You are on page 1of 12

# __________________________________________________________________________

Part- 1
Q1 Attempt all questions. Each question carries two marks
(10*2 =20)
(a) What is Margin of safety ?
Ans : Margin of Safety: Margin of Safety is the difference between the actual sales and the break even
sales. As we have discussed, at the breakeven point there is neither any prot nor loss. Hence any rm
will always be interested in being as much above the break even level as possible. Margin of safety
explains precisely this thing and the higher the safety margin the better it is. Margin of safety is
computed as follows
Margin of Safety = Actual Sales Break Even Sales.
(b) Explain the concept of life cycle costing
Ans : Product life cycle is a pattern of expenditure, sale level, revenue and profit over the period from
new idea generation to the deletion of product from product range. Product life cycle spans the time
from initial R&D on a product to when customer servicing and support is no longer offered for the
product. For products like motor vehicles this time span may range from 5 to 7 years. For some basic
pharmaceuticals, the time span may be 7 to 10 years. In case of cameras, photocopying machines etc.
the life is more than 100 years.
(c) What is P/V ratio ?
Ans :The Profit Volume Ratio (PV Ratio) is the relationship between Contribution and Sales Value. It is
also termed as Contribution to Sales Ratio.
Significance of PV Ratio:
PV Ratio is considered to be the basic indicator of the profitability of the business.
The higher the PV Ratio, the better it is for a business. In the case of a firm enjoying steady business
conditions over a period of years, the PV Ratio will also remain stable and steady.
If PV Ratio is improved, it will result in better profits.
(d) What is Angle of incidence ?
Ans : It is the angle between total sales line and total cost line drawn in the case of break even chart. It
provides useful information about the rate at which profits are being made. The larger the angle of
incidence, the higher the rate of profit and vice versa
(e) Profit Rs 200 ,Sales Rs 2000 and variable cost 75% of sales. Find out break even sales
Ans : P/v ratio : Contribution/sales *100 = 5000/2000 *100 = 25%
Break even sales = 300/25% = Rs 1200
(f) Explain period cost and product cost.
Ans : Period Cost: These are the costs, which are not assigned to the products but are
charged as expenses against the revenue of the period in which they are incurred. Nonmanufacturing
costs e.g. Selling and Distribution Costs are generally recognised as
period costs. These costs are not included in inventory valuation.
2. Product Cost: These are the costs, which are assigned to the product and are included
in inventory valuation. These are also called as Inventorial costs. Under absorption
costing, total manufacturing costs are regarded as product costs while under marginal
costing, only variable manufacturing costs are considered.
(g) Explain the different items excluded from cost sheet.
Ans : Different items excluded from cost sheet are
Purely Financial charges
Appropriation of profit
Writing of intangiable assets
Abnormal gains and losses

## (h) Differentiate between Cost centre and Profit centre

Ans :
Cost centre is the smallest unit of activity for which costs are collected whereas profit centre is
that segment of activvity of abusiness which is responsible for both reenue and expenses.
Cost centre are created for accounting conveniences of costs and their control where a profit
centre is created because of decentralisation of operstions.
Cost Centres are not autonomous whereas profit centres are autonomous
(i) Explain the meaning of Sunk cost and out of pocket cost.
Ans : Sunk Cost It is the cost, which has already been incurred or sunk in the past. It is not relevant for
decision-making and is caused by complete abandonment as against temporary shutdown. Thus if a firm
has obsolete stock of materials amounting to Rs.50,000 which can be sold as scrap for Rs.5,000 or can
be utilised in a special job, the value of opening stock of Rs.50,000 is a sunk cost and is not relevant for
decision making.
Out-of pocket cost These are the costs, which entail current or near future cash outlays for the decision
at hand as opposed to cost, which do not require any cash outlay (e.g. depreciation). Such costs are
relevant for decision-making, as these will occur in near future. This cost concept is a short-run concept
and is used in decisions relating to fixation of selling price in recession, make or buy, etc. Out-of-pocket
costs can be
avoided or saved if a particular proposal under consideration is not accepted.
(j) Determine the amount of fixed expenses from the following particulars:
Sales Rs 2400000 ; Direct material Rs 80000; Direct labour Rs 50000: Variable Overheads Rs 20000
and Profit Rs 50000
Ans : Fixed expe2200000
Part-2
Note :Attempt any five questions .Each question caries 10 marks

