cost accounting part 1

CA-CMA Inter

Cost Accounting

Part 1

Dr CMA T K Sridhar

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CONTENT

Page

Cost Accounting

1 Introduction to Cost Accounting 1

2 Cost Ascertainment

2.1 Material Cost [CAS 6] 11

2.2 Employee Cost [CAS 7] 38

2.3 Direct Expenses [CAS 10] 64

2.4 Overheads [CAS 3] 68

Introduction to Cost Accounting 1

1. INTRODUCTION TO COST ACCOUNTING

Classification of Cost by

1. Nature of element

a) Material: Cost of material used in production

b) Labour: Cost of Workers

c) Expenses: Costs other than Material and Labour

2. Traceability to object

a) Direct Cost: Which can be allocated directly to the product

b) Indirect Cost: Which cannot be directly allocated to the product

3. Functions

a) Production Costs: Cost of whole process of Production

b) Selling Costs: Cost for creating demand of the product produced.

c) Distribution Costs: starting from packing cost till reconditioning of empty products

d) Administrative Costs: Cost of formulating policy, managing the organisation,

e) Development Costs: Development Costs for trial Run

f) Pre-Production Costs: Costs incurred up to the commencement of the production process.

g) Conversion Costs: Cost of converting RM in to FG (DL + DE + FOH)

4. Variability / Changes in Activity or Volume

a) Fixed Costs: Cost which remains constant in total.

i. Committed costs

ii. Policy and managed costs

iii. Discretionary costs

iv. Step costs

b) Variable Costs: Cost which changes with production.

c) Semi-Variable Cost: Cost which are partly fixed and partly variable

5. Controllability

a) Controllable costs –can be influenced by the action of the management. E.g. direct costs.

b) Uncontrollable costs – cannot be influenced. e.g. overhead

6. Normality

a) Normal Costs: Costs which are expected to be incurred in normal routine

b) Abnormal Costs: Costs which are over and above normal costs.

7. Accounting period

a) Capital Cost

b) Revenue Cost

8. Time

a) Historical Cost (incurred cost)

b) Pre-determined cost. (standard cost)

9. Planning

a) Budgeted cost: projection cost for planning

b) Standard cost: scientifically predetermined cost for controlling cost

10. Association with the product

a) Product costs: variable cost

b) Period costs: fixed cost

Cost Accounting 2

11. Managerial decisions

a) Marginal cost: increased cost for increase cost of producing one unit (variable cost)

b) Out of pocket cost (explicit costs): involves cash outflow

c) Differential cost: incremental cost or decremental cost in case change in size of production

d) Sunk cost: cost incurred in the past and irrelevant for decision making

e) Imputed or notional cost (implicit cost | economic cost): involves no cash outflow

f) Opportunity cost: benefit foregone on the second best alternative

g) Replacement cost: current market price

h) Avoidable and unavoidable cost

Relevant costs / irrelevant costs:

a) Relevant Costs: Costs which are relevant and useful for decision making. E.g. Marginal Costs,

Differential Costs, Opportunity Costs, Out of Pocket

b) Irrelevant Costs: Costs which are not relevant or useful to decision making. E.g. Sunk Costs,

Committed costs, fixed costs

Question: Write short notes on direct expense

{CMA inter J03 & J07}

Direct expenses are directly identifiable and chargeable to a product process, job, contract and

service

They form a major part of prime cost

Example: cost of patent rights, hire charges of special plant, experimental costs, Royalty paid in

mining, costs of special layouts and designs, etc.

Question: Match the following:

{CA inter}

(i) Total fixed cost 1 What cost should be?

(ii) Total variable cost 2 Incurred cost

(iii) Unit variable cost 3 Increase in proportion to output

(iv) Unit fixed cost 4 Cost of conversion

(v) Standard cost 5 What costs are expected to be?

(vi) Period cost 6 Decreases with rise in output

(vii) Actual cost 7 Remains constant in total

(viii) Labour and overhead 8 Remains constant per unit

(ix) Incremental cost 9 Cost not assigned to products

(x) Budgeted cost 10 Added value of a new product.

Answer:

Question (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x)

Answer 7 3 8 6 1 9 2 4 10 5


Question: Indicate whether the following statements are true or false:

1. All costs are controllable.

2. Conversion cost is equal to direct wages plus factory overhead.

3. Variable cost per unit varies with the increase or decrease in the volume of output.

4. Depreciation is an out of pocket cost.

5. An item of cost that is direct for one business may be indirect for another

6. Fixed cost per unit remains fixed.

Answer:

Question (i) (ii) (iii) (iv) (v) (vi)

Answer False True False False True False

Cost Objects: Cost object is anything for which a separate measurement of cost is required. Cost object

may be a product, a service, a project, a customer, a brand category, an activity, a department or a

programme etc.

Cost unit: It is a unit of production, service time or a combination of these, in relation to which may

be ascertained or expressed. A cost unit is a unit of product or unit of service to which costs are

ascertained by means of allocation, apportionment and absorption.

Industry or Product Cost unit

Construction Each contract

Nuts & bolts Gross

Power KWH

Chemicals Litre. Gallon, KG, etc.

Transport Passenger, Km, etc.

{CA inter M95, M97 & N02, 4 marks | CMA inter 10, 5 marks}

Type of Costing

1. Uniform Costing: Standardised principles and practices of costing are used by a number of

different industries.

2. Marginal Costing: Only variable costs directly linked are charged to the product or process.

3. Standard Costing: Standard Costs are compared with actual costs, to determine variances.

4. Historical Costing: Where costs are compared with actual costs, to determine variances.

5. Direct Costing: Direct Costs are charged to the product or process, Indirect Costs are charged to

the profit from the product or process.

6. Absorption Costing: All Costs (variable and Fixed) are charged to the product or process.

Methods of Costing + Applicable Industry

{CA inter N99, 4 marks}

1. Job Costing: Cost is ascertained for each job order using a job card. This method of costing is used

in printing press, foundries and general engineering workshops, advertising etc.

Cost Accounting 4

2. Batch Costing: is used where small components but same kind are required to be manufactured in

large quantities.

3. Contract Costing: If a job is very big and takes a long time for its completion, then method used for

costing is known as Contract Costing. It is suitable for firms engaged in the construction of bridges,

roads, buildings etc.

4. Operating Costing: used in service industry like transport, supply of water, telephone services,

hospitals, nursing homes etc.

5. Single or Output: Cost ascertainment for a single product.

6. Process Costing: The cost of production at each stage is ascertainment separately.

7. Operation Costing: a refined process costing where cost for each operation is identified.

8. Multiple Costing: Combination of two or more methods of costing

Industry Method of costing Unit of cost

1 Nursing Home / hospital Operating Per Bed per week or per day

2 Road transport Operating Per Tonne Kilometer or per mile

3 Steel Process Per Tonne

4 Coal Single Per unit

5 Bicycles Multiple Each unit

6 Bridge construction Contract Each contract

7 Interior Decoration Job Each Job

8 Advertising Job Each Job

9 Furniture Multiple Each unit

10 Ship building Contract Per ship

11 Toy making Batch Per batch

12 Radio Mulitple Per radio or per batch

11 Sugar company having

its own sugar-cane fields

Process Per Quintal/Tonne

Industry / Product Unit of cost Method of Costing

(i) Brick – works 1,000 bricks Single or output

(ii) Bi-cycle Each bicycle Multiple

(iii) Oil refining mill Per-Tonne Process

(iv) Road transport company Per-tonne-km Operating

{CA inter N97 & N98, 2 & 3 marks}

Industries Method of costing Unit of cost

(i) Textile mills Process Costing Kg of yarn or Meters of cloth

(ii) Electricity undertaking Service Costing KWH

(iii) Automobile repair work shop Job Costing Each vehicle


(iv) Cement manufactures Costing Single of Output per tonne or Kg.

(v) Passenger bus service Service Costing Passenger-kilometer

Technique of Costing

1. Marginal Costing

2. Standard Costing

3. Budget and Budgetary control

Cost reduction and Cost control

{CA inter N02, M03, M04, N04, & N07, 4 & 3 marks | CMA inter D09, J11, J12 & D15, 4 05 marks}

Cost Reduction Cost Control

1 Reducing cost of production Cost not to exceed pre-determined cost

2 by waste reduction, expense reduction

and increased production

By investigating the variances

and taking remedial measures.

3 It is a corrective function. It is a preventive function

Responsibility Centres: the departments or persons are responsible for performance in terms of

expenditure, revenue, profitability and return on investment

Cost Centre

1. A location, person or an item of equipment (or group of these) for which cost may be ascertained.

2. A cost centre is the smallest sub-unit for which separate cost allocation can be done.

3. It is used for controlling costs.

Types of Cost Centres:

1. Personal Cost Centre: it consists of a person or a group of persons

2. Impersonal Cost Centre: it consists of location or an item of equipment

Revenue centres: the responsibility centres which are accountable for generation of revenue for the

entity.

Profit Centre: Centres which have the responsibility of generating and maximizing profits are called

profit centres.

Investment Centres: Those centres which are concerned with earning an adequate return on

investment are known as Investment centres.

{CA inter N97 & N08, 2 marks | CMA inter J09, J11 & J16, 5 marks}

Objectives of introduction of a Cost Accounting System Ascertainment of cost

1. Determination of selling price

2. Cost control and cost reduction

3. Ascertainment of profit of each activity

4. Assisting in managerial decision making

{CA inter M01 & N02, 2 & 3 marks}

Cost Accounting 6

COST SHEET

Example for various element for furniture manufacturer

Material Labour Expenses

Direct Wood, Steel, Glass Carpenter wages Curving, job charges

Indirect (OH)

Factory Material for machines Workman salary

Administration Material for office equipment Office manager’s salary

Selling & Dist. Packing materials Salesman salary

Statement of Cost Sheet

₹

Opening Stock of Raw Materials ×××

Add Purchase of Raw Materials ×××

×××

Less Closing Stock of Raw Materials ×××

Cost of Raw materials consumed ×××

Direct Labour ×××

Direct Expenses ×××

Prime Cost ×××

Factory OH [Less: sale value of scrap] ×××

Total Factory / Works / Manufacturing Cost ×××

Add Opening Work-in-progress ×××

×××

Less Closing work-in-progress ×××

Works / Factory / Manufacturing Cost ×××

Administration OH

[Quality control + R&D + Production Admn + Primary packing]

×××

Cost of Production ×××

Add Opening Stock of Finished Goods ×××

Cost of Goods Available for Sale ×××

Less Closing Stock of Finished Goods ×××

Cost of Goods Sold ×××

Administration [General] / Selling / Distribution OH [secondary packing] ×××

Cost of Sales ×××

Profit ×××

Sales ×××


Question 1: Following information has been obtained from the records of a Manufacturing company:

Particulars 1-1-2012 31-12-2012

Stock of Raw Materials (₹) 40,000 50,000

Stock of Finished Goods (₹) 1,00,000 1,50,000

Stock of Work-in-progress (₹) 10,000 14,000

Transactions during the year:

Indirect Labour 50,000 Power 32,000

Lubricants 10,000 Direct Labour 3,00,000

Insurance on Plant 3,000 Property Tax on Factory Building 11,000

Purchase of Raw Material 4,00,000 Depreciation on Machinery 50,000

Sale Commission 60,000 Sales 12,00,000

Factory Rent 60,000 Salaries of Salesmen 1,00,000

Admn. Expenses 1,00,000 Realisation from the scrap 2,000

Carriage Outward 20,000

Calculate: Cost of Raw Materials Consumed, Prime cost, Total Manufacturing Cost, Factory

Manufacturing Cost, Cost of Production, Cost of Goods Sold, Cost of Sales and Profit.

Answer:

Statement of Cost and Profit for the year ended 31-12-2012

Opening Stock of Raw Materials 40,000

Add Purchase of Raw Materials 4,00,000

4,40,000

Less Closing Stock of Raw Materials 50,000

Cost of Raw materials consumed 3,90,000

Direct Labour 3,00,000

Prime Cost 6,90,000

Factory Overheads:

Indirect Labour 50,000

Lubricants 10,000

Insurance on Plant 3,000

Power 32,000

Depreciation on Machinery 50,000

Factory Rent 60,000

Property Tax on Factory Building 11,000

Less Realisation from scrap (2,000) 2,14,000

Total Manufacturing Cost 9,04,000

Cost Accounting 8

Add Opening Work-in-progress 10,000

9,14,000

Less Closing work-in-progress 14,000

Factory (Manufacturing) Cost 9,00,000

Administration Expenses 1,00,000

Cost of Production 10,00,000

Add Opening Stock of Finished Goods 1,00,000

Cost of Goods Available for Sale 11,00,000

Less Closing Stock of Finished Goods 1,50,000

Cost of Goods Sold 9,50,000

Selling Overheads:

Sale Commission 60,000

Salaries of Salesmen 1,00,000

Carriage Outward 20,000 1,80,000

Cost of Sales 11,30,000

Profit 70,000

Sales 12,00,000

Question 2: A factory uses a job costing system. The following cost data are available from the books

for the year ended 31st March 2012:

Particulars ₹ Particulars ₹

Direct Material 9,00,000 Selling and Distribution Overhead 5,25,000

Direct Wages 7,50,000 Administrative Overhead 4,20,000

Profit 6,09,000 Factory Overhead 4,50,000

Required

(a) Prepare a Cost Sheet indicating the prime cost, works cost, production cost, cost of sales and sales.

(b) In 2012-13, the factory has received an order for a number of jobs. It is estimated that the direct

materials would be ₹12,00,000 and direct labour would cost ₹7,50,000. What would be the price for

these jobs if the factory intends to earn the same rate of profit on sales, assuming that the selling

and distribution overhead has gone up by 15%. The factory recovers factory overhead as a

percentage of direct wages and administrative and selling and distribution overheads as a

percentage of works cost, based on the cost rates prevalent in the previous year.


Answer: Cost Sheet

₹ in ‘000

Particulars 2011-12 2012-13 BASE Formula Particulars

₹ ₹ 𝑂𝐻

𝐵𝑎𝑠𝑒× 100

Direct Material 900 1200

Direct Wages 750 750

PRIME COST 1650 1950

Factory OH 450 450 Direct Wage 𝐹𝑂𝐻

𝐷𝑊× 100

450

750× 100 = 60%

WORKS COST 2100 2400

Administrative OH 420 480 Works Cost 𝐴𝑂𝐻

𝑊𝐶× 100

420

2100× 100 = 20%

PRODUCTION COST 2520 2880

Selling & Distribution OH 525 1690 Works Cost 𝑆𝐷𝑂𝐻

𝑊𝐶× 100

525

2100× 100 = 25%

COSTS OF SALES 3045 3570

Profit 609 714 Sale 𝑃𝑟𝑜𝑓𝑖𝑡

𝑆𝑎𝑙𝑒𝑠× 100

609

3654× 100 = 16

2

3%

SALES VALUE 3654 4284

1 15% increased for price hike

Question 3: A fire occurred in the factory premises on July 31, 2012. The accounting records have been

destroyed. Certain accounting records were kept in another building. They reveal the following for the

period June 1, 2012 to July 31, 2012.

₹

Direct materials purchased 2,50,000

Work-in-process inventory, 1-6-2012 40,000

Direct materials inventory, 1-6-2012 20,000

Finished goods inventory, 1-6-2012 37,750

Indirect manufacturing costs [40% of conversion cost]

Sales revenues 7,50,000

Direct manufacturing labour 2,22,250

Prime costs 3,97,750

Profit-margin percentage based on revenues [GP] 30%

Cost of goods available for sale 5,55,775

The loss is fully covered by insurance company. The insurance company wants to know the historical

cost of the inventories as a basis of negotiating a settlement, although the settlement is actually to be

based on replacement cost, not historical cost.

Cost Accounting 10

Required:

a. Finished goods inventory, 31-07-2012

b. Work-in-process inventory, 31-07-2012

c. Direct materials inventory, 31-07-2012


Answer: Note 1

Statement of Cost and Profit for the year ended 31-12-2012

Opening Stock of Raw Materials 20,000 Given

Add Purchase of Raw Materials 2,50,000 Given

2,70,000

Less Closing Stock of Raw Materials [2,70,000 – 1,75,500] 94,500 Balancing figure

Cost of Raw materials consumed [3,97,750 – 2,22,250] 1,75,500 Reverse calculation

Add Direct Labour 2,22,250 Given

Prime Cost 3,97,750 Given

Add Factory Overheads 1,48,167 Note 2

Total Manufacturing Cost 545,917

Add Opening Work-in-progress 40,000

5,85,917

Less Closing work-in-progress [5,85,917 – 5,18,025] 67,892 Balancing figure

Factory (Manufacturing) Cost 5,18,025 Reverse calculation

Administration Expenses Nil Assumed

Cost of Production [5,55,775 – 37,750] 5,18,025 Reverse calculation

Add Opening Stock of Finished Goods 37,750 Given

Cost of Goods Available for Sale 5,55,775 Given

Less Closing Stock of Finished Goods [5,55,775 – 5,25,000] 30,775 Balancing Figure

Cost of Goods Sold 5,25,000 Reverse calculation

Selling Overheads Nil Assumed

Cost of Sales [7,50,000 – 2,25,000] 5,25,000 Reverse calculation

Profit [30% of sales] 2,25,000 7,50,000 × 30%

Sales 7,50,000

Note 2: Conversion and indirect manufacturing cost

Conversion cost (Direct manufacturing cost + Indirect manufacturing cost)

Indirect manufacturing cost 40% of conversion cost

Conversion cost Direct manufacturing cost +40% of conversion cost

0.60 conversion cost Direct manufacturing cost

Conversion cost ₹2,22,250

0.60 = ₹3,70,417

Indirect manufacturing cost 40% × ₹3,70,417 = ₹1,48,167

Material Cost [CAS 6] 11

2.1 MATERIAL COST [CAS 6]

Methods to reduce the unwanted investments in stock

1 EOQ 5 ABC | HML | VED | FSN | FSND

2 Fixation of raw material levels 6 Inventory Turnover

3 Pricing of material issue 7 Waste | Scrape | Defective | Spoilage

4 Determination of Cost of RM | WIP | FG 8 Normal and abnormal loss

Economic Order Quantity [EOQ] or Reorder Quantity: the size of the order for which both ordering

and carrying costs together are minimum.

{CA inter N03, 2 marks | CMA inter J06, 4 marks}

Particulars Formula

1 EOQ √

2𝐴𝑂

𝐶

2 Minimum Cost at EOQ √2𝐴𝑂𝐶

3 Total Inventory Cost Ordering Cost + Carrying Cost + Purchase Cost

4 Number of orders per annum 𝐴𝑛𝑛𝑢𝑎𝑙 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡

𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟

5 Ordering Cost Number of orders per annum × O

6 Carrying Cost1 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟

2× 𝐶

7 Frequency of Order Days or months in a year

Number of orders per annum

Where, A – Annual demand C – Carrying Cost per unit per annum

O – Cost per order EOQ – Economic Ordering Quantity

Note: Re order quantity is usually EOQ

Ordering Cost and carrying cost are variable

Orders Quantity Ordering cost Carrying cost Total Cost

Many Small Higher Lower High

A few Large Lower Higher High

At EOQ Equal Lowest

Ordering Costs:

1. Cost of staff posted for ordering of goods

2. Carriage inward

1 Note: Carrying cost is for average inventory and should be taken half of EOQ

Cost Accounting 12

3. Inspection cost of incoming material

4. Cost of stationery, typing, postage, telephone charge etc

Carrying Cost: (costs for holding the inventories):

1. Interest on investment in inventories

2. Cost of storage

3. Insurance costs

4. Cost of spoilage in handing of materials

Assumptions in computation of EOQ

1. Ordering cost (per order) and carrying cost (per unit/annum) are known and constant.

2. Anticipated usage (in units) of material for a period is uniform and known.

3. Cost per unit of the material (to be purchased) is known and it is constant.

{CA inter N95 2 marks | CMA inter D07, 4 marks}

Possible reasons of ordering quantity other than EOQ:

1. The demand pattern and lead time is not certain.

2. Safety stock requirement

3. EOQ lot is not available for sale

4. Panic buying tendency of the person engaged.

5. Expectation in price increase

{CMA inter J04}

Material Levels

Stock

Level

Formula Description

(1) Re-order Maximum reorder period × Maximum usage The level at which fresh

purchase order is made If lead

time given

𝐴

360 𝑑𝑎𝑦𝑠× 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒 + 𝑆𝑎𝑓𝑡𝑦 𝑆𝑡𝑜𝑐𝑘

(2) Minimum Re-order Level –

Normal usage × Average reorder period

Lowest possible level to be

kept always to reduce stock out

(3) Maximum Re-order level + Re order quantity –

(Minimum usage × Minimum reorder period)

Not to keep stock beyond this

level to minimize carrying cost

(4) Average Minimum Stock Level + Maximum Stock Level

2

Other-way Minimum Level + 1

2 × Re-order Quantity

(5) Danger Maximum Lead time for emergency

purchases × Average Consumption

Use material for emergency use

only



Perpetual Inventory System: (stock control system)

A continuous record of receipt and issue of material is maintained

Bin cards and the stores ledger show clearly the receipts, issues and balance of stock at all times

This system facilitates planning of uninterrupted production

Continuous Stock taking:

Physical verification of Stores on a continuous basis is taken

Any discrepancies is noted and appropriate rectification is taken

A perpetual inventory system is usually supported by continuous stock taking.

