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CA Intermediate (New Syllabus)

Cost & Management Accounting (Paper 3)
May, 2022 Exam - Suggested Answers
Question No. 1 is compulsory.
Answer any four questions out of the remaining five questions.
Working notes should form part of the answer.

Question 1(a) : [ 5 Marks ]

Reference : Chapter 2 - Material Cost - EOQ
A Limited a toy company purchases its requirement of raw material from S Limited at ` 120 per
kg. The company incurs a handling cost of ` 400 plus freight of ` 350 per order. The
incremental carrying cost of inventory of raw material is ` 0.25 per kg per month. In addition the
cost of working capital finance on the investment in inventory of raw material is ` 15 per kg per
annum. The annual production of the toy is 60,000 units and 5 units of toys are obtained from
one kg. of raw material.
Required :
(i) Calculate the Economic Order Quantity (EOQ) of raw materials.
(ii) Advise, how frequently company should order to minimize its procurement cost. Assume
360 days in a year.
(iii) Calculate the total ordering cost and total inventory carrying cost per annum as per EOQ.

Answer 1(a) :
(i) Calculation of Economic Order Quantity :
Annual production of toy = 60,000 units
Annual consumption of Raw Material = 60,000 units / 5 units = 12,000 kgs.
Ordering cost per order = 400 + 350 = Rs. 750 per order
Carrying cost per kg. p.a. = (0.25 x 12 months) + 15 = ` 18 per kg. p.a.

EOQ = 2 x Annual consumption x Ordering cost per order

Carrying cost per unit p.a.

EOQ = 2 x 12,000 kg. x 750 per order

18 per kg. p.a.
= 1,000 kgs.

(ii) Frequency of placing an order :

No. of orders to be place in a year = 12,000 kg. / 1,000 kg. = 12 orders
Frequency of placing an order = 360 days / 12 orders = 30 days

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(ii) Calculation of total cost at EOQ :

Particulars Amount (`)

(a) Order size (units) 1,000

(b) No. of orders p.a. (12,000 / a) 12

(c) Ordering cost p.a. [ b x 750 ] 9,000

(d) Carrying cost p.a. [ a / 2 x 18 9,000

(e) Total minimum cost p.a. [ c + d ] 18,000

Question 1(b) : [ 5 Marks ]

Reference : Chapter 3 - Labour Cost - Employee Turnover
PQR Limited has replaced 72 workers during the quarter ended 31st March 2022. The labour
rates for the quarter are as follows :
Flux method 16%
Replacement method 8%
Separation method 5%

You are required to ascertain :

(i) Average number of workers on roll (for the quarter),
(ii) Number of workers left and discharged during the quarter,
(iii) Number of workers recruited and joined during the quarter,
(iv) Equivalent employee turnover rates for the year.

Answer 1(b) :
(i) Turnover Ratio using Replacement method
= No. of workers replaced
Avg. no. of workers
  8% = 72 / Avg. no. of workers
  Average workers = 72 / 8%
= 900 workers for the quarter

(ii) Turnover Ratio by Separation method

= No. of workers left and discharged
Avg. No. of workers
5% = X / 900
 X = 5% x 900
 No. of workers left & discharged = 45 workers during the quarter

(iii) Flux Method :-

= No. of workers joined + No. of workers left
Avg. no. of workers p.a.
 16% = ( X + 45 ) / 900

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 900 x 16% = X + 45
 144 = X + 45
 144 – 45 = X = 99 workers
 No. of workers recruited & joined = 99 workers during the quarter

(iv) Equivalent employee turnover rates for the year :

Note : Turnover rates are already given in the question for a quarter. We need to just
convert it in to an annual rate as follows :
Flux Method = 16% x 4 = 64% p.a.
Replacement Method = 8% x 4 = 32% p.a.
Separation Method = 5% x 4 = 20% p.a.

Question 1(c) : [ 5 Marks ]

Reference : Chapter 13 - Marginal Costing - Cost BEP
Top-tech a manufacturing company is presently evaluating two possible machines for the
manufacture of superior Pen-drives. The following information is available :

Particulars Machine A Machine B

Selling price per unit ` 400.00 ` 400.00
Variable cost per unit ` 240.00 ` 260.00
Total fixed costs per year ` 350 lakhs ` 200 lakhs
Capacity (in units) 8,00,000 10,00,000

Required :
(i) Recommend which machine should be chosen?
(ii) Would you change your answer, if you were informed that in near future demand will be
unlimited and the capacities of the two machines are as follows?
Machine A – 12,00,000 units
Machine B – 12,00,000 units
Why ?

Answer 1(c) :
(i) Calculation of Cost BEP :
Cost BEP = Difference in Fixed Cost / Difference in variable cost per unit
= ( 350 - 200 lakhs ) / ( 260 - 240 p.u. )
= 150 lakhs / 20 = 7,50,000 units
Conclusion :
For demand below 7,50,000 units p.a., Machine B is better and for the demand above
7,50,000 units p.a., Machine A is better. However, capacity of Machine A is restricted to
8,00,000 units, hence Machine B seems to be better than A.

(ii) Revised Answer :

If the demand will be unlimited in near future, then we should buy Machine A. Because
Machine A is economical if demand exceeds 7,50,000 units p.a.

