COST ACCOUNTING

Suggested Answers
Intermediate Examinations – Spring 2010

Ans.1 A B C D
------------ Units ------------
Opening stock 10,000 15,000 20,000 25,000
Production during the period A 50,000 60,000 75,000 100,000
Goods available for sale B 60,000 75,000 95,000 125,000
Closing Stock C (5,000) (10,000) (15,000) (24,000)
Sale D 55,000 65,000 80,000 101,000
Cost of goods available for sale: ----------------- Rupees -----------------
Opening stock valuation at lower of cost and NRV) 70,000 110,000 180,000 300,000
Cost of production for the period E 400,000 600,000 825,000 1,200,000
Cost of goods available for sale F 470,000 710,000 1,005,000 1,500,000

Closing stock cost

A & B (W/Avg.): F/B×C 39,167 94,667
G{
C & D (FIFO): E/A×C 165,000 288,000
Selling expenses - current year H 60,000 80,000 90,000 100,000
Sales price - per unit I 10.0 12.0 12.0 12.5

Total sales price of closing stock C×I 50,000 120,000 180,000 300,000
Selling costs H / D × C × 1.1 (6,000) (13,538) (18,563) (26,139)
Repair cost of damaged units (900) (1,200) (2,000) (5,250)
NRV of Closing stock 43,100 105,262 159,438 268,611

Value of closing stock (At lower of cost and NRV) 39,167 94,667 159,438 268,611

Ans.2
Purchase department’s variable cost: Rs. 4,224,000

Costs applicable to product CALTIN - 10% of above Rs. 422,400

Ordering costs per purchase order

Annual purchases of CALTIN (tons) [240,000 x 32.5%) Tons 78,000
Existing size of purchase order (tons) Tons 6,500
No. of orders (78,000 / 6,500) Orders 12
Ordering cost per order (422,400/12) Rs. 35,200

Carrying costs per ton (22,125 / 1.25 x 1% ) Rs. Per Ton 177

2 × 78,000 tons x 35,200

Computation of EOQ = 5,570 tons
177

Marks EOQ Existing

Demand of CALTIN Tons 78,000 78,000
Order quantity Tons 5,570 6,500
No. of orders 14 12
Average inventory excluding buffer stock (order quantity / 2) Tons 2,785 3,250
Buffer stock Tons 2,000 2,000
Average inventory Tons 4,785 5,250
Cost of placing orders (Rs 35,200 per order) Rupees 492,800 422,400
Carrying cost ([Avg. Inventory x Rs. 177) Rupees 846,945 929,250
Total costs Rupees 1,339,745 1,351,650

Savings on adoption of EOQ Rupees 11,905

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 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

Ans.3 (a) EQUIVALENT PRODUCTION UNITS

Quantity Schedule (in litres)

Dept. A Dept. B
WIP opening 64,500 40,000
Started in process / material added 600,000 500,000
Received from preceding department - 610,000
664,500 1,150,000
Transferred out to B (664,500-24,000)x100/105 610,000 -
Transferred to finished goods (1,150,000-50,000-61,000-6,100) - 1,032,900
WIP closing 24,000 50,000
Normal loss – A (664,500-24,000)x5/105) 30,500 -
Normal loss – B (10% x 610,000) - 61,000
Abnormal loss – B (10% x 61,000) - 6,100
664,500 1,150,000

Equivalent production unit (in litres)

Department A Department B
Material Conversion Material Conversion
Units completed and transferred out 610,000 610,000 1,032,900 1,032,900
Opening Inventory (60% completed) (64,500) (38,700) (40,000) (24,000)
Abnormal loss (B: 6,100 x 60%) - - - 3,660
Closing inventory (A: 70%, B: 80%) 24,000 16,800 50,000 40,000
569,500 588,100 1,042,900 1,052,560