{CA inter N98 & M01, 4 & 3 marks | CMA inter D09 & D11 5 & 5 marks}

Purchase requisition: Purchase request of stores by store keeper to the purchasing department

A specimen form of purchase requisition

Purchase Requisition

|

For Stock _____________

Date _____________ Date of Requirement _____________

Requisition No. _____________ Work Order No. _____________

|

Sl. No. Code No. Description Quantity Grade Remarks

Requisitioned by _________ Checked by _________ Approved by _________

For Purchase Department use

Purchase Order No. _________ Purchase Order No. _________

Name of supplier _________ Name of supplier _________

{CMA inter N98, 4 marks}

Purchase Order: Issued by purchase department for purchase of store

Specimen draft of a 'Purchase Order'

ABC Limited

Purchase Order No. ____________

Dated:__________

To

__________________

__________________

Dear Sirs,

Cost Accounting 14

With reference to your quotation No. ____ dated _____, has been accepted by our office.

Please supply the following item of stores on the terms and conditions listed on the reverse

of this order; latest by _______

S.No. Description Quantity Rate ₹ Amount ₹

1

2

Terms of delivery: _________

Terms of Payment: _________

Packing and dispatch instructions: __________________

Bill to be sent to:

Yours faithfully,

Purchase Officer

{CA inter M97, 4 marks}

Bin Cards are quantitative records of the stores receipt, issue and balance by the store keeper.

Stock control cards: similar to Bin Cards but contain stock on order


Two bin system: The bin has two parts. One part should stock the re-ordering level, and the other to

keep the remaining quantity. Issues are made out of the larger part, but as soon as it becomes

necessary to use quantity out of the smaller part of the bin, fresh order is placed.

Distinguish between Bin Card and Stores Ledger

Bin Card Stores Ledger

1 Maintained In the stores in the cost a/c department

2 Purpose Stock register Accounting record

3 Posted by the store keeper the stores ledger clerk.

4 Records the quantity the quantities and value

5 Posted at the time of issue of material. after the issue of materials.

{CA inter M99, M00, M02, M03 2~4 marks}

Question: Draw a specimen bin card and appropriately record the following transactions.

01-12-2013 Received from Supplier SW, 80 kg materials A, Purchase Price ₹20 per kg.

04-12-2013 issued to assembly 50 kg. of A at ₹15 per kg vide requisition No. 313.

{CMA inter D13, 2 marks}


Answer: Specimen of Bin Card

Bin Card

Bin No _______________ Description Material A

Item A Max. Quantity _______________

Store Ledger Folio _______________ Min. Quantity _______________

Code No _______________ Re-ordering Level _______________

Date Description Receipts (kg) Issues (kg) Balance (kg) Note

01.12.13 Supplier SW 80 80

04.12.13 Requisition No. 313 50 50

Bill of material is a list of materials required for a particular work or job order and prepared by the

production planning department.

{CA inter M98, 4 marks | CMA inter J03 & J15 2 marks}

Proforma of Bill of Materials

(4 copies prepared for stroes dept. | cost a/c dept. | production control dept. | production dept.)

Bill of Materials

Job No ______________ No. ______________

Department Authorised ______________ Date ______________

S.No. Code No. or size Description Qty. Issue Rate

₹

Amount ₹

Date Qty.

Authorised by ______________ Received by _____________

Store Keeper's Signature ______________ Checked by ______________

Cost Clerk ______________

Material Transfer Note [MTN]: The surplus material arising on a job are transferred from one

department to another within same organization and MTN is raised.

It is made in duplicate and is sent to cost dept. and transferor dept.

No entry is made in stores records.

{CMA inter J03}

Cost Accounting 16

Classification of materials

1. ABC analysis (always better control)

2. HML analysis: high price, medium price and low cost items.

3. VED analysis: vital, essential and desirable items. It is used in spare parts inventory.

4. FSN: fast moving, slow moving and non-moving

5. FNSD analysis: fast moving, normal moving, slow moving and dead stock

ABC Analysis (The pereto principle):

{CA inter M96, M00 & N04, | CMA inter D05, J07 & J10, 3~5 marks}

Selective inventory control | Intensive Control for A category material

A B C

Value 70% 20% 10%

Quantity 10% 20% 70%

A class items B class items C class items

1 Value High Moderate Low

2 Control Very strict Moderate Loose

3 Safety stocks No Low High

4 Follow up Maximum Periodic Rarely

5 Value analysis Rigorous Moderate Minimum

6 Handled by Senior officers Middle management Anybody

Inventory Turnover ratio:

Inventory Turnover Ratio = Material Consumed

Average Inventory

Inventory Turnover Period = Days or months in a year

Inventory Turnover Ratio

Pricing of material issues

Method Issue price Stock price Suitable

1 First in first out (FIFO) Old Latest Price decrease

2 Last in first out (LIFO) Latest Old Price increase

3 Simple Average Price Total of unit price of each purchase

Total number of purchases

Balance

4 Weighted Average Price Total Cost of material in stock

Total quantity in stock

Balance

5 Replacement Price Current purchase price Price increse

6 Standard Price Predetermined pice


Wastage | Scrap | Spoilage | Defective

1. Wastage:

Loss of raw materials

by evaporation & shrinkage

during a manufacturing process.

It may be visible or invisible.

But it has no recovery value.

Normal waste Abnormal waste

1 Determination Past experience, technical factors, etc., Normal yield less Actual yield

2 Accounting Absorbed in the cost of output Transferred to costing P/L a/c

2. Scrap:

The incidental residue

arising from the manufacturing operations,

small in quantity and

low in value, recoverable without further processing.

Accounting Treatment

1 Negligible Transfer to P/L a/c

2 Considerable Absorbed in the cost of output / job

Difference between waste and scrap

Waste Scrap

1 Value No Low

2 Visible May be Yes

3. Spoilage:

Goods damaged beyond rectification to be sold without further processing.

Salvage: any amount recovered by selling spoiled goods

Accounting treatment: Loss less salvage value

1 Normal Included in cost of good units

2 Abnormal Transferred to costing P/L a/c

4. Defectives:

Goods not meeting standard but can be rectified

by application of additional labour or other services.

Cost Accounting 18

Accounting treatment for rectification cost

Rectification cost Identifiable for Charged to

1 Inherent (normal) Good units Good products

Specific jobs Jobs

A responsible department Department OH

Otherwise General OH

2 Not inherent (abnormal) Beyond the control Transferred to costing P/L a/c

Valuation of Material Receipts (CAS 6)

Description

Material Costs

Discounts and Subsidy

1 Trade / Quantity Discount (Not cash discount) Excludible

2 Subsidy / Grant / Incentives Excludible

Duties and Taxes

3 Road Tax / Toll Tax / Basic Customs Duty Includible

4 CGST / SGST / IGST (if ITC is availed) Excludible

5 CGST / SGST / IGST (if ITC is not availed) Includible

6 Penalty and Demurrage Charges Excludible

Other Expenditure

7 Insurance Charges (transit) Includible

8 Commission or brokerage paid Includible

9 Freight Inwards Includible

10 Cost of Containers: (Non-returnable containers) less scrape value Includible

Cost of Containers: (Returnable containers) Excludible

Cost of Containers: (Returnable containers with a cost) Includible

11 Shortage: Normal (unavoidable: breaking of bulk, evaporation, etc) Includible

Shortage: Abnormal (avoidable: mishandling, pilferage) Costing P/L

12 Finance Charges Excludible

Just in Time (JIT) purchase (by Toyota in Japan)

Purchase: Right Material | Right Quantity | Right Time | Right Place

Advantages of JIT purchases:

1. Good supplier-relationship for delivery of goods on right time.

2. Reduces investment in inventory

3. Minimises storage cost

4. Reduces obsolescence loss


PRACTICAL PROBLEMS

1. Economic Ordering Quantity

2. Material Levels

3. Selection of Supplier

4. Pricing of Material Issues

5. Classification of Material (ABC Analysis, FSND & Inventory Turnover Ratio)

6. Computation of Cost of Raw Materials and Finished Goods

7. Spoilage, Defective, Scrap and Waste

(1) ECONOMIC ORDERING QUANTITY (EOQ)

Question 1: From the following particulars, calculate the Economic order Quantity [EOQ] in units

and rupees, number of orders, frequency of orders, total cost (ordering cost + carrying cost) at EOQ

level

Annual Requirement: 1,600 units

Cost of material per unit: ₹40

Cost of placing and receiving one order: ₹50

Annual carrying cost of inventory: 10% of inventory value.

Answer: Calculation of EOQ – Tabulation Method

[1] [2] [3] [4] [5] [6]

[1]/[2] [2]×₹50 ½ × [3] × ₹4 [4]+[5]

A No. of orders Qty per order Ordering Cost Carrying Cost Total Cost

1600 1 1600.00 50 3200.00 3250.00

1600 2 800.00 100 1600.00 1700.00

1600 3 533.33 150 1066.67 1216.67

1600 4 400.00 200 800.00 1000.00

1600 5 320.00 250 640.00 890.00

1600 6 266.67 300 533.33 833.33

1600 7 228.57 350 457.14 807.14

1600 8 200.00 400 400.00 800.00

1600 9 177.78 450 355.56 805.56

1600 10 160.00 500 320.00 820.00

1600 11 145.45 550 290.91 840.91

1600 12 133.33 600 266.67 866.67

Cost Accounting 20

Calculation of EOQ – Graphical Method

Calculation of EOQ – Formula Method

Particulars Formula Calculation Answer

1 EOQ in units1 √

2𝐴𝑂

𝐶 √

2×1,600×50

4

200 units

2 EOQ in rupees2 √

2𝐴𝑂

𝐶 √

2×1,600×40×50

10%

8,000 units

Other-way

3 Number of orders p.a. 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑

𝐸𝑂𝑄

1,600

200

8 orders

4 Frequency of orders 𝐷𝑎𝑦𝑠 𝑜𝑟 𝑚𝑜𝑛𝑡ℎ𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠

360 𝑑𝑎𝑦𝑠

8 𝑜𝑟𝑑𝑒𝑟𝑠

45 days

5 Cost at EOQ √2𝐴𝑂𝐶 √2 × 1,600 × 50 × 4 800

Other-way

Ordering Cost 𝑁𝑜. 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠 × 𝑂 8 × 50 400

+ Carrying Cost 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟

2× 𝐶

200

2× 4

400

Cost at EOQ 800

Question 2: From the following information, calculate economic order quantity (EOQ) and the

number of order to be placed in one quarter of the year:

1. Quarterly Consumption of material: 2,000 kg.

2. Cost of material per kg ₹40

3. Cost of placing one order ₹50

4. Storage and carrying cost 8% on average inventory.

1 C = Annual carrying cost of one unit i.e. ₹40 ×

10

100 = ₹4

2 C= carrying cost in percent i.e. 8%

0

500

1000

1500

2000

2500

3000

3500

1 2 3 4 5 6 7 8 9 10 11 12

Am

ou

nt

Number of orders


Answer:

𝑬𝑶𝑸 = √2𝐴𝑂

𝐶 = √

2 × 8,000 × 50

3.2 = 500 𝑘𝑔𝑠

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠 𝑝𝑒𝑟 𝑞𝑢𝑎𝑟𝑡𝑒𝑟 = 𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑞𝑢𝑎𝑟𝑡𝑒𝑟

𝐸𝑂𝑄 =

2,000

500 = 4

Question 3: EOQ with Quantity Discount: The Purchase Department of your organisation has

received an offer of quantity discounts on its order of materials as under:

Price per tonne (₹) Tonnes

1,400 Less than 500

1,380 500 and less than 1,000

1,360 1,000 and less than 2,000

1,340 2,000 and less than 3,000

1,320 3,000 and above

The annual requirement of the material is 5,000 tonnes. The delivery cost per order is ₹1,200 and the

annual stock holding cost is estimated at 20 per cent of the average inventory.

The Purchase Department wants you to consider the following purchase options and advise which

among them will be the most economical ordering quantity, presenting the relevant information in a

tabular form.

The purchase quantity options to be considered are 400 tonnes, 500 tonnes, 1,000 tonnes, 2,000 tonnes

and 3,000 tonnes

Answer:

Order size

[tones]

Price

per

tonne

Number of

Orders

Cost of

inventory

Ordering

Cost

Carrying

Cost

Total

cost

[1] [2] [3]

(A/[1])

[4]

(A×[2])

[5]

([3]×1,200)

[6]

(𝟏

𝟐×[1]×[2]×0.2)

[7]

(4+5+6)

₹ ₹ ₹ ₹ ₹

400 1400 12.5 70,00,000 15,000 56,000 70,71,000

500 1380 10 69,00,000 12,000 69,000 69,81,000

1,000 1360 5 68,00,000 6,000 1,36,000 69,42,000

2,000 1340 2.5 67,00000 3,000 2,68,000 69,71,000

3,000 1320 1.67 66,00,000 2,000 3,96,000 69,98,000

Advice to Purchase Department: From the above table, it is clear that the most economical order size

among the given options is 1,000 tonnes, as at this order size, the total cost is the minimum.

Cost Accounting 22

(2) MATERIAL LEVELS

Question 1: Following information is given:

Cost of placing a purchase order ₹20

Number of units to be purchased during the year 5,000 numbers

Purchase price per unit inclusive of transport cost ₹50

Annual storage cost per unit ₹5

Details of lead time:

Average 10 days

Maximum 15 days

Minimum 6 days

For emergency purchase 4 days

Rate of consumption per day:

Average 15 units

Maximum 20 units

Calculate: Re-order Quantity, Re-order level, Minimum Level, Maximum Level, Average Stock Level

and Danger level

Answer: Re-order Quantity of units used =√2𝐴𝑂

𝐶 =√

2×5,000×20

5 = 200

Stock Level Formula Calculations Level

(1) Re-order Maximum reorder period × Maximum usage 15×20 300 u.



300–10×15 150 u.



300+200–10×6 440 u.


2

150+440

2 295 u.

(5) Danger Maximum Lead time for emergency purchases

× Average Consumption

4×15 60 u

Question 2: Shriram Enterprises manufactures a special product "ZED". The following particulars

were collected for the year 1986

Monthly demand of ZED 1000 units

Cost of placing an order ₹100

Annual carrying cost per unit ₹15

Normal usage per week 50 units


Minimum usage per week. 25 units

Maximum range per week 75 units

Re-order period 4 to 6 weeks

Compute: Re-order Quantity, Re-order level, Minimum Level, Maximum Level and Average Stock

Level

Answer: Re-order Quantity of units used =√2𝐴𝑂

𝐶 =√2×2,6001×100

15 = 186

Stock Levels


(1) Re-order Maximum reorder period × Maximum usage 6×75 450 u.



450–50×5 200 u.



450+186–25×4 536 u.


2

200+536

2 368 u.

Question 3: Pooja Pipes Ltd. uses about 75,000 valves per year and the usage is fairly constant at 6,250

valves per month. The valve costs ₹1.50 per unit when bought in large quantities; and the carrying

cost is estimated to be 20% of average inventory investment on an annual basis. The cost to place an

order and process the delivery is ₹18. It takes 45 days to receive delivery from the date of an order

and a safety stock 3,250 valves is desired.

You are required to determine

1. The most economical order quantity and frequency of order;

2. The re–order point and

3. The most economical order quantity if the valves cost ₹4.50 each instead of ₹1.50 each.

Answer:

Description Formula Calculation Answer

1 Re-order Quantity √

2𝐴𝑂

𝐶 √

2×75,000×18

0.3

3,000

2 Re-order point 𝐴

360 𝑑𝑎𝑦𝑠× 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒 + 𝑆𝑎𝑓𝑡𝑦 𝑆𝑡𝑜𝑐𝑘

75,000

360 𝑑𝑎𝑦𝑠× 45 𝑑𝑎𝑦𝑠 + 3,250

12,625 u.

3 Re-order Quantity

(if price ₹4.50) √

2𝐴𝑂

𝐶 √

2×75,000×18

0.9

1,732

Question 4: G Ltd. produces a product which has a monthly demand of ₹4,000 units. The product

requires a component X which is purchased at ₹20. For every finished product, one unit of component

is required. The ordering cost is ₹120 per order and the holding cost is 10% p.a. You are required to

1 Annual input-demand for producing 12,000 "ZED" = 52 weeks × 50 units [normal usage] = 2,600 units

Cost Accounting 24

calculate: (i) EOQ (ii) If the minimum lot size to be supplied is 4,000 units, what is the extra cost, the

company has to incur?

{CA inter M96}

Answer:

(i) 𝐸𝑂𝑄 = √2𝐴𝑂

𝐶= √

2×48,000×120

2= 2,400 units

(ii) Extra cost incurred by the company

Order size 2,400 u 4,000 u

Material price 48,000 u × ₹20 9,60,000 48,000 u × ₹20 9,60,000

Ordering cost 48,000

2,400 × ₹120 2,400 48,000

4,000 u × ₹120 1,440

Carrying cost 2,400

2 × 2 2,400 4,000

2 × 2 4,000

Total cost 9,64,800 9,65,440

Extra cost incurred if the order is for 4,000 units = ₹9,65,440 – ₹9,64,800 = ₹640

Question 5: M/s Tubes Ltd. is the manufacturers of picture tubes for T.V. The following are the details

of their operation during 1997:

Average monthly market demand 2,000 Tubes

Ordering cost ₹100 per order

Inventory carrying cost 20% per annum

Cost of tubes ₹500 per tube

Normal usage 100 tubes per week

Minimum usage 50 tubes per week

Maximum usage 200 tubes per week

Lead time to supply 6-8 weeks

Compute from the above:

1. Economic Order Quantity. If the supplier is willing to supply quarterly 1,500 units at a discount of

5%, is it worth accepting?

2. Maximum level of stock,

3. Minimum level of stock and

4. Reorder level

{CA M98 & M00}

Answer: (1)

𝐸. 𝑂. 𝑄 = √2𝐴𝑂

𝐶 = √

2 × 52 𝑤𝑒𝑒𝑘𝑠 × 100 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑤𝑒𝑒𝑘 (𝑛𝑜𝑟𝑚𝑎𝑙) × 100

500 × 20% = 102 𝑡𝑢𝑏𝑒𝑠 (𝑎𝑝𝑝𝑟𝑜𝑥. )


Order size 1,500 u 102 u

Material price 5,200 u × ₹475 24,70,000 5,200 u × ₹500 26,00,000

Ordering cost 5,200

1,500 u × ₹100 347 5,200

102 u × ₹100 5,098

Carrying cost 1,500

2 × 20% × ₹475 71,250 1,500

2 × 20% × ₹475 5,100

Total cost 25,41,597 26,10,198

Cost at discount offer is cheaper hence discount offer is accepted.




1,600 + 102– 50 × 6 1,402 u.



1,600– 100 × 7 900 u.

(4) Re-order Maximum reorder period × Maximum usage 8 × 200 1,600 u.

Question 6: If the minimum stock level and average stock level of raw-material A are 4,000 and 9,000

units respectively, find out its 'Re-order quantity'1


Question 7: A company manufactures a product from a raw material, which is purchased at ₹60 p.kg.

The company incurs a handling cost of ₹360 plus freight of ₹390 per order. The incremental carrying

cost of inventory of raw material is ₹0.50 p.kg. p.m. In addition, the cost of working capital finance on

the investment in inventory of raw material is ₹9 p.kg. p.a. The annual production of the product is

1,00,000 units and 2.5 units are obtained from one k.g. of raw material.

Required:

1. Calculate the economic order quantity of raw materials.

2. Advise, how frequently should orders for procurement be placed.

3. If the company proposes to rationalize placement of orders on quarterly basis, what percentage of

discount in the price of raw materials should be negotiated?

