A) + 4,800 (A) (Hence Proved)
LABOUR VARIANCES:
(i) Labour Cost Variance = (Standard Hour × Standard Rate) – (Actual Hour × Actual Rate)
= (2,160×2.50×₹4)–₹(29,700) = ₹21,600-₹29,700 = ₹8,100 (A)
(ii) Labour Rate Variance = Actual Hour (Standard Rate – Actual Rate)
= 5,940 ₹(4 – 5) = ₹5,940 (A)
(iii) Labour Efficiency Variance = Standard Rate (Standard Hour – Actual Hour)
= ₹4 (5,400 – 5,940) = ₹2,160 (A)
Verification: LCV = LRV + LEV
∴ 8,100 (A) = 5,940 (A) + 2,160 (A) (Hence Proved)
11. In a manufacturing company, the standard units of production for the year were
fixed at 1,20,000 units and overhead expenditures were estimated to be as follows:
Particulars Amount (₹)
Fixed 12,00,000
Semi-variable (60% expenses are of fixed nature & 40% are of variable 1,80,000
nature)
Variable 6,00,000
Actual production during the month of April, 20X1 was 8,000 units. Each month has
20 working days. During the month there was one public holiday. The actual
overheads were as follows:

Particulars Amount (₹)

Fixed 1,10,000
Semi-variable (60% expenses are of fixed nature & 40% are of variable) 19,200
Variable 48,000
You are required to calculate the following variances for the month of April 20X1:
(i) Overhead Cost Variance
(ii) Fixed Overhead Cost Variance
 (iii) Variable Overhead Cost Variance
(iv) Fixed Overhead Volume Variance
(v) Fixed Overhead Expenditure Variance
(vi) Calendar Variance (Dec. 2021, Modified MTP Nov. 2019)
Ans. COMPUTATION OF VARIANCES
(i) Overhead Cost Variance = Absorbed Overheads – Actual Overheads
= (₹87,200 + ₹44,800) – (₹1,21,520 + ₹55,680) = ₹45,200 (A)
(ii) Fixed Overhead Cost Variance = Absorbed Fixed Overheads – Actual Fixed Overheads
= ₹87,200 – ₹1,21,520 = ₹34,320 (A)
(iii) Variable Overhead Cost Variance
= Standard Variable Overheads for Production – Actual Variable Overheads
= ₹44,800 – ₹55,680 = ₹10,880 (A)
(iv) Fixed Overhead Volume Variance = Absorbed Fixed Overheads – Budgeted Fixed Overheads
= ₹87,200 – ₹1,09,000 = ₹21,800 (A)
(v) Fixed Overhead Expenditure Variance
= Budgeted Fixed Overheads – Actual Fixed Overheads
= ₹10.90 × 10,000 units – ₹1,21,520 = ₹12,520 (A)
(vi) Calendar Variance = Possible Fixed Overheads – Budgeted Fixed Overheads
= ₹1,03,550 – ₹1,09,000 = ₹5,450 (A)
Alternatively,
Calendar Variance = (Actual days – Budgeted days) × St. fixed overhead rate per day
13,08,000
Here, Standard fixed overhead rate per day = 20 × 12
= ₹5,450
∴ Fixed Overhead Calendar Variance = (19-20) × ₹5450 = ₹5,450(A)
Working Notes:
Budgeted Fixed Overheads ₹12,00,000
Fixed Overheads = = = ₹10
Budgeted Output 1,20,000 units
Fixed Overheads element in Semi-Variable Overheads i.e., 60% of ₹1,80,000 = ₹1,08,000
Budgeted Fixed Overheads ₹1,08,000
Fixed Overheads = = = ₹0.90
Budgeted Output 1,20,000 units
∴ Standard Rate of Absorption of Fixed Overheads per unit (₹10 + ₹0.90) = ₹10.90
Fixed Overheads Absorbed on 8,000 units @ ₹10.90 = ₹87,200
Budgeted Variable Overheads ₹6,00,000
Add: Variable element in Semi-Variable Overheads 40% of ₹1,80,000 ₹72,000
Total Budgeted Variable Overheads ₹6,72,000
Budgeted Variable Overheads ₹6,72,000
Standard Variable Cost per unit = = = ₹5.60
Budgeted Output 1,20,000 units
Standard Variable Overheads for 8,000 units @ ₹5.60 = ₹44,800
Budgeted Annual Fixed Overheads (₹12,00,000 + 60% of ₹1,80,000) = ₹13,08,000
Budgeted Fixed Overheads
Possible Fixed Overheads = × Actual Days
Budgeted Days
∗₹1,09,000
=[ × 19 Days] = ₹1,03,550
20 Days
₹12,00,000 ₹1,08,000
Here, Budgeted Fixed Overheads = + = ₹1,09,000
12 12
Actual Fixed Overheads (₹1,10,000 + 60% of ₹19,200) = ₹1,21,520
Actual Variable Overheads (₹48,000 + 40% of ₹19,200) = ₹55,680
18. Following information has been provided by a company:
Number of units produced and sold 9,000
Standard labour rate per hour ₹12
Standard hours required for 9,000 units -
 Actual hours required 25,641 hours
Labour efficiency 105.3%
Labour rate variance ₹1,53,846 (A)
You are required to CALCULATE:
(i) Actual labour rate per hour
(ii) Standard hours required for 9,000 units
(iii) Labour Efficiency variance
(iv) Standard labour cost per unit
(v) Actual labour cost per unit. (MTP Dec. 2021, RTP Nov. 2023(M))
Ans. Given. Labour Rate Variance = AH (SR – AR) = ₹1,53,846 (A)
(i) ∴ 1,53,846 = 25,641 (12-AR) ⇒ 6 = 12 – AR
∴ AR (Actual Labour Rate per hour) = ₹18
(ii) Given. Labour Efficiency =
SH
= 105.3%
AH
AH×105.3 25,641×105.3
∴ 𝐒𝐇 (𝐒𝐭𝐚𝐧𝐝𝐚𝐫𝐝 𝐡𝐨𝐮𝐫𝐬) = = = 26,999.973 or 27,000 hours
100 100
(iii) Labour Efficiency Variance = SR (SH – AH) = 12(27,000 – 25,641) = ₹16,308 (F)