(10*5 =50)

## Q2 (a) Distinction between Flexible budget and Fixed Budget.

Ans : The xed and exible budgets are discussed in detail in the following paragraphs.
Fixed Budgets: When a budget is prepared by assuming a xed percentage of capacity utilization, it is
called as a xed budget. For example, a rm may decide to operate at 90% of its total capacity and
prepare a budget showing the projected prot or loss at that capacity. This budget is dened by The
Institute of Cost and Management Accountants [U.K.] as the budget which is designed to remain
unchanged irrespective of the level of activity actually attained. It is based on a single level of activity.
For preparation of this budget, sales forecast will have to be prepared along with the cost estimates.
Cost estimates can be prepared by segregating the costs according to their behavior i.e. xed and
variable. Cost predictions should be made element wise and the projected prot or loss can be
worked out by deducting the costs from the sales revenue. Actually in practice, xed budgets are
prepared very rarely.
The main reason is that the actual output differs from the budgeted output signicantly. Thus if the
budget is prepared on the assumption of producing 50, 000 units and actually the number of units
produced are 40, 000, the comparison of actual results with the budgeted ones will be unfair and
misleading. The budget may reveal the difference between the budgeted costs and actual costs but the
reasons for the deviations may not be pointed out. A xed budget may be prepared when the budgeted
output and actual output are quite close and not much deviation exists between the two. In such cases,
maximum control can be exercised between the budgeted performance and actual performance.
Flexible Budgets: A exible budget is a budget that is prepared for different levels of capacity
utilization. It can be called as a series of xed budgets prepared for different levels of activity. For
example, a budget can be prepared for capacity utilization levels of 50%, 60%, 70%, 80%, 90% and

100%. The basic principle of exible budget is that if a budget is prepared for showing the results at
say, 15, 000 units and the actual production is only 12, 000 units, the comparison between the
expenditures, budgeted and actual will not be fair as the budget was prepared for 15, 000 units.
Therefore a exible budget is developed for a relevant range of production from 12, 000 units to 15,
000 units. Thus even if the actual production is 12, 000 units, the results will be comparable with the
budgeted performance of 12, 000 units. Even if the production slips to 8, 000 units, the manager has a
tool that can be used to determine budgeted cost at 9, 000 units of output. The exible budget thus,
provides a reliable basis for comparisons because it is automatically geared to changes in production
activity. Thus a exible budget covers a range of activity, it is exible i.e. easy to change with variation
in production levels and it facilitates performance measurement and evaluation.
While preparing exible budget, it is necessary to study the behavior of costs and divide them in xed,
variable and semi variable. After doing this, the costs can be estimated for a given level of activity. It
is also necessary to plan the range of activity. A rm may decide to develop exible budget for activity
level starting from 50% to 100% with an interval of 10% in between. It is necessary to estimate the costs
and associate them with the chosen level of activity. Finally the prot or loss at different levels of
activity will be computed by comparing the costs with the revenue
Q2(b) Cost may be classified in a variety of ways according to their nature and the information needs of
management Explain and discuss the statement giving examples of classifications required for different
purpose
Ans : Costs can be classified according to their nature and information needs of the management in
the following manner.
1. By element: Under this classification costs are classified into (a) Direct costs and (b) Indirect costs
according to elements viz. materials, labour and expenses.
2. By function: Here costs are classifieds as: Production cost, administration cost, selling cost,
distribution cost, research cost, distribution cost etc.
3. By behaviour: According to this classification costs are classified as fixed, variable and semi-variable
costs. Fixed costs can be further classified as committed and discretionary costs.
4. By Controllability: Costs are classified as controllable and non-controllable costs.
5. By normality: Costs are segregated as normal and abnormal costs.
Management of a business house requires cost information for decision making under different
circumstances. For e.g. they require such information for fixing selling price, controlling and reducing
costs. To perform all these functions a classification of cost according to their nature and information
needs is an essential pre-requisite of the management.
Q2(C) Define management Accounting and distinguish it from financial accounting.
Ans : Management accounting is not a specific system of accounting. It could be any form
of accounting which enables a business to be conducted more effectively and efficiently. It is largely
concerned with providing economic information to mangersfor achieving organizational goals. It is an
extension of the horizon of cost accounting towards newer areas of management. Much management
accounting information is financial in nature but has been organized in a manner relating
directly to the decision on hand. Management Accounting is comprised of two words Management and
Accounting. It means the study of managerial aspect of accounting. The emphasis
of management accounting is to redesign accounting in such a way that it is helpful
to the management in formation of policy, control of execution and appreciation of
effectiveness.
Financial Accounting versus Management Accounting comparison chart
Financial Accounting
Audience