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Question 1(d) : [ 5 Marks ]

Reference : Chapter 9 - Service Costing
Coal is transported from two mines X & Y and unloaded at plots in a railway station. X is at
distance of 15 kms and Y is at a distance of 20 kms from the rail head plots. A fleet of lorries
having carrying capacity of 4 tonnes is used to transport coal from the mines. Records reveal
that average speed of the lorries is 40 kms per hour when running and regularly take 15
minutes to unload at the rail head.
At Mine X average loading time is 30 minutes per load, while at mine Y average loading times is
25 minutes per load.
Additional Information :
Drivers‟ wages, depreciation, insurance and taxes, etc. ` 12 per hour.
Operated Fuel, oil tyres, repairs and maintenance, etc. ` 1.60 per km.
You are required to prepare a statement showing the cost per tonne kilometre of carrying coal
from each mine „X‟ and „Y‟.

Answer 1(d) :
Comparison of the Cost per Tonne Km. for each mine :

Particulars Mine 'X' Mine 'Y'

(a) One way distance from rail head (kms.) 15 20
(b) Distance per round trip (kms.) [ a x 2 ] 30 40
(c) Variable cost per round trip [ b x 1.60 ] 48 64
(d) Travelling time per round trip (minutes) 45 60
[ 60 min. / 40 km. x b ]
(e) Loading time at mine (minutes) 30 25
(f) Unloading time at rail head (minutes) 15 15
(g) Total time per round trip (minutes) [ d + e + f ] 90 100
(h) Fixed cost per round trip [ 12/60 x g ] 18 20
(i) Total cost per round trip [ c + h ] ` 66 ` 84
(j) Tonne Kms. per round trip 60 [ 4 x 15 ] 80 [ 4 x 20 ]
(k) Cost per ton km. [ i / j ] ` 1.10 ` 1.05

Question 2(a) : [ 10 Marks ]

Reference : Chapter 4 - Overheads
In a manufacturing company, the overhead is recovered as follows :
Factory Overheads : a fixed percentage basis on direct wages and
Administrative overheads : a fixed percentage basis on factory cost.
The company has furnished the following data relating to two jobs undertaken by it in a period.
Particulars Job 1 (`) Job 2 (`)
Direct materials 1,08,000 75,000
Direct wages 84,000 60,000
Selling price 3,33,312 2,52,000
Profit percentage on total cost 12% 20%

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You are required to :

(i) Compute the percentage recovery rates of factory overheads and administrative
overheads.
(ii) Calculate the amount of factory overheads, administrative overheads and profit for each
of the two jobs.
(iii) Using the above recovery rates, determine the selling price to be quoted for job 3.
Additional data pertaining to Job 3 is as follows :

Direct materials ` 68,750

Direct wages ` 22,500
Profit percentage on selling price 15%

Answer 2(a) :
(i) Calculation of Overhead Recovery Rates :
Let us assume the factory overheads are recovered at x% of Direct wages, and
Administrative Overheads are recovered at y% of Factory Cost.
Particulars Job 1 (Rs.) Job 2 (Rs.)
a) Direct Material 1,08,000 75,000
b) Direct Wages 84,000 60,000
c) Prime Cost (a + b) 1,92,000 1,35,000
d) Add: Factory Overheads 840x 600x
@ x% of Direct Wages
e) Factory Cost (c + d) 1,92,000 + 840x 1,35,000 + 600x
f) Add : Administrative Overheads 1,920y + 8.4xy 1,350y + 6xy
@ y% of Factory cost
g) Total Cost (e + f) 1,92,000 + 840x 1,35,000 + 600x
+ 1,920y + 8.4xy + 1,350y + 6xy
h) Selling Price 3,33,312 2,52,000
i) Profit as % of total cost 12% 20%
j) Amount of profit 35,712 42,000
[ 3,33,312 x 12/112 ] [ 2,52,000 x 20/120 ]
k) Total Cost ( h – j ) 2,97,600 2,10,000

Equating the total cost as calculated in (g) and (k) above, we get -
1,92,000 + 840x + 1,920y + 8.4xy = 2,97,600 From Job 1
840x + 1,920y + 8.4xy = 1,05,600 Eq. (i)
1,35,000 + 600x + 1,350y + 6xy = 2,10,000 From Job 2
600x + 1,350y + 6xy = 75,000 Eq. (ii)
Multiplying Eq. (ii) by 1.4, we get -
840x + 1,890y + 8.4xy = 1,05,000 Eq. (iii)
Subtracting Eq. (iii) from Eq. (i), we get -
840x + 1,920y + 8.4xy = 1,05,600 Eq. (i)
- 840x + 1,890y + 8.4xy = 1,05,000 Eq. (iii)
30y = 600

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Hence, y = 20
Substituting y = 20 in Eq. (i), we get -
840x + 1,920y + 8.4xy = 1,05,600 Eq. (i)
840x + [ 1920 * 20 ] + [ 8.4x * 20 ] = 1,05,600
840x + 38,400 + 168x = 1,05,600
1,008x = 67,200
x = 66.67%
Hence, Factory Overhead Rate = 66.67% of Direct Wages
And Administrative Overhead Rate = 20% of Factory Cost

(ii) Cost Sheet of Job 1 and Job 2 :

