Material Cost 2.

2  AnnualRe quirement for material  Orderingcos t

2
EOQ =
Carryingcos t per unit per annum
Material Cost Material A =
2  19,28,000units `15,000
=
38,56,000 `15,000
= 54,462 units
13%of `150 `19.5
Question 1 (Economic Order Quantity):
2  77,56,000units `15,000 1,55,12,000 `15,000
Arnav Ltd. manufactures a product X which requires two raw materials A and B in a ratio of Material B = = = 94,600 units
13%of `200 `26
1:4. The sales department has estimated a demand of 5,00,000 units for the product for
the year. To produce one unit of finished product, 4 units of material A is required. (ii) Computation of EOQ when purchase order for the both materials is not placed
Stock position at the beginning of the year is as below: separately

Product- X 12,000 units 2  (19,28,000  77,56,000)units `15,000

Material A & B =
13%of `190
Material A 24,000 units
Material B 52,000 units 1,93,68,000 `15,000
= = 1,08,452 units
To place an order the company has to spend `15,000. The company is financing its `24.7
working capital using a bank cash credit @13% p.a. 1,08,452  19,28,000
Material A = = 21,592 units
Product X is sold at `1,040 per unit. Material A and B is purchased at `150 and `200 96,84,000
respectively. 1,08,452  77,56,000
Material A = = 86,860 units
Required: 96,84,000
COMPUTE economic order quantity (EOQ): (`150  19,28,000)  (`200  77,56,00)
* = `190
(i) If purchase order for the both materials is placed separately. (19,28,000  77,56,000)
(ii) If purchase order for the both materials is not placed separately.

Question 2 (Stock levels):

Answer:
A company manufactures 5,00,000 units of a product per month. The cost of placing an order
Workings: is `1,000. The purchase price of the raw material is `50 per kg. The re-order period is 4 to 8
Annual production of Product X = Annual demand – Opening stock days. The consumption of raw materials varies from 14,000 kg to 18,000 kg per day, the
average consumption being 16,000 kg. The carrying cost of inventory is 20% per annum.
= 5,00,000 – 12,000 = 4,88,000 units
You are required to CALCULATE
Annual requirement for raw materials = Annual production × Material per unit – Opening
(i) Re-order quantity (ii) Re-order level
stock of material
(iii) Maximum level (iv) Minimum level
Material A = 4,88,000 × 4 units – 24,000 units = 19,28,000 units
(v) Average stock level
Material B = 4,88,000 × 16 units – 52,000 units = 77,56,000 units
Answer:
(i) Computation of EOQ when purchase order for the both materials is placed
separately (i) Reorder Quantity (ROQ) = 34,176 kg. (Refer to working note)

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 2.3 Cost and Management Accounting

(ii) Reorder level (ROL) = Maximum usage × Maximum re-order period Employee Cost and Direct
(iii) Maximum level
=
=
18,000 kg. × 8 days = 1,44,000 kg.
ROL + ROQ – (Min. usage × Min. re-order period)
3 Expenses
= 1,44,000 kg. + 34,176 kg. – (14,000 kg.× 4 days)
= 1,22,176 kg. Question 1:
(iv) Minimum level = ROL – (Normal usage × Normal re-order period) The following particulars have been extracted from the records of MJ Ltd.
= 1,44,000 kg. – (16,000 kg. × 6 days) Workers
= 48,000 kg. A B C
1 Actual hours worked in a month 152 160 136
(v) Average stock level = (Maximum level + Minimum level)   
2 Hourly rate of wages ` 50 ` 55 ` 48
1
  = (1,22,176 kg. + 48,000 kg.) = 85,088 kg. Production in units
2 Product- P 84 - 240
OR Product- Q 144 - 540
1 Product -R 184 100 -
= Minimum level + ROQ
2 Standard time allowed per unit of each product is:
1 P Q R
= 48,000 kg. + × 34,176 kg. = 65,088 kg.
2 Minutes 12 18 30
Working Note For the purpose of piece rate, each minute is valued at `1/-
Annual consumption of raw material (A) = (16,000 kg. × 365 days) = 58,40,000 kg. You are required to CALCULATE the wages of each worker under:
Cost of placing an order (O) = ` 1,000 (i) Guaranteed hourly rates basis
Carrying cost per kg. Per annum (c × i) = ` 50 × 20% = ` 10 (ii) Piece work earnings basis, but guaranteed at 75% of basic pay (guaranteed hourly rate)
2AO if the earnings are less than 50% of basic pay.
Economic order quantity (EOQ) =
C×i (iii) Premium bonus basis where the worker receives bonus based on Rowan scheme.
Answer:
2  58,40,000 kgs.  `1,000
= = 34,176 kg. (i) Computation of wages of each worker under guaranteed hourly rate basis
` 10
Workers Actual hours Hourly rate of Wages
worked in a week wages (`) (`)
(a) (b) (c) (d) = (b) × (c)
A 152 50 7,600
B 160 55 8,800