## Financial accounting produces information

Management Accounting
Managerial accounting produces

## Financial Accounting versus Management Accounting comparison chart

Financial Accounting

Management Accounting

## that is used by external parties, such as

shareholders and lenders.

## information that is used

within an organization, by
managers and employees.

Objectives

## The main objectives of financial

accounting are to disclose the end results of
the
business, and the financial condition of the

## The main objective of managerial

accounting is to help management by
providing information that is used
to plan, set goals and evaluate these goals.

Optional?

## It is legally required to prepare finance

al accounting reports and share
them with investors.

## Managerial accounting reports are

not legally required.

Segment
reporting

## Pertains to the entire organization.

Certain figures may be broken out for

Focus

## Financial accounting focuses on history;

reports on the prior quarter or year.

## Managerial accounting focuses on the

present and forecasts for the future.

Q2 (d) What do you understand by Zero base budgeting? Explain its advantage and limitation.
Ans : Zero Base Budgeting is method of budgeting whereby all activities are revaluated each time
budget is formulated and every item of expenditure in the budget is fully justied. Thus the Zero
Base Budgeting involves from scratch or zero.
Zero based budgeting [also known as priority based budgeting] actually emerged in the late 1960s
as an attempt to overcome the limitations of incremental budgeting. This approach requires that all
activities are justied and prioritized before decisions are taken relating to the amount of resources
allocated to each activity. In incremental budgeting or traditional budgeting, previous years
gures are taken as base and based on the same the budgeted gures for the next year are worked
out. Thus the previous year is taken as the base for preparation of the budget. However the main
limitation of this system of budgeting is that an activity is continued in the future only because it
is being continued in the past. Hence in Zero Based Budgeting, the beginning is made from
scratch and each activity and function is reviewed thoroughly before sanctioning the same and all
expenditures are analyzed and sanctioned only if they are justied.
Besides adopting a Zero Based approach, the Zero Based Budgeting also focuses on programs or
activities instead of functional departments based on line items, which is a feature of
traditional budgeting. It is an extension of program budgeting. In program budgeting, programs
are identied and goals are developed for the organization for the particular program. By inserting
decision packages in the system and ranking the packages, the analysis is strengthened and
priorities are determined.