Particulars Job 1 (Rs.) Job 2 (Rs.)
Direct Material 1,08,000 75,000
Direct Wages 84,000 60,000
PRIME COST 1,92,000 1,35,000
Add: Factory OH @ 66.67% of Direct Wages 56,000 40,000
FACTORY COST 2,48,000 1,75,000
Add: Admin. Overheads @ 20% of factory cost 49,600 35,000
TOTAL COST 2,97,600 2,10,000
Add: Profit @ 12% & 20% on total cost 35,712 42,000
SELLING PRICE 3,33,312 2,52,000

(iii) Calculation of Selling Price for Job 3 :

Particulars (Rs.)
Direct Material 68,750
Direct Labour 22,500
PRIME COST 91,250
Add: Factory Overheads (66.67% of 22,500) 15,000
FACTORY COST 1,06,250
Add: Administrative Overheads (20% of 1,06,250) 21,250
TOTAL COST 1,27,500
Add: Profit @ 15% of sales price 22,500
i.e. (1,27,500 x 15 / 85 of cost)
SELLING PRICE 1,50,000

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Question 2(b) : [ 5 Marks ]

Reference : Chapter 8 - Contract Costing
Paramount Constructions Limited is engaged in construction and erection of bridges under long
term contracts. It has entered into a big contract at a agreed price of ` 250 Lakhs subject to an
escalation clause for material and labour as spelt out in the contract and corresponding actual
are as follows :

Standard Actual
Material Quantity Rate per Quantity Rate per
Tonnes Tonne (`) Tonnes Tonne (`)
P 2,800 1,500 3,000 1,750
Q 3,100 900 2,900 800
R 800 4,500 950 4,350
S 150 32,500 120 34,200
Labour Hours Hourly rate Hours Hourly rate
(`) (`)
LM 65,000 60 61,500 70
LN 46,000 45 45,000 50

Required :
(i) Prepare a statement showing admissible additional claim of material and labour due to
escalation clause.
(ii) Determine the final price payable after admissible escalation claim.

Answer 2(b) :
(i) Calculation of admissible claim of material and labour due to escalation clause :

Standard Actual Difference Claim

Material Quantity Rate per Rate per Rate per Amount
Tonnes Tonne (`) Tonne (`) Tonne (`) (`)
P 2,800 1,500 1,750 250 7,00,000
Q 3,100 900 800 (100) (3,10,000)
R 800 4,500 4,350 (150) (1,20,000)
S 150 32,500 34,200 1,700 2,55,000
Labour Hours Hourly rate Hourly rate Hourly rate Amount
(`) (`) (`) (`)
LM 65,000 60 70 10 6,50,000
LN 46,000 45 50 5 2,30,000
Total amount of admissible additional claim 14,05,000

(ii) Final price payable after admissible escalation claim :

= ` 250 lakhs + 14.05 lakhs
= ` 264.05 lakhs

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Question 2(c) : [ 5 Marks ]

Reference : Theory Question - Job & Process Costing
Distinguish between Job costing and Process Costing. (Any five points of differences)

Answer 2(c) :

S.N. Job costing Process costing

1 Production is made by specific orders. Uniform production in continuous flow.
2 Costs are determined by jobs. Costs are compiled on time basis for each
process.
3 The various jobs are separate and Being manufactured in continuous flow,
independent form each other. products lose their individual identity.
4 Job cost is ascertained when job is Process costs are calculated periodically.
complete.
5 There are usually no inter-job In a continuous flow, there is transfer from
transfers. one process to another process
continuously.
6 There may or may not be work-in Production being continuous, there is
progress at the end of an accounting some work–in-progress at the beginning
period. as well as at the end of the accounting
period.
7 Each job being independent, more Process production is standardised.
managerial attention is required for Control becomes comparatively easier.
proper control.

Question 3(a) : [ 10 Marks ]

Reference : Chapter 15 - Budgetary Control
SR Ltd. is a manufacturer of Garments. For the first three months of financial year 2022-23
commencing on 1st April 2022, production will be constrained by direct labour. It is estimated
that only 12,000 hours of direct labour hours will be available in each month.
For market reasons, production of either of the two garments must be at least 25% of the
production of the other. Estimated cost and revenue per garment are as follows :

Particulars Shirt (`) Short (`)

Sales price 60 44
Raw Materials :
Fabric @ 12 per metre 24 12
Dyes and cotton 6 4
Direct labour @ 8 per hour 8 4
Fixed Overhead @ 4 per hour 4 2
Profit 18 22
From the month of July 2022 direct labour will no longer be a constraint. The company expects
to be able to sell 15,000 shirts and 20,000 shorts in July, 2022. There will be no opening stock
at the beginning of July 2022.

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Sales Volumes are expected to grow at 10% per month cumulatively thereafter throughout the
year. Following additional information is available :
 The company intends to carry stock of finished garments sufficient to meet 40% of the
next month‟s sale from July 2022 onwards.
 The estimated selling price will be same as above.
Required :
I. Calculate the number of shirts and shorts to be produced per month in the first quarter of
financial year 2022-2023 to maximize company‟s profit.
II. Prepare the following budgets on a monthly basis for July, August and September, 2022 :
(i) Sales budget showing sales units and sales revenue for each product.
(ii) Production budget (in units) for each product.

