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Naresh Aggarwal’s
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Accounting • Costing • Taxation • Financial Management
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Management Accounting
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Standard Costing
Activity Based Costing For Eenquiries
Absorption Costing Versus Marginal Costing Call or whatsapp: 8800215448
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Type of worker No. of workers Wage rate per worker (per hour )
Standard Costing Skilled 2 20
Semi-skilled 3 14
Illustration 3.4: The standard mix to produce one unit of product is as follows:
Unskilled 5 10
Material A 60 units @ Rs.15 per unit = Rs.900
The gang was engaged for 200 hours during the month, which included 12 hours
Material B 80 units @ Rs.20 per unit = Rs.1,600
when no production was possible, due to machine breakdown. 810 units of the product
Material C 100 units @ Rs.25 per unit = Rs.2,500
were recorded as output of the gang during the month.
240 units Rs.5,000
You are required to :
During the month of July, 10 units were actually produced and consumption was as
(a) Compute the standard unit labour cost of the product.
follows:
(b) Compute the total variance in labour cost during the month.
Material A 640 units @ Rs.17.50 per unit = Rs.11,200
(c) Analyse the variances in (b) above in sub variances and reconcile.
Material B 950 units @ Rs.18.00 per unit = Rs.17,100
[LCV: Rs.2,100 (A); LRV: Rs.3,200 (A); LEV: Rs.1,100 (F)
Material C 870 units @ Rs.27.50 per unit = Rs.23,925
ITV: Rs.1,440 (A); LYV: Rs.1,740 (F)]
2460 units Rs.52,225
Calculate all material variances
Problem 3.20: A group of 10 skilled and 20 unskilled workers were expected to
[MCV: Rs.2,225 (A); MPV: Rs.1,875 (A); MUV: Rs.350 (A)
produce 400 kg of Chemical BXT in an 8 hour day. The standard hourly wage rate
MMV: Rs.900 (F); MYV: Rs.1,250 (A)]
was fixed at Rs.25 and Rs.15 respectively.
Actually, a group of 15 skilled and 10 unskilled workers was deployed and paid for 8
Q-26: From the following data, prepare unit cost statement showing prime cost of
hour day at an hourly wage rate of Rs.22 and Rs.18 respectively. Two hours were
products A and B together with analysis of variances :
wasted for the entire group due to power failure and only 300 kg of BXT was produced.
Materials : Product A Product B You are required to compute :
Standard 600 kg. @ Rs.5.00 90 kg. @ Rs.3.00 (i) Labour cost variance (iv) Labour usage variance
Actual 580 kg. @ Rs.5.50 100 kg. @ Rs.2.80 (ii) Labour rate variance (v) Labour mix variance
Labour : Product A Product B (iii) Idle time variance (vi) Labour yield variance
Standard 80 hrs. @ Rs.2.00 16 hrs. @ Rs.2.80 [LCV: Rs.780 (A); LRV: Rs.120 (F); LEV: Rs.900 (A)
Actual 92 hrs. @ Rs.1.75 14 hrs. @ Rs.2.60 ITV: Rs.1,050 (A); LMV: Rs.400 (A); LYV: Rs.550 (F)]
[Standard total cost - Product A: Rs.3,160; Product B : Rs.314.80
Actual total cost - Product A: Rs.3,351; Product B : Rs.316.40 Illustration 3.12: XYRS. Ltd. has furnished you the following information for the
Total cost variance - Product A: Rs.191 (A); Product B: Rs.1.60 (A) month of August :
Material Variance - Product A: MPV Rs.290 (A); MUV Rs.100 (F); MCV Rs.190 (A) Budget Actual
Product B: MPV Rs.20 (F); MUV Rs.30 (A); MCV Rs.10 (A) Output 30,000 units 32,500 units
Labour Variance - Product A: LRV Rs.23 (F); LEV Rs.24 (A); LCV Rs.1,00 (A) Time 30,000 Hours 33,000 Hours
Product B: LRV Rs.2.80 (F); LEV Rs.5.60 (F); LCV Rs.8.40 (F)] Fixed overhead Rs.45,000 Rs.50,000
Variable overhead Rs.60,000 Rs.68,000
Q-27: The following was the composition of the gang of workers in a factory during Working days 25 Days 26 Days
a particular month, in one of the production departments. The standard composition Calculate all possible overhead variances.