(iv) Standard Labour Cost per unit =

27,000×₹12
= ₹𝟑𝟔
9,000
(v) Actual Labour Cost per unit =
25,641×18
= ₹𝟓𝟏. 𝟐𝟖𝟐
9,000
Note: SR: Standard Labour Rate per hour AR: Actual Labour Rate per hour
SH: Standard Hours AH: Actual Hours
 OVERHEADS – ABSORPTION COSTING METHOD
Q. No. Questions and Answers
3. A Machine shop has 8 identical Drilling machines manned by 6 operators. The
machine cannot be worked without an operator wholly engaged on it. The original
cost of all these machines works out to ₹8 lakhs. These particulars are furnished for
a 6 months period:
Normal available hours per month 208
Absenteeism (without pay) hours 18
Leave (with pay) hours 20
Normal idle time unavoidable- hours 10
Average rate of wages per worker for 8 hours a day. ₹800
Production bonus estimated 15% on wages
Value of power consumed ₹80,500
Supervision and indirect labour ₹33,000
Lighting and electricity ₹12,000
These particulars are for a year
Repairs and Maintenance including consumables- 3% of value of machines.
(i) Insurance- 40,000.
(ii) Depreciation-10% of original cost.
(iii) Other sundry works expenses- ₹12,000.
(iv) General management expenses allocated-₹54,530.
You are required to compute a Comprehensive machine hour rate for the machine
shop.
(ICAI SM, Modified Jan. 2021, Modified MTP May 2022, Modified MTP May 2019
Modified MTP Nov. 2022)
Ans. Computation of comprehensive machine hour rate of machine shop:
Particulars (₹)
Operator’s wages (W.N.2) 7,38,000
Production bonus (15% on wages) 1,10,700
Power consumed 80,500
Supervision and indirect labour 33,000
Lighting and electricity 12,000
Repairs and maintenance (3% × ₹8 lakh × 1/2) 12,000
Insurance (₹40,000 × 1/2) 20,000
Depreciation (10% × ₹8 lakhs × 1/2) 40,000
Sundry works expenses (₹12,000 × 1/2) 6,000
General management expenses (₹54,530 × /2)1 27,265
10,79,465
Total overheads of machine shop ₹10,79,465
∴ Machine Hour Rate = Hours of machines operation
= 7,200 hours (W.N.1) = ₹149.93
Working Notes:
1. Computation of hours, for which 6 operators are available for 6 months:
Particulars For 6 months & 6 operators
Normal available hours (208 × 6 months × 6 operators) 7,488
Less: Absenteeism hours (18 × 6 operators) (108)
Paid hours 7,380
Less: Leave hours (20 × 6 operators) (120)
Less: Idle time hours (10 × 6 operators) (60)
Effective working hours 7,200
 As machines cannot be worked without an operator wholly engaged on them therefore,
hours for which 6 operators are available for 6 months are the hours for which machines
can be used. Hence 7,200 hours represent effective working hours.
2. Computation of operator’s wages:
₹800
Average rate of wages = = ₹100 per hour
8 hours
∴ Total wages paid to 6 operators for 6 months = 7,380 hours × ₹100 = ₹7,38,000
4. The following account balances and distribution of indirect charges are taken from
the accounts of a manufacturing concern for the year ending on 31st March, 20X1:
Items Total Production Departments Service
(₹) Departments
X (₹) Y (₹) Z (₹) A (₹) B (₹)
Indirect Material 1,25,000 20,000 30,000 45,000 25,000 5,000
Indirect Labour 2,60,000 45,000 50,000 70,000 60,000 35,000
Superintendent’s Salary 96,000 ---- ---- 96,000 ---- ----
Fuel and Heat 15,000 ---- ---- ---- ---- ----
Power 1,80,000 ---- ---- ---- ---- ----
Rent and Rates 1,50,000 ---- ---- ---- ---- ----
Insurance 18,000 ---- ---- ---- ---- ----
Meal Charges 60,000 ---- ---- ---- ---- ----
Depreciation 2,70,000 ---- ---- ---- ---- ----
The following departmental data are also available:
Particulars Production Departments Service Departments
X Y Z A B
Area (Sq.ft.) 4,400 4,000 3,000 2,400 1,200
Capital Value of Assets (₹) 4,00,000 6,00,000 5,00,000 1,00,000 2,00,000
Kilowatt Hours 3,500 4,000 3,000 1,500 ----
Radiator Sections 20 40 60 50 30
No. of Employees 60 70 120 30 20
Expenses charged to the service departments are to be distributed to other
departments by the following percentages:
Particulars X Y Z A B
Department A 30 30 20 ---- 20
Department B 25 40 25 10 ----
Prepare an Overhead Distribution Statement to show the total overheads of
production departments after re-apportioning service departments’ overhead by
using simultaneous equation method. Show all the calculations to the nearest rupee.
(Nov. 2012, ICAI SM, MTP Modified Dec. 2021, MTP July 2021, Nov. 2023 Modified)
Ans. Primary Distribution of Overheads
Items Basis Total Production Departments Service
(₹) Departments
X (₹) Y (₹) Z (₹) A (₹) B (₹)
Indirect Actual 1,25,000 20,000 30,000 45,000 25,000 5,000
Material
Indirect Actual 2,60,000 45,000 50,000 70,000 60,000 35,000
Labour
Super- Actual 96,000 ---- ---- 96,000 ---- ----
Intendent’s
Salary
Fuel and Radiator Sections 15,000 1,500 3,000 4,500 3,750 2,250
Heat (2:4:6:5:3)
 Power Kilowatt hours 1,80,000 52,500 60,000 45,000 22,500 ----
(7:8:6:3:0)
Rent and Area (Sq. ft.) 1,50,000 44,000 40,000 30,000 24,000 12,000
Rates (22:20:15:12:6)
Insurance Capital Value of 18,000 4,000 6,000 5,000 1,000 2,000
Assets (4:6:5:1:2)
Meal No. of Employees 60,000 12,000 14,000 24,000 6,000 4,000
Charges (6:7:12:3:2)
Depreciation Capital Value of 2,70,000 60,000 90,000 75,000 15,000 30,000
Assets (4:6:5:1:2)
Total Overheads 11,74,000 2,39,000 2,93,000 3,94,500 1,57,250 90,250
Re-distribution of Overheads of Service Department A and B:
Total Overheads of Service Departments may be distributed using simultaneous
equation method:
Let the total overheads of A and B are a and b respectively.
a = 1,57,250 + 0.10 b ----------- (i)
⇒ 10a− b= 15,72,500 ----------- (ii) [(i) × 10]
b = 90,250 + 0.20 a
⇒ - 0.20a + b = 90,250 ----------- (iii)
Solving (ii) and (iii), we get
⇒ 9.8a = 16,62,750 ∴ A = 1,69,668
Putting the value of ‘a’ in equation (iii), we get
⇒ b = 90,250 + 0.20 × 1,69,668 ∴ B = 1,24,184
Secondary Distribution of Overheads
Particulars Production Departments
X (₹) Y (₹) Z (₹)
Total Overhead as per primary distribution 2,39,000 2,93,000 3,94,500
Service Department A (80% of ₹1,69,668) 50,900 50,900 33,934
Service Department B (90% of ₹1,24,184) 31,046 49,674 31,046
Total 3,20,946 3,93,574 4,59,480
7. A Manufacturing unit has purchased and installed a new machine of ₹12,70,000 to
its fleet of 7 existing machines. The new machine has an estimated life of 12 years
and is expected to realise ₹70,000 as scrap at the end of its working life. Other
relevant data are as follows:
(i) Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This
includes 300 hours for plant maintenance and 92 hours for setting up of plant.
(ii) Estimated Cost of maintenance of the machine is ₹25,000 (p.a.)
(iii) The machine requires a special chemical solution, which is replaced at the end of each
week (6 days in a week) at a cost of ₹400 each time.
(iv) Four operators control operation of 8 machines and the average wages per person
amounts to ₹420 per week plus 15% fringe benefits.
(v) Electricity used by the machine during the production is 16 units per hour at a cost of
₹3 per unit. No current is taken during maintenance and setting up.
(vi) Departmental and general works overhead allocated to the operation during last year was
₹50,000. During the current year it is estimated to increase 10% of this amount.
Calculate machine hour rate, if:
(a) Setting up time is unproductive.
(b) Setting up time is productive. (May 2005, May 2021 RTP, May-2002 modified)
Ans. Computation of Machine hour Rate
 Particulars Per year (a) Per hour (b) Per hour
(₹) (unproductive) (productive)
(₹) (₹)
Standing Charges:
Operator wages (4 × 420 × 54 weeks) 90,720
(54 Weeks = 324/6)
Add: Fringe Benefits 15% 13,608
1,04,328
Departmental and General Overhead 55,000
₹(50,000 + 5,000)
Total Standing Charging for 8 machines 1,59,328
Cost per machine (₹1,59,328/8) 19,916
Cost per Machine hour (
₹19,916
) = 9.05 (
₹19,916
) = 8.69
2,200 2,292
Machine Expenses:
Depreciation [
(12,70,000−70,000)
] [
(12,70,000−70,000)
]
(12×2,200) (12×2,292)
= 45.45 = 43.63
Electricity (16 × ₹3) = 48.00 (16×₹3×2,200) = 46.07
2,292
Special chemical solution (
400×54
) = 9.82 (
400×54
) = 9.42
2,200 2,292
Maintenance (
₹25,000
) = 11.36 (
₹25,000
) = 10.91
2,200 2,292
Total 123.68 118.72
Working Notes: Computation of Machine hours
1. Setting time (unproductive) = 2,592− 300−92 = 2,200 hours
2. Setting time (productive) = 2,592−300 = 2,292 hours
9. A factory has three production departments. The policy of the factory is to recover
the production overheads of the entire factory by adopting a single blanket rate
based on the percentage of total factory overheads to total factory wages. The
relevant data for a month are given below:
Department Direct Direct Factory Direct Machine
Materials Wages Overheads Labour Hours
(₹) (₹) (₹) hours
Budget:
Machining 6,50,000 80,000 3,60,000 20,000 80,000
Assembly 1,70,000 3,50,000 1,40,000 1,00,000 10,000
Packing 1,00,000 70,000 1,25,000 50,000 ----
Actual:
Machining 7,80,000 96,000 3,90,000 24,000 96,000
Assembly 1,36,000 2,70,000 84,000 90,000 11,000
Packing 1,20,000 90,000 1,35,000 60,000 ----
The details of one of the representative jobs produced during the month are as
under:
Job No. CW 7083:
Departments Direct Direct Direct Labour Machine
Materials Wages (₹) hours (₹) hours
Machining 1,200 240 60 180
Assembly 600 360 120 30
Packing 300 60 40 ----
 The factory adds 30% on the factory cost to cover administration & selling overheads & profit.
Required:
(a) Compute the overhead absorption rate as per the current policy of the company and
determine the selling price of the job No. CW 7083.
(b) Suggest any suitable alternative method (s) of absorption of the factory overheads and
calculate the overhead recovery rates based on the method (s) so recommended by you.
(c) Determine the Selling price of Job CW 7083 based on the overhead application rates
calculated in (b) above.
(d) Calculate the department-wise and total under or over recovery of overheads based
on the company’s current policy and the method (s) recommended by you.
(ICAI SM, Nov. 1994, MTP Sept 2024 S-II(M))
Ans. Computation of Overhead Absorption Rate
(a) (as per the current policy of the company)
Departments Budgeted factory Overheads (₹) Budgeted direct wages (₹)
Machinery 3,60,000 80,000
Assembly 1,40,000 3,50,000
Packing 1,25,000 70,000
Total 6,25,000 5,00,000
Budgeted factory overheads
∴ Overhead absorption rate = Budgeted direct wages
× 100
₹6,25,000
= ₹5,00,000 × 100 = 125% of Direct Wages

Selling Price of the Job No. CW-7083

Particulars (₹)
Direct Materials (₹1,200 + ₹600 + ₹300) 2,100.00
Direct Wages (₹240 + ₹360 + ₹60) 660.00
Overheads (125% × ₹660) 825.00
Total Factory Cost 3,585.00
Add: Mark-up (30% × ₹3,585) 1,075.50
Selling price 4,660.50
(b) Methods available for absorbing factory overheads and their overhead recovery
rates in different departments:
(i) Machining Department:
In the machining department, the use of machine time is the predominant factor of
production. Hence machine hour rate should be used to recover overheads in this
department.
The overhead recovery rate based on machine hours has been calculated as under:
Budgeted factory overheads ₹3,60,000
∴ Machine Hour Rate = Budgeted machine hours
= = ₹𝟒. 𝟓𝟎 𝐩𝐞𝐫 𝐡𝐨𝐮𝐫
80,000 hours

(ii) Assembly Department:

In this department direct labour hours is the main factor of production. Hence direct
labour hour rate method should be used to recover overheads in this department. The
overheads recovery rate in this case is:
Budgeted Factory overheads ₹1,40,000
∴ Direct Labour Hour Rate = = = ₹2.50 per hour
Budgeted direct labour hours 1,00,000 hours

(iii) Packing Department:

Labour is the most important factor of production in this department. Hence direct
labour hour rate method should be used to recover overheads in this department.
The overhead recovery rate in this case comes to Budgeted factory overhead.
 Budgeted Factory overheads ₹1,25,000
∴ Direct Labour Hour Rate = Direct labour hours
= 50,000 hours = ₹𝟐. 𝟓𝟎 𝐩𝐞𝐫 𝐡𝐫

(c) Selling Price of Job CW-7083 [based on the overhead application rates calculated in
(b) above]
Particulars (₹)
Direct Materials 2,100.00
Direct Wages 660.00
Overheads (W.N.) 1,078.00
Factory Cost 3,838.00
Add: Mark up (30% of ₹3,838) 1,151.40
Selling Price 4,989.40
Working Notes:
Overhead Summary Statement
Dept. Basis Hours Rate (₹) Overheads (₹)
Machining Machine hour 180 4.50 810
Assembly Direct labour hour 120 1.40 168
Packing Direct labour hour 40 2.50 100
Total 1,078

(d) Department-wise Statement of total under or over recovery of overheads:

(i) Under Current Policy
Departments
Particulars Machining Assembly Packing Total
(₹) (₹) (₹) (₹)
Direct Wages (Actual) 96,000 2,70,000 90,000
Overheads recovered @ 125 % of
Direct Wage (A) 1,20,000 3,37,500 1,12,500 5,70,000
Actual Overheads (B) 3,90,000 84,000 1,35,000 6,09,000
Under/Over recovery of overheads(A-B) (2,70,000) 2,53,500 (22,500) (39,000)
(ii) As per methods suggested
Basis of overheads recovery
Particulars Machine Labour Direct Total
Direct hours Labour (₹)
hours hours
Hours worked (A) 96,000 90,000 60,000
Rate/hour (₹) (B) 4.50 1.40 2.50
Overhead recovered (₹) (C=A×B) 4,32,000 1,26,000 1,50,000 7,08,000
Actual overheads (₹) (D) 3,90,000 84,000 1,35,000 6,09,000
Under/Over recovery (C-D) 42,000 42,000 15,000 99,000
 ACTIVITY BASED COSTING
Q. No. Questions & Solutions
21. ABC Limited manufactures two radio models, the Nova which has been produced for
five years and sells for ₹900, and the Royal, a new model introduced in early 20X1,
which sells for ₹1,140. Based on the toy, Income Statement for the year 20X1-X2, a
decision has been made to concentrate ABC Limited's marketing resources on the
Royal model and to begin phase out the Nova model.
ABC Limited Income Statement
for the year ending March 31, 20X2
Royal Model Nova Model Total
Sales (₹) 45,60,000 1,98,00,000 2,43,60,000
Cost of Goods sold (₹) 31,92,000 1,25,40.000 1,57,32,000
Gross margin (₹) 13,68,000 72,60,000 86,28,000
Selling & Administrative Expenses (₹) 9,78,000 58,30,000 68,08,000
Net income 3,90,000 14,30,000 18,20,000
Unit Produced and sold 4,000 22,000
Net income per unit sold (₹) 97.50 65
The standard unit costs for the Royal and Nova models are as follows:
Royal Model (₹) Nova Model (₹)
Direct Materials 584 208
Direct Labour:
Royal (3.5 hrs. × ₹12) 42
Nova (1.5 hrs. × ₹12) 18
Machine usage
Royal (4 hrs. × ₹18) 72
Nova (8 hrs. × ₹18) 144
Manufacturing Overheads
(Applied on the basis of machine hours at a 100 200
pre-determined rate of ₹25 per hour)
Standard Cost 798 570
ABC Ltd.'s Controller is advocating the use of activity-based costing and has gathered
the following information for the company’s manufacturing overheads cost for the
year ending March 31, 20X2:
Traceable Number of Events
Activity Centre
Costs Royal Nova Total
(Cost driver)
(₹) (₹) (₹) (₹)
Soldering (Number of solder joints) 9,42,000 3,85,000 11,85,000 15,70,000
shipments (Number of shipments) 8,60,000 3,800 16,200 20,000
Quality control (Number inspections) 12,40,000 21,300 56,200 77,5000
Purchase orders (Number of orders) 9,50,400 1,09,900 80,100 1,90,000
Machine Power (Machine hours) 57,600 16,000 1,76,000 1,92,000
Machine setups (Number of setups) 7,50,000 14,000 16,000 30,000
Total Traceable costs 48,00,000
Required:
(i) Prepare a statement showing allocation of manufacturing overheads using the
principles of activity-based costing.
(ii) Prepare a statement showing product cost and profitability using activity-based
costing.
 (iii) Should ABC Ltd. continue to emphasize the Royal model and phase out the Nova
model? Discuss. (Nov. 2005)
Ans. (i) Statement showing allocation of manufacturing overheads using the principles of
Activity Based Costing:
Particulars Cost allocation Royal Nova Total
basis Royal (₹) (₹) (₹)
Soldering 385:1185 2,31,000 7,11,000 9,42,000
Shipments 38:162 1,63,400 6,96,600 8,60,000
Quality control 213:562 3,40,800 8,99,200 12,40,000
Purchase orders 109900:80100 5,49,731 4,00,669 9,50,400
Machine power 16:176 4,800 52,800 57,600
Machine setups 14:16 3,50,000 4,00,000 7,50,000
16,39,731 31,60,269 48,00,000
Unit produced & sold 4,000 22,000
Manufacturing Overheads 409.93 143.65
cost p.u.
(ii) Statement showing product cost and profitability using Activity Based Costing:
Particulars Royal (₹) Nova (₹)
Direct Materials 584.000 208.000
Direct Labour 42.000 18.000
Machine Usage 72.000 144.000
Manufacturing Overheads (as per ABC) 409.975 143.640
Cost 1107.975 513.64
Selling and Distribution Overheads 244.50 265.00
Cost of Sales 1,352.475 778.640
Profit (212.475) 121.36
Sales 1,140.00 900.00
(iii) Statement Showing Net Income
Particulars Royal Nova Total
Gross margin/unit 32.02 386.36
Gross Margin 1,28,080 84,99,920 86,28,000
Selling Administrative Expenses 9,78,000 58,30,000 68,08,000
Net Income (8,49,920) 26,69,920 18,20,000
Company should not emphasise the royal model and should emphasise more on Nova
Model and phase out the Royal Model gradually. Rather, the pricing of Royal Model is
required to be corrected.
23. JH Plastics Limited manufactures three products S, M and L. To date, simple
traditional absorption costing system has been used to allocate overheads to
products. Total production overheads are allocated on the basis of machine hours.
The machine hour rate for allocating production overheads is ₹240 per machine
hour under the traditional absorption costing system. Selling prices are calculated
by adding mark up of 40% of the product cost. Information related to products for
the most recent year is as under:
Products
S M L
Units produced and sold 7,500 12,500 9,000
Direct material cost per unit (₹) 158 179 250
 Direct labour cost per unit (₹) 40 45 60
Machine hours per unit 0.30 0.45 0.50
Number of Machine setups 120 120 160
Number of purchase orders 90 135 125
Number of inspections 100 160 140
The management wishes to introduce Activity-Based Costing (ABC) system of
attributing production overheads to products and has identified major cost pools
for production overheads and their associated cost drivers as follows:
Cost pool Amount Cost driver
Purchasing Department Cost ₹7,00,000 Number of Purchase orders
Machine setup Cost ₹9,00,000 Number of Machine setups
Quality Control Cost ₹6,56,000 Number of inspections
Machining Cost ₹5,64,000 Machine hours
Required:
(i) Calculate the total cost per unit and selling price per unit for each of the three
products using:
(a) The traditional costing approach currently used by JH Plastics Limited;
(b) Activity based costing (ABC) approach.
(ii) Calculate the difference in selling price per unit as per (a) and (b) above and show
which product is under-priced or over-priced. (Nov. 2023)
Ans. (i) (a) Statement showing ‘Cost per unit & Selling price per unit – Traditional Method’.
Particular Products
S (₹) M (₹) L (₹)
Direct material cost per unit 158 179 250
Direct labour cost per unit 40 45 60
Production overhead @ ₹240 per 72 96 120
machine hour (₹240 × 0.3) (₹240 × 0.4) (₹240 × 0.5)
Cost per unit 270 320 430
Add: Profit @ 40% 108 128 172
Selling price per unit 378 448 602
(b) Statement showing ‘Cost per unit & Selling price per unit – Activity Based
Costing’.
Particular Activity Total Amount Products
Drivers (₹) S M L
Production - - 7500 12500 9000
(units)
Machine - - 2250 5000 4500
hours (7500 × 0.3) (12500 × 0.4) (9000 × 0.5)
(₹) (₹) (₹)
Direct 158 179 250
Material Cost
per unit (i)
Direct labour 40 45 60
cost p.u. (ii)
Overheads:
Purchasing No. of 7,00,000 1,80,000 2,70,000 2,50,000
Department purchase
Cost orders
(90:135:125)
 Machine Setup No. of 9,00,000 2,70,000 2,70,000 3,60,000
Cost machine
(120:120:160) setups
Quality Control No. of 6,56,000 1,64,000 2,62,400 2,29,600
Cost inspections
(100:160:140)
Machining cost Machine 5,64,000 1,08,000 2,40,000 2,16,000
(225:500:450) hours
Total 7,22,000 10,42,400 10,55,600
Overheads
Costs
Overhead Cost 96.27 83.39 117.29
p.u. (iii)
Total Cost 294.27 307.39 427.29
p.u. (i+ii+iii)
Add: Profit @ 117.71 122.96 170.92
40%
Selling price 411.98 430.35 598.21
per unit
Note: The question may also be solved by calculating cost driver rate & allocating various cost
based on cost driver rate. However, there will be no change in any of the answer.
(ii) Particulars Products
S (₹) M (₹) L (₹)
Selling price per unit as per Traditional Costing 378 448 602
Selling price per unit as per Activity Based Costing 411.98 430.35 598.21
Difference (33.98) 17.65 3.79
Decision: Product S is underpriced while product M and L is overpriced using Traditional
costing approach.
 MATERIAL COST
Q. No. Questions & Answers
1. A Company manufactures 5000 units of a product per month. The cost of placing an order
is ₹100. The purchase price of the raw material is ₹10 per kg. The re-order period is 4 to
8 weeks. The consumption of raw materials varies from 100 kg to 450 kg per week, the
average consumption being 275 kg. The carrying cost of inventory is 20% per annum.
You are required to Calculate:
(a) Re-Order Quantity
(b) Re-Order Level
(c) Maximum Level
(d) Minimum Level
(e) Average Stock Level
(Nov. 2002, May 2006, Nov. 2018, ICAI SM, Modified Nov. 2022, MTP July 2021,
MTP May 2023–II, MTP Nov. 2023-II Modified, May 2024 Modified)
Ans. (a) Re-Order Quantity: When price discount is not involved, re-order quantity should be
such a quantity of ordering/order at which the total cost of ordering and carrying
inventory p.a. is the least. This is known as Economic Order Quantity (EOQ).
Calculation:
2AO
EOQ = √ C
… where A = Annual Requirement = Average Consumption per week × 52 weeks
= 275kg week × 52 weeks = 14,300 kg
O = Ordering Cost/Order = ₹100 per order
P = Price per unit = ₹10 per kg
C = Stock Holding rate = 20 % p.a.
C = Carrying Cost/unit p.a. = ₹10 × 20% = ₹2
2×14,300×100
∴ EOQ = √ = √14,30,000 = 𝟏, 𝟏𝟗𝟔 𝐤𝐠 (𝐚𝐩𝐩𝐫𝐨𝐱. )
2

(b) Re-Order Level = Maximum Usage × Maximum Lead Time

= 450 kg. per week × 8 week = 3,600 kg.
(c) Maximum Level = Reorder Level + Reorder Quantity – (Min. Usage × Min. Lead Time)
= 3,600 kg. + 1,196 kg. - (100 kg per week × 4 weeks)
= 4,796 kg.−400 kg. = 4,396 kg
(d) Minimum Level = Re-order Level−(Average Usage × Average Lead Time)
100+450 4+8
= 3,600 kg - [( )×( )]
2 2
= 3,600− (275 × 6) = 3,600 − 1,650 = 1,950 kg.
(e) Average Stock Level =
Maximum Level+Minimum Level
=
4396 + 1950
= 𝟑, 𝟏𝟕𝟑 𝐤𝐠.
2 2
1
Alternatively, Average Stock Level = Minimum Level + (2 × Re-order Quantity)
1196
= 1,950 kg. + ( 2
kg. ) = 1,950 + 598 kg. = 2,548 kg.