{CA inter N01}

Answer:

1. 𝐸𝑂𝑄 = √2𝐴𝑂

𝐶 =

√2 × (

1 𝑘. 𝑔.2.5 𝑢𝑛𝑖𝑡𝑠

× 1,00,000) × (360 + 390)

0.5 × 12 𝑚𝑜𝑛𝑡ℎ𝑠 + 9 = 2,000 𝐾𝑔𝑠.

2. 𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 𝑜𝑓 𝑂𝑟𝑑𝑒𝑟 = 𝐷𝑎𝑦𝑠 𝑜𝑟 𝑚𝑜𝑛𝑡ℎ𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠 𝑝𝑒𝑟 𝑎𝑛𝑛𝑢𝑚 =


40,000 𝑘. 𝑔.2,000 𝑘. 𝑔.

= 18 𝑑𝑎𝑦𝑠

1 Average stock level=Minimum stock level + ½ Reorder quantity & hence Reorder quantity= 10,000

Cost Accounting 26

3. 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑛𝑒𝑒𝑑𝑒𝑑 =𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑐𝑜𝑠𝑡

𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑠𝑡% =

78,000 − 30,000

40,000 × 60% = 2%

Question 8: JP Limited, manufacturers of a special product, follows the policy of EOQ for one of its

components. The component's details are as follows:

Particulars ₹

Purchase Price Per Component 200

Cost of an Order 100

Annual Cost of Carrying one Unit in Inventory 10% of Purchase Price

Total Carrying Cost of Inventory and Ordering p.a. ₹4,000

The company has been offered a discount of 2% on the price of the component provided the lot size is

2,000 units at a time. You are required to:

(a) Compute the EOQ,

(b) Advise whether the quantity discount offer can be accepted. (Assume that the inventory carrying

cost does not vary according to discount policy) and

(c) Would your advice differ if the company is offered 5% discount on a single order?

{CA inter N94}Answer:

Answer: (a) Total Carrying Cost and Ordering Cost at EOQ = √𝟐𝑨𝑶𝑪

₹4,000 = √2 × 𝐴 × 100 × 20

A (EOQ) = 4000 units

(b) & (c)

Order size Formula 2,000 u 4,000 u

Ordering cost 𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 [𝐴]

𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟× 𝑂

4,000

2,000× 100%

200 4,000

1,000× 100

100

Carrying cost Quantity per order

2× 𝐶

2,000

2× 20

20,000 4,000

2× 20

40,000

Total cost 20,200 40,100

Discount 𝐴 × 𝑃𝑟𝑖𝑐𝑒 × 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡% 4,000 × 200 × 2% 16,000 4,000 × 200 × 5% 40,000

Extra Cost 4,200 100

Advice to management Reject Accept

(3) SELECTION OF SUPPLIER

Question 1: A company has the option to procure a particular material from two sources:

Source I assures that defectives will not be more than 2% of supplied quantity.

Source II does not give any assurance, but on the basis of past experience of supplies received from it,

it is observed that defective percentage is 2.8%.


The material is supplied in lots of 1,000 units. Source II supplies the lot at a price, which is lower by

₹100 as compared to Source I. The defective units of material can be rectified for use at a cost of ₹5 per

unit. You are required to find out which of the two sources is more economical.1

{CA inter M01}

(4) PRICING OF MATERIAL ISSUS

Question 1: Pricing Material Issues: The following information is extracted from the Stores Ledger:

Material X

Opening Stock Nil

January 1 Purchases 100 @ ₹1 p.u

January 20 Purchases 100 @ ₹2 p.u

January 22 Issues 60 for Job W 16

January 23 Issues 60 for Job W 17

Complete the receipts and issues valuation by adopting the First-in First-Out, Last-in First Out and the

Weighted Average Method. Tabulate the values allocated to Job W16, Job W17 and the closing stock

under the methods aforesaid and discuss from the different points of view which method you would

prefer.

Answer: Statement of Receipts and Issues by adopting First-in-First-Out Method

Date Particulars Receipts Issues Balance

Qty Rate Value Qty Rate Value Qty Rate Value

Jan 1 Purchase 100 1 100 – – – 100 1 100

Jan 20 Purchase 100 2 200 – – – 100 1 100

100 2 200

Jan. 22 Issue to Job W16 – – – 60 1 60 40 1 40

100 2 200

Jan. 23 Issue to Job W17 – – – 40 1 40

20 2 40 80 2 160

Statement of Receipts and Issues by adopting Last-In-First-Out method

Date Particulars Receipts Issues Balance

Qty Rate Value Qty Rate Value Qty Rate Value

Jan 1 Purchase 100 1 100 – – – 100 1 100

Jan 20 Purchase 100 2 200 – – – 100 1 100

100 2 200

Jan. 22 Issue to Job W 16 – – – 60 2 120 100 1 100

40 2 80

Jan. 23 Issue to Job W 17 – – – 40 2 80 80 1 80

20 1 20

1 𝑆𝑜𝑢𝑟𝑐𝑒 𝐼: 𝑑𝑒𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑐𝑜𝑠𝑡 = 1,000 × 2% × ₹5 = 100 & 𝑆𝑜𝑢𝑟𝑐𝑒 𝐼𝐼: 𝑑𝑒𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑐𝑜𝑠𝑡 𝑙𝑒𝑠𝑠 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 = 1,000 × 2.8% × ₹5 − 100 = 40 ℎ𝑒𝑛𝑐𝑒 𝑆𝑜𝑢𝑐𝑟𝑒 𝐼𝐼 𝑖𝑠 𝑐ℎ𝑒𝑎𝑝𝑒𝑟

Cost Accounting 28

Statement of Receipt and Issues by adopting Weighted Average method

Date Receipt Issue Balance

Particulars Qty Rate Value Qty Rate Value Qty Rate Value

Jan 1 Purchase 100 1 100 — — — 100 1 100

Jan 20 Purchase 100 2 200 — — — 200 1.50 300

Jan. 22 Issue to Job W 16 — — — 60 1.50 90 140 1.50 210

Jan. 23 Issue to Job W 17 — — — 60 1.50 90 80 1.50 120

Statement of Material values allocated to Job W 16, Job W 17 & Stock

Particulars FIFO

[₹]

LIFO

[₹]

Weighted

Average [₹]

Material for Job W 16 60 120 90

Material for Job W 17 80 100 90

Closing Stock 160 80 120

300 300 300

Question 2: AT Ltd. furnishes the following stores transactions for September, 2012

1-9-12 Opening balance 25 Units value ₹162.50

4-9-12 Issues Requisition No. 85 8 Units

6-9-12 Receipts from B & Co. GRN NO. 26 50 Units @ ₹5.75 per unit

7-9-12 Issues Req. No. 97 12 Units

10-9-12 Returns to B & Co. 10 Units

12-9-12 Issues Req. No. 108 15 Units

13-9-12 Issues Req. No.110 20 Units

15-9-12 Receipts from M & Co. GRN NO. 33 25 Units @ ₹6.10 per unit

17-9-12 Issues Reg. No. 121 10 Units

19-9-12 Received replacement from B & Co. GRN No. 38 10 Units

20-9-12 Returned from department,

material of B & Co. MRR No. 4

5 units

22-9-12 Transfer from Job 182 to Job 187 in the dept. MTR 6 5 Units

26-9-12 Issues Req. No. 146 10 units

29-9-12 Transfer from Dept. "A" to Dept. "B" MTR 10 5 Units

30-9-12 Shortage in stock taking 2 Units

Write up the stores ledger on FIFO method and discuss how to treat the shortage in stock


Answer: Ledger of AT Ltd. for the month of September, 2012 (FIFO method)

Date Receipt Issue Balance

Particulars Qty Rate ₹ Qty Rate ₹ Qty Rate ₹

1.9.12 Balance – – – – – – 25 6.50 162.50

4.9.12 RS: 85 – – – 8 6.50 52 17 6.50 110.50

6.9.12 GRN: 26 50 5.75 287.50 – – – 17

50

6.50

5.75

398.00

7.9.12 RS: 97 – – – 12 6.50 78 5

50

6.50

5.75

320.00

10.9.12 Nil – – – 10 5.75 57.50 5

40

6.50

5.75

262.00

12.9.12 RS: 108 – – – 5

10

6.50

5.75

90

30

5.75

172.50

13.9.12 RS: 110 – – – 20 5.75 115 10 5.75 57.50

15.9.12 GRN: 33 25 6.10 152.50 – – – 10

25

5.75

6.10

210.00

17.9.12 RS: 121 – – – 10 5.75 57.50 25 6.10 152.50

19.9.12 GRN: 38 10 5.75 57.50 – – – 25

10

6.10

5.75

210.00

20.9.12 GRN: 4 5 5.75 28.75 – – – 5

25

10

5.75

6.10

5.75

238.75

26.9.12 RS: 146 – – – 5

5

5.75

6.10

59.29

20

10

6.10

5.75

179.50

30.9.12 Shortage – – – 2 6.10 12.20 18

10

6.10

5.75

167.30

Note: GRN – Goods Received Note, RS – Requisition Slip

Question 3: The following are the details of receipts and issues of a material of stores in a manufacturing

company for the period of three months ending 30th June, 2008:

Receipts Issues

Date Quantity (kgs) Rate per kg. ( ₹) Date Quantity (kgs)

April 10 1,600 5 April 4 1,100

April 20 2,400 4.90 April 24 1,600

May 5 1,000 5.10 May 10 1,500

May 17 1,100 5.20 May 26 1,700

Cost Accounting 30

May 25 800 5.25 June 15 1,500

June 11 900 5.40 June 21 1,200

June 24 1,400 5.50

There was 1,500 k.g. in stock at April 1, 2008 which was valued at ₹4.80 per kg.

Issues are to be priced on the basis of weighted average method. The stock verifier of the company

reported a shortage of 80 kgs on 31st May, 2008 and 60 kgs on 30th June, 2008. The shortage is treated

as inflating the price of remaining material on account of shortage.

You are required to prepare a Stores Ledger Account.


Answer: Stores Ledger Account for the three months ending 30th June, 2008

(Weighted Average Method)

Receipts Issues Balance

Date

2008

Part. Qty.

(Kgs.)

Rates

( ₹)

Amt

(₹)

Qty.

(Kgs.)

Rates

( ₹)

Amt

( ₹)

Qty.

(Kgs.)

Amt

( ₹)

Rates

( ₹)

April 1 1,500 7,200 4.80

April 4 Issue 1,100 4.80 5,280 400 1,920 4.80

April 10 Receipt 1,600 5.00 8,000 2,000 9,920 4.96

April 20 Receipt 2,400 4.90 11,760 4,400 21,680 4.93

April 24 Issue 1,600 4.93 7,888 2,800 13,792 4.93

May 5 Receipt 1,000 5.10 5,100 3,800 18,892 4.97

May 10 Issue 1,500 4.97 7,455 2,300 11,437 4.97

May 17 Receipt 1,100 5.20 5,720 3,400 17,157 5.05

May 25 Receipt 800 5.25 4,200 4,200 21,357 5.09

May 26 Issue 1,700 5.09 8,653 2,500 12,704 5.09

May 31 Shortage 80 2,420 12,704 5.25

June 11 Receipt 900 5.40 4,860 3,320 17,564 5.29

June 15 Issue 1,500 5.29 7,935 1,820 9,629 5.29

June 21 Issue 1,200 5.29 6,348 620 3,281 5.29

June 24 Receipt 1,400 5.50 7,700 2,020 10,981 5.40

June 30 Shortage 60 1,960 10,981 5.60

Question 4: The following transactions in respect of material Y occurred during the six months ended

30th June, 2013

Month Purchase (Units) Price per unit [₹] Issued units

January 200 25 Nil

February 300 24 250


March 425 26 300

April 475 23 550

May 500 25 800

June 600 20 400

The chief accountant argues that the values of closing stock remain the same no matter which method

of pricing of material issues is used. Do you agree? Why or why not? Detailed stores ledgers are not

required.1

Question 5: From the records of a company distributing petrol, the following is available, for the

month of March, 2002:

Sales for the month ₹79,10,000

Opening Stock as on 1.3.2002 1,25,000 litres @ ₹30.00 per litre,

Purchases March 5 1,50,000 litres @ ₹31.10 per litre

Purchases March 27 1,00,000 litres @ ₹31.20 per litre

Closing Stock as on 31.3.2002 1,30,000 litres

General admn. Expenses for March, 2002 ₹1,72,000

From the information given above, work out the following using FIFO & LIFO method of inventory

valuation, assuming pricing of issues being done at the end of month after all receipts during the

month:

a) Value of closing stock as on 31.3.2002

b) Cost of sales for March, 2002

c) Profit or loss for March, 2002

{CMA inter D02}

Answer:

(a) Valuation of closing stock as on 31.3.2002

Date Particulars FIFO LIFO

Qty ₹ p.u. Total ₹ Qty ₹ p.u. ₹ Total

1.3.2002 Opening stock 1,25,000 30.00 3,75,0000 1,25,000 30 3,750,000

March 5 + Purchase 1,50,000 31.10 4,665,000 1,50,000 31.10 4,665,000

March 27 1,00,000 31.20 3,120,000 1,00,000 31.20 3,120,000

2,50,000 7,785,000 2,50,000 7,785,000

Total (A) 3,75,000 11,535,000 3,75,000 11,535,000

March 31 _ Issues 1,25,000 30.00 3,750,000 1,00,000 31.20 3,120,000

1,20,000 31.10 3,732,000 1,45,000 31.10 4,509,500

1 Chief Accountant is correct

Cost Accounting 32

Total (B) 2,45,000 7,482,000 2,45,000 7,629,500

31.03.02 Closing stock 30,000

1,00,000

31.10

31.20

9,33,000

3,120,000

5,000

1,25,000

31.10

30.00

1,55,500

3,750,000

(A-B) 1,30,000 4,053,000 1,30,000 3,905,500

(b) Statement showing cost of sales for March 2002

Particulars Methods

FIFO (₹) LIFO (₹)

Opening stock as on 1.3.2002(as exhibited in (a) 3,750,000 3,750,000

Add Purchase (as exhibited in (a) 7,785,000 7,785,000

Total 11,535,000 11,535,000

Less Closing stock as on 31.3.2002 (a) 4,053,000 3,905,000

Cost of Petrol sold 7,482,000 7,629,500

Add General admn. Expenses for the month of March 2002 1,72,000 1,72,000

Cost of sales 7,654,000 7,801,500

(c) Statement showing Profit / Loss for March 2002

Particulars Methods

FIFO (₹) LIFO (₹)

Sales for the Month 7,910,000 7,910,000

Less Cost of sales (as exhibited in (b) 7,654,000 7,801,000

Profit for March 2002 2,56,000 1,08,500

(5) CLASSIFICATION OF MATERIALS

Question 1: ABC Analysis: What do you understand by ABC analysis of inventory control? A factory

uses 4,000 varieties of inventory. In terms of inventory holding and inventory usage, the following

information is compiled:

Number of varieties

of inventory

% Value of inventory

holding (average) in %

Inventory usage

(in end-product) in %

Answer

Class

3,875 96.875 20 5 C

110 2.750 30 10 B

15 0.375 50 85 A

4,000 100.000 100 100

Classify the items of inventory as per ABC analysis with reasons.

{CA inter N98 | CMA inter J02}


INVENTORY TURNOVER RATIO

Question 2: The following data are available in respect of material X for the year ended 31.2020.

₹

Opening stock 90,000

Purchases during the year 2,70,000

Closing stock 1,10,000

Calculate: Inventory turnover ratio; and the number of days for which the average inventory is held


Answer:

Formula Workings Answer

(1) Inventory turnover ratio 𝑅𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑑

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘 𝑜𝑓 𝑟𝑎𝑤 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙

90 + 270 − 110

90 + 1102

2.5

(2) Inventory holding period 365 𝑑𝑎𝑦𝑠

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜


2.5

146 days

(6) CALCULATION OF COST OF RAW MATERIAL AND FINISHED GOODS

Question 1: A manufacturer of Ahmedabad purchased three Chemicals X, Y and Z from Mumbai.

The invoice gave the following information:

₹

Chemical X : 3,000 kg @ ₹4.20 per kg. 12,600

Chemical Y : 5,000 kg @ ₹3.80 per kg. 19,000

Chemical Z : 2,000 kg. @ ₹4.75 per kg. 9,500

IGST ITC not available 2,055

Railway Freight 1,000

Total Cost 44,155

A shortage of 200 kg in Chemical X, of 280 k.g. in Chemical Y and of 100 kg. in Chemical Z was noticed

due to breakages. At Ahmedabad, the manufacturer paid Octroi duty @ Re 0.10 per k.g. He also paid

Cartage ₹22 for Chemical X, ₹63.12 for Chemical Y and ₹31.80 for Chemical Z. Calculate the stock rate

that you would suggest for pricing issue of chemicals assuming a provision of 5% towards further

deterioration.

Answer:

Statement showing the Issue Rate of Chemicals Chemicals

X Y Z

Purchase Price 12,600 19,000 9,500

Add IGST @ 5% (IGST

total purchase price) of purchase price 630 950 475

Add Railway Freight in the ratio of 3:5:2 (Qty. ratio) 300 500 200

Add Octroi @ ₹0.10 per kg. on the quantity of material received 280 472 190

Cost Accounting 34

Add Cartage 22 63.12 31.80

[A] Total Price in ₹ 13,832 20,985.12 10,396.80

[B] Quantity available for issue in kg (Note) 2,660 4,484 1,805

Rate of issue per Kg in ₹= [𝑨]

[𝑩] 5.20 4.68 5.76

Note: Statement showing the quantity of chemicals available for issue

Chemicals X Y Z

Kg Kg kg

Quantity purchased 3,000 5,000 2,000

Less Shortage (Assumed to be normal) 200 280 100

Quantity received at the store 2,800 4,720 1,900

Less Provision for further deterioration 5% 140 236 95

Quantity available for issue 2,660 4,484 1,805

Question 2: The manufacture of each unit of Product X requires 2 kgs each of raw materials A, B and

C. There was no opening stock of any material. The following transaction took place in the production

period relating to purchase of raw materials.

A’s supplier charges ₹10,000 for 100 kgs of A. Additionally, insurance was ₹600 and the freight to get

A to the store was ₹800.

B’s invoice price showed ₹12,000 charged by the supplier for 100 kgs freight was ₹800, which was

included in the ₹12,000. There was no insurance. B had a normal evaporation loss of 10% in transit. A

further abnormal loss of 20 kg of B was reported due to a small accident in transit. ₹200 was recovered

from the transporter.

C’s supplier charged ₹15,000 for 120 kgs. of C. C absorbs moisture on exposure to the outside air and

by the time it came to the store, it weighed 150 kgs. This is a normal feature of C.

Materials were issued to production as per requirement. Compute the material cost per unit of X

corrected to two decimal places, using the Generally Accepted Cost Accounting Principles for material

cost and giving the break-up of each raw material.


Answer:

Material A Material B Material C

Qty Value Qty Value Qty Value

Invoice Price 100 10,000 Material B 100 12,000 Material C 120 15,000

Insurance 600 Normal loss 10% 10 Normal gain 30

Freight 800 90 12,000 Total 150 15,000

Total Cost 100 11,400 Abnormal loss 20 2,666.67

₹/kg 114 133.33 100


Material Cost of X Qty ₹ p.u. ₹ total

Material A 2 114 228

Material B 2 133.33 266.67

Material C 2 100 200

Total material cost p.u. unit of X 694.67

(7) SPOILAGE, DEFECTIVE, SCRAPE AND WASTE

Question 1: 200 kg of a certain material valued at ₹50 per kg were issued from the Stores Department

to the Production Department, During transit, 2 kg physically disappeared due to shrinkage (1%

shrinkage is considered normal) In the production process, the yield of good output was 80% of the

input. 8% of the input had a slightly substandard dimension and this can be sold as seconds in the

market at a discount of 25% of the selling price of good output, which is ₹300 per kg. 12% of the input

emerged as trimmings in the process. This was collected and can be sold in the market at a net price of

₹20 per kg which is credited to the manufacturing overhead as per the company’s practice.

Explain with reasons, the quantities that you will classify as (i) waste, (ii) scrap and (iii) spoilage.

What will be the material cost per unit of the good output?

{CMA inter J14, 8 marks}

Answer:

Material issued to production 200 kg

Less Shrinkage (1% of 200) 2 kg Waste

Input 198 kg

Less 12% of 198 trimming 23.76 kg Scrap

174.24 kg

Less 8% sub-standard (8% of 198) 15.84 kg Spoilage

Output 158.40

Material cost per unit of output 10000

158.4

₹63.13 / unit.

