TEST- 16 [Solution]

Time Allowed: 1 hour 30 min. Total Marks: 50 Marks Answer to Question no.1: Sub- Contracting along with its Advantages

1. Sometimes the contractor may not find it feasible to do the entire work by his own efforts and he may entrust or delegate some portion of work to another person who is called the sub- contractor and the work delegated to him is known as “Sub- contract”.

2. The procedure of sub-contracting is normally observed in complex projects where many specialized activities are involved and it becomes necessary to delegate some of the activities to other specialized organizations.

3. Sub – contractor is accountable to the main contractor and not the contractee. 4. Advantage of Sub-contracting:-

a) It leads to quick completion of contract. b) Quality is improved due to expertise of sub-contractor in their respective jobs.Cost may be

saved as the main contractor may find it more expansive to do the work himself. Inter – Process Profits

1) Under the normal circumstance, the output of one process is transferred to next process is transferred to next process at cost price. In other words, no profit is added while transferring the output to the next process.

2) However, if some amount of profit is considered while transferring the output to the next process, the profit so incorporated is known as “Inter- Process Profits”.

3) The amount of profit which is to be considered is decided on the basis of prevailing market conditions or conditions prevailing in the particular industry.

4) Objectives of Inter- process Profits:- I. To ascertain whether the cost of production competes with the market prices. II. To enable the transferee process to stand on its own efficiency.

Answer to Question no.3: Particulars Amount (`) Contract Price 25,00,000 Work Certified 24,00,000 Cash Received 21,60,000 Cost of Contract to date 19,80,000 Total Estimated Cost Cost of Contract to date 19,80,000 Add: Estimated Additional Cost 1,20,000

21,00,000 Estimated Profit Contract Price 25,00,000 Less: Estimated Additional cost (21,00,000)

` 4,00,000 Computation of amount of profit to be taken to Profit and Loss A/c under different methods Method 1 Work Certified ` 24, 00, 000

Estimated Profit × = ` 4, 00, 000 × = ̀ 3,84, 000 Contract Price ` 25, 00, 000

Method 2

Estimated Profit × Work Certified × Cash Received Contract Price Work Certified

` 24, 00, 000 ` 21,60, 000 = ` 4,00,000 × × = ` 3,45,600

` 25, 00, 000 ` 24, 00, 000 Method 3 Cost of Contract to date ` 19,80, 000

Estimated Profit × = ` 4,00,000 × = ` 3,77,143 Total Estimated Cost ` 21, 00, 000

Method 4 Estimated Profit × Cost of Contract to date × Cash Received

Total Estimated Cost Work Certified ` 19,80, 000 ` 21,60, 000

= ` 4,00,000 × × = ` 3,39,429 ` 21, 00, 000 ` 24, 00, 000

Recommendation: - On conservative basis, it is recommended to transfer the least amount (i.e. ` 3,39,429) to Profit and Loss A/c.

Answer to Question no.4: Let the quantity of raw material introduced in Process I be 100 kg. The output and input in the four processes then is as follows: Particulars Process I Process II Process III Process IV Input (kg.) 100

25% = (25)

75

20% = (15)

60

20% = (12)

48 16 2

3 %= (8) Less: Loss (kg.)

Output (kg.) 75 60 48 40 Thus if the end output is 40 kg. the input in Process I is 100 kg. If output of process IV is 40,000 kg. the input in Process I will be 40,000 × (100/40) = 1,00,000 kg. Thus, for 1 kg. of output 2.5 kg. of materials is required. If costs of material increases or decreases by ` 1, the cost of output will increase or decrease by 100/40 = ` 2.50 per kg. Total cost of initial input for 40,000 kg. of output = 1,00,000 kg. × ̀ 50 = ̀ 50,00,000 Input cost per kg. of output = ` 50 × 2.5 kg. = ` 125.

Answer to Question no.5: Process III A/c Particulars Units Amount (`) Units Amount (`) To Opening W.I.P. 2,000

53,000 25,750

4,11,500 1,97,600

97,600 48,800

7,500

By Normal Loss 2,500 48,000

5,000

7,500 7,19,750

61,500 To Process II A/c By Process IV To Direct Materials By Closing WIP To Direct Wages To Production Overheads To Abnormal Gain 500

55,500 7,88,750 55,500 7,88,750 5

Normal Loss = [Opening WIP + Units from Process II – Closing WIP] 100

5 = (2,000 + 53,000 – 5,000) = 2,500 units

100 Statement of Equivalents Production (FIFO)

Units Particulars Units Material (1) Material (2) Labour Overhead In Out % Quantity % Quantity % Quantity % Quantity

2,000 53,000

Op. WIP, completed

2,000

46,000

48,000 2,500 5,000 (500)

– –

46,000

–

5,000 (500)

20 400

46,000

– 3,500 (500)

40 800

46,000

– 2,500 (500)

400 800

46,000

– 2,500 (500)

Introduced and completed

100 100 100 100

Transferred Normal Loss – – – – Closing WIP 100 70 50 50 Abnormal Gain 100 100 100 100

55,000 55,000 50,500 49,400 48,800 48,800

[P.T.O.]