4. A Company manufactures a special product which requires a component ‘Alpha’.

The following particulars are collected for the year 20X1:
Annual demand of Alpha 8,000 units
Cost of placing an order ₹200 per order
Cost per unit of Alpha ₹400
Carrying cost p.a. 20%
 The Company has been offered a quantity discount of 4% on the purchase of ‘Alpha’
provided the order size is 4,000 components at a time.
Required:
(a) Compute the Economic Order Quantity.
(b) State whether the quantity discount offer can be accepted.
(ICAI SM, MTP May 2023–I, MTP May 2024-II Modified, May 2024 Modified)

Ans.
2 AO 2×8,000 units ×₹200
(a) Economic Order Quantity (EOQ) = √ =√ 20 = 𝟐𝟎𝟎 𝐮𝐧𝐢𝐭𝐬
C ₹400×
100

(b) Evaluation of Profitability of Different Options of Order Quantity:

Option I: When EOQ is Ordered.
Particulars (₹)
Purchase Cost (8,000 units × ₹400) 32,00,000
Ordering Cost [(8,000 units/200 units) × ₹200] 8,000
Carrying Cost (200 units × ₹400 × ½ × 20/100) 8,000
Total Cost 32,16,000
Option II: When Quantity Discount is accepted.
Particulars (₹)
Purchase Cost (8,000 units × ₹384 *) 30,72,000
Ordering Cost [(8,000 units/4000 units) × ₹200] 400
Carrying Cost (4000 units × ₹384 × ½ × 20/100) 1,53,600
Total Cost 32,26,000
∴ Purchase Cost = ₹400 – ₹16 = ₹384
Advise: The total cost of inventory is lower if EOQ is adopted. Hence, the company is
advised not to accept the quantity discount.
Note:* We have, Unit Cost = ₹400 and Quantity Discount @ 4% = ₹400 × 4% = ₹16
6. A Ltd. produces a Product ‘X’ using a raw material ‘D’. To produce one unit of X, 4 kg of D
is required. As per the sales forecast conducted by the company. It will be able to sale
20,000 units of X in the coming year.
The following are the information related to the raw material D:
(i) The Re-order quantity is 400 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum Consumption per day is 40 kg. more than the average consumption per day.
(iii) There is an opening stock of 2,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is ₹250 per kg.
(vi) There is an opening stock of 1,800 units of the finished product X.
(vii) The Carrying cost of inventory is 14% p.a.
(viii) To place an order company has to incur ₹1,340 on paper and documentation work.
From the above information, find out the followings in relation to raw material D:
(a) Re-Order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) Calculate the impact on the profitability of the company by not ordering the EOQ.
[Take 300 days for a year]
(RTP May 2021, Modified MTP May 2019, Modified MTP Nov. 2022, Nov. 2023
Modified)
Ans. (a) Re-Order Quantity = EOQ − 400 kg. = 2,328 kg (W.N.2) − 400 kg = 1,928 kg
(b) Maximum Stock Level:
= Re order level + Re order Quantity – (Min. Consumption per day × Min. lead time)
= 2,208 kg (W.N.3) + 1,928 kg – (196 kg (W.N.4) × 4 days) = 4,136 kg – 784 kg = 3,352 kg

(c) Minimum Stock Level:

= Re-order level – (Average Consumption per day × Average lead time)
= Re order level – (Average Consumption per day × Average lead time)
= 2,208 kg (W.N.3) – (236 kg × 6 days) = 792 kg
(d) Impact on the profitability of the company by not ordering the EOQ:
Particulars When purchasing the ROQ When purchasing the EOQ
Order Quantity 1,928 kg. 2,328 kg.
No. of orders a year 70,800 kg
= 36.72 or 37 orders
70,800 kg
= 30.41 or 31 orders
1,928 kg 2,328 kg
Ordering Cost (A) 37 orders × ₹1,340 = ₹49,580 31 orders × ₹1,340 = ₹41,540
Average Inventory (B) 1,928 kg
= 964 kg
2,328 kg
= 1,164 kg
2 2
Carrying Cost 964 kg × ₹35 1,164 kg × ₹35
(C = B × ₹35) = ₹33,740 = ₹40,740
Total Cost (A+C) ₹83,320 ₹82,280

Decision: Extra Cost incurred due to not ordering EOQ = ₹83,320 − ₹82,280 = ₹1,040
Working Notes:
1. Computation of Annual Consumption & Annual Demand for Raw Material ‘D’:
Sales forecast of the product ‘X’ 20,000 units
Less: Opening Stock of ‘X’ (1,800) units
Fresh Units of ‘X’ to be produced 18,200 units
Raw material required to produce 18,200 units of ‘X’ (18,200 units×4 kg.) 72,800 kg
Less: Opening Stock of ‘D’ (2,000) kg
Annual demand for Raw Material ‘D’ 70,800 kg
2. Computation of Economic Order Quantity (EOQ):
2×Annual demand of ′D′×Ordering Cost
∴ EOQ = √
Carrying Cost per unit per annum

2×70,800 kg (W.N.1) ×₹1,340 2×70,800 kg×₹1,340

=√ =√ = 𝟐, 𝟑𝟐𝟖 𝐤𝐠 (approx.)
₹250×14% ₹35
3. Re-Order level = (Maximum Consumption per day × Maximum lead time)
Annual Consumption of ′D′
= {( + 40 kg. ) × 8 days}
300 days
70,800 kg. (W.N.1)
= {( + 40 kg. ) × 8 days} = 𝟐, 𝟐𝟎𝟖 𝐤𝐠.
300 days
4. Minimum Consumption per day of raw material ‘D’:
70,800 kg. (W.N.1)
Here, Average Consumption per day = = 236 kg
300 days
Hence, Maximum Consumption per day = 236 kg. + 40 kg. = 276 kg
Min.Consumption+Max.Consumption
As we know, Average Consumption =
2
Minimum Consumption +276 kg.
⇒ 236 kg. =
2
∴ Minimum Consumption = 472 kg − 276 kg = 𝟏𝟗𝟔 𝐤𝐠
8. A Company uses four raw materials A, B, C and D for a particular product for which
the following data apply:
 Raw Usage Re- Price Delivery period Re- Minimum
Material per unit order per (in weeks) Order Level
of Quantity kg. Level (kg.)
Product (kg.) (₹) (kg.)
(Kg.) Min. Avg. Max.
A 12 12,000 12 2 3 4 60,000 ?
B 8 8,000 22 5 6 7 70,000 ?
C 6 10,000 18 3 5 7 ? 25,500
D 5 9,000 20 1 2 3 ? ?

Weekly production varies from 550 to 1,250 units, averaging 900 units of the said product.
What would be the following quantities:
(a) Minimum Stock of A? (b) Maximum Stock of B?
(c) Re-Order level of C? (d) Average Stock level of A?
(e) Re-Order Level of D? (f) Minimum Stock Level of D?
(RTP Nov. 2020, ICAI SM, Modified Nov. 2022)
Ans. Minimum Stock of A:
(a) = Re-Order Level− (Average Consumption × Average Time Required to obtain delivery)
= 60,000 kg. – (900 units × 12 kg. × 3 weeks) = 27,600 kg.
.

(b) Maximum Stock of B:

= Re-Order Level + Re-Order Quantity – (Min. Consumption × Min. Re-Order Period)
= 70,000 kg. + 8,000 kg− (550 Units × 8 kg × 5 weeks) = 78,000−22,000 = 56,000 kg.
(c) Re-Order Level of C = Maximum Re-Order Period × Maximum Usage
= 7 weeks × (1,250 Units × 6 Kg.) = 52,500 kg.
Alternatively,
Re-order level of C = Min. Stock Level of C + (Average Consumption × Average delivery time)
= 25,500 kg + [(900 units × 6 kg) × 5 weeks] = 52,500 kg
(d) Minimum Stock Level + Maximum Stock Level∗
Average Stock Level of A = 2
27,600+58,800
= 2
= 𝟒𝟑, 𝟐𝟎𝟎 𝐤𝐠
Note: *Maximum Stock of A = ROL + ROQ− (Minimum Consumption × Minimum Re-Order Period)
= 60,000 kg + 12,000 kg – [(550 units × 12 kg.) × 2 weeks] = 58,800 kg
(e) Re-Order Level of D = Maximum Re-Order Period × Maximum Usage
= 3 weeks × (1,250 units × 5 kg) = 18,750 kg
(f) Minimum Stock of D
= Re-Order Level−(Average Consumption × Average time required to obtain delivery)
= 18,750 kg. – (900 units × 5 kg. × 2 weeks) = 9,750 kg
15. M/s Tyro tubes trades in four-wheeler tyres and tubes. It stocks sufficient quantity of
tyres of almost every vehicle. In year end 202X-X1, the report of sales manager revealed
that M/s Tyro tubes experienced stock-out of tyres. The Stock-out data is as follows:
Stock-Out of Tyres No. of times of Stock Out
100 2
80 5
50 10
20 20
10 30
0 33
M/s Tyro tubes loses ₹150 per unit due to stock-out and spends ₹50 per unit on carrying
of inventory.
 Determine optimum safest stock level. (ICAI SM)
Ans. Computation of Stock-out and Inventory Carrying Cost
Safety Stock Probability Stock Expected Inventory Total
Stock Out Out Cost Stock-out Carrying Cost (₹)
Level (Units) (₹) Cost (₹) Cost (₹)
(Units) [(4) = [(5) = [(6) = [(7) =
(1) (2) (3) (2)×₹150] (3) × (4)] (1) × ₹50] (5) + (6)]
100 0 0.00 0 0 5,000 5,000
80 20 0.02 3,000 60 4,000 4,060
50 50 0.02 7,500 150
30 0.05 4,500 225
15,000 375 2,500 2,875
20 80 0.02 12,000 240
60 0.05 9,000 450
30 0.10 4,500 450
25,500 1,140 1,000 2,140
10 90 0.02 13,500 270
70 0.05 10,500 525
40 0.10 6,000 600
10 0.20 1,500 300
31,500 1,695 500 2,195
0 100 0.02 15,000 300 2,700
80 0.05 12,000 600
50 0.10 7,500 750
20 0.20 3,000 600
10 0.30 1,500 450
39,000 2,700 0 2,700
At Safety Stock level of 20 units, total cost is least i.e., ₹2,140.
Working Notes: Computation of Probability of Stock-out
Stock-out (units) 100 80 50 20 10 0 Total
Nos. of times 2 5 10 20 30 33 100
Probability 0.02 0.05 0.10 0.20 0.30 0.33 1.00
 EMPLOYEE COST & DIRECT EXPENSES
Q. Questions & Answers
No.
2. A skilled worker in XYZ Ltd. is paid a guaranteed wage rate of ₹30 per hour. The standard time
per unit for a particular product is 4 hours. Mr. P, a machine man, has been paid wages under
the Rowan Incentive Plan and he had earned an effective hourly rate of ₹37.50 on the
manufacture of that particulars product.
State what could have been his total earnings and effective hourly rate, had he been put
on Halsey Incentive Scheme (50%)?
(ICAI SM, Nov. 2009, Nov. 2017, May 2013 RTP, MTP May 2024-II, MTP Sept 2024-II(m))
Ans. Total Earnings (under 50% Halsey Incentive Scheme)
1
= Hours worked × Rate per hour + × time saved × Rate per hour
2
1
= 3 hours (W. N. ) × ₹30 + × 1 hour × ₹30 = ₹105
2
Total Earnings ₹105
∴ Effective Hourly Rate = = = ₹𝟑𝟓
Hours taken 3 hours