OTHER COMPREHENSIVE PROBLEMS

Question 1: Raw materials ‘AXE’ costing ₹150 per k.g. and ‘BXE’ costing ₹90 per k.g. are mixed in

equal proportions for making product ‘A’. The loss of material in processing works out to 25% of

the product. The production expenses are allocated at 40% of direct material cost. The end product

is priced with a margin of 20% over the total cost.

Material ‘BXE’ is not easily available and substitute raw material ‘CXE’ has been found for ‘BXE’

costing ₹75 per kg. It is required to keep the proportion of this substitute material in the mixture

as low as possible and at the same time maintain the selling price of the end product at existing

level and ensure the same quantum of profit as at present.

You are required to compute the ratio of the mix of the raw materials ‘AXE’ and ‘CXE.


Cost Accounting 36

Answer:

Working Notes:

k.g. ₹ per k.g. [X&Y] ₹ k.g. [X&Z] ₹

Material AXE 50% 0.625 150 93.75 0.75 112.5

Material BXE 50% 0.625 90 56.25 - -

Material CZE - - 75 - 0.50 37.5

Input 100% 1.250 150.00 1.25 150

Normal Loss 20% 0.250 - 0.250 -

Output A [Material Cost] 80% 1.000 150.00 1.000 1150

Add Production Cost

[40% of material]

60.00

Total Cost 210.00

Add Profit 20% of total cost 42.00

Selling Price 252.00

Proportion of Materials X and Z in the Product A

Equation

Quantity X + Y = 1.25 1

Cost 150X + 75Y = 150 2

75X + 75Y = 93.75 3 = [1×75]

75X = 56.25

X = 0.75

Y = 0.5

Question 2: A Ltd. was ordering (in economic order quantities) (EOQ) its raw material RM at a price

of ₹750 per unit. The average annual consumption was 18000 units. Carrying cost was 20% of average

inventory and the ordering cost was ₹1500 per order. A Ltd. wants to move towards the Just-in-Time

system and the new policy proposes as follows: the average number of units held in stock will be 100

units; ordering cost per order will be ₹1510; carrying cost will be 20% of average inventory. However,

the purchase price will increase. The total new ordering cost will be 9 times the new carrying cost.

1. What was the EOQ before the new policy?

2. Calculate the inventory turnover ratio before and after the new policy.

3. How much is the increase in purchase price under the new policy?

Compare the two policies regarding raw material management and offer your comments.

{CMA inter D15, 3+5+5=12 marks}

1 To maintain the same level of profit and the selling price, the total cost of material in 1 k.g. of product A

should not exceed ₹150


Answer:


1 EOQ √2𝐴𝑂

𝐶 √

2 × 18,000 × 1,500

150 600

2 Inventory Turnover Ratio 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦

Existing 18,000

300 60 times

New 18,000

100 180 times

Note

Average Inventory (existing) 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑟𝑑𝑒𝑟𝑒𝑑

2

600

2 300

Quantity ordered (Q) (new) 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 × 2 100 × 2 200

3 JIT Policy

Price of raw material (P) 𝑜𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 (𝑂) = 9 𝑡𝑖𝑚𝑒𝑠 𝑜𝑓 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡

𝐴

𝑄× 𝑂 = 9 (

1

2× 𝐴 × 𝑃 × 𝐶%) =

18,000

200× 1,510 = 9 (

18,000

2× 𝑃 × 0.2) 755

Cost Accounting 38

2.2 EMPLOYEE COSTS [CAS 7]

Labour Turnover

{CA inter N94, M96, N98, N03, M03, N03, N04 & N07 | CMA inter J02, J04, J06, D09 & D10, 3~7

marks}

The process of workers leaving and coming in business organizations

Labour turnover is the rate of change in its labour force during a period.

A higher labour turnover reflects that the workers are new and inexperienced

Measurement of Labour Turnover:

Method Formula

1 Flux Number of additions + Number of separations

Average number of workers%

2 Replacement Number of workers replaced


3 Separations Number of separations


4 Additions Number of additions


Causes of Labour Turnover:

Avoidable Causes Personal Causes Unavoidable Causes

1 Remuneration 1 For job betterment 1 Seasonal change

2 Working hours 2 Ill health, death 2 Shortage of RM

3 Working conditions 3 Family problems 3 No market for product

4 Training 4 Dissatisfied with job 4 Government ban

5 Promotion 5 Disciplinary action

Remedial steps to minimize labour turnover:

1. Exit interview

2. Job analysis and evaluation

3. Scientific system of recruitment, selection, placement and promotion

4. Enlightened attitude of management to resort employee’s dissatisfaction

5. Use of committee to analyse and reduce labour turnover

Impact of Labour Turnover

1. Even flow of production is disturbed.

2. Cost of recruitment and training increases.

3. Breakage of tools, wastage of materials increases.

Employee Costs [CAS 7] 39

4. Overall production decreases

5. Reduction in profit because of loss in contribution and goodwill

Costs of labour turnover

Preventive costs Replacement costs

1 Increased remuneration 1 Advertising cost

2 Transport facility 2 Recruitment cost

3 Welfare services 3 Selection cost

4 Promotion 4 Training cost

5 Improve working condition 5 Loss of productive hours due to delay in recruitment

6 Defective products because of inexperienced

Treatment for cost of labour turnover: It is generally treated as an overhead expense.

Time Keeping: Recording of the employee’s attendance time

Objectives of time keeping: preparation of payroll & computation of cost

Methods of time keeping:

1. Time recording clocks or clock cards

2. Disc method

3. Attendance records

Time Booking: Recording the details of work done and the time spent on each job or process.

Objectives of time booking:

1. To ascertain the labour time spent on the job and the idle labour hours.

2. To ascertain labour cost of various jobs and products.

3. To calculate the amount of wages and bonus payable under the wage incentive scheme.

4. To compute and determine overhead rates and absorption of overheads

5. To evaluate the performance of labour by comparing actual time booked with standard time

Methods of time booking:

1. Daily time sheets

2. Weekly time sheets

3. Job tickets

4. Labour cost cards

5. Time and job card

Work study: includes job study and method study for fixing standard time for a job and incentive

Method study: Finding the most efficient use of resources to produce at optimal level

Steps

1. Select jobs having complex operations

Cost Accounting 40

2. Study and collect information for the job such as purpose, location, skilled labour required…

3. After the study, develop optimum method

4. Implement the developed method

5. Do follow up

Work measurement: to determine standard time and reduce idle time

Steps:

1. Selection of work

2. Measuring actual time taken in the work done

3. Making comparison between the standard time and actual time

Objectives:

1. To determine incentive wages

2. Improving utilisation of factors of production

3. Assisting production control

4. Setting labour standards

5. Cost control and reduction

Job evaluation: determination of relative value of jobs for fixing skill requirement and wages

Objectives:

Helps employer understanding worth of job in comparison to another.

Promotes reliability and equity in designing wage structure.

Helps personnel department in selection and training of employees.

It facilitates cost control.

Use of job evaluation avoids unrest between employer and employee

Method Job Evaluation:

(a) Ranking method: Job are ranked according to their requirements and responsibilities

(b) Grading method: Jobs are graded in order of their importance

(c) Point ranking method: Jobs are rated according to Responsibility, Working conditions, Skill,

Training & Experience, complexity of duty, physical labour and Education.

(d) Factor comparison: All jobs are ranked against the key job on the basis of monetary values to

various factors.

Merit rating: Assessment of an employee’s performance on the job

{CA inter N96, N99 & N01 | CMA inter J05, D09, J11 & D12, 3~5 marks}

Objectives:

1. For determining employee’s incentive and promotion

2. To determine employee’s suitability for job

3. Provide training for employee to improve competence


4. Better employee control

Distinction between job evaluation and merit rating:

Job evaluation Merit rating

1 Assessment of Job Man doing the work

2 Fixing Wages for job Wage and incentive for workers

3 Help Wage uniformity Incentive for different workers

Time and motion study

Time study: fixation of standard time for the job

Motion study: elimination of unnecessary motions of a job

1. Primary – Operation analysis: basic operations of a job is analysed and eliminate deficiencies

2. Secondary – Motion Study: refining the methods and operations

Steps for fixing standard time

1. Job is broken down in to elements (operations)

2. Operations are analysed and refined and eliminated as per motion study

3. Time taken for each element is recorded with stop watch

4. Sum the time taken of all elements

5. The total time for the job is adjusted for performance of average workers

6. Standard time = The adjusted total time + time allowance for rest

Benefits of time and motion study

1. It helps to assess the labour requirements.

2. It helps in the fixation of wage rates and incentive schemes.

3. It helps in standardizing jobs, equipment and operations

4. It helps to find performance of employees.

5. It helps in planning and exercising cost control.

Employee Cost [CAS 7]

Principles of measurement of employee cost

Employee cost

1 Gross pay + allowance + ALL kind of bonus Includible

2 Remuneration (fixed or % on NP) to managerial personnel Includible

3 Imputed cost (not considered in financial a/c) Includible

4 Idle time: normal Includible

5 Idle time: abnormal

6 Subsidy / grant / incentive Reduced

7 Employee cost variance: Normal Included

Cost Accounting 42

8 Employee cost variance: Abnormal (quantifiable) Excluded

9 Penalties, damages paid (statutory | others) Excluded

10 Free amenities (perquisites) less amount recovered Included

Change in the cost accounting principles is made only for law or CAS compliance

Assignment of employee cost

Employee cost Included in

1 Direct employee cost: traceable to a cost object Cost object: Job

2 Indirect employee cost FOH / AOH / SOH

3 Indirect employee: not traceable to cost object Suitable basis

4 Voluntary retirement cost Amortised

5 Voluntary retirement cost: discontinued operations Costing P/L

6 Recruitment costs / training cost / LT cost Overhead

7 Overtime premium: if traceable to cost object Cost object: Job

Overtime premium: if traceable to department Department

Overtime premium (abnormal) Costing P/L

8 Normal idle time cost: (rest, lunchtime, holiday etc.) Cost object Job or OH

9 Abnormal idle time cost: (strikes, lockouts, floods) Costing P/L

10 Normal idle capacity FOH

11 Abnormal idle capacity (trade depression, etc.) Costing P/L

Idle Capacity (facilities) = Installed capacity – actual capacity utilization (if actual is less)

METHODS OF WAGE PAYMENT

Note:

1 Piece Rate Hourly rate

Standard output per hour

2 Hourly Rate 𝑃𝑖𝑒𝑐𝑒 𝑟𝑎𝑡𝑒 × 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑜𝑢𝑡𝑝𝑢𝑡 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟

3 Standard Output Hours Taken

Standard time per unit

4 Performance Rating Actual output

Standard output𝑜𝑟

Standard time

Actual Time

Methods of wage payment

1 Time Rate: [ordinary | high wage | graduated] 𝐻𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑 × 𝑅𝑎𝑡𝑒 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟

2 Straight Piece Rate System 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 × 𝑃𝑖𝑒𝑐𝑒 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡


Differential price Rate System

3 F.W Taylor’s System

Efficiency Payment

Less than 100% 80% of piece rate.

At or above 100% 120% of piece rate

4 Merrick Multiple Piece Rate System

Efficiency Payment

Up to 83% Piece rate

83% to 100% 110% of Piece rate

Above 100% 120% of Piece rate

II Combination of Time and Piece Rate

5 Emerson Efficiency System

Efficiency Payment

Below 662

3% Guaranteed time rate

662

3% to 100% Time wage + [1% to 20%]

Above 100% 120% of time wage +

1% for each 1% increase in efficiency

6 Gantt Guarantee Task Plan

Output Payment

Output below standard Guaranteed time rate

Output at standard 120% of time rate

Output over standard 120% of piece rate or High piece rate

Premium Plans

7 Halsey 𝐻𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑 × 𝑅𝑎𝑡𝑒 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟 + 50% × 𝑇𝑖𝑚𝑒 𝑠𝑎𝑣𝑒𝑑 × 𝑅𝑎𝑡𝑒 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟

8 Halsey-Weir 𝐻𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑 × 𝑅𝑎𝑡𝑒 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟 + 30% × 𝑇𝑖𝑚𝑒 𝑠𝑎𝑣𝑒𝑑 × 𝑅𝑎𝑡𝑒 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟

9 Rowan 𝐻𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑 × 𝑅𝑎𝑡𝑒 𝑝. ℎ𝑟 +

𝑇𝑖𝑚𝑒 𝑠𝑎𝑣𝑒𝑑

𝑇𝑖𝑚𝑒 𝑎𝑙𝑙𝑜𝑤𝑒𝑑 × 𝐻𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑 × 𝑅𝑎𝑡𝑒 𝑝. ℎ𝑟

10 Barth 𝑅𝑎𝑡𝑒 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟 × √𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 ℎ𝑜𝑢𝑟𝑠 × ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑

Group bonus plans

1. Budgeted expenses bonus: (% 𝐵𝑜𝑛𝑢𝑠 × (𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 – 𝑎𝑐𝑡𝑢𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠))

2. Cost efficiency bonus: (% 𝐵𝑜𝑛𝑢𝑠 × (𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 – 𝑎𝑐𝑡𝑢𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠))

3. Pristman system: (𝐵𝑜𝑢𝑛𝑠 % =𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡−𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑜𝑢𝑡𝑝𝑢𝑡

𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑂𝑢𝑡𝑝𝑢𝑡%)

4. Towne profit sharing plan:

𝑊𝑜𝑟𝑘𝑒𝑟𝑠 𝑎𝑛𝑑 𝑠𝑢𝑝𝑒𝑟𝑣𝑖𝑠𝑜𝑟𝑦 𝑠𝑡𝑎𝑓𝑓 𝑠ℎ𝑎𝑟𝑒: (𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑙𝑎𝑏𝑜𝑢𝑟 𝑐𝑜𝑠𝑡 – 𝑎𝑐𝑡𝑢𝑎𝑙 𝑙𝑎𝑏𝑜𝑢𝑟 𝑐𝑜𝑠𝑡)

5. Waste reduction bonus: 𝑊𝑜𝑟𝑘𝑒𝑟𝑠 𝑠ℎ𝑎𝑟𝑒: (𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 – 𝑎𝑐𝑡𝑢𝑎𝑙 𝑚𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑠𝑡)

Cost Accounting 44

6. Ruker plan: 𝐵𝑜𝑛𝑢𝑠 % =𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐿𝑎𝑏𝑜𝑢𝑟 𝑐𝑜𝑠𝑡

𝑉𝑎𝑙𝑢𝑒 𝑎𝑑𝑑𝑒𝑑−

𝐴𝑐𝑡𝑢𝑎𝑙 𝐿𝑎𝑏𝑜𝑢𝑟 𝑐𝑜𝑠𝑡

𝑉𝑎𝑙𝑢𝑒 𝑎𝑑𝑑𝑒𝑑

7. Scanlon plan: 𝐵𝑜𝑛𝑢𝑠 % =𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑛𝑛𝑢𝑎𝑙 𝐿𝑎𝑏𝑜𝑢𝑟 𝐶𝑜𝑠𝑡

Average Annual Sales Revenue−

𝐴𝑐𝑡𝑢𝑎𝑙 𝐿𝑎𝑏𝑜𝑢𝑟 𝑐𝑜𝑠𝑡

𝐴𝑐𝑡𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠

Bonus system for indirect workers:

1. Indirect monetary incentives: profit sharing (Bonus Act) & co-partnership (e.g. ESOP)

2. Non-monetary incentives: perquisites

Treatment of some of the employee cost items in costing

1. Supervisors salary / foreman’s salary: FOH

2. Bonus under Payment of Bonus Act

(a) Minimum bonus included in labour cost &

(b) Over and above minimum bonus is transferred to Costing P/L A/c

3. Leave Travel Assistance: direct labour or OH as the case may be

4. Night shift allowance: similar to OT premium

5. Fringe benefits: OH

6. Attendance Bonus: OH

7. Lost time due to major overhauling: Normal – OH & Abnormal – Costing P/L

PRACTICAL PROBLEMS

1. Labour Turnover (Rate of Labour Turnover and Cost of Labour Turnover)

2. Idle Time Cost and Treatment (Normal and Abnormal)

3. Pay Roll Accounting

4. Remuneration (Standard Time / Performance Rating)

(1) LABOUR TURNOVER RATE

Question 1: From the following information, calculate Labour turnover rate and Labour flux rate:

Number of workers as on 0.01.2000 7, 600

Number of workers as on 31.12.2000 8,400

During the year, 80 workers left while 320 workers were discharged 1,500 workers were recruited

during the year of these, 300 workers were recruited because of exits and the rest were recruited in

accordance with expansion plans.


Answer:

Method Formula Workings Answer

1 Flux No. of additions + No. of separations


1,500 + 400

0.5 × (7,600 + 8,400)%

23.75%



300

0.5 × (7,600 + 8,400)%

3.75%



80 + 320

0.5 × (7,600 + 8,400)%

5%

4 Additions Number of additions


1,500

0.5 × (7,600 + 8,400)%

18.75%


Question 2: The cost accountant of Y Ltd. has computed labour turnover rates for the quarter ended

31st March, 1997 as 10%, 5% and 3% respectively under Flux method, ‘Replacement method’ and

‘Separation method’. If the number of workers replaced during that quarter is 30, find out the

number of (1) workers recruited and joined and (2) workers left and discharged.


Answer:

Method Formula Workings Answer



5% 30

AN= 0.05

AN = 600



3% S

600= 0.03

S = 18

3 Flux1 No. of additions + No. of separations


10% N + 30 + 18

600= 0.1

N=12

LOSS DUE TO LABOUR TURNOVER

Question 3: The management of Sunshine Ltd. wants to have an idea of the profit lost / foregone as a

result of labour turnover last year. Last year sales amounted to ₹66 lacs and the PVR was 20%. The

total number of actual hours worked by the direct labour force was 3.45 lacs. As a result of the delays

by the Personnel Department in filling vacancies due to labour turnover, 75,000 potentially

productive hours were lost. The actual direct labour hours included 30,000 hours attributable to

training new recruits, out of which half of the hours were unproductive. The cost incurred consequent

on labour turnover revealed on analysis the following:

Settlement cost due to leaving 27,420 Recruitment Costs 18,725

Selection costs 12,750 Training costs 16,105

Assuming that the potential production loss due to labour turnover could have been sold at

prevailing prices, ascertain the profit foregone / lost last year on account of labour turnover.


Answer:

Calculation of Actual Productive Hours ₹

Actual hours worked 3,45,000

(-) Hours lost due to training workers

(unproductive hours i.e. half of 30,000 hours)

15,000

Actual Productive Hours 3,30,000

Sales per productive hour = Total Sales

Actual Productive Hours ₹66,00,000

3,30,000 Hours

₹20

Productive hours lost as a result of labour turnover 75,000 hours

Sales forgone @ ₹20 per hour 75,000 × ₹20 ₹15,00,000

1Number of additions [A] = Number of workers replaced [R] + Number of workers recruited for expansion [N]

Cost Accounting 46

Contribution foregone= Sales foregone × PVR ₹15,00,000 × 20% 3,00,000

Statement of Profit Foregone (As A Result of LT)

Contribution foregone ₹3,00,000

Add Settlement cost due to leaving ₹27,420

Recruitment costs ₹18,725

Selection costs ₹12,750

Training costs ₹16,105

₹3,75,000

(2) IDLE TIME COST

Question 1: The capacity usage ratio and the capacity utilization ratio in respect of a machine for a

particular month is 80% and 90% respectively. The available working hours in a month are 200 hours.

The break-up of idle time is: Waiting for job – 5 hours, Breakdown – 4 hours and Waiting for tools – 3

hours. Calculate the idle time cost and present the same in a tabular form when the hourly fixed cost

of running the machine is ₹8.

{CMA inter}

Answer: Available working hours in a month 200 hours, Capacity usage ratio 80%, standard working

hours expected (80% of 200 hours) 160 hours, Unavoidable idle time (200 hours - 160 hours), Capacity

utilization ratio 90%, Actual hours worked (90% of 160 hours) and unutilised capacity or avoidable

idle time (160 - 144) 16 hours.

Analysis of Avoidable Idle Time: Idle time card reveals the following:

Waiting for job 5 hours

Break down 4 hours

Waiting for tools 3 hours

12 hours

Idle facilities (Balancing figure 16 - 12) 4 hours 4 hours

Total avoidable idle time 16 hours 16 hours

Idle Time Report: (Cost = Idle time ×₹8)

Particulars Time in hours Cost in ₹

Unavoidable Idle Time 40 320

Avoidable Idle Time:

Waiting for job 5 hours 40

Break down 4 hours 32

Waiting for tools 3 hours 24

Idle facilities 4 hours 32


Total 56 448

TREATMENT OF IDLE TIME COST (NORMAL AND ABNORMAL)

Question 2: The worker is paid 50 paisa per hour and the 5 days working week contains 42 hours.