(b) COST OF ABNORMAL LOSS AND CLOSING WIP

Department A Department B
Quantity Rate Amount Quantity Rate Amount
Cost of abnormal loss
Units Rs. Rs. Units Rs. Rs.
(Department B)
From department A
(610,000 x 10% x 10%) 6,100 (W-2) 54.60 333,044
Labour (60%) 3,660 6.07 22,216
Overheads (60%) 3,660 3.54 12,956
- 368,216
WIP-closing costs
From department A - - - 50,000 (W-2) 28.42 1,421,000
Material 24,000 30.00 720,000 50,000 9.29 464,500
Labour (70%, 80%) 16,800 15.00 252,000 40,000 6.07 242,800
Overheads (70%, 80%) 16,800 5.00 84,000 40,000 3.54 141,600
1,056,000 2,269,900

(c) COST OF GOODS TRANSFERRED TO FINISHED GOODS

Rupees
Total costs charged to department (W-1) 51,863,000
Less: WIP closing costs (Computed above) (2,269,900)
Less: Cost of abnormal loss (Computed above) (368,216)
Costs transferred to finished goods 49,224,884

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 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

W-1: Cost charged to department:

Department A Department B
Unit Unit
Equivalent Equivalent
Cost (Rs.) cost Cost (Rs.) cost
Units Units
(Rs.) (Rs.)
WIP - opening inventory 2,184,000 2,080,000
Cost from department A 29,974,000
Material 569,500 17,085,000 30.00 1,042,900 9,693,000 9.29
Labour 588,100 8,821,000 15.00 1,052,560 6,389,000 6.07
Overheads 588,100 2,940,000 5.00 1,052,560 3,727,000 3.54
Total cost to be accounted for 31,030,000 50.00 51,863,000

W-2: Allocation of cost received from department A:

Amount Unit cost

Quantity
(Rs.) (Rs.)
Units received from A 610,000
Normal loss at 10% (61,000)
549,000 *29,974,000 54.60
Abnormal loss at 1% (6,100) (333,044) 54.60
Units after inspection 542,900 29,640,956 54.60
Addition of material COY 500,000
1,042,900 29,640,956 28.42
*Rs. 31,030,000 (Total cost) – Rs. 1,056,000 (Closing WIP) = Rs. 29,974,000

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 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

Ans.4 Actual quantity purchased: Material X Material Y

Standard consumption quantities 50,000×6 300,000 50,000×3 150,000
Quantity used in excess of standard usage 0 150,000/30 5,000
(adverse quantity variance)
Ending inventory 300,000×20/365 16,438 150,000×20/365 8,219
Opening stock 300,000×25/365 (20,548) 150,000×25/365 (10,274)
Actual purchase quantity kg 295,890 kg 152,945
Actual cost of purchase:
Actual quantity purchased at standard rate 295,890×50 14,794,500 152,945×30 4,588,350
Price paid above / (below) the standard rate
{adverse / (favorable) price variance} 95,000 4,588,350×.06 (275,301)
Actual cost of purchase Rs. 14,889,500 Rs. 4,313,049

Labour and overhead variances:

Skilled labour Unskilled labour

Labour rate variance:
Actual hours at standard rate 168,000×3/7×150 10,800,000 168,000×4/7×100 9,600,000
Rate variance 10% & 5% Adverse (1,080,000) Adverse (480,000)
Labour efficiency variance:
Standard hours for 50,000 units at
standard rate 50,000×1.5×150 11,250,000 50,000x2x100 10,000,000
Actual hours for 50,000 units at
standard rate 168,000×3/7×150 10,800,000 168,000×4/7×100 9,600,000
Favourable 450,000 Favourable 400,000

Overheads spending variance:

Actual hours at standard rate-skilled 168,000x3/7x100 7,200,000
Actual hours at standard rate-unskilled 168,000x4/7x80 7,680,000
Fixed overheads as budgeted 4,000,000
18,880,000
Actual variable overheads 16,680,000
Actual fixed overheads 4,000,000x1.06 4,240,000
20,920,000
Spending variance Adverse (2,040,000)
Overheads efficiency variance:
Standard hours for 50,000 units at
standard rate
Skilled 50,000*1.5*100 7,500,000
Unskilled 50,000*2*80 8,000,000
15,500,000
Actual hours for 50,000 units at
standard rate
Skilled 168,000*3/7*100 7,200,000
Unskilled 168,000*4/7*80 7,680,000
14,880,000
Favourable 620,000