Working Note: Calculation of the total time worked in hours by the skilled workers:
Let T hours be the total time worked in hours by the skilled workers (machine man P). ₹30 is the
rate per hour; standard time is 4 hours p.u. & effective hourly earnings rate is ₹37.50 then,
Earning (under Rowan plan)
Time saved
= Hours worked × Rate per hour + × Time taken × Rate per hour
Time allowed
(4−T)
∴ ₹37.5 T = T × ₹30 + × T × ₹30
4
⇒ ₹37.5 = ₹30 + (4 − T) × ₹7.5 … [(Both sides are divided by T)
⇒ ₹37.5 = ₹30 + ₹30 − 7.5 T ⇒ ₹7.5 T = ₹60 − ₹37.5
⇒ ₹7.5 T = ₹22.5 ∴ T = 3 hours
4. A Company is undecided as to what kind of wage scheme should be introduced. The
following particulars have been complied in respect of three workers, which are under
consideration of the management:
Particulars I II III
Actual hours worked 380 100 540
Hourly rate of wages (in ₹) 40 50 60
Production in units:
Product A 210 ---- 600
Product B 360 ---- 1,350
Product C 460 250 ----
A B C
Standard time allowed p.u. of each product in minutes 15 20 30
For the purpose of piece rate, each minute is valued at ₹1.
You are required to Calculate the wages of each worker under:
(a) Guaranteed hourly rate basis.
(b) Piece work earning basis, but guaranteed at 75% of basic pay (Guaranteed hourly rate if
his earnings are less than 50% of basic pay.)
(c) Premium bonus basis where the worker received bonus based on Rowan Scheme.
(Nov. 2010 RTP, Nov. 2002 RTP, Modified MTP Dec. 2021, MTP May 2024-I Modified)
Ans. (a) Computation of wages of each worker under Guaranteed Hourly Rate Basis
Worker Actual hours Hourly Wage Rate Wages (₹)
worked (Hours) (₹)
I 380 40 15,200
 II 100 50 5,000
III 540 60 32,400
(b) Computation of Wages of each worker under Piece Work Earning Basis
Product Piece rate Worker-I Worker-II Worker-III
per unit (₹) Units Wages Units Wages Units Wages
(W.N.1) (₹) (₹) (₹)
A 15 210 3,150 ---- ---- 600 9,000
B 20 360 7,200 ---- ---- 1,350 27,000
C 30 460 13,800 250 7,500 ---- ----
Total 24,150 7,500 36,000
Since each worker’s earnings are more than 50% of basic pay. Therefore, Worker-I, II, and III,
will be paid the wages as computed i.e., ₹24,150, ₹7,500 and ₹36,000 respectively.
(c) Computation of Wages of each worker under Premium bonus basis (where each worker
receives bonus based on Rowan Scheme)
Worker Time Allowed Time Time Wage Earnings Bonus* Total
(Hr.) (W.N.2) Taken Saved Rate per (₹) (₹) Earnings
(Hr.) (Hr.) hour (₹) (₹)
I 402.5 380 22.5 40 15,200 850 16,050
II 125 100 25 50 5,000 1,000 6,000
III 600 540 60 60 32,400 3,240 35,640
Time Taken
Note: *Bonus = × Time Saved × Wage Rate
Time Allowed
380 100
Worker-I: × 22.5 × 40 = 𝟖𝟓𝟎; Worker-II: × 25 × 50 = 𝟏, 𝟎𝟎𝟎
402.5 125
540
Worker-III: × 60 × 60 = 𝟑, 𝟐𝟒𝟎
600
Working Notes: 1. Piece rate per unit:
Product Standard time per Piece rate each Piece rate per unit
unit in minute minute (₹) (₹)
A 15 1 15
B 20 1 20
C 30 1 30
(1) Time Allowed to each work:
Worker Product-A Product -B Product -C Total Time
(Hours)
I 210 units × 15 360 units × 20 460 units × 30 24,150/60
= 3,150 = 7,200 = 13,800 = 402.50
II ---- ---- 250 units × 30 7,500/60
= 7,500 = 125
III 600 units × 15 1,350 units × 20 ---- 36,000/60
= 9,000 = 27,000 = 600

6. In a factory, the basic wage rate is ₹100 per hour and overtime rates are as follows:
Before and after normal working hours 175% of basic wage rate
Sundays and holidays 225% of basic wage rate
During the previous year, the following hours were worked:
Normal time 1,00,000 hours
Overtime before and after working hours 20,000 hours
Overtime on Sundays and holidays 5,000 hours
Total 1,25,000 hours
The following hours have been worked on job ‘Z’:
 Normal 1,000 hours
Overtime before and after working hours. 100 hours
Sundays and holidays 25 hours
Total 1,125 hours
You are required to Calculate the labour cost chargeable to job ‘Z’ and overhead in
each of the following instances:
(a) Where overtime is worked regularly throughout the year as a policy due to the Workers
shortage.
(b) Where overtime is worked irregularly to meet the requirements of production.
(c) Where overtime is worked at the request of the customer to expedite the job.
(ICAI SM, RTP Nov. 2021, Modified MTP Nov. 2020, Sept 2024 (M))
Ans. (a) Where overtime is worked regularly as a policy due to workers’ shortage:
The overtime premium is treated as a part of employee cost and job is charged at an inflated
wage rate. Hence, employee cost chargeable to job Z.
= Total hours × Inflated wage rate = 1,125 hours × ₹117 (W. N. ) = ₹𝟏, 𝟑𝟏, 𝟔𝟐𝟓
(b) Where overtime is worked irregularly to meet the requirements of production:
Basic wage rate is charged to the job and overtime premium is charged to factory overheads
as under:
Employee Cost chargeable to Job Z: 1,125 hours @ ₹100 per hour = ₹1,12,500
Factory Overheads: {100 hours × ₹(175−100)} + {25 hours × ₹(225−100)}
= {₹7,500 + ₹3,125} = ₹10,625
(c) Where overtime is worked at the request of the customer, overtime premium is also
charged to the job as under:
Particulars (₹)
Job Z Employee Cost [1,125 hours @ ₹100] 1,12,500
Overtime premium: [100 hours @ ₹(175−100)] 7,500
[25 hours @ ₹(225−100)] 3,125
Total 1,23,125
Workings Note:
Given: Basic wage rate : ₹100 per hour
∴ Overtime wage rate before and after working hours : ₹100 × 175% = ₹175 per hour
and Overtime wage rate for Sundays and holidays: ₹100 × 225% = ₹225 per hour
Computation of average inflated wage rate (including overtime premium):
Particulars
Annual wages for the previous year for normal time (1,00,000 hours × ₹100) 1,00,00,000
Wages for overtime before and after working hours (20,000 hours × ₹175) 35,00,000
Wages for overtime on Sundays and holidays (5,000 hours × ₹225) 11,25,000
Total wages for 1,25,000 hours 1,46,25,000
₹1,46,25,000
∴ Average Inflated Wage Rate = = ₹𝟏𝟏𝟕
1,25,000 hours
13. GZ Ltd. pays the following to a skilled worker engaged in production works. The
following are the employee benefits paid to the employee:
1. Basic Salary per day ₹1,000
2. Dearness allowance (DA) 20% of basic Salary
3. House rent allowance 16% of basic salary
4. Transport allowance ₹50 per day of actual work
5. Overtime Twice the hourly rate (Considers basic and DA), only if
works more than 9 hours a day otherwise no overtime
allowance. If works for more than 9 hours a day then
overtime is considered after 8th hours.
 6. Work of holiday and Sunday Double of per day basic rate provided works at least 4
hours. The holiday & Sunday basic is eligible for all
allowances & Statutory deductions.
7. Earned leave & Casual leave These are paid leave.
8. Employer’s Contribution to 12% of basic and DA
Provident fund
9. Employer’s Contribution to 7% of basic and DA
Pension fund
The Company normally works 8-hours a days and 26-day in a month. The Company provides
30 minutes’ lunch break in between.
During the month of August 20X1, Mr. Z works for 23 days including 15th August and a Sunday
and applied for 3 days of casual leave. On 15th August and Sunday he worked for 5 and 6 hours
respectively without lunch break.
On 5th and 13thAugust he worked for 10 and 9 hours respectively.
During the month Mr. Z worked for 100 hours on job no. HT 200.
You are required to Calculate:
(a) Earnings per day.
(b) Effective wages rate per hour of Mr. Z.
(c) Wages to be changed to Job no. HT200. (Nov. 2020 RTP, MTP 2023–II)
Ans. (a) Calculation of Earnings per day:
Particulars (₹)
Basic Salary (₹1,000 × 26 days) 26,000
Dearness allowance (20% of basic salary) 5,200
31,200
House Rent Allowance (16% of basic salary) 4,160
Employers Contribution to Provident fund (12% × ₹31,200) 3,744
Employers Contribution to Pension fund (7% × ₹31,200) 2,184
41,288
No. of working days in a month (days) 26
Rate per day (A) 1,588
Transport Allowance per day (B) 50
Earnings per day (A/B) 1,638
Note: Additional basic salary for Sunday and holiday is to be considered only for calculation of
effective wage rate.