Statement of Cost per unit

Type of Cost Amount (`) Equivalent Units Cost per unit (`) Material (1) 4,11,500

7,500

(-) Normal loss 4,04,000 50,500 8 Material (2) 1,97,600 49,400 4 Labour 97,600 48,800 2 Overheads 48,800 48,800 1

Statement of Value of Equivalent Production Material (1) – 8 –

Opening WIP, now completed Material (2) 400 4 1,600 Labour 800 2 1,600 Overhead 800 1 800 4,000 Material (1) 46,000 8 3,68,000

Introduced and completed Material (2) Labour

46,000 46,000

4 2

1,84,000 92,000

Overhead 46,000 1 46,000 6,90,000 Material (1) 500 8 4,000

Abnormal Gain Material (2) Labour

500 500

4 2

2,000 1,000

Overhead 500 1 500 7,500 Material (1) 5,000 8 40,000

Closing WIP Material (2) Labour

3,500 2,500

4 2

14,000 5,000

Overhead 2,500 1 2,500 61,500 Computation of Total Cost of 48,000 units transferred to Process IV 2,000 units of Opening WIP

– Cost already incurred 25,750

– Cost now incurred 4,000 29,750 46,000 Units out of introduced units 6,90,000 7,19,750

Answer to Question no.6: Contract Account for the period of 1.7.2011 to 31.3.2012 Particulars Amount (`) Particulars Amount (`) To Material Issued 7,74,300

11,81,500 1,84,500

60,750 4,50,600

7,71,000

By Material at site c/d 75,800 10,000

3,500 6,93,750

26,39,600

To Labour (10,79,000 + 1,02,500) By Material Sold To Engineers’ salary (20,500 × 9 months By Profit and Loss A/c (Loss on Sale) To Supervisors’ salary (9,000×9× 3/4) By Plant at site c/d

Less: 7,71,000-50,000 9 7 12

To Administration Expenses (4,60,600 – 10,000) To Plant sent to site By Cost of Contract To Date c/d

27,28,950 10,87,500 To Cost of Contract to date b/d 26,39,600

2,70,300 By WIP a) Work certified b) Work uncertified

22,50,000

6,59,900 To Notional Profit c/d

29,09,900 29,09,900 To Profit & Loss Account 1,60,178

1,10,122 By Notional Profit b/d 2,70,300

To Reserve (WIP) 2,70,300 2,70,300

6

Computation of Work uncertified Proportional of - Total works done = 2/3

- Work works done = 2/3 - Work uncertified = 2/3 – 1/2 = 1/6

Cost incurred to date on 2/3rd contract = ` 26,39,600 Hence, proportionate cost related to 1/6th uncertified works

= 26,39,600 1 = ` 6,59,600

Computation of estimated profit to be transferred to profit and loss account

= 2 Notional Profit Work Certified

3 Contract Price

2 2,70,300 20,00,000

` 1,60,178 3 22,50,000

Answer to Question no.7: Process I Account

Particulars Kgs. Amount (`) Particulars Kgs. Amount (`) To Direct Materials 2,500 10,000 By Normal Loss 250 500 To Direct Labour 6,250 By Process II @ ` 9 2,300 20,700 To Overhead 4,500 To Abnormal Gain @ ` 9 50 450

2,550 21,200 2,550 21,200

Cost Per Kg. = 10, 000 + 6,250 + 4, 500 - 500 2, 500 kgs. - 250 kgs.

= ` 9 per kg

Normal loss Account Particulars Kgs. Amount (`) Particulars Kgs. Amount (`) To Process I A/c 250 500 By Bank A/c 200

50 400 100 By Abnormal Gain A/c

250 500 250 500 Abnormal Gain Account

Particulars Kgs. Amount (`) Particulars Kgs. Amount (`) To Normal Loss A/c 50 100

350 By Process I A/c 50 450

To P & L A/c 50 450 50 450

(b) Statement of profit (Attributable to each of the Joint Products according to weight of output and market value of production)

Joint

Product

Output

Kg.

Selling price per Unit (`)

Sales

Value (`)

Joint Cost Apportionment according to:

Profit (Loss)

Profit (Loss)

Weight of output (`)

Market value of production (`)

Weight of output (`)

Market value of production (`)

1 2 3 2 × 3 = 4 5 6 4 - 5 = 7 4 – 6 = 8 A 900

800 600

24 21,600 14,400 7,200

13,500 12,000 9,000

17,250 11,500 5,750

8,100 2,400

(1,800)

4,350 2,900 1,450

B 18 C 12

2,300 43,200 34,500 34,500 8,700 8,700

[P.T.O.]

Working Notes:

(1) Joint Cost of three products under Process 2: - Transfer of output from Process I ` 20,700

6,900 6,900

Add: Direct Labour Overhead Total 34,500

Joint Products Output In kg. S.P. (per unit) Sales Revenue Share of Joint Costs A - 900 24 21,600 ` 34,500/6 × 3 ` 17,250 B - 800 18 14,400 ` 35,500/ 6 × 2 ` 11,500 C - 600 12 7,200 ` 34,500/6 ×1 ` 5,750

43,200 ` 34,500 (3)Apportionment of Joint Cost on the basis of weight of output

Product Output (Kgs.) Share of Joint Cost

A 900 34,500 × 900/2,300 13,500 B 800 34,500 × 800/2,300 12,000 C 600 34,500 × 600/2,300 9,000

2,300 34,500