of workers and wage rate per hour were as below : [FOCV: Rs.1,250 (A); FOExpV: Rs.5,000 (A); FOVV: Rs.3,750 (F)
Skilled : Two workers at a standard rate of Rs.20 per hour each FOEffV: Rs.750 (A); FOCapV: Rs.2,700 (F); CALV: Rs1,800 (F)
Semi-skilled : Four workers at a standard rate of Rs.12 per hour each VOCV: Rs.3,000 (A); VOExpV: Rs.2,000 (A); VOEffV: Rs.1,000 (A)]
Unskilled : Four workers at a standard rate of Rs.8 per hour each
The standard output of the gang was four units per hour of the product. During the
month in question, however, the actual composition of the gang and hourly rates
paid were as under :
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Problem 3.28: The following data has been collected from the cost records of a unit Illustration-3.14 : The following data relates to two product X and Y.
for computing the various fixed overhead variances for a period : Budget Actual
Number of budgeted working days ..... ..... 25
Product Qty. Rate (Rs.) Value (Rs.) Qty. Rate (Rs.) Value (Rs.)
Budgeted man-hours per day ..... ..... 6,000
X 1,000 5 5,000 1,200 6 7,200
Output (budgeted), per man-hour (in units) ..... ..... 1
Y 1,500 10 15,000 1,400 9 12,600
Fixed overhead cost as budgeted ..... ..... Rs.1,50,000
2,500 2,000 2,600 19,800
Actual number of working days ..... ..... 27
Calculate Sales Variance.
Actual man-hours per day ..... ..... 6,300
[SVV: Rs.200 (A); SVPV: Rs.200 (A); SVVV: Nil; SVQV: Rs.800 (F); SVMV: Rs.800 (A)]
Actual output per man-hour (in units) ..... ..... 0.9
Actual fixed overhead incurred ..... ..... Rs.1,56,000
Calculate fixed overhead variances :
(a) Expenditure Variance (b) Calender Variance
Absorption Costing Versus Marginal Costing
(c) Capacity Variance (d) Efficiency Variance
(e) Volume Variance (f) Fixed Cost Variance
Problem 4.1: XYRS. Ltd. supplies you the following data for the year ending
[FOCV: Rs.2,910 (A); FOExpV: Rs.6,000 (F); FOVV: Rs.3,090 (F)
31.12.2016 :
FOEffV: Rs.17,010 (A); FOCapV: Rs.8,100 (F); CALV: Rs.12,000 (F)]
Production ..... ..... 1,100 units
Sales ..... ..... 1,000 units
Problem 3.29: A company has a normal capacity of 120 machines, working 8 hours
Variable manufacturing cost per unit ..... ..... Rs.7
per day of 25 days in a month. The fixed overheads are budgeted at Rs.1,44,000 per
Total Fixed manufacturing overhead ..... ..... Rs.2,200
month. The standard time required to manufacture one unit of product is 4 hours.
Variable selling and administration overhead per unit ..... ..... Rs.0.50
In April, the company worked 24 days of 840 machine hours per day and produced
Total Fixed selling and administration overhead ..... ..... Rs.400
5,305 units of output. The actual fixed overheads were Rs.1,42,000.
Selling price per unit ..... ..... Rs.15
Compute :
There was no opening stock
(i) Efficiency variance (ii) Capacity Variance
You are required to prepare the followings :
(iii) Calender variance (iv) Expense variance
(a) Income statement under variable costing.
(v) Volume variance (vi) Total fixed overhead variance
(b) Income statement under absorption costing.
[FOCV: Rs.14,680 (A); FOExpV: Rs.2,000 (F); FOVV: Rs.16,680 (A)
(c) Explain the difference in profit under variable and absorption costing, if any.
FOEffV: Rs.6,360 (F); FOCapV: Rs.17,280 (A); CALV: Rs.5,760 (A)]
[Cost of Production per unit - Absorption Costing: Rs.9; Marginal Costing: Rs.7
Net Profit - Absorption Costing: Rs.5,100; Marginal Costing: Rs.4,900]
Problem 3.36 : Compute the following variance from the data given below:
1. Total sales margin variance
Problem 4.2: XYZ limited sells its croducts at Rs.3 per unit. The company uses a
2. Sales margin volume variance
First-In First-Out actual costing system. A new fixed manufacturing overhead
3. Sales margin price variance
allocation rate is computed each year by dividing the actual fixed manufacturing
4. Sales margin quality (sub-volume) variance
overhead cost by the actual production costs. The following simplified data are related
5. Sales margin mix variance
to its first two years of operation :
Product Budgeted Actual Budgeted Sales Actual Sale Standard
Year I Year II
quantity quantity price per unit price per unit cost per
Sales (units) 1,000 1,200
(units) (units) Rs. Rs. unit Rs.