(b) Calculation of Effective wage rate per hour of Mr. Z:

Particulars (₹)
Basic Salary (₹1,000 × 26 days) 26,000
Additional Basic Salary for Sunday & holiday (₹1,000 × 2 days) 2,000
Dearness Allowance (20% of basic salary) 5,600
33,600
House Rent Allowance (16% of Basic salary) 4,480
Transport Allowance (₹50 × 23 days) 1,150
Overtime Allowance (₹160* × 2 × 2 hours) 640
Employers Contribution to Provident fund (12% × ₹33,600) 4,032
Employers Contribution to Person fund (7% × ₹33,600) 2,352
Total monthly wages (A) 46,254
Hours worked by Mr. Z (hours) (B) 186.5
 Effective wage rate per hour (A/B) 248
Note: *Overtime Allowance Rate = (Daily Basic + DA) ÷ 7.5 hours
= (1,000 + 200) ÷ 7.5 = ₹160 per hour
(c) Calculation of wages to be charged to Job no. HT 200 = ₹248 × 100 hours = ₹24,800
Working Notes:
1. Normal working hours in a month = (Daily working hours – lunch break) × no. of days
= (8 hours – 0.5 hours) × 26 days = 195 hours
2. Hours worked by Mr. Z = No. of normal days worked + Overtime + holiday/Sunday worked
= (21 days × 7.5 hrs) + (9.5 hrs + 8.5 hrs) + (5 hrs + 6 hrs)
= 157.5 hours + 18 hours + 11 hours = 186.50 hours
 COST SHEET
Q. Questions and Answers
No.
2. The following date relates to manufacturing of a standard product during the month
of March, 20X1:
Particulars Amount (in ₹)
Stock of Raw material as on 01-03-20X1 80,000
Work in Progress as on 01-03-20X1 50,000
Purchase of Raw material 2,00,000
Carriage Inwards 20,000
Direct Wages 1,20,000
Cost of special drawing 30,000
Hire charges paid for Plant 24,000
Return of Raw Material 40,000
Carriage on return 6,000
Expenses for participation in Industrial exhibition 8,000
Legal charges 2,500
Salary to Office Staff 25,000
Maintenance of Office Building 2,000
Depreciation on Delivery van 6,000
Warehousing charges 1,500
Stock of Raw Material as on 31-03-20X1 30,000
Stock of Work-in-progress as on 31-03-20X1 24,000
• Store overheads on materials are 10% of material consumed.
• Factory overheads are 20% of the Prime cost.
• 10% of the output was rejected and a sum of ₹5,000 was realised on sale of scrap.
• 10% of the finished product was found to be defective and the defective products were
rectified at an additional expenditure which is equivalent to 20% of proportionate
direct wages.
• The total output was 8,000 units during the month.
You are required to prepare a Cost Sheet for the above period showing the:
(i) Cost of Raw Material consumed (ii) Prime Cost
(iii) Work Cost (iv) Cost of Production (v) Cost of Sales
(July 2021, Modified MTP Nov. 2022, Modified MTP May 2019, May 2022 Modified,
RTP Nov. 2022 Modified, Nov. 2023)
Ans. Cost Sheet during the Month of March 20X1
Particulars Amount (₹) Amount (₹)
Raw materials purchased (₹2,00,000 – ₹40,000) 1,60,000
Carriage inwards 20,000
Add: Opening stock of raw materials 80,000
Less: Closing stock of raw materials (30,000)
Cost of Material Consumed (i) 2,30,000
Direct Wages 1,20,000
Direct Expenses:
Cost of special drawing 30,000
Hire charges paid for Plant 24,000 54,000
Prime Cost (ii) 4,04,000
Carriage on return 6,000
Store overheads (10% of material consumed) 23,000
 Factory overheads (20% of Prime cost) 80,800
Additional expenditure for rectification of defective
products (W.N.2) 2,160 1,11,960
Gross Factory Cost 5,15,960
Add: Opening value of W-I-P 50,000
Less: Closing value of W-I-P (24,000)
Works/ Factory Cost (iii) 5,41,960
Less: Realizable value on sale of scrap (5,000)
Cost of Production (iv) 5,36,960
Add: Opening Stock of Finished Goods -
Less: Closing Stock of Finished Goods -
Cost of Goods Sold 5,36,960
Administrative Overheads:
Maintenance of Office Building 2,000
Salary paid to Office Staff 25,000
Legal Charges 2,500 29,500
Selling Overheads:
Expenses for participation in Industrial exhibition 8,000
Distribution overheads:
Depreciation on delivery van 6,000
Warehousing charges 1,500 7,500
Cost of Sales (v) 5,81,960
Alternative Solution: (considering Hire charges paid for Plant as indirect expenses)
Statement of Cost for the month of March
Particulars Amount Amount
(₹) (₹)
Raw materials purchased (₹2,00,000 – ₹40,000) 1,60,000
Carriage inwards 20,000
Add: Opening stock of raw materials 80,000
Less: Closing stock of raw materials (30,000)
Cost of Material Consumed (i) 2,30,000
Direct Wages 1,20,000
Direct Expenses:
Cost of Special Drawing 30,000 30,000
Prime Cost (ii) 3,80,000
Hire charges paid for Plant 24,000
Carriage on return 6,000
Store overheads (10% of material consumed) 23,000
Factory overheads (20% of Prime cocxxst) 76,000
Additional expenditure for rectification of defective
products (W.N.2) 2,160 1,31,160
Gross Factory Cost 5,11,160
Add: Opening Value of W-I-P 50,000
Less: Closing Value of W-I-P (24,000)
Works/ Factory Cost (iii) 5,37,160
Less: Realizable value on sale of scrap (5,000)
Cost of Production (iv) 5,32,160
Add: Opening Stock of Finished Goods -
Less: Closing Stock of Finished Goods -
(i) Cost of Goods Sold 5,32,160
Administrative Overheads:
 Maintenance of Office Building 2,000
Salary paid to Office Staff 25,000
Legal Charges 2,500 29,500
Selling Overheads:
Expenses for participation in Industrial exhibition Distribution
Overheads 8,000
Depreciation on delivery van 6,000
Warehousing Charges 1,500 7,500
Cost of Sales (v) 5,77,160
Working Notes: 1. Number of Rectified units:
Total Output 8,000 units
Less: Rejected 10% (800 units)
Finished product 7,200 units
∴ Rectified units (10% of finished product) = 720 units
2. Proportionate additional expenditure on 720 units
1,20,000
= 20% of proportionate direct wages = 0.20 × ( ) × 720 (W.N.1) = ₹2,160
8,000

5. MNP Limited have the capacity to produce 84,000 units of a product very month. Its prime
cost per unit at various levels of production is as follows:
Level Prime Cost per unit (₹)
10% 50
20% 48
30% 46
40% 44
50% 42
60% 40
70% 38
80% 36
90% 34
100% 32
Its prime cost consists of raw material consumed, direct wages and direct expenses in the
ratio of 3 : 2 : 1. In the month of January 2024, the company worked at 40% capacity and
raw material purchased amounting to ₹8,40,000. In the month of February 2024, the
company worked at 100% capacity and raw material purchased for ₹16,46,400.
It is the policy of the company to maintain opening stock of raw material equal to 1/3 of
closing stock of raw material. Factory overheads are recovered at 60% of direct wages cost.
Fixed administration expenses (as part of production cost) and fixed selling and
distribution expenses are ₹2,01,600 and ₹1,68,000 per month respectively. During the
month of January 2024 company sold 33,600 units @ ₹68.8 per unit. The variable
distribution cost amounts to ₹1.5 per unit sold.
The management of the company chalks out a pl for the month of February 2024 to sell its
whole output @ ₹61 per unit by incurring following further expenditure:
(1) Company sponsors a television programme on every Sunday at a cost of ₹26,250 per
week. There are 4 Sundays in February 2024.
(2) Hi-tea programme every month for its potential customers at a cost of ₹1,05,000.
(3) Special gift item costing ₹105 on sale of a dozen units.
 (4) Lucky draws scheme is introduced every month by giving the first prize of ₹1,00,000;
second prize of ₹80,000; third prize of ₹40,000 and four consolation prizes of ₹8,000
each.
Note: (In the month of February 2024, there is a significant saving in material cost per unit
due to entry of new suppliers in the market and saving in per unit cost of Direct wages and
Direct expenses due to introduction of new· policy by the management.)
Prepare a cost sheet for the month of January 2024 and February 2024 showing prime cost
(with different elements of prime cost), factory cost, cost of production, total cost and
profit earned.
(ICAI SM, Modified MTP Nov. 2020, Modified MTP May 2022, Sept. 2024)
Ans. Cost Sheet
Particulars January 2024 February 2024
33,600 Units 84,000 Units
Opening Stock of Raw Material 50,400 1,51,200
Add: Purchases 8,40,000 16,46,400
Less: Closing stock of Raw Material (1,51,200) (4,53,600)
Direct materials consumed: 7,39,200 13,44,000
Direct Wages 4,92,800 8,96,000
Direct expenses 2,46,400 4,48,000
Prime Cost 14,78,400 26,88,000
Factory overheads (60% of direct wages) 2,95,680 5,37,600
Factory / Works Cost 17,74,080 32,25,600
Add: Administration overhead 2,01,600 2,01,600
(Production)
Cost of Production / Cost of goods sold 19,75,680 34,27,200
Add: Fixed selling and distribution Overhead 1,68,000 1,68,000
Variable distribution overheads 50,400 1,26,000
(₹1.5 per unit)
- Sponsorship cost - 1,05,000
- Hi tea programme - 1,05,000
- Special gifts (84,000 × 1/12 × 105) - 7,35,000
- Lucky draw prize * - 2,52,000
Cost of sales / Total Cost 21,94,080 49,18,200
Profit (Balancing figure) 1,17,600 2,05,800
Sales revenue 23,11,680 51,24,000
*Lucky draw prize:
Amount (₹)
1st Prize 1,00,000
2nd Prize 80,000
3rd Prize 40,000
Consolation Prizes (4 × ₹8,000) 32,000
Total 2,52,000
Working Note:
Calculation of opening and costing stock of Raw Material
January
Units Manufactured = 84,000 x 40% = 33,600 units
Prime Cost = 33,600 x 44 = ₹14,78,400
Raw Material consumed = ₹14,78,400 X 3/6 = ₹7,39,200
Raw Material purchase (given) = ₹8,40,000
Let closing stock of Raw Material be x
Opening stock of Raw Material be 1/3x
Opening Stock + Purchase – closing stock = Raw Material consumed
1/3x + ₹8,40,000 – x = ₹7,39,200
1/3x – x = ₹7,39,200 – ₹8,40,000
2/3x = ₹1,00,800
x = ₹1,51,200 (closing stock)
Opening stock = ₹1,51,200 x 1/3 = ₹50,400
February
Prime Cost = 84,000 x 32 = ₹26,88,000
Raw Material consumed = ₹26,88,000 x 3/6 = ₹13,44,000
Raw Material purchased (given) = ₹16,46,400
Opening Stock + Purchase – closing stock = Raw Material consumed
₹1,51,200 + ₹16,46,400 – closing stock = ₹13,44,000
Closing stock =₹4,53,600
 PROCESS & OPERATION COSTING
Q. No. Questions and Answers
1. Following details are related to the work done in Process-I by XYZ Company during
the month of March, 202X:
Particulars (₹)
Opening work-in-process (2,000 units):
Materials 80,000
Labour 15,000
Overheads 45,000
Materials introduced in Process-I (38,000 units): 14,80,000
Direct Labour 3,59,000
Overheads 10,77,000
Units Scrapped: 3,000 Units
Degree of Completion:
Materials 100%
Labour and Overheads 80%
Closing work-in-process: 2,000 units
Degree of Completion:
Materials 100%
Labour and Overheads 80%
Units finished and transferred to Process-II: 35,000 units
Normal Loss:
5% of total input including opening work-in-process.
Scrapped units fetch ₹20 per piece.
You are required to Prepare using average method:
(a) Statement of Equivalent Production.
(b) Statement of Cost.
(c) Statement of Distribution Cost, and
(d) Process-I Account, Normal Loss Account & Abnormal Loss Account.
(ICAI SM, Nov. 2015, Modified Jan. 2021, Nov. 2020, Modified MTP May 2019,
Modified MTP Nov. 2022, RTP May 2024 Modified, RTP Sept 2024)
Ans. (a) Statement showing the Equivalent Production of XYZ Ltd. during the month of March