Answer 3(a) :
Working Notes :
Calculation of contribution per labour hour and ranking :

Particulars Shirt (`) Short (`)

(a) Sales price 60 44
(b) Raw Materials :
Fabric @ 12 per metre 24 12
Dyes and cotton 6 4
(c) Direct labour @ 8 per hour 8 4
(d) Contribution per unit [ a - b - c ] 22 24
(e) Labour hours per unit [ c / 8 ] 1 0.5
(f) Contribution per hour [ d / e ] 22 48

Note : From the above working, we come to know that 'Short' earns the highest contribution per
hour and hence should be produced in maximum quantity to generate maximum profit.

I. Calculation of the number of shirts and shorts to be produced per month in the first
quarter of financial year 2022-2023 to maximize company’s profit :
Let's assume No. of units to be produced of 'Short' = X per month and
No. of units to be produced of 'Shirt' = 0.25X per month
Hence, [ X * 0.5 ] + [ 0.25X * 1 ] = 12,000 labour hours
0.5X + 0.25X = 12,000 and hence X = 16,000
We should produce 0.25X i.e. 4,000 Shirts and 16,000 Shorts per month.

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II. Sales & Production Budget for July, August & September, 2022 :

Particulars July August Sept. Oct.

Product Shirt :
Sales (units) with 10% increase 15,000 16,500 18,150 19,965
Add : Closing stock @ 40% of next 6,600 7,260 7,986
month's sales
Less : Opening stock 0 (6,600) (7,260)
 Production (units) 21,600 17,160 18,876
Sales Revenue @ ` 60 per unit 9,00,000 9,90,000 10,89,000
Product Short :
Sales (units) with 10% increase 20,000 22,000 24,200 26,620
Add : Closing stock @ 40% of next 8,800 9,680 10,648
month's sales
Less : Opening stock 0 (8,800) (9,680)
 Production (units) 28,800 22,880 25,168
Sales Revenue @ ` 44 per unit 8,80,000 9,68,000 10,64,800

Question 3(b) : [ 10 Marks ]

Reference : Chapter 6 - Cost Sheet
The following data are available from the books and records of A Ltd. for the month of April,
2022 :

Particulars Amount (`)

st
Stock of raw materials on 1 April, 2022 10,000
Raw materials purchased 2,80,000
Manufacturing wages 70,000
Depreciation on plant 15,000
Expenses paid for quality control check activities 4,000
Lease Rent of Production Assets 10,000
Administrative Overheads (Production) 15,000
Expenses paid for pollution control and engineering & maintenance 1,000
th
Stock of raw materials on 30 April, 2022 40,000
Primary packing cost 8,000
Research & development cost (Process related) 5,000
Packing cost for redistribution of finished goods 1,500
Advertisement expenses 1,300

Stock of finished goods as on 1st April, 2022 was 200 units having a total cost of ` 28,000. The
entire opening stock of finished goods has been sold during the month. Production during the
month of April, 2022 was 3,000 units. Closing stock of finished goods as on 30th April, 2022 was
400 units.

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You are required to :

I. Prepare a Cost Sheet for the above period showing the :
(i) Cost of Raw Material consumed
(ii) Prime Cost
(iii) Factory Cost
(iv) Cost of Production
(v) Cost of goods sold
(vi) Cost of sales

II. Calculate selling price per unit, if sale is made at a profit of 20% on sales.

Answer 3(b) :
Cost Sheet of A Ltd. for April, 2022 : [ Production : 3,000 units & Sales : 2,800 units ]

Particulars Amount (`) Amount (`)

Direct Material Consumed :
Raw materials purchased 2,80,000
Add: Opening stock 10,000
Less: Closing stock (40,000) 2,50,000

Manufacturing Wages 70,000

PRIME COST 3,20,000

Add : Factory Overheads :

Depreciation on plant 15,000
Lease rent of production assets 10,000
Expenses paid for pollution control and engineering 1,000 26,000

FACTORY COST 3,46,000

Quality control cost 4,000

Research & development cost (process related) 5,000
Administrative overheads (production) 15,000
Primary packing cost 8,000

COST OF PRODUCTION [ 3,000 units ] 3,78,000

Add : Opening stock of Finished goods [ 200 units ] 28,000

Less : Closing stock of Finished goods [3,78,000 / 3,000 x 400] (50,400)
COST OF GOODS SOLD [ 2,800 units ] 3,55,600

Add : Advertisement expenses 1,300

Add : Secondary packing cost for distribution of FG 1,500
COST OF SALES 3,58,400

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Add : Profit @ 20% of sales i.e. [ 20/80 x 3,58,400 ] 89,600

 Sales Revenue 4,48,000

 Selling Price per unit [ 4,48,000 / 2,800 units ] 160

Question 4(a) : [ 10 Marks ]

Reference : Chapter 10 - Process Costing
STG Limited is a manufacturer of Chemical „GK‟, which is required for industrial use. The
complete production operation requires two processes. The raw material first passes through
Process I, where Chemical „G‟ is produced. Following data is furnished for the month April,
2022 :
Particulars (in kgs.)
Opening work-in-progress quantity 9,500
(Material 100% and conversion 50% complete)
Material input quantity 1,05,000
Work Completed quantity 83,000
Closing work-in-progress quantity 16,500
(Material 100% and conversion 60% complete)

You are further provided that :