Production (units) 1,400 1,000
X 240 400 50 45 30
Costs : Rs. Rs.
Y 160 200 25 20 15
Variable manufacturing 700 500
[SVV: Rs.6,000 (F); SVPV: Rs.3,000 (A); SVVV: Rs.9,000 (F) SVQV: Rs.8,000 (F)
Fixed manufacturing 700 700
SVMV: Rs.1,000 (F); SMVV: Rs.600 (F); SMPV: Rs.3,000 (A); SMVV: Rs.3,600 (F)
Variable marketing and administration 1,000 1,200
SMQV: Rs.3,200 (F); SMMV: Rs.400 (F)]
Fixed marketing and administration 400 400
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Required : Decision Making

(i) Prepare income statements based on :
(a) Absorption costing
Illustration 6.1: A manufacturer of plastic buckets makes an average profit of 2.50
(b) Variable costing for each year
per piece on a selling price of Rs.14.50 by producing and selling 60,000 pieces at 60%
(ii) Give reasons for the difference in the answer.
of potential capacity. His cost of sales is as under:
[Cost of Production per unit - Absorption Costing: (Year I): Rs.1.00; (Year II): Rs.1.20
Direct materials (per piece) : Rs.4.00
Marginal Costing (Year I): Rs.0.50; (Year II): Rs.0.50
Direct wages (per piece) : Rs.1.00
Net Profit - Absorption Costing (Year I): Rs.600; (Year II): Rs.640
Variable Factory overhead (per piece) : Rs.3.00
Marginal Costing (Year I): Rs.400; (Year II): Rs.700
Variable Selling overhead (per piece) : Rs.0.25
Total Fixed Cost : Rs.2,25,000
Problem 4.3: Your company has a production capacity of 12,500 units and normal
During the current year, he intends to produce the same number of units, but anticipates
capacity utilisation is 80%. Opening inventory of finished goods on 01.01.2016 was
that :
1,000 units. During the year ending 31.12.2016, it produced 11,000 units while it sold
(a) Fixed cost will go up by 10%
only 10,000 units.
(b) Material and Labour costs will go up by 5% each
Standard variable cost per unit is Rs.6.50 and standard fixed factory cost per unit is
Under these circumstances, he obtains an offer for a further 20% of his capacity.
Rs.1.50 total fixed selling and administration overhead amounted to Rs.10,000. The
What minimum price you would recommend for acceptance to ensure an overall profit
company sells its product at Rs.10 per unit.
of Rs.1,60,000.
Prepare Income Statements under Absorption Costing and Variable Costing. Explain
[Answer: Rs.10.875]
the reasons for difference in profit, if any.
[Cost of Production per unit - Absorption Costing: Rs.8; Marginal Costing: Rs.6.50
Illustration 6.2: Indo-British Company has a capacity to produce 5,000 articles but
Net Profit - Absorption Costing: Rs.11,500; Marginal Costing: Rs.10,000]
actually produces only 2,000 articles for home market at the following costs.
Particulars Rs.
Problem 4.10: The following cost data are available from the records of M/s ABC
Materials ..... ..... ..... 40,000
Ltd. with regard to their product ‘Milenium’ :
Wages ..... ..... ..... 36,000
Selling price per unit ..... ..... ..... Rs.60
Factory Overheads :
Variable cost per unit ..... ..... ..... Rs.36
Fixed ..... ..... ..... 12,000
Fixed cost per unit ..... ..... ..... Rs.12
Variable ..... ..... ..... 20,000
Normal output ..... ..... ..... 1,00,000 units
Administration overhead :
Other additional data available for four consecutive periods are as under :
Fixed ..... ..... ..... 18,000
Period I Period II Period III Period IV Total units
Selling and distribution overheads:
Opening stock - - 30,000 20,000 -
Fixed ..... ..... ..... 10,000
Production 1,00,000 1,20,000 1,10,000 90,000 4,20,000
Variable ..... ..... ..... 16,000
Sales 1,00,000 90,000 1,20,000 1,10,000 4,20,000
Total Cost ..... ..... ..... 1,52,000
Closing stock - 30,000 20,000 - -
The home market can consume only 2,000 articles at a selling price of Rs.80 per
You are required to prepare a statement showing profit for different periods, under
article. An additional order for the supply of 3,000 articles is received from a foreign
both Marginal Costing and Absorption Costing methods, showing under/over
country at Rs.65 article. Should this order be accepted or not, if execution of this
absorption of overheads, if any, and also give your comments.
order entails an additional packing cost of Rs.3,000.