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 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

Ans.5 AW AX AY AZ Total
Sale price 150.00 180.00 140.00 175.00
Less: Variable cost
Material Q at Rs 15 30.00 37.50 22.50 26.25
Material S at Rs 20 10.00 12.00 8.00 13.00
Labour cost at Rs. 25 per hour 50.00 56.25 43.75 62.50
Overheads 37.50 45.00 43.75 56.25
127.50 150.75 118.00 158.00
Contribution margin per unit Rs 22.50 29.25 22.00 17.00
Annual demand Units 5,000 10,000 7,000 8,000

Possible production under each machine:

Processing machine:
Machine hours required per unit 5.00 6.00 8.00 10.00
Average CM per hour 4.50 4.88 2.75 1.70
Production priority 2 1 3 4
No. of units that can be produced in
available hours in order of CM priority
(Restricted to annual demand) 5,000 10,000 7,000 900
Hours required Hours 25,000 60,000 56,000 9,000 150,000
Contribution margin Rs. 112,500 292,500 154,000 15,300 574,300

Production for product ‘Z’ has to be restricted to 900 units due to limited number of machine hours.

Packing machine:
Machine hours required per unit 2.00 3.00 2.00 4.00
Average CM per hour 11.25 9.75 11.00 4.25
Production priority 1 3 2 4
No. of units that can be produced in
available hours in order of CM priority
(Restricted to annual demand) 5,000 10,000 7,000 8,000
Hours required Hours 10,000 30,000 14,000 32,000 86,000

Conclusion :
The packing machine can meet the full demand but capacity of processing machine is limited.
Therefore, product mix of processing machine will be manufactured.

Assumption:
It has been assumed that the wage rate per eight hours is divisible.

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 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

Ans.6 (a) Opportunity cost:

An opportunity cost is a cost that measures the opportunity that is lost or sacrificed when the
choice of one course of action requires that an alternative course of action be given up.

Example
A company has an opportunity to obtain a contract for the production of Z which will require
processing on machine X which is already working at full capacity. The contract can only be
fulfilled by reducing the present output of machine X which will result in reduction of profit
contribution by Rs. 200,000.

If the company accepts the contract, it will sacrifice a profit contribution of Rs. 200,000 from
the lost output of product Z. This loss of Rs. 200,000 represents an opportunity cost of
accepting the contract.

(b) Sunk cost

A sunk cost is a historical or past cost that the company has already incurred. These costs
cannot be changed/recovered in any case and are ignored while making a decision.

Example
A company mistakenly purchased a machine that does not completely suit its requirements.
The price of the machine already paid is a sunk cost and will not be considered while deciding
whether to sell the machine or use it.

(c) Relevant cost:

The predicted future costs that would differ depending upon the alternative courses of action,
are called relevant costs.

Example
A company purchased a raw material few years ago for Rs. 100,000. A customer is prepared to
purchase it for Rs. 60,000. The material is not otherwise saleable but can be sold after further
processing at a cost of Rs. 30,000.

In this case, the additional conversion cost of Rs. 30,000 is relevant cost whereas the raw
material cost of Rs. 100,000 is irrelevant.

Ans.7
Direct labour Overheads
(xy) (x2)
Hours (x) (y)
September 2009 50 14,800 740,000 2,500
October 2009 80 17,000 1,360,000 6,400
November 2009 120 23,800 2,856,000 14,400
December 2009 40 11,900 476,000 1,600
January 2010 100 22,100 2,210,000 10,000
February 2010 60 16,150 969,000 3,600
450 105,750 8,611,000 38,500

b (Variable cost per unit) =

∑ xy) - (∑ x)(∑ y) = 6 x 8,611,000 - 450 x 105,750 = 143.1053
n(
n(∑ x ) − (∑ x)
2 2
6 (38,500) - (450)2

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 COST ACCOUNTING
Suggested Answers
Intermediate Examinations – Spring 2010

a (Fixed costs per month) =

( ∑ y) − b(∑ x) = (105,750 - 143.11 (450)) = 6,892
n 6

(THE END)

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