Particulars (in `)
Opening work-in-progress cost
Material cost 29,500
Processing cost 14,750
Material input cost 3,34,500
Processing cost 2,53,100

Normal process loss may be estimated to be 10% of material input. It has no realizable value.
Any loss over and above normal loss is considered to be 100% complete in material and
processing.
The Company transfers 60,000 kgs. of output (Chemical G) from Process I to Process II for
producing Chemical „GK‟. Further materials are added in Process II which yield 1.20 kg. of
Chemical „GK‟ for every kg. of Chemical „G‟ introduced. The chemicals transferred to Process II
for further processing are then sold as Chemical „GK‟ for ` 10 per kg. Any quantity of output
completed in Process I, are sold as Chemical „G‟ @ ` 9 per kg.
The monthly costs incurred in Process II (other than the cost of Chemical „G‟) are :
Input 60,000 kg. of Chemical „G‟
Materials Cost ` 85,000
Processing Costs ` 50,000

You are required to :

(i) Prepare Statement of Equivalent production and determine the cost per kg. of Chemical
„G‟ in Process I using the weighted average cost method.

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(ii) Prepare a statement showing cost of Chemical „G‟ transferred to Process II, cost of
abnormal loss and cost of closing work-in-progress.
(iii) STG is considering the option to sell 60,000 kg. of Chemical „G‟ of Process I without
processing it further in Process-II. Will it be beneficial for the company over the current
pattern of processing 60,000 kg. in process-II ?
(Note : You are not required to prepare Process Accounts)

Answer 4(a) :
1. Statement of equivalent production (weighted average method) :

Particulars Total Equivalent Production

units Material Cost Conversion cost
% Units % Units
Input:
- Opening W.I.P. 9,500
- Input of material 1,05,000
Total Input 1,14,500
Output :
A) Work Completed 83,000 100% 83,000 100% 83,000
B) Normal Loss 10% 10,500 -- -- -- --
C) Abnormal Loss (BF) 4,500 100% 4,500 100% 4,500
D) Closing WIP 16,500 100% 16,500 60% 9,900
Total 1,14,500 1,04,000 97,400

2. Statement of Cost for Process I :

Particulars Material Conversion Total (Rs.)

Cost of opening WIP 29,500 14,750 44,250
Add: Cost incurred during the period 3,34,500 2,53,100 5,87,600
Total Cost 3,64,000 2,67,850 6,31,850
(÷) Equivalent units 1,04,000 97,400
Cost per Equivalent Unit (` / kg.) 3.50 2.75 6.25

Note : Out of 83,000 kg. of 'G' completed, only 60,000 kg. is transferred to Process II and
remaining 23,000 kg. of 'G' is sold @ ` 9 per kg.

3. Allocation of Cost :

Particulars Rs. Rs.

A) Cost of Chemical G transferred to Process II : 3,75,000
[ 60,000 kg. x Rs. 6.25 per kg. ]
B) Closing WIP :
Material [ 16,500 kg. x Rs. 3.50 ] 57,750
Conversion [ 9,900 kg. x Rs. 2.75 ] 27,225 84,975
C) Abnormal Loss [ 4,500 kg. x Rs. 6.25 ] 28,125

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4. Incremental Profit / (Loss) on further processing of 'G' into 'GK' :

Particulars Rs. Rs.

Sale Value of 'GK' [ 60,000 kg. x 1.20 x Rs. 10 ] 7,20,000
Less : Further Processing Cost :
Material cost 85,000
Processing cost 50,000
Opportunity cost of 'G' [ 60,000 x Rs. 9 ] 5,40,000 6,75,000
 Incremental Profit 45,000

Conclusion : Considering an incremental profit, we can say that the current pattern of
processing 'G' in process-II is more beneficial to the company.

Question 4(b) : [ 5 Marks ]

Reference : Chapter 13 - Marginal Costing
UV Limited started a manufacturing unit from 1st October 2021. It produces designer lamps and
sells its lamps at ` 450 per unit.
During the quarter ending on 31st December, 2021, it produced and sold 12,000 units and
suffered a loss of ` 35 per unit.
During the quarter ending on 31st March, 2022, it produced and sold 30,000 units and earned a
profit of ` 40 per unit.
You are required to calculate :
(i) Total fixed cost incurred by UV Ltd. per quarter.
(ii) Break Even sales value (in rupees)
(iii) Calculate Profit, if the sale volume reaches 50,000 units in the next quarter (i.e., quarter
ending on 30th June, 2022).

Answer 4(b) :
(i) Calculation of Fixed Cost for the quarter :
Loss during quarter ending on 31.12.2021 = 12,000 units x 35 p.u. = ` 4,20,000
Profit during quarter ending on 31.03.2022 = 30,000 units x 40 p.u. = ` 12,00,000
Contribution per unit = Change in Profit / Change in Output
= [ ` 12,00,000 - ( - 4,20,000 ) ] / ( 30,000 - 12,000 units )
= ` 16,20,000 / 18,000 units = ` 90 per unit
Fixed Cost = Contribution - Profit
Using data at 30,000 units, we get fixed cost as
= ( 30,000 units x 90 ) - 12,00,000
= ` 15,00,000 per quarter

(ii) Calculation of BEP sales :