[Cost of Production per unit - Absorption Costing: Rs.48; Marginal Costing: Rs.36
[Yes, Additional Income will be Rs.24,000]
Net Profit - Absorption Costing: Rs.12,00,000; Rs.13,20,000; Rs.15,60,000; Rs.12,00,000
Marginal Costing: Rs.12,00,000; Rs.9,60,000; Rs.16,80,000; Rs.14,40,000]
Illustration 6.3: A radio manufacturing co. finds that while it costs Rs.6.25 to make
component R-518, the same is available in the market at Rs.5.75 each, with an
assurance of continued supply. The break-down of the cost is as follows :
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Particulars Rs. prices is possible :

Materials ..... ..... ..... 2.75 each Volume of production Selling price per unit
Labour ..... ..... ..... 1.75 each At 60% capacity 60,000 units ..... ..... ..... Rs.0.90
Other variables ..... ..... ..... 0.50 each At 70% capacity 70,000 units ..... ..... ..... Rs.0.80
Depreciation and other fixed costs ..... ..... ..... 1.25 each At 80% capacity 80,000 units ..... ..... ..... Rs.0.75
(a) Should you make or buy ? At 90% capacity 90,000 units ..... ..... ..... Rs.0.67
(b) What would be your decision, if the supplier offered the component at Rs.4.85 At 100% capacity 1,00,000 units ..... ..... ..... Rs.0.61
each ? Variable cost of manufacture is 15 paise per unit and total fixed cost Rs.40,000.
[(a) Should not purchase; (b) Should be purchased] Prepare a statement showing incremental revenue and differential cost of each stage.
At which volume of production will the profit be maximum ?
Illustration 6.5: The following production / sales mix are capable of achievement in [Maximum Profit at 80% capacity]
a factory:
(i) 2,000 units of product A and 2,000 units of product C. Illustration 6.9: The management of a company is thinking. whether it should drop
(ii) 4,000 units of product B. one item from the product line and replace it with another. Given below are present
(iii) 1,000 units of product A, 2,000 units of product B and 1,600 units of product C. cost and output data:
Details of cost per unit is as follows : Product Price Variable costs Percentage
Particulars A B C Rs. per unit (Rs.) of sales
Direct materials Rs.20 Rs.16 Rs.40 Book shelf 60 40 30%
Direct wages Rs.8 Rs.10 Rs.20 Table 100 60 20%
Fixed cost is Rs.20,000 and variable overheads per unit of A, B and C are Rs.2, Bed 200 120 50%
Rs.4 and Rs.8 respectively. Selling prices of A, B and C are Rs.36, Rs.40 and Rs.100 Total fixed costs per year are Rs.7,50,000 and Sales are Rs.25,00,000.
per unit respectively. The change under consideration consists in dropping the line of Tables and Cabinets.
Determine the marginal contribution per unit of A, B and C and the profits resulting If this change is made, the manufacturer forecasts the following cost and output
from product mixes (i), (ii) and (iii). data:
[(i) Rs.56,000; (ii) Rs.20,000 (iii) Rs.57,200] Product Price Variable costs Percentage
Rs. per unit (Rs.) of sales
Illustration 6.6: A company manufactures three products. The budgeted quantity, Book shelf 60 40 50%
selling prices and unit costs are as under : Cabinet 160 60 10%
Particulars A B C Bed 200 120 40%
Raw materials (Rs.20 per kg) Rs.80 Rs.40 Rs.20 Total fixed cost per year will be Rs.7,50,000 and Saleswill be Rs.26,00,000. Should
Direct wages (Rs.5 per hour) Rs.5 Rs.15 Rs.10 this proposal be accepted? Comment.