The daily allowance for approved absence from his place of work, maintenance of machine, etc., is 12

minutes and his job cards show that his time chargeable during the week to various cost centres is as

follows.

Job Number 305 – 20 hrs,

Job Number 310 – 10 hrs and

Job Number 320 – 8 hrs

Time unaccounted for is caused by a power failure. Show how his wages for the week would be dealt

with in the cost accounts.

Answer: Worker’s wages are to be dealt with in the cost accounts as follows

Chargeable @ 0.5 per hour Hours ₹

Job 305 20 10.00

Job 310 10 5.00

Job 320 8 4.00

Approved absence [12 m × 5 days]

[Normal loss and added with factory overhead]

1 0.50

Power Failure [Balance hours]

[Abnormal Loss and adjusted in Costing P/L A/c]

3 1.50

Total wages payable to the workers for the week 42 21.00

(3) PAYROLL ACCOUNTING

Question 1: From the particulars given below, prepare labour cost per man day of8 hours. [Current

cost of living index is 700 points]

A Basic Salary ₹2 per day

B Dearness Allowance 25 p. per every point over 100

cost of living index for working class.

C Leave Salary 10% of (a) and (b)

D Employees contribution to PF 8% of (a), (b) and (c)

E Employers contribution for ESI 2.5% of (a), (b) and (c)

F Expenditure on amenities to labour ₹20 per head per mensem

G Number of working days in a month 25 days of 8 hours each

Answer:

Statement of Labour Cost (8 hours / day) Workings CTC THP

Cost Accounting 48

A Basic Salary 2.00 2.00

B Dearness Allowance 600 × 0.25

25 days

6.00 6.00

C Leave Salary 0.1 × (2 + 6) 0.80 0.80

D Employees contribution to PF 0.08 × (2 + 6 + 0.8) 0.70 (0.70)

E Employers contribution for ESI 0.025 × (2 + 6 + 0.8) 0.22 (0.22)

F Expenditure on amenities to labour ₹20 per month

25 days

0.80 -

Total 10.52 7.88

Question 2: Calculate the earnings of A&B from the following particulars & allocate the labour cost to

the job X, Y and Z

Particulars A B

Basic Wages ₹100 ₹160

Dearness Allowance 50% 50%

Contribution to Provident Fund (on basic wages) 8% 8%

Contribution to ESI (on basic wages) 2% 2%

Overtime Hours 10 NIL

The Normal working hours for the month are 200. Overtime is paid at double the total of normal

wages and dearness allowance. Employer’s contribution to State Insurance and Provident Fund are at

equal rates of employees’ contributions. The two workers were employed on jobs X, Y and Z in the

following proportions:

Particulars Job X Job Y Job Z

Worker A 40% 30% 30%

Worker B 50% 20% 30%

Overtime was done on job Y.

Answer:

Statement Showing Earnings of Workers A and B

Workers: A B

Basic Wages 100 160

DA (50% of Basic Wages) 50 80

Gross Wages earned 15 -

Less PF – 8% of Basic Wages – ESI – 2% of Basic Wage 165 240

Net Wages paid 155 224

Statement of Labour Cost: ₹ ₹


Gross Wages (excluding overtime) 150 240

Employer’s Contribution to P.F. and E.S.I 10 16

(a) Ordinary wages 160 256

Labour Rate per hour = (a)

200 hours 0.80 1.28

Statement Showing allocation of Wages to Jobs

Particulars Total Wages Job X Job Y Job Z

Worker A Ordinary Wages: (4:3:3) 160 64 48 48

Worker A Overtime 15 - 15 -

Worker B Ordinary Wages: (5:2:3) 256 128 51.20 76.8

431 192 114.2 124.8

Working Notes:

1. Normal Wages are considered as basic wages:

2. Overtime = 2 ×𝐵𝑎𝑠𝑖𝑐 𝑤𝑎𝑔𝑒+𝐷𝑒𝑎𝑟𝑛𝑒𝑠𝑠 𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒

200 ×10 hours = 2 ×

150

200×10 hours = ₹15.

(4) REMUNERATION AND INCENTIVES

CALCULATION OF PERFORMANCE RATING

Question 1: From the following information, calculate the performance rating [PR] of A, B & C

A B C

A B C

Actual output [AO] 80 100 120 Actual time taken [AT] 8 10 12.5

Standard output [SO] 100 Standard time allowed [ST] 10

PR = AO/SO % 80% 100% 120% PR = ST/AT % 125% 100% 80%

CALCULATION OF STANDARD TIME

Question 1: A work measurement study was carried out in a firm for 10 hours & the following

information was generated:

Units produced 350

Idle time 15%

Performance rating 120%

Allowance time 10% of standard time

What is the standard time for the task?

Cost Accounting 50

Answer:

Units produced 350

Time spent 10 hours

Idle time 15 %

Therefore observed time per unit in minutes 10 × 60 × 0.85

350= 1.457

Time per unit is 1.457 minutes when performance rating is 120%.

Therefore normal time per unit at 100%

performance rating is normal time

1.457 × 1.2 = 1.748 𝑚𝑖𝑛𝑢𝑡𝑒𝑠

Allowance time = 10% of standard time. Therefore standard time 1.748 × 1.10 = 1.923 𝑚𝑖𝑛𝑢𝑡𝑒𝑠

Alternatively standard time may be calculated as follows: 1.748 × 100

90= 1.942 𝑚𝑖𝑛𝑢𝑡𝑒𝑠

TAYLORS DIFFERENTIAL PIECE RATE SYSTEM

Question 1: In a factory, a worker produced 14 units in a day of 8 hours. Wage rate per hour is ₹40.

Standard output per hour is 2 units. Under differential piece rate system, a worker is paid at 83% when

his performance is below standard and 125% of piece rate when his performance is at or above standard.

(1) Find out the labour cost of the worker for the day. (2) Also find out the labour cost of the worker for

the day if he produces 18 units in a day.


Answer:


(1) Performance Rating 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑑𝑎𝑦

𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑑𝑎𝑦

14

8 ℎ𝑟𝑠 × 2 𝑢𝑛𝑖𝑡𝑠%

87.5%

Differential Piece Wage 𝑃𝑃 × 𝑃𝑅 × 𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑡𝑖𝑎𝑙 % 14 × 20 × 83% ₹232.4

(2) Performance Rating 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑑𝑎𝑦

𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑑𝑎𝑦

18

8 ℎ𝑟𝑠 × 2 𝑢𝑛𝑖𝑡𝑠%

112.5%

Differential Piece Wage 𝑃𝑃 × 𝑃𝑅 × 𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑡𝑖𝑎𝑙 % 18 × 20 × 125% ₹450

MERRICK’S MULTIPLE PIECE RATE SYSTEM

Question 2: Calculate the earnings of workers A, B and C under Straight Piece Rate System and

Merrick’s Multiple Piece Rate System from the following particulars:

Normal Rate per Hour - ₹5.40

Standard Time per Unit - 1 Minute

Output per day is as follows:

Worker A – 390 Units, Worker B – 450 Units & Worker C– 600 Units

Working hours per day are 8.



Answer:

Particulars Formula Workings Answer

Standard production for a day of 8 hours Time available

Time required per unit

8 × 60 × 1

1

480

Normal piece rate hourly rate

standard output per hour

₹5.40

60 units

₹0.09

Formula A B C

Pieces produced 390 450 600

Straight piece wage 𝑃𝑖𝑒𝑐𝑒𝑠 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑 × 𝑃𝑖𝑒𝑐𝑒 𝑅𝑎𝑡𝑒 ₹35.10 ₹40.50 ₹54.00

Performance rating Actual Output

Standard Output

81.25% 93.75% 125%

Merrick’s bonus Nil 10% 20%

Merrick’s piece wage 𝑃𝑖𝑒𝑐𝑒 𝑤𝑎𝑔𝑒 × [1 + 𝑚𝑒𝑟𝑟𝑖𝑐𝑘’𝑠 𝑏𝑜𝑛𝑢𝑠] 35.10 44.55 64.8

GANT’S TASK AND BONUS PLAN

Question 3: From the following data calculate total monthly remuneration of 3 workers A, B and C

under the Gant’s Task and Bonus Scheme.

1. Standard production per month per worker is 1,000 units

2. Actual production during the month for A is 850 units, B is 1,000 units and C is 1,100 units.

3. Piece work rate is ₹0.50 per unit.

Answer:

A B C

Performance rating

(Actual Output

Standard Output)

850

1,000= 85%

1,000

1,000= 100%

1,100

1,000= 100%

Gant’s bonus Guaranteed

time wage

120% of

time wage

120% of

piece wage

Gant’s piece wage 1,000 × 0.5 = ₹5001 1,000 × 0.5 × 1.2 = ₹600 1,200 × 0.5 × 1.2 = ₹660

HALSEY, HALSEY WEIR, ROWAN AND BARTH PREMIUM PLANS

Question 4: Calculate the earnings of a worker under (i) Halsey Plan (ii) Halsey weir, (iii) Rowan

Plan and (iv) Barth Plan from the following particulars:

(1) Hourly rate of wages guaranteed 0.50 paise per hour.

(2) Standard time for producing one dozen articles – 3 hours.

(3) Actual time taken by the worker to produce 20 dozen articles – 48 hours.


1 Note: piece wage at normal production is equal to time wage

Cost Accounting 52

Answer:

Plan Formula Workings

Total

Earnings

Effective

earnings p.hr1

(i) Halsey 𝑇𝑇 × 𝐻𝑅 +1

2× 𝑇𝑆 × 𝐻𝑅 48 × 0.5 +

1

2× 12 × 0.5 ₹27 ₹0.5625

(ii) Halsey

Weir 𝑇𝑇 × 𝐻𝑅 +

1

2× 𝑇𝑆 × 𝐻𝑅 48 × 0.5 +

30

100× 12 × 0.5 ₹25.8 ₹0.5375

(iii) Rowan 𝑇𝑇 × 𝐻𝑅 +𝑇𝑇

𝑇𝐴× 𝑇𝑆 × 𝐻𝑅 48 × 0.5 +

48

60× 12 × 0.5 ₹28.8 ₹0.60

(iv) Barth 𝐻𝑅 × √𝑇𝐴 × 𝑇𝑇 0.5 × √60 × 48 ₹26.83 ₹0.559

Time Allowed [TA] = 20 dozens × 3 hours per dozen= 60 hours

Question 5: A worker produced 200 units in a week’s time. The guaranteed weekly wage payment

for 45 hours is ₹81. The expected time to produce one unit is 15 minutes which is raised further by

20% under the incentive scheme. What will be the earnings per hour of that worker under Halsey

(50% sharing) and Rowan bonus schemes?


Answer:

Wages (Rowan) 𝑇𝑇 × 𝐻𝑅 +

𝑇𝑆

𝑆𝑇× 𝑇𝑇 × 𝐻𝑅 45 × ₹1.8 +

15

60× 45 × ₹1.8

₹101.25

Effective HR (Rowan) 𝑊𝑎𝑔𝑒𝑠 𝑢𝑛𝑑𝑒𝑟 𝑅𝑜𝑤𝑎𝑛

𝑇𝑇

₹101.25

45

₹2.25

Wages (Halsey) 𝑇𝑇 × 𝐻𝑅 +

𝑇𝑆

2× 𝐻𝑅 45 × ₹1.8 +

50

100× 15 × ₹1.8

₹94.50

Effective HR (Halsey) 𝑊𝑎𝑔𝑒𝑠 𝑢𝑛𝑑𝑒𝑟 𝐻𝑎𝑙𝑠𝑦

𝑇𝑇

94.50

45

₹2.1

Working Notes

Normal Time per unit 15 mts

Incentive Time 20% 3 mts

Standard Time per unit 18 mts

Standard Time for Actual Production 60 hrs 200 𝑢𝑛𝑖𝑡𝑠 × 18 𝑚𝑖𝑛𝑢𝑡𝑒𝑠

60 𝑚𝑖𝑛𝑢𝑡𝑒𝑠

Question 6: A worker under the Halsey Plan of remuneration has a day rate of ₹1,200 per week of 48

hours, plus a cost of living bonus of ₹10 per hour worked. He is given an 8 hour task to perform,

which he accomplishes in 6 hours. He is allowed 30% of the time saved as premium bonus. What

would be his total hourly rate of earnings and what difference would it make if they were paid under

the Rowan plan?

1 Effective rate of earnings per hour =

𝑇𝑜𝑡𝑎𝑙 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠

𝑇𝑖𝑚𝑒 𝑇𝑎𝑘𝑒𝑛


Answer:

Formula Workings Total

Earnings

Effective

rate

of earnings

p.hr1

Halsey 𝑇𝑇 × 𝐻𝑅 +

30

100× 𝑇𝑆

× 𝐻𝑅

6 × 25 + 30

100× 2 × 25

+ [6 × 10]

₹225 ₹37.50

Rowan 𝑇𝑇 × 𝐻𝑅 +

𝑇𝑇

𝑇𝐴× 𝑇𝑆 × 𝐻𝑅 6 × 25 +

6

8× 2 × 25 + [6 × 10]

₹247.5 ₹41.25

Under Rowan, the worker gets ₹3.75 per hour more.

Question 7: 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. 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 particular product. What could have been his total earnings and effective

hourly rate, had he been put on Halsey Incentive Scheme (50%)?


Answer:

Rowan Plan 𝑇𝑇 × 𝐻𝑅 +

𝑇𝑆

𝑆𝑇× 𝑇𝑇 × 𝐻𝑅

Effective HR: Rowan Plan 30𝑇𝑇 + 4 − 𝑇𝑇

4× 𝑇𝑇 × 30

𝑇𝑇= 37.5

30 + 4 − 𝑇𝑇

4× 30 = 37.5

TT=3

Halsey Plan 𝑇𝑇 × 𝐻𝑅 +

𝑇𝑆

2× 𝐻𝑅 3 × 30 +

1

2× 30

105

Effective HR: Halsey Plan 𝑊𝑎𝑔𝑒𝑠 𝑢𝑛𝑑𝑒𝑟 𝐻𝑎𝑙𝑠𝑦

𝑇𝑇

105

3

₹35

Question 8: Under the Rowan Premium Bonus system, a less efficient worker can obtain same

bonus as a highly efficient worker.’ Discuss with suitable examples.


Answer: For example let time allowed for a job = 4 hours and Labour rate = ₹5 per hour.

Time taken in case I is 3 hours and case II is 1 hour

Plan Formula Case I [TT = 3] Case II [TT = 1]

Bonus under Rowan 𝑇𝑇

𝑇𝐴× 𝑇𝑆 × 𝐻𝑅

3 ℎ𝑜𝑢𝑟𝑠

4 ℎ𝑜𝑢𝑟𝑠× 1 × 5 = ₹3.75


4 ℎ𝑜𝑢𝑟𝑠× 3 × 5 = ₹3.75

So, it can be concluded that under Rowan System, the less efficient worker and highly efficient

worker can get the same bonus.

1 Effective rate of earnings per hour =

𝑇𝑜𝑡𝑎𝑙 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠

𝑇𝑖𝑚𝑒 𝑇𝑎𝑘𝑒𝑛

Cost Accounting 54

OTHER MODELS

Question 1: The standard hours of job X are 100 hours. The job has been completed by Amar in 60

hours, Akbar in 70 hours and Anthony in 95 hours. The bonus system applicable to the job is as

follows:-

Per cent of time saved to time allowed Bonus

Saving up to 10% 10% of time saved

From 11% to 20% 15% of time saved



The rate of pay is ₹1 per hour. Calculate the total earnings of each worker and also the rate of earnings

per hour


Answer:

Statement of total earnings and rate of earning per hour

Workers Amar Akbar Anthony

Standard hours of Job [hours] 100 100 100hrs

(i) Time taken on the Jobs [hours] 60 70 95hrs

Time saved [hours] 40 30 5hrs

Per cent of time saved to time allowed 40% 30% 5%

(ii) Bonus in hours1 6.5 4.5 0.5

Total earning to be paid [hours] [(i)+(ii)] 66.5 74.5 95.5

(iii) Total earning @ ₹1 per hour ₹66.5 ₹74.5 ₹95.5

Rate of earning per hour [(iii)

(i)] ₹1.1083 ₹1.0642 ₹1.005

Question 2: The standard labour time required for the production of a certain component has been

fixed as 4 hours. An incentive scheme was introduced recently to raise labour productivity. The relevant

details of the scheme are as follows:

Efficiency wages Incentive as a percentage of basic

Below 100% No incentive

100% (i.e. 4 hours/units) 10%

Above 100% 1% additional incentive for every 1% increase in

efficiency above 100%, fractions excluded.

1 Amar 10 hours × 10% + 10 hours × 15% + 20 hours × 20% 6.5 hours

Akbar 10 hours × 10% + 10 hours × 15% + 10 hours × 20% 4.5 hours

Anthony 5 hours × 10% 0.5 hours


Four workers A, B, C and D produced 16, 12, 14 and 10 units respectively in a particular week of 48

hours. The basic wages of all these workers is ₹15 per hour. Calculate the efficiency, incentive bonus,

total earnings and labour cost per unit in respect of each of the above four workers.

{CMA inter D03}

Answer:

Workers A B C D

1 Production (units) 16 12 14 10

2 Total time required @ 4 hrs./Unit 64 48 56 40

3 Actual time 48 48 48 48

4 Efficiency (%) (2 divided by 3) 133 100 116 -

5 Bonus (%) 43 10 26 -

6 Basic wage (48 × ₹15) ₹720 ₹720 ₹720 ₹720

7 Incentive bonus (43% of ₹720) 309.60 72.00 187.20 Nil

8 Total earnings 1,029.60 792.00 907.20 720.00

9 Labour cost 5 per unit (8 divided by 1) 64.35 66.00 64.80 72.00

Question 3: The budgeted annual production of a company is 1,20,000 units, each unit requiring 2½

hours at an hourly wages rate of ₹15. Currently the average efficiency of the production workers is only

60%. The management has a scheme to raise this to 75%. The scheme involves realigning the machinery

and intensive training of the production workers, at a onetime cost or ₹10 lacs. The scheme also

proposes to raise the wage rate to ₹16 to enlist the full co-operation of the workers.

Examine the scheme and state whether it can be accepted.

{CMA inter D04}

Answer:

Budgeted annual production 1,20,000 units

Standard time required for the production @ 2½ hrs. per unit 3,00,000 hrs

Standard showing comparative labour cost before and after the implementation of the scheme

Before After

1 Production 3,00,000 hrs 3,00,000 hrs

2 Labour efficiency 60% 75%

Estimated labour hrs likely to be taken (𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛

𝐿𝑎𝑏𝑜𝑢𝑟 𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦) 5,00,000 4,00,000

Labour rate/hour ₹15 ₹16

Total estimated labour cost per year 75 lacs ₹64 lacs

Saving in labour cost: ₹75 lacs - ₹64 lacs = ₹11 lacs

Cost Accounting 56

Decision: From the above comparative assessment of Total Wages Per year, the Management should

accept the proposed scheme since the net savings of ₹11 lacs exceed the onetime cost (₹10 lacs) of the

said scheme.

GROUP BONUS SCHEME

Question 1: In a unit, 10 men work as a group. When the production for the group exceeds the

standard output of 200 pieces per hour, each man is paid an incentive for the excess production in

addition to his wages at hourly rates. The incentive is at half the percentage, the excess production

over the standard bears to the standard production, each man is paid an incentive at the rate of

this percentage of a wage rate of ₹2 per hour. There is no relation between the individual

workman’s hourly rate and the bonus rate. In a week, the hours worked are 500 hours and the

total production is 1,20,000 pieces.

Compute the total amount of the bonus for the week. Calculate the total earnings of two workers A and

B of the group:-

A worked 44 hrs and his basic rate per hour was ₹2.20 and

B worked 48 hrs and his basic rate per hour was ₹1.90.

Answer:

Actual production during the week 1,20,000 pieces

Less Standard prod during the week of 500 hours, @ 200 pieces per hour 1,00,000 pieces

Excess production over standard 20,000 pieces

𝐼𝑛𝑐𝑒𝑛𝑡𝑖𝑣𝑒 % =

1

2×

20,000

1,00,000%

10%

Rate of incentive (10% 𝑜𝑓 ₹2.00) ₹0.2

(a) Total amount of bonus for the week: 500 hours × ₹0.20 = ₹100.