Profit Volume Ratio = Contribution / Sales Price
= 90 / 450 x 100 = 20%
BEP value = Fixed Cost / P V Ratio
= 15,00,000 / 20% = ` 75,00,000 for a quarter

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(iii) Calculate of Profit, if the sale volume reaches 50,000 units :

Profit = Contribution - Fixed Cost
= ( 50,000 units x 90 ) - 15,00,000
= ` 30,00,000 for the quarter ending on 30.06.2022

Question 4(c) : [ 5 Marks ]

Reference : Chapter 12 - Ledger Accounting
Journalize the following transactions assuming the cost and financial accounts are integrated :

Particulars Amount (`)

Direct Materials issued to production 5,88,000
Allocation of Wages (Indirect) 7,50,000
Factory Overheads (Over absorbed) 2,25,000
Administrative Overheads (Under absorbed) 1,55,000
Deficiency found in stock of Raw Material (Normal) 2,00,000

Answer 4(c) :
Journal Entries under Integrated Accounts

SN Particulars L/F Dr. Amount Cr. Amount

1. Work in Progress Control A/c Dr. 5,88,000
To, Stores Ledger Control A/c 5,88,000
[ Being Direct Materials issued to production ]

2. Manufacturing Overheads Control A/c Dr. 7,50,000

To, Wages Control A/c 7,50,000
[ Being allocation of indirect wages ]

3. Factory Overheads Control A/c Dr. 2,25,000

To, Profit & Loss A/c 2,25,000
[ Being over absorption of factory overheads,
Transferred to P&L A/c ]

4. Profit & Loss A/c Dr. 1,55,000

To, Administration Overheads A/c 1,55,000
[ Being under absorption of admin. overheads,
Transferred to P&L A/c ]

5. Factory Overheads Control A/c Dr. 2,00,000

To, Stores Ledger Control A/c 2,00,000
[ Being normal loss of material transferred
To Factory OH A/c ]

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Question 5(a) : [ 10 Marks ]

Reference : Chapter 5 - Activity Based Costing
Star Limited manufacture three products using the same production methods. A conventional
product costing system is being used currently. Details of the three products for a typical period
are :
Product Labour Hrs. Machine Hrs. Materials per Volume in
Per unit Per unit Unit (`) Units

AX 1.00 2.00 35 7,500

BX 0.90 1.50 25 12,500
CX 1.50 2.50 45 25,000

Direct Labour costs ` 20 per hour and production overheads are absorbed on a machine hour
basis. The overhead absorption rate for the period is ` 30 per machine hour.
Management is considering using Activity Based Costing system to ascertain the cost of the
products. Further analysis shows that the total production overheads can be divided as follows :

Particulars %
Cost relating to set-ups 40
Cost relating to machinery 10
Cost relating to material handling 30
Cost relating to inspection 20
Total production overhead 100

The following activity volumes are associated with the product line for the period as a whole.
Total activities for the period :

Product No. of set-ups No. of movements No. of

of Materials Inspections
AX 350 200 200
BX 450 280 400
CX 740 675 900
Total 1,540 1,155 1,500

Required :
(i) Calculate the cost per unit for each product using the conventional method.
(ii) Calculate the cost per unit for each product using activity based costing method.

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Answer 5(a) :
Working Notes :
WN1 - Key Details :

Particulars AX BX CX Total
(a) Volume in Units 7,500 12,500 25,000
(b) Machine Hours per unit 2.00 1.50 2.50
(c) Total machine hours [ a x b ] 15,000 18,750 62,500 96,250
(d) Total overheads (`) [ 96,250 x 30 ] 28,87,500

WN2 - Activity wise details of overheads :

Particulars % Amount (`)

Cost relating to set-ups 40 11,55,000
Cost relating to machinery 10 2,88,750
Cost relating to material handling 30 8,66,250
Cost relating to inspection 20 5,77,500
Total production overhead 100 28,87,500

(i) Calculation of the cost per unit for each product using the conventional method :

Particulars AX BX CX
(a) Materials per unit (`) 35 25 45
(b) Labour Hours per unit 1.00 0.90 1.50
(c) Labour cost per unit [ b x 20 ] (`) 20 18 30
(d) Machine Hours per unit 2.00 1.50 2.50
(e) Overheads per unit [ d x 30 ] (`) 60 45 75
(f) Product cost per unit [ a + c + e ] (`) 115 88 150

(ii) Calculation of the cost per unit for each product using ABC method :

Particulars Total AX BX CX
(a) Cost relating to set-ups apportioned 11,55,000 2,62,500 3,37,500 5,55,000
using no. of set ups in the ratio
350 : 450 : 740
(b) Cost relating to machinery 2,88,750 45,000 56,250 1,87,500
apportioned using total machine hours
in the ratio of 15000 : 18750 : 62500
(c) Cost relating to material handling 8,66,250 1,50,000 2,10,000 5,06,250
apportioned using no. of material
movements as 200 : 280 : 675

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(d) Cost relating to inspection 5,77,500 77,000 1,54,000 3,46,500

apportioned using no. of inspections as
200 : 400 : 900
(e) Total overheads [ a to d ] 28,87,500 5,34,500 7,57,750 15,95,250
(f) Volume in Units 7,500 12,500 25,000
(g) Overheads per unit [ e / f ] 71.27 60.62 63.81
(h) Materials per unit (`) 35 25 45
(i) Labour cost per unit [ b x 20 ] (`) 20 18 30
(f) Total cost per unit [ g + h + i ] (`) 126.27 103.62 138.81