Variable overheads Rs.10 Rs.30 Rs.20 [Yes, Acceptance of proposal will increase profit by Rs.61,833]
Fixed overheads Rs.9 Rs.22 Rs.18
Budgeted production (in units) 6,400 3,200 2,400 Illustration 6.10: In a company engaged in process industry, four products emerge
Selling price per unit (in Rs.) Rs.140 Rs.120 Rs.90 from a particular process of operation. The total cost of input for the period ended
Required : 30.09.2016 is Rs.2,53,000. The detail of output, additional cost after ‘split-off-point’
(i) Present a statement of budgeted profit. and sales value of the products are appended below:
(ii) Set optimal product-mix and determine the profit, if the supply of raw materials is Products Output Share in Additional process cost Sales
restricted to 18,400 kg. Kgs. joint cost after split-off point value
[(i) Profit: Rs.3,24,800; (ii) Profit: Rs.1,44,800] A 8,000 Rs.85,000 Rs.60,000 Rs.1,68,000
B 5,000 Rs.67,000 Rs.10,000 Rs.1,10,000
Illustration 6.7: A company has a capacity of producing 1,00,000 units of a certain C 3,000 Rs.41,000 Rs.2,000 Rs.60,000
product in a month. The sales department reports that the following schedule of sale D 4,000 Rs.60,000 Rs.18,000 Rs.90,000
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If the products are sold at ‘split-off point’ without further processing, the sales value Production overhead split by departments:
would have been : Department X ..... ..... ..... Rs.12,00,000
A : Rs.1,15,000 Department Y ..... ..... ..... Rs.15,00,000
B : Rs.90,000 Total Overheads Rs.27,00,000
C : Rs.55,000 Department X is labour intensive and Y is machine intensive.
D : Rs.80,000 Total labour hours in Department X ..... ..... ..... 2,00,000
You are required to prepare a statement of profitability and advise whether products Total machine hours in Department Y ..... ..... ..... 5,00,000
should be sold at split off point or should be further processed. Production overhead split by activity:
[Product B and Product C should be further processed, others should not be processed] Receiving and inspection ..... ..... ..... Rs.14,00,000
Production scheduling/set-up ..... ..... ..... Rs.13,00,000
Problem 6.2: Smart Exports Ltd. is producing and selling 20,000 units of its product Total ..... ..... ..... 27,00,000
in the home market at a price of Rs.60 per unit. The per unit cost is as follows : No.of batches received/inspected ..... ..... ..... 2500
Direct materials ..... ..... ..... Rs.10 per unit No.of batches for scheduling/set-up ..... ..... ..... 400
Direct labour ..... ..... ..... Rs.7 per unit You are required to prepare cost statement under traditional absorption costing and
Factory expenses : activity based costing methods. Also compare the result of the two methods and
Fixed ..... ..... ..... Rs.12 per unit give your comments..
Variable ..... ..... ..... Rs.4 per unit
Office and selling expenses : Problem-5.1: A company produces single product which sells for Rs.20 per unit.
Fixed ..... ..... ..... Rs.6 per unit Veriable cost is Rs.15 per unit and fixed overhead for the year is Rs.6,30,000.
Variable ..... ..... ..... Rs.3 per unit Required:
An importer from Australia placed an order for 6,000 units at a price of Rs.30 per unit. (a) Claculate sales value needed to earn a profit of 10% on sales.
(b) Calculate sales price per unit to bring BEP down to 1,20,000 units.
Execution of Australian order will result in an additional total cost of Rs.10,000 over
(c) Calculate margin of safety sales if profit is Rs.60,000.
and above the variable cost. Should the Australian order be accepted ? Show complete
working clearly. Problem-5.2: From the following data calculate the break-even point.
[Yes, Acceptance of proposal will increase profit by Rs.26,000] Direct material per unit Rs.3
Direct labour per unit Rs.2
Fixed overhead (Total) Rs.10,000
Variable overhead 100% on direct labour
Activity Based Costing Selling price per unit Rs.10
Trade discount 5%
Illustration 5.1: ABZ Company Ltd. produces three products A, B and Z for which
the standard cost and quantities per unit are as follows:

Products A Products B Products Z

Output (units) 10,000 20,000 30,000
Direct material per unit Rs.50 Rs.40 Rs.32
Direct labour per unit Rs.30 Rs.40 Rs.48
Labour hours per unit 3 Hours 4 Hours 5 Hours
Machine hours per unit 4 Hours 4 Hours 7 Hours
No. of purchase requisitions 600 900 1,000
No. of machine set-ups 120 130 150