(b) Total Earnings of two workers A & B of the group (time taken × (Hourly Rrate + Bonus rate))

𝑓𝑜𝑟 𝐴 = 44 × (2.2 + 0.2) = 105.60 𝑎𝑛𝑑 𝑓𝑜𝑟 𝐵 = 𝑓𝑜𝑟 𝐵 = 48 × (1.9 + 0.2) = 100.80

Question 2: Both direct and indirect labours of a department in a factory are entitled to production

bonus in accordance with a Group Incentive Scheme, the outlines of which are as follows:

1. For any production in excess of the standard rate fixed at 12,500 tonnes per month (of 25 days) a

general incentive of ₹10 per tone is paid in aggregate. The total amount payable to each separate

group is determined on the basis of an assumed percentage of such excess production being

contributed by it, namely @ 70% by direct labour, @ 10% by inspection staff, @ 12% by maintenance

staff and @ 8% by supervisory staff.

2. Moreover, if the excess production is more than 20% above the standard, direct labour also get a

special bonus @ 7 per tonne for all production in excess of 120% of standard.

3. Inspection staff is penalized @ ₹20 per tonne for rejection by customer in excess of 1% of production.

4. Maintenance staff is also penalized @ ₹20 per hour of breakdown.

5. From the following particulars for a month, work out the production bonus earned by each group:

a. Actual working days : 20


b. Production : 13,000 tonnes

c. Rejection by customer : 200 tonnes

d. Machine breakdown : 50 hours

{CMA inter D11, 10 marks (modified)}

Answer:

Number of working days during the month 20

Standard production for 20 days 12,500 ton× 𝟐𝟎 𝐝𝐚𝐲𝐬

𝟐𝟓 𝐝𝐚𝐲𝐬 10,000 tonnes

Actual production during month 13,000 tonnes

Excess production during month 13,000 – 10,000 3,000 tonnes

Excess production above 20% of standard 3,000 – 20%×10,000 1,000 tonnes

Statement showing Bonus earned by each category of staff

Category General Incentive Special Incentive Penalty Bonus Earned

% Tonnes ₹ Tonnes ₹ ₹ ₹

Direct labour 70 2,100 21,000 1,000 7,000 - 28,000

Inspection staff 10 300 3,000 - - *1,400 1,600

Maintenance staff 12 360 3,600 - - **1,000 2,600

Supervisory staff 8 240 2,400 - - - 2,400

Total 100 3,000 30,000 1,400 7,000 2,400 34,600

* Penalty for rejection: 90 tonnes (i.e. 200 tonnes – 130 tonnes) @ ₹20 per tone

** Penalty for machine breakdown for 50 hours @ ₹20 per hour.

ADVANCED PROBLEMS

Question 1: A job can be executed either through workman A or B. A takes 32 hours to complete

the job while B finishes it in 30 hours. The standard time to finish the job is 40 hours.

The hourly wage rate is same for both the workers. In addition workman A is entitled to receive bonus

according to Halsey plan (50%) sharing while B is paid bonus as per Rowan plan. The works overheads

are absorbed on the job at ₹7.50 per labour hour worked. The factory cost of the job comes to ₹2,600

irrespective of the workman engaged.

Find out the hourly wage rate and cost of raw materials input. Also show cost against each element of

cost included in factory cost.


Answer:

WN1: Time saved and wages

Workmen A B

Method Halsey Rowan

Standard time (hours) 40 40

Cost Accounting 58

Less Actual time taken (hours) 32 30

Time saved (hours) 08 10

Method Halsey Rowan

Formula [TT+50

100×TS]×HR [TT+

𝑇𝑇

𝑆𝑇×TS]×HR

Wages payable [HR = X] [32+50

100×8]X [30+

30

40×10]X

Wage Payable 36X 37.5X

Statement of factory cost of the job

Workmen A B

Material cost [Y] Y Y

Wages (WN1) 36X 37.5X

Works overhead [TT×₹7.50] 240 225

Factory cost 2,600 2,600

The above relations can be written as follows:

1 36X + Y + 240 = 2,600

2 37.5X+ Y + 225 = 2,600

1-2 1.5X+0+15 = 0

Hour rate [X] = ₹10

Material Cost [Y] = ₹2,000

Question 2: The existing Incentive system of Alpha Limited is as under:

Normal working week 5 days of 8 hours each +

3 late shifts of 3 hours each

Rate of Payment Day Work: ₹160 per hour and

Late shift: ₹225 per hour

Average output per operator for 49 hours week

i.e. including 3 late shifts

120 articles

In order to increase output and eliminate overtime, it was decided to switch on to a system of payment

by results. The following Information is obtained:

Time-rate (as usual) ₹160 per hour

Basic time allowed for 15 articles 5 hours

Piece-work rate Add 20% to basic piece-rate

Premium Bonus Add 50% to time


Required: Prepare a Statement showing hours worked, weekly earnings, number of articles produced

and labour cost per article for one operator under the following systems:

1. Existing time-rate,

2. Straight piece-work,

3. Rowan system and

4. Halsey premium system

Assume that 135 articles are produced in a 40-hour week under straight piece work, Rowan Premium

system, and Halsey premium system above and worker earns half the time saved under Halsey

premium system.

{CA inter 8 marks}

Answer:

Table showing Labour Cost per Article

Method of Payment Hours

worked

Articles

produced Workings

Weekly

earnings

Cost1

Per hour

Existing time rate 49 120 40 hours×₹160 +

9 hours×₹225 ₹8,425.00 ₹70.21

Straight piece rate system 40 135 135×₹642 ₹8,640.00 ₹64

Rowan Premium System3 40 135 ₹9,007.41 ₹66.72

Halsey Premium System4 40 135 ₹8,600.00 ₹63.70

Note: 𝑇𝑖𝑚𝑒 𝐴𝑙𝑙𝑜𝑤𝑒𝑑 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑖𝑒𝑐𝑒𝑠 × 𝐵𝑎𝑠𝑖𝑐 𝑡𝑖𝑚𝑒 + 50% = 135 ×5 ℎ𝑜𝑢𝑟𝑠

15 𝑎𝑟𝑡𝑖𝑐𝑙𝑒𝑠× [1.5] = 67.5

Question 3: ZED Limited is working by employing 50 skilled workers it is considered the

introduction of incentive scheme-either Halsey scheme (with 50% bonus) or Rowan scheme of wage

payment for increasing the labour productivity to cope up the increasing demand for the product

by 40%. It is believed that proposed incentive scheme could bring about an average 20% increase

over the present earnings of the workers; it could act as sufficient incentive for them to produce

more. Because of assurance, the increase in productivity has been observed as revealed by the

figures for the month of April, 2004.

Hourly rate of wages (guaranteed) ₹30

Average time for producing one unit by one worker at the previous performance 1.975 hours

Number of working days in the month 24

Number of working hours per day of each worker 8

Actual production during the month 6,120 units

1 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟 =

𝑊𝑒𝑒𝑘𝑙𝑦 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠

𝐻𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑

2 𝑃𝑖𝑒𝑐𝑒 𝑟𝑎𝑡𝑒 = 𝐻𝑜𝑢𝑟𝑙𝑦 𝑟𝑎𝑡𝑒

𝑃𝑖𝑒𝑐𝑒𝑠 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟× [1 + 20%] =

160

3× [1.2] = ₹64

3 𝑅𝑜𝑤𝑎𝑛 = 𝑇𝑇 × 𝐻𝑅 +𝑇𝑇

𝑇𝐴× 𝑇𝑆 × 𝐻𝑅 = 40 × 160 +

40

67.5× 27.5 × 160 ₹9,007

4 𝐻𝑎𝑙𝑠𝑒𝑦 = 𝑇𝑇 × 𝐻𝑅 +1

2× 𝑇𝑆 × 𝐻𝑅 = 40 × 160 +

1

2× 27.5 × 160 = ₹8,006

Cost Accounting 60

Required:

1. Calculate the effective rate of earnings under the Halsey scheme and the Rowan scheme

2. Calculate the savings to the ZED Limited in terms of direct labour cost per piece and

3. Advise ZED Limited about the selection of the scheme to fulfil their assurance.


Answer:

Existing:

Hike expected 20% of existing = ₹2,88,000×20% = ₹57,600

Revised wages payable = ₹2,88,000 + ₹57,600 = ₹3,45,000

Time Allowed [TA] 𝑈𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 × 𝑇𝑖𝑚𝑒 𝑝. 𝑢. = 6,120 𝑢𝑛𝑖𝑡𝑠 × 1.975 ℎ𝑟𝑠 12,087 hours

Time Taken [TT] [24 𝑑𝑎𝑦𝑠 × 8 ℎ𝑟𝑠 × 50 𝑝𝑒𝑟𝑠𝑜𝑛𝑠] 9,600 hours

Time Saved [TS] [𝑇𝐴 − 𝑇𝑇] 2,487 hours

Plan Formula Workings Total-

Earnings

Hike

%

₹ p.u.1

Existing 𝐻𝑅 × 𝑇𝐴 𝑝. 𝑢. 30 × 1.9752 ₹2,88,000 - 59.25

Halsey 𝑇𝑇 × 𝐻𝑅 +1

2× 𝑇𝑆 × 𝐻𝑅 9,600 × 30 +

1

2× 2,487 × 30 ₹3,25,305

12.95% 53.15

Rowan 𝑇𝑇 × 𝐻𝑅 +𝑇𝑇

𝑇𝐴× 𝑇𝑆 × 𝐻𝑅 9,600 × 30 +

9,600

12,087× 2,487 × 30 ₹3,47,258

20.58% 56.75

Advise to ZED Ltd: Rowan fulfils the promise of 20% increase over the present earnings of ₹2,88,000

by paying 20.58% in the form of bonus. Hence Rowan Plan may be adopted.

Question 5: A Company is undecided as to what kind of wage scheme should be introduced. The

following particulars have been compiled in respect of three systems, which are under

consideration of the management.

Workers A B C

Actual hours worked in a week 38 40 34

Hourly rate of wages 6 5 7.2

Production in units

Product P 21 - 60

Product Q 36 - 135

Product R 46 25 -

Standard time allowed per unit of each product is:

1 𝑊𝑎𝑔𝑒𝑠 𝑝. 𝑢. =

𝑇𝑜𝑡𝑎𝑙−𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠

𝑈𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑

2 Wages paid to workers: 8 hours×24 days×₹30 per hour×50 persons


P Q R

Minutes 12 18 30

For the purpose of piece rate, each minute is valued at ₹0.10

You are required to calculate the wages of each worker under:

1. Guaranteed hourly rates basis

2. Piece work earnings basis, but guaranteed at 75% of basic pay (guaranteed hourly rate) if his

earnings are less than 50% of basic pay.

3. Premium bonus basis where the worker receives bonus based on Rowan scheme.


Answer:

(1) Computation of wages of each worker under guaranteed hourly rate basis

Workers Actual hours Hourly rate Wages

(a) (b) (c) (d) = (b) × (c)

A 38 6.00 228.00

B 40 5.00 200.00

C 34 7.20 244.80

(2) Computation of wages of each worker under piece work earnings basis

Workers A B C

Product PR Units Total Units Total Units Total Total

P 1.2 21 25.2 60 72 127.2

Q 1.8 36 64.8 135 243 307.8

R 3.0 46 138 25 75 138

Total 228 75 315 573

Since each worker has been guaranteed at 75% of basic pay, if his earnings are less than 50% of basic

pay, therefore, workers A and C will be paid the wages as computed viz., ₹228 and ₹315 respectively.

The computed wage of worker B is ₹75 which is less than 50% of basic pay viz., ₹100 therefore he would

be paid 75% × ₹200 or ₹150.

Working Notes:

(i) Piece rate / per unit

Product Standard time per unit

in minutes

Piece rate

each minute

Piece rate

per unit

(a) (b) (c) (d) = (b) × c

P 12 0.10 1.20

Q 18 0.10 1.80

R 30 0.10 3.00

Cost Accounting 62

(ii) Time allowed to each worker

A B C

Units Time Total Units Time Total Units Time Total

P 21 12 m 252 m 60 12 m 720 m

Q 36 18 m 648 m 135 18 m 2,430 m

R 46 30 m 1,380 m 25 30 m 750 m

Total 2,280 m 750 m 3,150 m

Total 38 hrs 12.5 hrs 52.5 hrs

3 Computation of wages of each worker under Rowan plan basis

TA

WN (ii)

TT

hours

TS

hours

₹ p.h.

Earnings Bonus Total Earnings

A 38.00 38.00 - 6.00 228.00 - 228.00

B 12.50 40.00 - 5.00 200.00 - 200.00

C 52.50 34.00 18.50 7.20 244.80 86.26 331.06

Question 6: A worker, whose day-work wages is ₹2.50 an hour, received production bonus under the

Rowan Scheme. He carried out the following work in a 48-hour week:

Job 1 – 1,500 items at 4 hours per 1,000



Job 4 – 1,500 items for which no standard time was fixed and it was arranged that the worker would

be paid a bonus of 25 percent. Actual time on the job was 4 hour.

Job 5 – 2,000 items at 8 hours per 1,000; each item was estimated to be half-finished.

Job 2 was carried out on a machine running at 90 percent efficiency and extra allowance of 1/9 th of

actual time was given to compensate the worker.

4 hours were lost due to power-cut. Calculate the earnings of the worker, clearly stating your

assumptions for the treatment given by you for the hours lost due to power-cut.

{CMA inter D01}

Answer: Standard Time for different Jobs-

(In Hours)

Job 1 1,500 items at 4 hours per 1,000 6.00 6.00

Job 2 1,800 items at 3 hours per 1,000 5.40

Add: Extra allowance 1/9th 0.60 6.00

Job 3 9,000 items at 6 hours per 1,000 54.00

Job 4 1,500 items actual time at 4 hour + bonus of 25% 5.00

Job 5 1,500 items (half of 2000 items) at 8 hours per 1,000 8.00


79.00

Less: Time taken Gross 48

Less: loss due to power cut 4 44.00

Time Saved 35.00

Computation of earning under Rowan Scheme

= 𝐻𝑅 × (𝑇𝑇 +𝑇𝑆

𝑇𝐴× 𝑇𝑇) = ₹2.50 × (48 ℎ𝑜𝑢𝑟𝑠 +


79 ℎ𝑜𝑢𝑟𝑠× 44 ℎ𝑜𝑢𝑟𝑠) = ₹168.73

Assumption: Worker is entitled to get bonus on lost time due to power cut.

Cost Accounting 64

2.3 DIRECT EXPENSES [CAS 10]

Direct Expenses: Direct expenses are expenses relating to manufacture of a product or rendering a

service, which can be identified or linked with the cost object other than direct material cost and direct

employee cost.

Examples of Direct Expenses are

royalties charged on production,

job charges,

hire charges for use of specific equipment for a specific job,

cost of special designs or

drawings for a job,

software services specifically required for a job,

travelling expenses for a specific job.

Condition for identification of Direct Expenses

1. traceability to cost object

2. Meet the test of materiality, (else it can be treated as part of overheads)

{CMA D13, 3 marks}

Principles of measurement

1. Identification: traceability in an economically feasible manner.

2. Direct expenses incurred for the use of bought out resources shall be determined at invoice or

agreed price including duties and taxes, and other expenditure directly attributable thereto net of

trade discounts, rebates, taxes and duties refundable or to be credited.

3. Direct expenses other than those referred to in above shall be determined on the basis of amount

incurred in connection therewith.

Examples: in case of dies and tools produced internally, the cost of such dies and tools will include

direct material cost, direct employee cost, direct expenses, factory overheads including share of

administrative overheads relating to production comprising factory management and

administration.

In the case of research and development cost, the amount traceable to the cost object for

development and improvement of the process for the existing product shall be included in Direct

Expenses.

4. Direct Expenses paid or incurred in lump-sum or which are in the nature of ‘one – time’ payment,

shall be amortised on the basis of the estimated output or benefit to be derived from such direct

expenses.

Examples: Royalty or Technical know-how fees, or drawing designing fees, are paid for which the

benefit is ensued in the future period. In such case, the production / service volumes shall be

estimated for the effective period and based on volume achieved during the Cost Accounting

period, the charge for amortisation be determined.

5. If an item of Direct Expenses does not meet the test of materiality, it can be treated as part of

overheads.

Direct Expenses [CAS 10] 65

6. Finance costs incurred in connection with the self-generated or procured resources shall not form

part of Direct Expenses.

7. Direct Expenses shall not include imputed costs. In case of goods produced for captive

consumption, treatment of imputed cost shall be in accordance with Cost

8. Where direct expenses are accounted at standard cost, variances due to normal reasons shall be

treated as part of the Direct Expenses. Variances due to abnormal reasons shall not form part of the

Direct Expenses.

9. Any Subsidy / Grant / Incentive or any such payment received/receivable with respect to any Direct

Expenses shall be reduced for ascertainment of the cost of the cost object to which such amounts

are related.

10. Any abnormal portion of the direct expenses where it is material and quantifiable shall not form

part of the Direct Expenses.

11. Penalties, damages paid to statutory authorities or other third parties shall not form part of the

Direct Expenses.

12. Credits / recoveries relating to the Direct Expenses, material and quantifiable, shall be deducted to

arrive at the net Direct Expenses.

13. Any change in the cost accounting principles applied for the measurement of the Direct Expenses

should be made only if, it is required by law or for compliance with the requirements of a cost

accounting standard, or a change would result in a more appropriate preparation or presentation

of cost statements of an organisation.

Disclosures

1. The cost statements shall disclose the following:

i. The basis of distribution of Direct Expenses to the cost objects/ cost units.

ii. Quantity and rates of items of Direct Expenses, as applicable.

iii. Where Direct Expenses are accounted at standard cost, the price and usage variances.

iv. Direct expenses representing procurement of resources and expenses incurred in connection

with resources generated.

v. Direct Expenses paid/ payable to related parties.

vi. Direct Expenses incurred in foreign exchange.

vii. Any Subsidy/Grant/Incentive and any such payment reduced from Direct Expenses.

viii. Credits/recoveries relating to the Direct Expenses.

ix. Any abnormal portion of the Direct Expenses.

x. Penalties and damages excluded from the Direct Expenses

2. Disclosures shall be made only where material, significant and quantifiable.

3. Disclosures shall be made in the body of the Cost Statement or as a foot note or as a separate

schedule.

4. Any change in the cost accounting principles and methods applied for the measurement and

assignment of the Direct Expenses during the period covered by the cost statement which has a

material effect on the Direct Expenses. Where the effect of such change is not ascertainable wholly

or partly the fact shall be indicated.

Cost Accounting 66

Practical Problems

Question 1: Calculate the direct expenses as per CAS-10 from the following information: Royalty paid

on sales: ₹125000; Royalty paid on production: ₹1,00,000; Design charges ₹26,000; Machine shop

expenses ₹45000; Software development charges related to production: ₹55,000;


Answer:

Computation of Direct Expenses

Particulars ₹

Royalty paid on Sales 1,25,000

Add Royalty paid on units produced 1,00,000

Add Design Charges 26,000

Add Software development charges related to production 55,000

Add Machine shop expenses 45,000

Direct Expenses 3,51,000

Question 2: Compute total direct expenses of Product X from the following information, giving

appropriate explanatory notes:

Particulars ₹

Production (Units) 20,000

Sales (Units) 16,000

Labour hours 10,000

Labour rate per hour (₹) 8

Royalty per unit of sales (₹) 2

Royalty per unit of production (₹) 1

Design Charges (₹) 12,000

Interest on loan for purchase of machine (₹) 5,000

Hire charges of equipment used for manufacturing product Y (₹) 6,000

Penalty for violating Patent (₹) 4,000


Answer:

Computation of direct expenses As per CAS-10

Particulars ₹

Royalty Paid on sale (2 × 16000) 32,000

Royalty Paid on production (1 × 20000) 20,000

Design Charges 12,000

64,000

Direct Expenses [CAS 10] 67

Note:

1. As per CAS – 10, finance cost is not a direct expense.

2. Penalty for violation is excluded from direct expense.

3. Hire charges of equipment used for manufacturing of product Y will not be the part of direct

expenses as it is not used for manufacturing of product X.

Question 3: Products X, Y and Z are manufactured by XYZ Company. Special permit charges of

₹12,00,000 are paid for X and renewable every 4 years. How will the permit charges be treated in Cost

Accounts?


Answer: XYZ Company is manufacturing three products X, Y and Z. Permit charges of ₹12,00,000 are

paid for product X hence will be charges from product X only. This will be added to the cost of the

product X as per CAS-10. Permit charges will be treated as direct cost. Renewal charges will also be

treated as direct cost of X.