Question 5(b) : [ 5 Marks ]

Reference : Chapter 14 - Standard Costing
A manufacturing department of a company has employed 120 workers. The standard output of
product “NPX” is 20 units per hour and the standard wage rate is ` 25 per labour hour.
In a 48 hours week, the department produced 1,000 units of “NPX” despite 5% of the time paid
being lost due to an abnormal reason. The hourly wages actually paid were ` 25.70 per hour.
Calculate :
(i) Labour Cost Variance
(ii) Labour Rate Variance
(iii) Labour Efficiency Variance
(iv) Labour Idle time Variance

Answer 5(b) :
Hint : Use three variance method
Working Notes :
In absence of specific information, it is assumed that 120 workers together as a gang can
produce a standard output of 20 units per gang hour
Hence, standard gang hours required for actual output of 1,000 units
= 1,000 units / 20 units per hour = 50 gang hours
Hence, standard labour hours = 50 gang hours x 120 workers = 6,000 labour hours
Actual labour hours paid = 48 gang hours x 120 workers = 5,760 labour hours
Actual labour hours worked = 5,760 hours - 5% idle time = 5,472 labour hours

(i) Labour Cost Variance :

= ( Std. hours x Std. Rate ) – ( Actual hours paid x Actual rate )
= ( 6,000 x 25 ) – ( 5,760 x 25.70 )
= ` 1,968 (F)

(ii) Labour Rate Variance

= Actual hours paid x ( Std. Rate – Actual Rate )
= 5,760 x ( 25 – 25.70 ) = ` 4,032 (A)

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(iii) Labour Efficiency Variance

= Std. Rate x ( Std. hours – Actual hours worked )
= 25 x ( 6,000 – 5,472 ) = ` 13,200 (F)

(iv) Labour Idle Time Variance

= Std. Rate x ( Actual hours paid – Actual hours worked )
= 25 x ( 5,760 – 5,472 ) = ` 7,200 (A)

Question 5(c) : [ 5 Marks ]

Reference : Chapter 11 - Joint Product Costing
RST Limited produces three joint products X, Y and Z. The products are processed further.
Pre-separation costs are apportioned on the basis of weight of output of each joint product. The
following data are provided for the month of April, 2022.
Cost incurred up to separation point : ` 10,000

Particulars Product X Product Y Product Z

Output (in litre) 100 70 80
` ` `
Cost incurred after separation point 2,000 1,200 800
Selling Price per Litre :
After further processing 50 80 60
At pre-separation point (estimated) 25 70 45

You are required to :

(i) Prepare a statement showing profit or loss made by each product after further processing
using the presently adopted method of apportionment of pre-separation cost.
(ii) Advise the management whether, on purely financial consideration, the three products are
to be processed further or not.

Answer 5(c) :
(i) Profitability statement after further processing :

Particulars Product X Product Y Product Z Total

(a) Output (in litre) 100 70 80 250
` ` `
(b) Joint cost apportioned in the 4,000 2,800 3,200 10,000
Ratio of output given in (a)
(c) Cost after separation point 2,000 1,200 800 4,000
(d) Total cost [ b + c ] 6,000 4,000 4,000 14,000
(e) Sales price after further processing 50 80 60
(f) Total sales value [ a x e ] 5,000 5,600 4,800 15,400
(g) Profit / (Loss) [ f - d ] (1,000) 1,600 800 1,400

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(ii) Further processing decision :

Particulars Product X Product Y Product Z

(a) Output (in litre) 100 70 80
` ` `
(b) Sales price after further processing 50 80 60
(c) Sales price at split off point 25 70 45
(d) Sales value after further processing 5,000 5,600 4,800
[axb]
(e) Sales value at split off point [ a x c ] 2,500 4,900 3,600
(f) Incremental sales revenue [ d - e ] 2,500 700 1,200
(g) Incremental cost after separation point 2,000 1,200 800
(h) Incremental Profit / (Loss) [ f - g ] 500 (500) 400
(i) Further processing decision Yes No Yes

Question 6 : Theory Questions

Answer any four of the following : [ 4 Que. x 5 Marks each = 20 Marks ]

(a) Briefly explain the essential features of a good Cost Accounting System.

(b) Write down the treatment of following items associated with purchase of materials.
(i) Cash discount
(ii) IGST
(iii) Demurrage
(iv) Shortage
(v) Basic Custom Duty

(c) Explain the treatment of Overtime Premium in following situations :

(i) SV & Co. wants to grab some special orders, and overtime is required to meet the
same.
(ii) Dept. X has to work overtime to make up a shortfall in production due to some fault
of management in dept. Y.
(iii) S Ltd. has to work overtime regularly throughout the year as a policy due to the
workers‟ shortage.
(iv) Due to flood in Odisha, RS Ltd. has to work overtime to compete the job.
(v) A customer requested the company MN Ltd. to expedite the job because of his
urgency of work.

(d) Discuss briefly some of the criticism which may be levelled against the Standard Costing
System.