Applications of Zero Based Budgeting: The following stages/steps are involved in the application of
Zero Based Budgeting.
Each separate activity of the organization is identied and is called as a decision package.
Decision package is actually nothing but a document that identies and describes an activity
in such a manner that it can be evaluated by the management and rank against other activities
competing for limited resources and decide whether to sanction the same or not.
It should be ensured that each decision package is justied in the sense it should be ascertained
whether the package is consistent with the goal of the organization or not.
If the package is consistent with the overall objectives of the organization, the cost of minimum
efforts required to sustain the decision should be determined.
Alternatives for each decision package are considered in order to select better and cheaper
options. Based on the cost and benet analysis a particular decision package/s should be selected and
resources are allocated to the selected package.
Benets from Zero Based Budgeting: ZBB was rst introduced by Peter A. Pyhrr, a staff control
manager at Texas Instruments Corporation, U.S.A. He developed this technique and implemented it
for the rst time during the year 1969-70 in Texas in the private sector and popularized its wider use.
He wrote an article on ZBB in Harvard Business Review and later wrote a book on the same. The ZBB
concept was rst applied in the State of Georgia, U.S.A. when Mr. Jimmy Carter was the Governor of
the State. Later after becoming the President of U.S.A. Mr. Carter introduced and implemented the
ZBB in the country in the year 1987. ZBB has a wide application not only in the Government
Departments but also in the private sector in a variety of business. In India, the ZBB was applied in the
State of Maharashtra in 80s and early 90s. Benets from ZBB can be summarized in the following
manner.
ZBB facilitates review of various activities right from the scratch and a detailed cost benet
study is conducted for each activity. Thus an activity is continued only if the cost benet study is
favorable. This ensures that an activity will not be continued merely because it was conducted in the
previous year.
A detailed cost benet analysis results in efcient allocation of resources and consequently
wastages and obsolescence is eliminated.
A lot of brainstorming is required for evaluating cost and benets arising from an activity and this
results into generation of new ideas and also a sense of involvement of the staff.
ZBB facilitates improvement in communication and co-ordination amongst the staff.
\Awareness amongst the managers about the input costs is created which helps the organization to
become cost conscious.
An exhaustive documentation is necessary for the implementation of this system and it
Limitations of Zero Based Budgeting: The following are the limitations of Zero Based
Budgeting.

It is a very detailed procedure and naturally if time consuming and lot of paper work is
involved in the same.
Cost involved in preparation and implementation of this system is very high.
Morale of staff may be very low as they might feel threatened if a particular activity
is discontinued.
Ranking of activities and decision-making may become subjective at times.
It may not advisable to apply this method when there are non nancial considerations, such as
ethical and social responsibility because this will dictate rejecting a budget claim on low
ranking projects.
Q2(e) A retail dealer in garments is currently selling 24, 000 shirts annually. He supplies the following
details for the year ended 31st March 2007.
Selling price per shirt: Rs.800
Variable cost per shirt: Rs.600
Fixed Cost:
Staff salaries: Rs.24, 00, 000
General Office Cost: Rs.8, 00, 000
As a Cost Accountant, you are required to answer the following each part independently:
Calculate Break Even Point and margin of safety in sales revenue and number of shirts sold
Ans : Break Even Point: [units] = Fixed Cost / Contribution Per Unit =
Rs.40, 00, 000/Rs.200 = 20 000 number of shirts
Break Even Point [sales value] = 20000 units Rs.800 = Rs.1, 60, 00, 000
Margin of safety = Actual Sales Break Even Sales
24, 000 shirts Rs.800 = Rs.1, 92, 00, 000 Rs.1, 60, 00, 000 = Rs.32, 00, 000
Margin of safety [units] = 24, 000 shirts 20, 000 shirts = 4000 shirts
2.

## Amount of prot if 30, 000 shirts are sold:

Sales [units] = Fixed Cost + Prot / Contribution Per Unit
30, 000 = Rs.40, 00, 000 + Prot /Rs.200 = Prot = Rs.20, 00, 000

Q2(f)Following information has been obtained from the records of a manufacturing concern.
1-1-2015
31-12-2015
Rs
Rs
Stock of Raw material
30000
35000
Work-in-progress
15000
20000
Stock of finished Goods
43700
54000
Transactions during the year :
Indirect wages
Sales
Factory rent
Offices salaries
General expenses
Office rent
Rent of show room

Rs
9720
325000
7830
15030
13500
2000
1200

## Prepare a cost sheet

Ans :
Particulars
Opening stock of material
Less Closing stock of Raw
material
Cost of raw materials consumed
Productive wages
Prime Cost
Indirect wages
Factory Rent
PlantRepair
Depericationon plant
Factory lighting
Factory cost
Less Closing stock of WIP
Factory cost
Indirect Expense
officeSalaries
General expenses
Cost of Good Sold
Goods
Less closing stock of Finished
Goods