Cost Accounting 68

2.4 OVERHEADS [CAS 3]

Overhead: Overheads comprise costs of indirect materials, indirect employees and indirect expenses

which are not directly identifiable or allocable to a cost object in an economically feasible manner.

Overhead accounting – steps

1. Collection, classification and codification of overheads

2. Allocation, Apportionment and Reapportionment of overheads

Primary Distribution: Allocation and apportionment of OH to production departments

a) Allocation: allotment of an entire item of cost to particular cost center or cost unit.

b) Apportionment: allotment of proportions of item of cost to cost centres or departments.

Secondary Distribution: (reapportionment) to service department

a) Direct method

b) Step or ladder method

c) Reciprocal method

(i) Repeated distribution

(ii) Trial and error

(iii) Simultaneous equation

3. Absorption of overheads

a) 𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝐻 𝑟𝑎𝑡𝑒 =𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝐻

𝐵𝑎𝑠𝑒

b) 𝑃𝑟𝑒𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑒𝑑 𝑂𝐻 𝑟𝑎𝑡𝑒 =𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝐻

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐵𝑎𝑠𝑒

c) 𝐵𝑙𝑎𝑛𝑘𝑒𝑡 (𝑆𝑖𝑛𝑔𝑙𝑒)𝑂𝐻 𝑟𝑎𝑡𝑒 =𝑂𝐻 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑓𝑎𝑐𝑡𝑜𝑟𝑦

𝑇𝑜𝑡𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 𝑏𝑎𝑠𝑒

d) 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑒 𝑂𝐻 𝑟𝑎𝑡𝑒𝑠 =𝑂𝐻 𝑓𝑜𝑟 𝑒𝑎𝑐ℎ 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 𝑜𝑟 𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡

𝐶𝑜𝑟𝑟𝑒𝑠𝑝𝑜𝑛𝑑𝑖𝑛𝑔 𝐵𝑎𝑠𝑒

Bases

Method Formula Suitable

1 Production unit 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑

𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑢𝑛𝑖𝑡𝑠

One product only produced

2 Direct material cost 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑

𝐷𝑖𝑟𝑒𝑐𝑡 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐶𝑜𝑠𝑡%

Material price is predominant

3 Direct wages 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑

𝐷𝑖𝑟𝑒𝑐𝑡 𝑊𝑎𝑔𝑒𝑠 𝐶𝑜𝑠𝑡%

Labour hour rate is predominant

4 Prime cost 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑

𝑃𝑟𝑖𝑚𝑒 𝐶𝑜𝑠𝑡%

Material and labour are predominant

5 Direct labour hour rate 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑

𝐿𝑎𝑏𝑜𝑢𝑟 𝐻𝑜𝑢𝑟%

Labour is predominant

6 Machine hour rate 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑

𝑀𝑎𝑐ℎ𝑖𝑛𝑒 𝐻𝑜𝑢𝑟%

Machine hour is predominant

4. Under or over absorption of overheads: Calculation | Accounting

Recovery of under or over absorption of overheads

a) Transfer to Costing P/L A/c

b) Carry forward to next period (not recommended model)

c) Use of supplementary rates and recover (Cost of Sales | FG | WIP)

Overheads [CAS 3] 69

5. Machine hour rate

Overheads on the basis of function

Factory or Manufacturing Overheads

Office and Administration Overheads

Selling and Distribution Overheads

Research and Development Overheads

Overheads based on behaviour

Fixed Overheads – Expenses that are not affected by any variation in the volume of activity.

Variable – Expenses that change in proportion to the change in the volume of activity

Semi-variable: (1) Fixed + Variable and (2) Step cost

o Graphical method

o Simultaneous equations method

o High or low method

o Least square method

Overhead Bases of Apportionment

1 Rent and maintenance the building Floor area

2 Insurance & depreciation of PPE Cost of PPE

3 Light Number of light points / Floor area

4 Power Horse power of machines

5 Repair Direct labour hours; Machine hours;

Direct labour wages; Plant value.

6 Executive salaries

Other fringe benefits to workers

Number of workers.

7 Indirect labour &

Works manager’s remuneration

Direct labour cost.

8 Delivery Expenses Volume or Distance or Weight

9 Purchase department Expenses No. of Purchase order / Value of Purchases

10 Advertisement / sales commission Actual sales

Question: What do you mean by the term under / over absorption of production overhead? How is it

treated in cost accounts?

{CA inter N98 & M04 | CMA inter J05 & D06 4 marks}

Cost Accounting 70

PRACTICAL PROBLEMS

Direct Redistribution

Question 1: In a light engineering factory, the following particulars have been collected for the three

month period ended on 31st March, 2002. You are required to re-apportion the service department’s

expenses to production departments:

P1 P2 P3 S1 S2

Expenses as per Primary Distribution 8,850 7,165 6,285 4,515 6,010

Apportion the expenses of service department S2 in proportion of 3: 3: 4 and those of service

department S1 in the ratio of 3: 1: 1 to departments P1, P2, and P3 respectively.

Answer: Production OH Distribution Summary for the quarter ending 31st March, 2002

P1 P2 P3 S1 S2

Expenses as per primary distribution 8,850 7,165 6,285 4,515 6,010

Distribution of S2 Expenses (3:3:4) 1,803 1,803 2,404 -- (6,010)

Distribution of S1 Expenses (3:1:1) 2,709 903 903 (4,515) --

Total 13,362 9,871 9,592 --- ---

Step or Ladder Redistribution

Question 2: Excellent Manufacturing Works have two production departments: Mixing and Curing

and three service departments: Time Office, Stores and Maintenance. The following details are available

from the Departmental Distribution Summary for the month of July 2001:

Particulars ₹ ₹

Production Departments Mining 1,44,000

Curing 96,000 2,40,000

Service Departments: Time Office 48,000

Stores 60,000

Maintenance 36,000 1,44,000

The following relevant data are also available:

Production Dept. Service Dept.

Mining Curing Time Office Stores Maintenance

No. of employees 20 15 10 8 5

No. of Stores Requisition processed 120 100 30

Machine hours 3,600 2,400


The company consistently follows the method of Secondary Distribution on non-reciprocal basis. Show

the apportionment of the cost of Service Departments to Production departments stating the basis of

computation in the form of a note at the end of the exercise.

{CMA inter D01}

Answer: Apportionment of Service department costs to production department

Dept. BOA PD – Total

Time Office Number of employees 48,000 (48,000)

Stores Number of stores requisition 60,000 8,000 (68,000)

Maintenance Machine Hours 36,000 5,000 8,160 (49,160)

Mining 1,44,000 20,000 32,640 29,496 2,26,136

Curing 96,000 15,000 27,200 19,664 1,57,864

Total 3,84,000 3,84,000

Question 3: Deccan Manufacturing Ltd. has 3 departments which are regarded as production

departments. Service departments’ costs are distributed to these production departments using the

“Step Ladder Method” of distribution. Estimates of factory overhead costs to be incurred by each

department in the forthcoming year are as follows. Data required for distribution is also shown against

each department:

Department Factory

Overhead

Direct

Labour Hours

Number of

Employees

Area

in sq. m.

Production: X 1,93,000 4,000 100 3,000

Production: Y 64,000 3,000 125 1,500

Production: Z 83,000 4,000 85 1,500

Service: P 45,000 1,000 10 500

Service: Q 75,000 5,000 50 1,500

Service: R 1,05,000 6,000 40 1,000

Service: S 30,000 3,000 50 1,000

The OH of the 4 service departments are distributed in order of P, Q, R and S respectively on the

following basis:

Department Basis

P Number of Employees

Q Direct Labour Hours

R Area in square meters

S Direct Labour Hours

Cost Accounting 72

You are required to:

1. prepare a schedule showing the distribution of overhead costs of the four service departments to

the three production departments; and

2. Calculate the overhead recovery rate per direct labour hour for each of the three production

departments.

Answer:

(a) DECCAN MANUFACTURING LIMITED - Distribution of OH among Departments

Service Production

Distribution P Q R S X Y Z

Overhead cost 45,000 75,000 1,05,000 30,000 1,93,000 64,000 83,000

Costs of Dept.`P` (45,000) 5,000 4,000 5,000 10,000 12,500 8,500

Costs of Dept.`Q` _ (80,000) 24,000 12,000 16,000 12,000 16,000

Costs of Dept.`R` _ _ (1,33,000) 19,000 57,000 28,500 28,500

Costs of Dept.`S` _ _ _ (66,000) 24,000 18,000 24,000

Total (A) 3,00,000 1,35,000 1,60,000

Direct Labour hrs (B) 4,000 3,000 4,000

Overhead recovery rate per hour: [(A)/(B)] ₹75/- ₹45/- ₹40/-

Reciprocal Redistribution [Simultaneous Equation, Repeated and Trail and Error Methods]

Question 4: A factory has three production departments A, B, and C and also two service departments

‘X’ and ‘Y’. The primary distribution of the estimated overheads in the factory has just been completed.

These details and the quantum of service rendered by the service departments, to the other departments

are given below:

Departments

A B C X Y

Primary distribution (₹) 2,40,000 2,10,000 2,50,000 1,40,000 96,000

Service rendered by

Dept. ‘X’ 30% 20% 35% - 15%

Dept. ‘Y’ 25% 40% 25% 10% -

Prepare a statement showing the distribution of service dept. overheads to the production departments,

by the simultaneous equation method.

{CMA inter D04}

Answer: (a) Simultaneous Equation Method

Let, X and Y be the total overheads of the service departments ‘X’ and ‘Y’ respectively.

𝑋 = 1,40,000 + 0.1𝑌

𝑌 = 96,000 + 0.15𝑋

𝑋 = 1,40,000 + 0.1(96,000 + 0.15𝑋)


𝑋 = 1,40,000 + 9,600 + 0.015𝑋

𝑋 = 1,51,878

𝑆𝑢𝑏𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑛𝑔 𝑋 = 1,51,878; 𝑌 = 96,000 + 0.15(1,51,878)

𝑌 = 1,18,782

(a) Distribution of overheads of Service Deparment

Production Dept. A B C Total

₹ ₹ ₹ ₹

2,40,000 2,10,000 2,50,000 7,00,000

1,40,000 Dept. X (85% of ₹1,51,878) 45,563 30,376 53,157 1,29,096

96,000 Dept. Y (90% of ₹1,18,782) 29,696 47,513 29,695 1,06,904

Total 3,15,259 2,87,889 3,32,852 9,36,000

(b) Repeated Distribution Method

P1 P2 P3 S1 S2

Total – PD 2,40,000 2,10,000 2,50,000 1,40,000 96,000

Dept X: 30%:20%:35%:0:15% 42,000 28,000 49,000 (1,40,000) 21,000

Dept Y: 25%:40%:25%:10%:0 29,250 46,800 29,250 11,700 (1,17,000)

Dept X: 30%:20%:35%:0:15% 3,510 2,340 4,095 (11,700) 1,755

Dept Y: 25%:40%:25%:10%:0 439 702 439 176 (1,755)

Dept X: 30%:20%:35%:0:15% 53 35 62 (176) 26

Dept Y: 25%:40%:25%:10%:0 8 10 8 3 (26)

Total 3,15,260 2,87,888 3,32,853

(c) Trial and Error Method

P1 P2 P3 S1 S2

Total – PD 1,40,000 96,000

Dept X to Y: 15% (1,40,000) 21,000

Dept Y to X: 10% 11,700 (1,17,000)

Dept X to Y: 15% (11,700) 1,755

Dept Y to X: 10% 176 (1,755)

Dept X to Y: 15% (176) 26

Dept Y to X: 10% 3 (26)

Dept X to Y: 15% (3) 0

Total 1,51,878 1,18,781

Dept X: 30%:20%:35% 45,563 30,376 53,157 (1,51,878)

Dept Y: 25%:40%:25% 29,696 47,513 29,695 (1,18,781)

Total 3,15,259 2,87,889 3,32,852

Cost Accounting 74

Question 5: Modern manufacturers Ltd., has three production departments P1, P2 and P3 and two

Service: S1 and S2 the details pertaining to which are as under:

Particulars P1 P2 P3 S1 S2

Direct Wages (₹) 3,000 2,000 3,000 1,500 195

Working Hours 3,070 4,475 2,419 – –

Value of Machines (₹) 60,000 80,000 1,00,000 5,000 5,000

HP of Machines 60 30 50 10 –

Light Points 10 15 20 10 5

Floor space (Sq.Ft.) 2,000 2,500 3,000 2,000 500

The following figures extracted from the Accounting records are relevant:

Particulars ₹

Rent and Rates 5,000

General Lighting 600

Indirect Wages 1,939

Power 1,500

Depreciation on Machines 10,000

Sundries 9,695

The expenses of the service departments are allocated as under:

P1 P2 P3 S1 S2

S1 20% 30% 40% – 10%

S2 40% 20% 30% 10% –

Find out the total cost of product X which is processed for manufacture in Departments P1, P2 and P3

for 4, 5 and 3 hours respectively, given that its Direct Material cost is₹50, Direct Labour cost is ₹30.

Answer:

Statement Showing Distribution of Overheads of Modern Manufacturers Ltd

Particulars Basis of Allocation Prod. Depts. Service Depts.

Total (₹) P1 P2 P3 S1 S2

Direct Wages Actual 1,695 — — — 1,500 195

Rent & Rates Area 5,000 1,000 1,250 1,500 1,000 250

General Lighting Light Points 600 100 150 200 100 50

Indirect Wages Direct Wages 1,939 600 400 600 300 39

Power H.P. 1,500 600 300 500 100 —

Dep of Machines Value of Machines 10,000 2,400 3,200 4,000 200 200

Sundries Direct Wages 9,695 3,000 2,000 3,000 1,500 195

30,429 7,700 7,300 9,800 4,700 929


Redistribution of Service Departments Expenses over Production Departments

Particulars Ratio Total P1 P2 P3 S1 S2

Total Overheads 30,429 7,700 7,300 9,800 4,700 929

Dept. S1 Overheads 2:3:4:-:1 4,700 940 1,410 1,880 -4,700 470

Dept. S2 Overheads 4:2:3:1:- 1,399 559.60 279.8 419.7 139.9 –1.399

Dept. S1 Overheads 2:3:4:-:1 139.90 27.98 41.97 55.96 –139.9 13.99

Dept. S2 Overheads 4:2:3:1:- 13.99 5.60 2.80 4.20 1.40 -13.99

Dept. S1 Overheads 2:3:4:-:1 1.40 0.28 0.42 0.56 -1.40 0.14

Dept. S2 Overheads 4:2:3:1:- 0.14 0.06 0.03 0.05 - -0.14

Total 9,233.52 9,035.02 12,160.47

Working hours 3,070 4,475 2,419

Overhead rate per hour 3.00 2.02 5.03

Cost of the Product 'X' ₹

Direct Material Cost 50

Direct Labour Cost 30

Overhead Cost ₹ Hrs ₹

P1: 3.00 4 12.00

P2: 2.02 5 10.10

P3: 5.03 3 15.15 37.25

Total Cost 117.25

Question 6: The following cost information for a period is available for a small engineering unit:

(a) Allocated expenditure

Allocated Production department Service departments

Total (₹) Machine shop Assembly General plant

Services

Stores & Misc.

Indirect Wages 29,300 8,000 6,000 4,000 11,300

Stores Consumed 6,700 2,200 1,700 1,100 1,700

Supervisory Salary 14,000 - - 14,000 -

Other Salaries 10,000 - - 10,000 -

(b) Expenditure to be apportioned

Power and Fuel 15,000

Rent 15,000

Insurance 3,000

Depreciation 1,00,000

Cost Accounting 76

(c) Additional information available:

Floor Area

(Sq. ft.)

H.P. hrs No. of

Employees

Investment

(₹)

Machine Shop 2,000 3,500 30 6,40,000

Assembly 1,000 500 15 2,00,000

General Plant 500 - 5 10,000

Stores and Maintenance 1,500 1,000 10 1,50,000

(d) Basis of distribution of service dept. costs:

Machine

Shop

Assembly General Plant

Service

Stores &

Misc.

Stores and

Maintenance

50% 20% 30% -

General Plant Services In proportion to the number of employees.

You are required to prepare an overhead distribution statement in detail. Service department costs are

to be distributed by continued distribution. Carry through three cycles. Calculations are to be shown

to the nearest rupee.

{CMA inter D03}

Answer:

(a) Department wise primary distribution summary

Particulars Basis of

allocation

Total Production

dept.

Service

dept.

Machine

Shop

Assembly General

Plant

service

Stores

&

Misc.

Allocation of Expenditure (₹)

Indirect wages Direct 29,300 8,000 6,000 4,000 11,300

Stores consumed Direct 6,700 2,200 1,700 1,100 1,700

Supervisory

salaries

Direct 14,000 - - 14,000 -

Other salaries Direct 10,000 - - 10,000 -

Appropriation of Expenditure (₹)

Power & Fuel H.P. hrs. 15,000 10,500 1,500 - 3,000

Rent Floor Area 15,000 6,000 3,000 1,500 4,500

Insurance Investment 3,000 1,920 600 30 450

Depreciation Investment 1,00,000 64,000 20,000 1,000 15,000

Total 1,93,000 92,620 32,800 31,630 35,950


(b) Secondary distribution

Particulars Total Production dept. Service dept.

Machine

Shop

Assembly General Plant

service

Stores &

Misc.

As per primary distribution 1,93,000 92,620 32,800 31,630 35,950

Stores & Misc. (50: 20: 30) 17,975 7,190 10,785 (35,950)

1,10,595 39,990 42,415 -

Gene. Plant services (30: 15: 10) 23,135 11,568 (42,415) 7712

1,33,730 51,558 - 7,712

Stores & Misc. (50: 20: 30) 3,856 1,542 2,314 (7,712)

1,37,586 53,100 2,314 -

Gene. Plant services (30: 15: 10) 1,262 631 (2,314) 421

1,38,848 53,731 - 421

Stores & Misc. (50: 20: 30) 211 84 126 (421)

1,39,059 53,815 126 -23

Gene. Plant services (30: 15: 10) 69 34 (126) -

1,39,128 53,840 - 23

Stores & Misc. (50: 20: 30) 16 7 - (23)

1,93,000 1,39,144 53,847 - -

Question 7: Selfhelp Ltd. has gensets and produces its own power. Data for power costs are as follows

Production depts. Service depts.

Horse power A B X Y

Needed capacity production in hours 10,000 20,000 12,000 8,000

Used during the month of May in hours 8,000 13,000 7,000 6,000

During the month of May costs for generating power amounted to ₹9,300 of this

₹2,500 was considered to be fixed cost. Service Dept. X renders service to A, B and Y in the ratio 13:6:1,

while Y renders service to A and B in the ratio 31:3.Giventhatthe direct labour hours in Dept A and B

are 1650 hours and 2175 hours respectively, find the Power Cost per labour hour in each of these two

Depts.

Answer:

Statement of overhead Distribution of a Selfhelp Ltd.

Particulars Basis Total Prod Depts. Service Depts.

A B X Y

Fixed Cost H.P. Hrs needed(5:10:6:4) 2,500 500 1,000 600 400

Variable Cost H.P. Hours used (8:13:7:6) 6,800 1,600 2,600 1,400 1,200

Cost Accounting 78

Expenses as per primary distribution 9,300 2,100 3,600 2,000 1,600

OH of Dept ‘X’ Apportion to A, B & Y [13:6:1] 1,300 600 –2,000 100

OH of Dept ‘Y’ Apportion to A & B [31:3] 1,550 150 –1,700

Expenses as per secondary distribution 4,950 4,350

Labour cost 1,630 2,175

Power cost per labour hour 3.00 2.00

OH Recovery Rate and Absorption

Question 8: ABC Ltd. manufactures four variables of a product namely A, B, C & D. If the company

manufactures only one variety, the monthly production can be either 5,000 of A or 10,000 of B or 15,000

of C or 30,000 of D.

A B C D

Production in month 675 1,800 4,050 9,450

Direct materials (₹) 3,000 6,000 9,000 18,000

Direct labour (₹) 1,500 3,000 4,500 9,000

Direct labour hours 50 100 150 300

Machine hours 30 15 10 5

Required: prepare a statement showing the allocation of factory overheads (which amounted to

₹108,000) using the basis of –

1. Direct material cost

2. Direct labour cost

3. Prime cost

4. Units produced

5. Direct labour hours

6. Machine hours

Out of these four bases of allocation, which you prefer and why?