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(e) Identify the methods of costing from the following statements :

(i) Costs are directly charged to a group of products.
(ii) Nature of the product is complex and method cannot be ascertained.
(iii) Cost is ascertained for a single product.
(iv) All costs are directly charged to a specific job.
(v) Costs are charged to operations and averaged over units products.

Answer 6 :
(a) Essentials Features of a Good Costing System :
1. It must be informative and simple.
2. It should be accurate and authentic.
3. It should involve minimum clerical work and expenditure.
4. It should fulfill the requirements and needs of management for cost control and decision
making.
5. It should be flexible and adaptive to take care of any changes, expansion or
modernization without much difficulty and cost.
6. The cost accounting system should be integrated with other systems like financial
accounting, taxation, legal compliance etc.
7. Uniformity and consistency - There should be a uniformity and consistency in
classification, treatment and reporting of cost data and related information. This is
required for comparability of results within the organisation and outside the organisation.
8. Trust on the system - Management should have trust on the system and its output. For
this, an active role of management is required for the development of such a system
that reflects a strong conviction in using information for decision making.

(b) Treatment of certain items while purchase of material :

S.N. Items Treatment

(i) Cash Discount Cash discount is not deducted from the purchase
price. It is treated as interest and finance charges. It is
ignored.
(ii) IGST Integrated Goods and Service Tax (IGST) is paid on
inter-state supply of goods and provision of services and
collected from the buyers. It is excluded from the cost
of purchase if credit for the same is available. Unless
mentioned specifically it should not form part of cost of
purchase.
(iii) Demurrage Demurrage is a penalty imposed by the transporter for
delay in uploading or offloading of materials. It is an
abnormal cost and not included with cost of purchase.
(iv) Shortage Shortage in materials are treated as follows:
Shortage due to normal reasons : Good units absorb
the cost of shortage due to normal reasons. Losses due
to shrinkage, evaporation, normal breakage or due to
any unavoidable conditions etc. are the reasons of
normal loss.

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Shortage due to abnormal reasons : Shortage arises

due to abnormal reasons such as material mishandling,
theft, breaking of bulk, accident or due to any avoidable
reasons are not absorbed by the good units. Losses due
to abnormal reasons are debited to costing profit and
loss account.
(v) Basic Custom Duty Basic Custom duty is paid on import of goods from
outside India. It is added with the purchase cost.

(c) Treatment of Overtime Premium :

S.N. Company Treatment

(i) SV & Co. My View : Charge to the specific order itself
ICAI View : Charge to the Overheads of respective department.
(ii) Dept. X Charge to the overheads of Dept. Y
(iii) S Ltd. Use inflated rate method and spread it over all the products
(iv) RS Ltd. Charge to Costing Profit & Loss Account
(v) MN Ltd. Charge to the specific customer order itself

(d) Criticism of Standard Costing System :

Student Note : Answer to this question can be found in ICAI module on page no. 13.49. As
this answer is lengthy, a student can skip this sub-question. You have to answer any 4.
(i) Variation in Price : Usually there is a huge fluctuation in the prices of material and wage
rates in real life situations. Hence, predicting the standard price of material and standard
wage rates would be a difficult task. It will make the comparison between standard and
actual data irrelevant.
(ii) Varying levels of Output : For calculation of overhead recovery rate, we use the
budgeted output / budgeted hours as a denominator. However, in real life situations,
predicting the budgeted output is very difficult and there might be a huge difference
between the budgeted output and actual output. Due to this, the overhead recovery rate
may vary widely.
(iii) Change in Technology : In today's world of constant change, often there are frequent
changes in the technology and the methods of production. This will make the standards set
on the basis of earlier technology as non viable. In such industries, we need to revise the
standards very frequently.
(iv) Attitude of Technical People : It is very common to face the opposition from technical
people, when we set the standards of their performance. For this, we need to educate them
about the need and suitability of standard costing system.
(v) Mix of Products : In case if a company manufactures multiple products, we often
assume certain product mix for such multiple products. However, actual sales and
production may not be in the same proportion which was decided earlier. Similarly, the
mixing proportion of raw material may also change due to change in production process. All
this will make the standard data as non comparable with actual data. In such cases, we
need to revise the standards very frequently.
(vi) Level of Performance : Standards set may be either too strict or too liberal because
they are based on (a) theoretical maximum efficiency (b) attainable efficiency or (c) average
past performance.

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If the standards set are too strict, then we will not get the cooperation of employees in
implementing standard costing system. Hence, management should consider an attainable
level of efficiency while setting the standards.
(vii) Standard costs may not reflect true value : Often historical cost data is considered
while setting the standards. In such case, the standards may become redundant and non
comparable. One should consider all the internal and external factors in mind and future
changes, while setting the standards of performance. One should try to set the realistic
level of performance.
(viii) Fixation of Standards may be Costly : The process of setting the standards and
implementing the standard costing system is costly. It requires high degree of forecasting
skill and knowledge and administrative work. Hence, small concerns feel that the cost of
implementing the standard costing system is higher than the benefits derived from such
system.

(e) Methods of Costing :

S.N. Method of Costing

(i) Batch Costing
(ii) Multiple Costing
(iii) Single Output Costing
(iv) Job Costing
(v) Process Costing

Important Note for Students :

There might be a difference in the presentation of ICAI answer and my answer given above.
However, the answer should be logically same. If there is a difference of opinion, then I provide
a note in the answer itself.

*****

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