Input Particulars Output Material Labour Overhead

% Units % Units % Units
2,000 Opening work-in- 2,000 100 2,000 100 2000 100 2,000
progress
38,000 Input
Finished Goods 33,000 100 33,000 100 33,000 100 33,000
Normal Loss 2,000 - - - - - -
Abnormal Loss 1,000 100 1,000 80 800 80 800
Closing Work-in-
progress 2,000 100 2,000 80 1,600 80 1600
40,000 40,000 38,000 37,400 37,400
(b) Statement of Cost:
Computation of cost per unit —
Total cost − Scrap value of Normal loss
As we know, Material Cost per unit =
Input − Normal loss
{80,000 + 14,80,000 – (2,000 × ₹20 per unit)}
= 38,000
= ₹40 p.u.
 (15,000 + 3,59,000)
Labour Cost = 37,400
= ₹10 per unit
(45,000 + 10,77,000)
Overheads = = ₹30 per unit
37,400
(c) Valuation/ Distribution of cost:
Closing Work-in-progress:
Material 2,000 units × ₹40 per unit = ₹80,000
Labour 1,600 units × ₹10 per unit = ₹16,000
Overheads 1,600 units × ₹30 per unit = ₹48,000
∴ Total Cost = ₹1,44,000
Abnormal Loss:
Material 1,000 units × ₹40 per unit = ₹40,000
Labour 800 units × ₹10 per unit = ₹8,000
Overheads 800 units × ₹30 per unit = ₹24,000
∴ Total Cost = ₹72,000
Finished Goods:
Material 35,000 units × ₹40 per unit = ₹14,00,000
Labour 35000 units × ₹10 per unit = ₹3,50,000
Overheads 35000 units × ₹30 per unit = ₹10,50,000
(d) Dr. Process-I Account Cr.
Particulars Units Amount (₹) Particulars Units Amount (₹)
To Opening work- 2,000 1,40,000 By Normal Loss 2,000 40,000
in-progress By Abnormal loss 1,000 72,000
To Material 38,000 14,80,000 By Process B 35,000 28,00,000
To Labour - 3,59,000 By Closing WIP 2,000 1,44,000
To Overheads 10,77,000
40,000 30,56,000 40,000 30,56,000
Dr. Normal Loss Account Cr.
Particulars Units Amount (₹) Particulars Units Amount (₹)
To Process Account 2,000 40,000 By Cost Ledger 2,000 40,000
Control A/c
2,000 40,000 2,000 40,000
Dr. Abnormal loss Account Cr.
Particulars Units Amount (₹) Particulars Units Amount (₹)
To Process Account 1,000 72,000 By Cash Account 1,000 20,000
By Costing Profit
& loss A/c - 52,000
1,000 72,000 1,000 72,000
2. MJ Pvt. Ltd. produces a product “SKY” which passes through two processes, viz. Process-
A and Process-B, the details for the year ending 31st March, 202X are as follows:
Particulars Process – A Process – B
40,000 Units introduced at a cost of ₹3,60,000 ----
Material Consumed ₹2,42,000 ₹2,25,000
Direct Wages ₹2,58,000 ₹1,90,000
Manufacturing Expenses ₹1,96,000 ₹1,23,720
Output in Units 37,000 27,000
Normal Wastage of Input 5% 10%
Scrap Value (per unit) ₹15 ₹20
Selling Price (per unit) ₹37 ₹61
Additional Information:
 (i) 80% of the output of Process-A, was passed on to the next process and the balance
was sold. The entire output of Process-B was sold.
(ii) Indirect expenses for the year were ₹4,48,080.
(iii) It is assumed that Process-A and Process-B are not responsibility centre.
Required:
(a) Prepare Process-A and Process-B Account.
(b) Prepare Profit & Loss Account showing the net profit/net loss for the year.
(May 2014, Mod. in May 2012, May 2008, Modified MTP May 2020, May 2024 Mod.)
Ans. Dr. Process-A A/c Cr.
(a) Particulars Units (₹) Particulars Units (₹)
To Input 40,000 3,60,000 By Normal wastage 2,000 30,000
To Material ---- 2,42,000 (2,000 units × ₹15)
To Direct Wages ---- 2,58,000 By Abnormal loss A/c 1,000 27,000
To Manufacturing ---- 1,96,000 (1,000 units × ₹27)
Expenses By Process-B 29,600 7,99,200
(29,600 units×₹27)
By Profit & Loss A/c 7,400 1,99,800
(7,400 units × ₹27)
40,000 10,56,000 40,000 10,56,000
₹10,56,000 − ₹30,000
Here, Cost per unit = = ₹27 per unit
₹40,000 unit − 2,000 units
Normal wastage = 40,000 units × 5% = 2,000 units
Abnormal loss = 40,000 units – (37,000 units + 2,000 units) = 1,000 units
Transfer to Process-B A/c = 37,000 units × 80% = 29,600 units
Sale = 37,000 units × 20% = 7,400 units
Dr. Process – B A/c Cr.
Particulars Units (₹) Particulars Units (₹)
To Process-A A/c 29,600 7,99,200 By Normal Wastage 2,960 59,200
To Material ---- 2,25,000 (2,960 units × ₹20)
To Direct Wages ---- 1,90,000 By Profit & Loss A/c 27,000 12,96,000
To Manufacturing ---- 1,23,720 (27,000 units×₹48)
Expenses
To Abnormal Gain A/c 360 17,280
(360 units × ₹48)
29,960 13,55,200 29,960 13,55,200
₹13,37,920 − ₹59,200
Here, Cost per unit = ₹29,600 units − 2,960 units = ₹48 per unit
Normal wastage = 29,600 units × 10% = 2,960 units
Abnormal gain = (27,000 units + 2,960 units) − 29,600 units = 360 units
(b) Dr. Profit & Loss A/c Cr.
Particulars (₹) Particulars (₹)
To Process-A A/c 1,99,800 By Sales:
To Process-B A/c 12,96,000 Process-A (7,400 units×₹37) 2,73,800
To Abnormal loss A/c 12,000 Process-B (*27,000 units×₹61) 16,47,000
To Indirect Expenses 4,48,080 By Abnormal Gain (W.N.3) 10,080
By Net Loss 25,000
19,55,880 19,55,880
+

Working Notes:
1. Dr. Normal Wastage (Loss) A/c Cr.
Particulars Units (₹) Particulars Units (₹)
 To Process-A A/c 2,000 30,000 By Abnormal Gain A/c 360 7,200
To Process-B A/c 2,960 59,200 (360 units × ₹20)
By Bank (Sales) 4,600 82,000
4,960 89,200 4,960 89,200
2. Dr. Abnormal Loss A/c Cr.
Particulars Units (₹) Particulars Units (₹)
To Process-A A/c 1,000 27,000 By Bank A/c 1,000 15,000
(1,000 units × ₹15)
By Profit & Loss A/c ---- 12,000
1,000 27,000 1,000 27,000

3. Dr. Abnormal Gain A/c Cr.

Particulars Units (₹) Particulars Units (₹)
To Normal loss A/c 360 7,200 By Process-B A/c 360 17,280
(360 units × ₹20)
To Profit & Loss A/c 10,080
360 17,280 360 17,280
4. Calculation of abnormal loss and abnormal gain
For Process A:
Particulars Quantity
Input 40,000
Less: Output (37,000)
Less: Normal loss 5% of 40,000 (2,000)
Abnormal Gain/ Abnormal loss (1,000)
For Process B:
Particulars Quantity
Input from process A 29,600
Less: Output (27,000)
Less: Normal loss (10% of 29,600) (2960)
Abnormal loss 360

5. “Healthy Sweets” is engaged in the manufacturing of jaggery. Its process involve sugarcane
crushing for juice extraction, then filtration and boiling of juice along with some chemicals
and then letting it cool to cut solidified jaggery blocks.
The main process of juice extraction (Process-I) is done in conventional crusher, which is
then filtered and boiled (Process- II) in iron pots. The solidified jaggery blocks are then cut,
packed and dispatched. For manufacturing 10 kg. of jaggery, 100 kg of sugarcane is
required, which extracts only 45 litres of juice.
Following information regarding Process-I has been obtained from the
manufacturing department of Healthy Sweets for the month of January, 202X:
Particulars (₹)
Opening work-in-process (4,500 litre):
Sugarcane 50,000
Labour 15,000
Overheads 45,000
Sugarcane introduced for juice extraction (1,00,000 kg.) 5,00,000
Direct Labour 2,00,000
Overheads 6,00,000
 Abnormal Loss: 1,000 kg Degree of Completion
Sugarcane 100%
Labour and Overheads 80%
Closing work-in-process: 9,000 litres Degree of Completion
Sugarcane 100%
Labour and Overheads 80%
Extracted Juice transferred for filtering and boiling: 39,500 litre (Consider mass of
1 litre of juice equivalent to 1 kg)
You are required to prepare using average method:
(a) Statement of Equivalent Production
(b) Statement of Cost
(c) Statement of Distribution Cost
(d) Process-I Account
(ICAI SM, May 2013, Nov. 2014, Modified MTP Nov. 2020)
Ans. (a) Statement of Equivalent Production
Input Particulars Output Material Labour &
Overheads
% Unit % Unit
4,500 Opening work-in-progress 4500 100 4,500 100 4,500
1,00,000 Input
Finished Goods 35,000 100 35,000 100 35,000
Normal Loss 55,000 - - - -
Abnormal Loss 1,000 100 1,000 80 800
Closing Work-in-progress 9,000 100 9,000 80 7,200
1,04,500 1,04,500 49,500 47,500
*100 kg of Sugarcane extracts only 45 litre of Juice.
Thus, Normal Loss = 100−45 = 55%
(b) Statement Showing Cost for each element
Particulars Sugarcane Labour Overheads Total
(₹) (₹) (₹) (₹)
Cost of Opening work-in-process 50,000 15,000 45,000 1,10,000
Cost incurred during the month 5,00,000 2,00,000 6,00,000 13,00,000
Total Cost (A) 5,50,000 2,15,000 6,45,000 14,10,000
Equivalent Units (B) 49,500 47,500 47,500 ----
Cost per equivalent unit (C = A ÷ B) 11.111 4.526 13.579 29.216