Rs
30000
120000

## Purchase of raw material

Direct wages
Plant repair
Deperication on Plant
Factory Lighting
Salesman salary

120000
90000
3420
8360
7380
7650

Rs

35000
115000
90000
205000
9720
7830
3420
8360
7380

15030
13500
2000
43700
54000

36710
241710
15000
256710
20000
236710

Sales men salaies
Rentof Showroom
Cost of Sales
Sales

7650
1200
59210
325000

Q2(g) What is Activity Based costing ? Explain its objectives and working.
Ans : Meaning :- CIMA defi nes Activity Based Costing as, cost attribution to cost units on the basis of
benefit received from indirect activities e.g. ordering, setting up, assuring quality.
One more defi nition of Activity Based Costing is, the collection of fi nancial and operational
performance
information tracing the signifi cant activities of the fi rm to product costs.
The following are the objectives of Activity Based Costing.
Objectives of Activity Based Costing
The objectives of Activity Based Costing are discussed below.
_ To remove the distortions in computation of total costs as seen in the traditional costing system and
bring more accuracy in the computation of costs of products and services.
_ To help in decision making by accurately computing the costs of products and services.
_ To identify various activities in the production process and further identify the value adding
activities.
_ To distribute overheads on the basis of activities.
_ To focus on high cost activities.
_ To identify the opportunities for improvement and reduction of costs.
_ To eliminate non value adding activities.
Working of Activity Based Costing
The working of Activity Based Costing is explained below.
Understanding and analyzing manufacturing process :- For installation of any costing system, study
of
manufacturing process is essential. For Activity Based Costing system also, it is necessary to study the
manufacturing process and ascertain various stages involved in the same so that activities involved in
the same can be identified.
Study of the Activities involved :- The next step is to study the activities involved in the manufacturing
process. This step is very crucial as the entire Activity Based Costing is based on identification of
activities. In this step, the activities involved in a process are identified.
Activity Cost Pool :- Cost pool is defi ned by CIMA as, the point of focus for the costs relating to a
particular activity in an activity based costing system. For example, in case of a library, the cost of
issue and receipts, cost of ordering, stock taking costs etc. can be identifi ed with Library Cost. In
other words, Library will the cost pool in which all the costs mentioned above may be clubbed. In
case of a manufacturing organization, as regards to stores, cost of classifi cation, cost of issue of stores
requisitions, inspection costs etc. can be pooled under the heading stores. Thus cost pool concept is
similar to the concept of cost center. The cost pool is the point of focus or in other words, it is the total
cost assigned to an activity. It is the sum of all the cost elements assigned to an activity.
Cost Drivers :- According to CIMA, cost driver is any factor which causes a change in the cost of an
activity, e.g. the quality of parts received by an activity is a determining factor in the work required
by that activity and therefore affects the resources required. An activity may have multiple cost
drivers associated with it. In other words, cost driver means the factors which determine the cost
of an activity. For example, if we repeat the example of library, the number of receipts and issue of