Answer: Statement showing the allocation of overheads

Basis Rate [WN] A (₹) B (₹) C (₹) D (₹)

Direct materials cost 300% 9,000 18,000 27,000 54,000

Direct labour cost 600% 9,000 18,000 27,000 54,000

Prime cost 200% 9,000 18,000 27,000 54,000

Units produced [₹24, ₹12, ₹8 & ₹4] 16,200 21,600 32,400 37,800

Direct labour hours ₹180/ hr. 9,000 18,000 27,000 54,000

Machine hours ₹1,800/ hr. 54,000 27,000 18,000 9,000


WN1: 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑅𝑒𝑐𝑜𝑣𝑒𝑟𝑦 𝑅𝑎𝑡𝑒 [𝑂𝐻𝑅𝑅] = 𝑇𝑜𝑡𝑎𝑙 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡

𝑆𝑢𝑖𝑡𝑎𝑏𝑙𝑒 𝐵𝑎𝑠𝑒%

Base for OHRR Formula Workings OHRR

(i) Direct material cost Total Factory Overhead Cost

Total Material Cost%

1,08,000

36,000%

300%

(ii) Direct labour cost Total Factory Overhead Cost

Total Labour Cost%

1,08,000

18,000%

600%

(iii) Prime cost Total Factory Overhead Cost

Total Labour Cost%

1,08,000

54,000%

200%

(iv) Direct labour hour Rate: Total Factory Overhead Cost

Total Labour Hour%

1,08,000

600%

₹180 p.l.hr

(v) Machine hours : Total Factory Overhead Cost

Total Machine Hour%

1,08,000

60%

₹180 p.m.hr

Units Produced A B C D

Equivalent Units 5,000A 10,000B 15,000C 30,000D

Ratio 1A 2B 3C 6D

1 Equivalent Units [Base Unit D] 6 3 2 1

2 Units 675A 1,800B 4,050C 9,450D

Total Equivalent Units [Base Unit D] 1×2 4,050 5,400 8,100 9,450 27,000

𝐼𝑛 𝑡𝑒𝑟𝑚 𝑜𝑓 𝐷, 𝑡ℎ𝑒 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑟𝑎𝑡𝑒 𝑤𝑖𝑙𝑙 𝑏𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡

𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑣𝑎𝑙𝑎𝑛𝑡 𝑈𝑛𝑖𝑡𝑠 =

1,08,000

27,000= 4

Thus rate for A will be ₹4 × 6 ₹24

For B will be ₹4 × 3 ₹12

For C will be ₹4 × 2 ₹8

For D will be ₹4 × 1 ₹4

Question 9: XYZ manufactures household pumps which pass through three departments namely

Foundry (F), Machine Shop (M) and Assembling (A). The manufacturing expenses are as follows:

F M A Total

Direct Wage 10,000 50,000 10,000 70,000

Factory Overhead 5,000 90,000 10,000 105,000

The factory cost of manufacturing a type ‘C’ pump was prepared by the company as follows:

Cost Accounting 80

Direct Material 16

Direct Wages – F 2

Direct Wages – M 4

Direct Wage – A 2 8

𝐹𝑂𝐻 =𝑇𝑜𝑡𝑎𝑙 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑

𝑇𝑜𝑡𝑎𝑙 𝐷𝑖𝑟𝑒𝑐𝑡 𝑊𝑎𝑔𝑒𝑠% =

1,05,000

70,000% = 150% 𝑜𝑓 𝐷𝑊

12

Total Cost 36

It seems that there is some fallacy. Try to correct it.

Answer: The fallacy lies in the adoption of a blanket or single rate for all the departments even though

the data is given to calculate the separate overhead rates for each department. Different overhead rates

are calculated below for each department in order to correct the position.

Formula F M A

OHRR Department FOH

Department Direct Wages%

5,000

10,000% = 50%

90,000

50,000% = 180%

10,000

10,000% = 100%

The correct factory cost of ‘C’ pump is calculated after taking into consideration the different overhead

rates for each department.

FACTORY COST OF ‘C’ PUMP

Direct Material 16.00

Direct Wages F 2

M 4

A 2 8.00

Factory Overhead F [50% of Direct wages of F] 1

OHRR [wn] M [180% of Direct wages of M] 7.2

A [100% of Direct wages of A] 2 10.20

Total Cost 34.20

Machine Hour Rate

Question 1: The following annual charges are incurred in respect of a machine in a shop where manual

labour almost nil and where work is done by means of 5 machines of exactly similar type of

specification:

Particulars ₹

Rent and Rates (proportional to the floor space occupied) for the shop 4,800

Depreciation on each machine 500

Repairs and maintenance for the five machines 1000

Power consumed (as per meter) @ 5 P. per unit for the shop 3000


Electric charges for light in the shop 540

Attendants: There are two attendants for the five machines and they are each paid ₹60 p.m.

Supervision: For the 5 machines in the shop there is one supervisor whose emoluments are ₹250 p.m.

Sundry supplies such as lubricants, jute and cotton waste etc., for the shop 450

Hire-purchase installment payable for the machine (including ₹300 as interest) 1200

The machine uses 10 units of power p.h. Calculate machine hour rate for the machine for the year.

Answer: Annual working hours are calculated as under:

Power consumed has been given for the purpose of calculating working hrs.

Total amount of power consumed ₹3,000

Rate of power 0.5 per hour

Total working hours of machine (3,000

0.5) 6,000

Number of machines 5

Working hours per machine (6,000

5) 1,200 hours p.a.

Computation of MHR for the year

Particulars Workings ₹ HR

Standing Charges

Rent and Rates 1

5× 4,800

960

Electric charges 1

5× 540

108

Attendants salary 1

5× 2 × 60 × 12

288

Supervision 1

5× 3,000

600

Sundry supplies 1

5× 450

90

Total 2,046

1,200

2,046 1.70

Machine Expenses

Depreciation 500

1,200

0.42

Repairs and maintenance 200

1,200

0.17

Power consumed 10 units×0.05 0.50

Machine Hour Rate 2.79

Cost Accounting 82

Question 2: A machine shop has 8 identical Drilling Machines manned by 6 operators. The

machines cannot be worked without an operator wholly engaged on it. The original cost of all these

8 machines works out to ₹8 lacs. These particulars are furnished for a 6 month period:

Normal available hours per month 208 hours

Absenteeism (without pay) 18 hours

Leave (with pay) 20 hours

Normal idle time unavoidable 10 hours

Average rate of wages per day of 8 hours ₹20

Production Bonus estimated 15% on wages

Value of Power consumed ₹8,050

Supervision and Indirect Labour ₹3,300

Lighting and Electricity ₹1,200

These particulars are for a year:

Repairs and maintenance including consumables 3% on the value of machines.

Insurance ₹40,000.

Depreciation 10% on original cost.

Other Sundry works expenses ₹12,000

General Management expenses allocated ₹54,530

You are required to work out a comprehensive machine hour rate for the Machine Shop.


Answer: Computation of Comprehensive Machine Hour Rate of Machine Shop

Particulars ₹

Operator’s Wages (WN2) 17,100

Production Bonus (15% on wages) 2,565

Power Consumed 8,050

Supervision 3,300

Lighting and Electricity 1,200

Repairs and Maintenance 12,000

Insurance 20,000

Depreciation 40,000

Sundry Works Expenses 6,000

General Management Expenses 27,265

Total Overhead of Machine Shop 1,37,480


𝑀𝑎𝑐ℎ𝑖𝑛𝑒 𝐻𝑜𝑢𝑟 𝑅𝑎𝑡𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 𝑠ℎ𝑜𝑝

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 ℎ𝑜𝑢𝑟𝑠 𝑜𝑓 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 =

₹1,37,480

5,760 ℎ𝑜𝑢𝑟𝑠 = ₹23.87

Working Notes 1

Computation of Hours, for which 6 operators are available for 6 months.

Normal available hours p.m. per operator 208

(-) Absenteeism hours 18

Leave Hours 20

Idle Time Hours 10 48

Utilisable Hours p.m. per operator 160

Utilisable hours for 6 months and 6 operators1 160×6×6 5,760

Working note 2

Average rate of wages 20

8 hours ₹2.5 per hour

Hours p.m. for which wages are paid to a worker [208 – 18] 190 hours

Total wages paid to 6 operators for 6 months 190 hours×6×6×₹2.50 ₹17,100

Question 3: The following are information available as per records of ABC & Co., a workshop where

work is done by means of five machines of exactly similar types.

Original cost of each machine ₹1,00,000

Installation charges on each machine ₹10,000

Estimated scrap on each machine ₹15,000

Estimated working life for each machine 10 years

Estimated working weeks for the shop per annum 50 weeks

Estimated working hours for each machine per week 44

Maintenance hours per machine 200

Setting up time 5%

Insurance premium on machine 1% on original cost

Power consumption per machine 20 units per hour

Rate of power per 100 units ₹570

Estimated repairs and maintenance for the shop ₹11,400 p.a.

Overhead chargeable to machines ₹16,260 per half year

Rent and rates for the shop ₹3,600 per quarter

General lighting for the shop ₹1,800 p.m.

1As machines cannot be worked without an operator wholly engaged on them therefore, hours for which 6

operator are available for 6 months are the hours for which machines can be used. Hence 5,760 hours represent

total machine hours.

Cost Accounting 84

Number of shop supervisors 2

Salary of each supervisor ₹300 p.m.

Number of attendants 2

Wages etc. of each attendant ₹240 per week

Wages etc. of mechanics ₹190 per month

Lubricants, cotton waste, chemicals etc. ₹120 per week

Required: Compute the machine hour rate in each of the following alternative cases:

(i) If the setting up time is productive and power is used during the setting up.

(ii) If the setting up time is unproductive and no power is used during the setting up.

Answer:

Case I

Statement showing the Computation of Machine Hour Rate

Particulars Per shop ₹ Per machine ₹ Per hour ₹

A Standing charges :

(a) Overheads 32,520 6,504

(b) Rent etc. 14,400 2,880

(c) General Lighting 21,600 4,320

(d) Salary of supervisor 7,200 1,440

(e) Wages etc. of attendants 24,000 4,800

(f) Wages etc. of mechanic 2,280 456

(g) Lubricants etc. 6,000 1,200

(h) Insurance premium 5,000 1,000

Total Standing Charges 1,13,000 22,600

Standing charges per hour (₹22,600

2,000) 11.30

B Machine expenses :

(a) Depreciation (₹100,000+₹10,000−₹15,000

10×2,000) 4.75

(b) Power (20 units×₹5.70×2,000

2000) 114.00

(c) Repairs and maintenance (₹11,400

5×2,000) 1.14

Machine hour rate 131.19

Case II

Statement showing the computation of Machine Hour Rate

Standing charges per hour (₹𝟐𝟐,𝟔𝟎𝟎

𝟏,𝟗𝟎𝟎) 11.89

B. Machine expenses :


(a) Depreciation (₹100,000+₹10,000−₹15,000

10×1,900) 5.00

(b) Power (20 units×₹5.70×2,000

2000) 114.00

(c) Repairs and maintenance (₹11,400

5×1,900) 1.20

Machine hour rate 132.09

Working Note

Calculation of effective productive machine hours

A Number of working weeks p.a. 50

B Number of working hours per week 44

C Total number of working hours (A × B) 2,200

(-) D Maintenance hours 200

E Productive machine hours (if set up time is a productive) 2,000

(-) F Unproductive set up time @ 5% 100

G Productive machine hours (E – F) 1,900

OVER / UNDER RECOVERY OF OVERHEAD

Question 1: Supplementary Recovery Rate [Under/Over Absorption]

The total overhead expenses of a factory are ₹446,380. Taking into account the normal working of the

factory, overhead was recovered in production at ₹1.25 per hour.

The actual hours worked were 293,104. How would you proceed to close the books of accounts,

assuming that besides 7,800 units produced of which 7,000 were sold, there were 200 equivalent units

in work-in-progress?

On investigation it was found that 50 per cent of the unabsorbed overhead was on account of increase

in the cost of indirect materials and indirect labor and the remaining 50 per cent was due to factory

inefficiency. Also give the profit implication of the method suggested.


Answer:

Overhead recovered from production 2,93,104×₹1.25 3,66,380

Actual overhead expense incurred 4,46,380

Amount of overhead unrecovered 80,000

It is given that 50% of the unabsorbed overhead was due to increase in the cost of indirect material and

indirect labour which should be charged to the units produced by means of a supplementary rate. It is

also given that 7,800 units were produced and 200 equivalent units were in work-in-progress.

𝑇𝑜𝑡𝑎𝑙 𝑛𝑜 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 = 7,800 + 200 = 8,000 𝑆𝑢𝑝𝑝𝑙𝑒𝑚𝑒𝑛𝑡𝑎𝑟𝑦 𝑟𝑎𝑡𝑒 = (50% ×80,000

8,000) = 5

This amount of ₹40,000 should be apportioned among cost of sales, finished goods and work-in-

progress at the rate of ₹5 per unit.

Cost Accounting 86

Cost of Sales 7,000×₹5 ₹35,000

Finished Goods 800×₹5 ₹4,000

Work-in-progress 200×₹5 ₹1,000

Total ₹40000

By using this method, the profit for the period will be reduced by ₹35,000& value of stock will increase

by ₹5,000. The latter will affect the profit of the subsequent period.

The balance amount ₹40,000 i.e., 50% of the unabsorbed overhead due to factory inefficiency should be

charged to Costing P/L A/c as this is abnormal cost for which production should not be penalized.

Question 2: Sweat Dreams Ltd. uses a historical cost system and absorbs overheads on the basis of

predetermined rate. The following data are available for the year ended 31st March, 1997.

₹

Manufacturing overheads: Amount actually spent 1,70,000

Amount absorbed 1,50,000

Cost of goods sold 3,36,000

Stock of finished goods 96,000

Works-in-progress 48,000

Using two methods of disposal of under-absorbed overheads show the implication on the profits of the

company under each method.


Answer:

Appointment of overhead under absorbed

₹ ₹ ₹

Cost of goods sold 3,36,000 3,36,000

4,80,000× 20,000

14,000 3,50,000

Stock of finished goods 96,000 96,000

4,80,000× 20,000

4,000 1,00,000

Work-in-progress 48,000 48,000

4,80,000× 20,000

2,000 50,000

4,80,000 20,000 5,00,000

The use of the above method would reduce the profit of the concern by ₹14,000.

ADVANCED PROBLEMS

Question 1: “E-books” is an online book retailer. The Company has four departments. The two

sales departments are Corporate Sales and Consumer Sales. The two support – departments are

Administrative (Human Resources Accounting) and Information Systems each of the sales

departments conducts merchandising and marketing operations independently.


The following data are available for October, 2003:

Departments Revenues Number of Employees Processing Time used (mts)

Corporate Sales ₹16,67,750 42 2,400

Consumer Sales ₹8,33,875 28 2,000

Administrative -- 14 400

Information system -- 21 1,400

Cost incurred in each of four departments for October, 2003 are as follow:

Corporate Sales ₹12,97,751

Consumer Sales ₹6,36,818

Administrative ₹94,510

Information systems ₹3,04,720

The company uses number of employees as a basis to allocate Administrative costs and processing time

as a basis to allocate Information systems costs.

Required:

1. Allocate the support department costs to the sales departments using the direct method.

2. Rank the support departments based on percentage of their services rendered to other support

departments. Use this ranking to allocate support costs based on the step-down allocation method.

3. How could you have ranked the support departments differently?

4. Allocate the support department costs to sales departments using the reciprocal allocation method


Answer:

1 Reallocation of support department costs by using the direct method

Sales Dept Support Dept

Particulars BOA Corp. Cons. Admin IS

Cost incurred 12,97,751 6,36,818 94,510 3,04,720

Re-allocation: Admin cost No of employees 56,706 37,804 (94,510) -

Re-allocation: IS cost Processing time 1,66,211 1,38,509 - (3,04,720)

Total 15,20,668 8,13,131 - -

WN: Ranking of support departments based on

service rendered to other department

(1) In percent (2) In amount

% Rank ₹ Rank

Administration dept. supports IS dept 21

42 + 28 + 21%

23.07% I ₹21,810 II

IS dept. supports Administration dept. 400

2,400 + 2,000 + 400%

8.33% II ₹25,383 I

Cost Accounting 88

2 Re-allocation of support costs by step-down allocation method

Ratio Sales dept Support dept

Particulars BOA Corp. Cons. Admin IS

Cost incurred 12,97,751 6,36,818 94,510 3,04,720

Admin dept to IS No. of employees 6:4:–:–3 43,520 29,080 (94,510) 21,810

IS dept to Admn Processing time 6:5:–:–:– 1,78,107 1,48,423 (3,26,530)

Total 15,19,478 8,14,321

(3) For reallocation, support departments could have been ranked based on amount of support offered

to other service department. Refer WN2

WN3 % of services provided by each service department to

other service department & sales departments.

Service departments Sale departments

Particulars Admin IS Corp. Sales Cons. Sales

Administrative – 23.07% 46.16% 30.77%

Information systems 8.33% – 50% 41.67%

Total cost of the support department: (By using simultaneous equation method):

Let AD and IS be the total costs of support departments Administrative and Information systems

respectively. These costs can be determined by using the following simultaneous equations:

AD = 94,510 + 0.0833 IS,

IS = 3,04,720 + 0.2307 AD or AD = 94,510 + 0.0833 {3,04,720 + 0.2307 AD}

or AD = 94,510 + 25,383 + 0.01922 AD or 0.98078AD = 1,19,893, or AD = ₹1,22,243

and IS = ₹3,32,922

Reallocation of support dept costs by reciprocal method

Sales department

Particulars Corp. sales (₹) Cons. sales (₹)

Costs incurred 12,97,571 6,36,818

Re-allocation of cost administrative

department (46.16% and 30.77% of ₹1,22,243)

56,427 37,614

Re-allocation of costs of information systems

Department (50% and 41.67% of ₹3,32,922)

1,66,461 1,38,729

Total 15,20,639 8,13,161


Question 2: In a manufacturing company factory overheads are charged as fixed percentage basis

on direct labour and office overheads are charged on the basis of percentage of factory cost. The

following information is available related to the year ending 31st March, 2008:

Product A Product B

Direct Materials ₹19,000 ₹15,000

Direct Labour ₹15,000 ₹25,000

Sales ₹60,000 ₹80,000

Profit 25% on cost 25% on sales price

You are required to find out:

i. The percentage of factory overheads on direct labour.

ii. The percentage of office overheads on factory cost.


Answer: Let, the percentage of factory overheads on direct labour is ‘x’ and the percentage of office

overheads on factory cost is ‘y’, then the total cost of product A and product B will be as follows:

Product A Product B

(₹) (₹)

Direct Materials 19,000 15,000

Direct labour 15,000 25,000

Prime Cost 34,000 40,000

Factory overheads (Direct labour x) 150 x 250 x

Factory cost (i) 34,000 + 150 x 40,000 + 250 x

Office overheads (Factory cost y) (ii) 340 y + 1.5 xy 400 y + 2.5 xy

Total Cost [(i) + (ii)] 34,000 + 150 x

+ 340y + 1.5xy

40,000 + 250 x

+400 y + 2.5 xy

Total cost on the basis of sales is: Product A Product B

₹ ₹

Sales 60,000 80,000

Less Profit

Product A – 25% on cost or 20% on Sales 12,000

Product B – 25% on sales ______ 20,000

Total Cost 48,000 60,000

Cost Accounting 90

Thus,

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴 𝑖𝑠 34,000 + 150𝑥 + 340𝑦 + 1.5𝑥𝑦 = 48,000

𝑜𝑟 150𝑥 + 340𝑦 + 1.5𝑥𝑦 = 14,000 ….(i)

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐵 𝑖𝑠 40,000 + 250𝑥 + 400𝑦 + 2.5𝑥𝑦 = 60,000

𝑜𝑟 250𝑥 + 400𝑦 + 2.5𝑥𝑦 = 20,000 ….(ii)

Equation (ii) multiplied by 0.6 and after deducting from equation (i), we get

150𝑥 + 340𝑦 + 1.5𝑥𝑦 = 14,000 …(i)

150𝑥 240𝑦 1.5𝑥𝑦 = 12,000 … (ii)

100𝑦 = 2,000

𝑜𝑟 𝑦 = 20

Putting value of y in equation (i), we get

150𝑥 + 340 20 + 1.5𝑥 20 = 14,000

𝑜𝑟 150𝑥 + 30𝑥 = 14,000 – 6,800

𝑜𝑟 180𝑥 = 7,200

𝑜𝑟 𝑥 = 40.

Hence, (i) the percentage of factory overheads on direct labour = 40 and

(ii) the percentage of office overheads on factory cost = 20.

cost accounting part 1

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