(c) Statement of Distribution of Cost

Particulars (₹) (₹)
(1) Value of units completed & transferred (39,500 units× ₹29.216) 11,54,032
(2) Value of Abnormal Loss:
Sugarcane (1,000 units × ₹11.111) 11,111
Labour (800 units × ₹4.526) 3,621
Overheads (800 units × ₹13.579) 10,863 25,595
(3) Value of Closing W-I-P:
Sugarcane (9,000 units × ₹11.111) 99,999
Labour (7,200 units × ₹4.526) 32,587
Overheads (7,200 units × ₹13.579) 97,769 2,30,355
(d) Dr. Process-I A/c Cr.
Particulars Units (₹) Particulars Units (₹)
To Opening W.I. P: By Normal Loss 55,000 ----
Sugarcane 4,500 50,000 By Abnormal Loss 1,000 25,613
Labour ---- 15,000 [₹25,595 + ₹18]
Overheads ---- 45,000 (difference due to
To Sugarcane 1,00,000 5,00,000 approximation)
introduced By Process-II A/c 39,500 11,54,032
To Direct Labour ---- 2,00,000 By Closing WIP 9,000 2,30,355
To Overheads ---- 6,00,000
1,04,500 14,10,000 1,04,500 14,10,000
 JOINT PRODUCTS AND BY PRODUCTS
Q. Questions and Answer
No.
2. A Ltd. produces ‘M’ as a main product and gets two by-products – ‘P’ & ‘Q’ in the
course of processing. Following information are available for the month of October,
20X1:
Particulars M P Q
Cost after separation ---- ₹60,000 ₹30,000
No. of units produced 4,500 2,500 1,500
Selling price (per unit) ₹170 ₹80 ₹50
Estimated Net profit to sales ---- 30% 25%
The joint cost of manufacture upto separation point amounts to ₹2,50,000. Selling
expenses amounting to ₹85,000 are to be apportioned to the three products in the ratio of
sales units.
There is no opening and closing stock. Prepare the statement showing:
(a) Allocation of joint cost.
(b) Product-wise overall profitability.
(c) Advise the company regarding results if the by-product ‘P’ is not further processed and
is sold at the point of separation at ₹60 per unit without incurring selling expenses.
(Nov. 2017, Modified in May 2013, May 2015 & RTP, MTP Sept 2024-I)
Ans. (a) Statement Showing Allocation of Joint Cost
Particulars P Q
No. of units produced (A) 2,500 1,500
Selling price per unit (₹) (B) 80 50
Sales Value (₹) (A×B) 2,00,000 75,000
Less: Estimated profit (P: 30%, Q: 25%) (60,000) (18,750)
Cost of sales 1,40,000 56,250
Less: Estimated Selling Expense (W.N.) (25,000) (15,000)
Cost of Production 1,15,000 41,250
Less: Cost after separation (60,000) (30,000)
Joint Cost allocated 55,000 11,250
Working Note: Calculation of selling expense:
85,000 85,000 85,000
P= × 2,500 = 𝟐𝟓, 𝟎𝟎𝟎; Q= × 1,500 = 𝟏𝟓, 𝟎𝟎𝟎; M = × 4,500 = 𝟒𝟓, 𝟎𝟎𝟎
8,500 8,500 8,500

(b) Statement of Profitability

Particulars M (₹) P (₹) Q (₹)
Sales value (A) 7,65,000 2,00,000 75,000
(4,500 × ₹170) (2500 × 80) (1500 × 50)
Joint Cost (2,50,000–55,000–11,250) 1,83,750 55,000 11,250
Cost after separation ---- 60,000 30,000
Selling Expenses 45,000 25,000 15,000
Total Cost (B) 2,28,750 1,40,000 56,250
Profit (A – B) 5,36,250 60,000 18,750
∴ Overall Profit = ₹5,36,250 + ₹60,000 + ₹18,750 = ₹6,15,000
(c) If the by-product P is not further processed and is sold at the point of separation:
Particulars Amount (₹)
 Sales value at the point of separation (2,500 units × ₹60) 1,50,000
Less: Joint cost (55,000)
Profit 95,000
Profit after further processing 60,000
Incremental Profit 35,000
Decision: If the by-product P is sold at the point of separation, it will give an additional
profit of ₹35,000 to the company, hence, the company should sell by-product P without
further processing.
10. ABC Ltd. operates a simple chemical process to convert a single material into three
separate items, referred to here as X, Y and Z. All three end products are separated
simultaneously at a single split-off point.
Product X and Y are ready for sale immediately upon split-off without further processing
orany other additional costs. Product Z, however, is processed further before being sold.
There is no available market price for Z at the split-off point.
The selling prices quoted here are expected to remain the same in the coming year.
During 20X0-X1, the selling prices of the items and the total amounts sold were:
X – 186 tons sold for ₹3,000 per ton
Y – 527 tons sold for ₹2,250 per ton
Z – 736 tons sold for ₹1,500 per ton
The total joint manufacturing costs for the year were ₹12,50,000. An additional ₹6,20,000 was
spent to finish product Z. There were no opening inventories of X, Y or Z at the end of the year.
The following inventories of complete units were on hand:
X 180 tons
Y 60 Tons
Z 25 tons
There was no opening or closing work-in-progress.
Required:
COMPUTE the cost of inventories of X, Y and Z and Cost of Goods Sold for year ended
March31, 20X1, using Net Realizable Value (NRV) method of joint cost allocation.
(RTP Nov. 2020, MTP May 2023–I)
Ans. Statement of Joint Cost allocation of inventories of X, Y and Z
(By using Net Realizable Value Method)
Particulars Products Total
X (₹) Y (₹) Z (₹) (₹)
Final sales value of total 10,98,000 13,20,750 11,41,500 35,60,250
production (W.N.1) (366 × ₹3,000) (587 × ₹2,250) (761 × ₹1,500)
Less: Additional cost -- -- (6,20,000) (6,20,000)
Net Realizable Value 10,98,000 13,20,750 5,21,500 29,40,250
(at Split-off Point)
Joint Cost Allocated 4,66,797 5,61,496 2,21,707 12,50,000
(W.N.2)
Cost of Goods Sold as on March 31, 20X1
(By using Net Realizable Value Method)
Particulars Products Total
X (₹) Y (₹) Z (₹) (₹)
Allocated jointcost 4,66,797 5,61,496 2,21,707 12,50,000
Additional costs -- -- 6,20,000 6,20,000
Cost of goods available 4,66,797 5,61,496 8,41,707 18,70,000
 for sale (CGAS)
Less: Cost of ending (2,29,571) (57,385) (27,692) (3,14,648)
inventory (W.N.1) (CGAS×49.18%) (CGAS×10.22%) (CGAS×3.29%)
Cost of Goods Sold 2,37,226 5,04,111 8,14,015 15,55,352
Working Notes:
1. Total production of three products for the year 20X0-20X1:
Products Quantity Quantity of Total Ending
sold in ending inventory production inventory
tones in tons percentage (%)
(1) (2) (3) (4) = [(2) + (3)} (5) = (3)/ (4)
X 186 180 366 49.18
Y 527 60 587 10.22
Z 736 25 761 3.29
2. Joint cost apportioned to each product
Total Joint cost
= Total Net Realisable Value × Net Realizable Value of each product
₹12,50,000
Total cost of Product X = × ₹10,98,000 = ₹4,66,797
₹29,40,250
₹12,50,000
Total cost of Product Y = ₹29,40,250 × ₹13,20,750 = ₹5,61,496
₹12,50,000
Total cost of Product Z = × ₹5,21,500 = ₹2,21,707
₹29,40,250

11. OPR Ltd. purchases crude vegetable oil. It does refine of the same. The refining process
results in four products at the split-off point – S, P, N and A. Product ‘A’ is fully processed
at the split-off point. Product S, P and N can be individually further refined into SK, PM, and
NL respectively. The joint cost of purchasing the crude vegetable oil and processing it were
₹40,000. Other details are as follows:
Product Further processing Sale at split-off Sales after further
costs (₹) point (₹) processing (₹)
S 80,000 20,000 1,20,000
P 32,000 12,000 40,000
N 36,000 28,000 48,000
A - 20,000 --
You are required to identify the products which can be further processed for
maximizing profits and make suitable suggestions. (July 2021, ICAI SM)
Ans. Statement of Comparison of Profits before and after further processing
S (₹) P (₹) N (₹) A (₹) Total (₹)
A. Sales at split-off point 20,000 12,000 28,000 20,000 80,000
B. Apportioned Joint Costs 10,000 6,000 14,000 10,000 40,000
(W.N.)
C. Profit at split-off point 10,000 6,000 14,000 10,000 40,000
(A-B)
D. Sales after furtherprocessing 1,20,000 40,000 48,000 - 2,08,000
E. Further processing cost 80,000 32,000 36,000 - 1,48,000
F. Apportioned Joint Costs 10,000 6,000 14,000 - -
(W.N.)
G. Profit if further processing 30,000 2,000 (2,000) - -
(D - E - F)
H. Increase/ decrease in 20,000 (4000) (16,000) - -
profit after further
processing (G - C)
Suggested Product to be further processed for maximizing profits:
On comparing the figures of "Profit if no further processing" and "Profits if further
processing", one observes that OPR Ltd. is earning more after further processing of
Product S only i.e., ₹20,000. Hence, for maximizing profits, only Product S should be further
processed and Product P, N and A should be sold at split-off point.
Working Note:
Apportionment of joint costs on the basis of Sales Value at split-off point.
Total joint Cost
Apportionment of joint cost = × Sale value of each product
Total Sale Value at Split−off point

… Where Total Joint cost = ₹40,000

Total sales at split-off point (S, P, N & A) = 20,000 + 12,000 + 28,000 + 20,000
= ₹80,000
₹40,000
Now, Share of S in Joint Cost = × ₹20,000 = ₹10,000
₹80,000
₹40,000
Share of P in Joint Cost = × ₹12,000 = ₹6,000
₹80,000
₹40,000
Share of N in Joint Cost = × ₹28,000 = ₹14,000
₹80,000
₹40,000
Share of A in Joint Cost = × ₹20,000 = ₹10,000
₹80,000
Alternative Solution:
Decision for further processing of Product S, P and N
Products S (₹) P (₹) N (₹)
Sales revenue after further processing 1,20,000 40,000 48,000
Less: sales value at split-off point (20,000) (12,000) (28,000)
Incremental Sales Revenue 1,00,000 28,000 20,000
Less: Further Processing cost (80,000) (32,000) (36,000)
Profit/ loss arising due to further processing 20,000 (-)4,000 (-)16,000
Suggested Product to be further processed for maximizing profits: On comparing the
figures of "Profit if no further processing" and "Profits if further processing", one observes that
OPR Ltd. is earning more after further processing of Product S only i.e., ₹20,000. Hence, for
maximizing profits, only Product S should be further processed and Product P, N and A should
be sold at split-off point.