books will be cost drivers, in a stores, no. of stores requisitions will be cost drivers, in customer order
processing the no. of customers as well as no. of orders will be cost drivers. Thus a cost driver is an
activity which generates cost. Activity Based Costing is based on the belief that activities cause costs
and therefore a link should be established between activities and product. The cost drivers thus are
the link between the activities and the cost.
Identifi cation of costs with the products :- The fi nal stage in Activity Based Costing is to identify the
cost with the fi nal products which can also be called as cost objects. Cost objects include, products,
services, customers, projects and contracts. As mentioned earlier, direct costs can be identified easily
with the products but the indirect costs can be linked with the products by identifying activities
and cost drivers. Thus Activity Based Costing is the process of tracing costs fi rst from resources to
activities and then from activities to specific products.
Q2 (h) What do you understand by Transfer Pricing? Explain various methods of fixation of Transfer
Prices
Ans : A Transfer Price is that notional value at which goods and services are transferred between
divisions in a decentralized organization. Transfer prices are normally set for intermediate products,
which are goods, and services that are supplied by the selling division to the buying division. As
explained in
the above paragraph, in large organizations, each division is treated as a profi t center as a part and
parcel of decentralization. Their profi tability is measured by fi xation of transfer price for inter
divisional
transfers.
There are several methods of fi xation of Transfer Price. They are discussed below.
_ Cost Based Pricing: - In these methods, cost is the base and the following methods fall under this
category.
_ Actual Cost of Production: - This is in fact the simplest method of fixation of transfer price. In this
method, the actual cost of production is taken as transfer price for inter divisional transfers. The actual
cost of production may consist of only variable costs or total costs including fixed cost.
Full Cost Plus: - In this method, the total cost of sales plus some percentage of profi t is charged
by the transferring division to the transferee division. The percentage of profi t may be on the
capital employed or on the cost of sales. The benefi t of this method is that the profi t measurement
becomes possible.
_ Standard Cost: - Standard cost is predetermined cost based on technical analysis for material,
labor and overhead. Under this method, transfer price is fi xed based on standard cost. The
transferring unit absorbs the variance, i.e. difference between standard cost and actual cost. This
method is quite simple for operation once the standards are set. However it becomes essential to
revise the standards at regular intervals, otherwise the standard cost may become outdated.
_ Marginal Cost Pricing: - Under this method, only the marginal cost is charged as transfer prices.
The logic used in this method is that fi xed costs are in any case unavoidable and hence should
not be charged to the buying division. Therefore only marginal cost should be taken as transfer
price.
_ Market Based Pricing: - Under this method, the transfer price will be determined according to the
market price prevailing in the market. It acts as a good incentive for effi cient production to the selling
division and any ineffi ciency in production and abnormal costs will not be borne by the buying
division. The forces of demand and supply will determine the market price in the long run and profi t
generated will be a very good parameter for measuring effi ciency. The logic used in this method is
that if the buying division would have purchased the goods/services from the open market, they
would have paid the market price and hence the same price should be paid to the selling division.
One of the variation of this method is that from the market price, selling and distribution overheads
should be deducted and price thus arrived should be charged as transfer price. The reason behind this
is that no selling efforts are required to sale the goods/services to the buying division and therefore

these costs should not be charged to the buying division. Market price based transfer price has the
_ Actual costs are fluctuating and hence difficult to ascertain. On the other hand market prices can
be easily ascertained.
_ Profits resulting from market price based transfer prices are good parameters for performance
evaluation of selling and buying divisions
Part -3
Note : Attempt any two questions .Each question carries 15 marks
(15*2=30)
Q3(a)
2014

Summarized below are the Income and Expenditure forecasts for the month March to August

Month
March
April
May
June
July
August

Credit
sales
Rs
60000
62000
64000
58000
56000
60000

Credit
Purchase
Rs
36000
38000
33000
35000
39000
34000

Wages

Mfgexpense
Rs
4000
3000
4500
3500
4000
3000

Rs
9000
8000
10000
8500
9000
8000

Office
expense
Rs
2000
1500
2500
2000
1000
1500

Selling
Expense
Rs
4000
5000
4500
3500
4500
4500

## You are given the following further information

_ Plant costing Rs.16, 000 due for delivery in June. 10% on delivery and balance after three months.
_ Advance tax Rs.8, 000 is payable in March and June
_ Period of credit allowed, Suppliers 2 months and customers 1 month
_ Lag in payment of manufacturing expenses half month
_ Lag in payment of all other expenses one month
_ Cash balance on 1st May 2008 is Rs.8, 000
_ Prepare Cash Budget for three months starting from 1st May 2014.
Ans :
Particulars
I]

II]

May

June

July

8,000

15,750

11150

## A] Collections from Debtors

62,000

64,000

58,000

[Credit 1 month]
III] Total Expected Receipts

62,000

64,000

58,000

## IV] Total Cash Available

70,000

79,750

69150

36,000

38,000

33,000

3,750

4,000

3,750

[I + III]
V] Expected Payments
A] Purchases [2 months credit]
B]
Expenses

Manufacturing

## C] Wages [Half month credit] *

8,000

10,000

8,500

D]
Ofce Expenses [one month
credit]
E]
Selling Expenses [one month
credit]
F] Purchase of Machine

1,500

2,500

2,000

5,000

4,500

3,500

1600

8,000

## VI] Total Payments

54,250

67,000

52,350

[A + B + C + D + E + F + G]
VII] Closing Balance

15,750

11150

18,400

[IV VI]
Q3(b) Company manufactures and markets three products X,Y,Z . All the three products are made from
the same set of machines.Production is limited by machine capacity.From the data given below,indicate
priorities for products X,Y and Z with a view to maximising profits.
X
Y
Z
Raw material cost per unit (Rs)
11.25
16.25
21.25
Direct labour cost per (Rs)
2.50
2.50
2.50
Other Variable cost per (Rs)
1.50
2.25
3.55
Selling price per unit (Rs)
25
30
35
Standard machine time requirted per unit in minutes
39
20
28
Ans : Contribution : Sales variable cost
Product X = 25- 15.25 = 9.75
Product Y = 30 21 =9
Product z = 35 27.30 = 7.70
Standard machine time required per unit in machines
Product x=39, Product y = 20 ,Product z =28
Contirbution per minute
Product X = 9.75/39 = 0.25
Product y = 9/20 = 0.45
Product z = 7.70/28 = 0.27
Priorities for product Product y = I
Product Z = II
Product X = III
Q3(c) The standard material cost to produce a ton of chemical X is given below:
300 kg of material A @ Rs.10 per kg
400 kg of material B @ Rs.5 per kg
500 kg of material C @ Rs.6 per kg
During a particular period, 100 tons of mixture X was produced from the usage of
35 tons of material A @ Rs.9, 000 per ton
42 tons of material B @ Rs.6, 000 per ton
53 tons of material C @ Rs.7, 000 per ton
Calculate material cost, price, and usage and mix variances.

I] Material Cost Variance: Standard Cost [for actual production] Actual Cost
Rs.8, 00, 000 Rs.9, 38, 000 = Rs.1, 38, 000 [A]
Note: Standard cost of materials for actual production: For 1 ton of production, the standard cost is
Rs.8, 000, so for 100 tons, the standard cost is Rs.8, 00, 000
II] Material Price Variance: Actual Quantity [STD Price Actual Price]
Material A = 35, 000 [Rs.10 Rs.9] = Rs.35, 000 [F]
Material B = 42, 000 [Rs.5 Rs.6] = Rs.42, 000 [A]
Material C = 53, 000 [Rs.6 Rs.7] = Rs.53, 000 [A]
Total Material Price Variance = Rs.60, 000 [A]
III] Material Quantity Variance = Standard Price [STD Quantity Actual Quantity]
Material A = Rs.10 [30, 000 35, 000] = Rs.50, 000 [A]
Material B = Rs.5 [40, 000 42, 000] = Rs.10, 000 [A]
Material C = Rs.6 [50, 000 53, 000] = Rs.18, 000 [A]
Total Material Quantity Variance = Rs.78, 000 [A]
IV] Material Mix Variance = Std Cost of Std Mix Std Cost of Actual Mix
Rs.8, 66, 667 Rs.8, 78, 000 = Rs.11, 333
Note: Standard Cost of Standard Mix is computed as under
If Actual mix would have been in the standard proportion, the quantities of material A, B and C
would have been,
A: 300/1200 _ 1, 30, 000 = 32, 500 X Rs.10 = Rs.3, 25, 000
B: 400/1200 _ 1, 30, 000 = 43, 333.33 X Rs.5 = Rs.2, 16, 667
C: 500/1200 _ 1, 30, 000 = 54, 166.67 X Rs.6 = Rs.3, 25, 000
Total standard cost of standard mix = Rs.8, 66, 667
Standard cost of actual mix has been computed by multiplying the actual quantity by the standard
cost.