© The Institute of Chartered Accountants of India © The Institute of Chartered Accountants of India
 Employee Cost and Direct Expenses 3.2 3.3 Cost and Management Accounting

C 136 48 6,528 (iii) Computation of wages of each worker under Premium bonus basis (where each
worker receives bonus based on Rowan Scheme)
(ii) Computation of wages of each worker under piece work earnings basis
Workers Time Time Time Wage Earnings Bonus Total of
Worker A Worker B Worker C allowed taken saved rate/hour earning &
Product Rate per Units Wages Units Wages Units Wages hours hours hours bonus
unit (`) (`) (`) (`) (`) (`) (`)
(a) (b) (c) (d= b*c) (e) (f = b*e) (g) (h=b*g) A 152 152 - 50 7,600 - 7,600
P 12 84 1,008 - - 240 2,880 B 50 160 - 55 8,800 - 8,800
Q 18 144 2,592 - - 540 9,720 C 210 136 74 48 6,528 2,300* 8,828
R 30 184 5,520 100 3,000 - -
Time saved
9,120 3,000 12,600 * Bonus under Rowan scheme = × Time taken × Rate per hour
Time allowed
Since each worker has been guaranteed at 75% of basic pay, if their earnings are less
74 hours
than 50% of basic pay (guaranteed hourly rate), earning of the workers will be as follows: = × 136 hours × `48 = `2,300
210hours
Workers A and C will be paid the wages as computed viz., `9,120 and `12,600
respectively. The computed earnings under piece rate basis for worker B is `3,000 which
is less than 50% of basic pay i.e., ` 4,400 (`8,800 × 50%) therefore B would be paid
Question 2 :
`6,600 i.e. 75% × `8,800 .
Working Notes: The existing incentive system of Alpha Limited is as under:

1. Piece rate / per unit Normal working week 5 days of 8 hours each plus 3 late shifts of 3
hours each
Product Standard time per Piece rate each Piece rate per unit
unit in minutes minute (`) (`) Rate of Payment Day work: `160 per hour
(a) (b) (c) (d) = (b) × (c) Late shift: `225 per hour
P 12 1.00 12.00 Average output per operator for 49-hours 240 articles
week i.e. including 3 late shifts
Q 18 1.00 18.00
In order to increase output and eliminate overtime, it is decided to switch on to a system of
R 30 1.00 30.00 payment by results. The following information is obtained:
2. Time allowed to each worker Time-rate (as usual) : `160 per hour
Worker A = (84 units × 12 minutes) + (144 units × 18 minutes) + (184 units × 30 Basic time allowed for 15 : 2.5 hours
minutes) articles
= 9,120 minutes or 152 hours Piece-work rate : Add 20% to basic piece-
Worker B = 100 units × 30 minutes rate
= 3,000 minutes or 50 hours Premium Bonus : Add 50% to time.
Worker C = (240 units × 12 minutes) + (540 units × 18 minutes) If during the last week 270 articles are produced in a 40-hour week.
= 12,600 minutes or 210 hours Required:

© The Institute of Chartered Accountants of India © The Institute of Chartered Accountants of India
 Employee Cost and Direct Expenses 3.4 3.5 Cost and Management Accounting

(i) CALCULATE weekly earnings, number of articles produced and labour cost per article for  27.5hours 
one operator under the following systems: = (40hours× ` 160)+  ×40hours× ` 160  = `9,007.41
 67.5hours 
(a) Existing time-rate
(d) Halsey Premium System
(b) Straight piece-work
1
(c) Rowan system = (Time taken×Rate per hour)+ ( ×Time saved×Rate per hour)
2
(d) Halsey premium system
1 
(ii) PREPARE a Statement showing hours worked, weekly earnings, number of articles = (40hours× ` 160)+  ×27.5hours× ` 160  = `6,400 + `2,200 = `8,600
produced and labour cost per article for one operator under the above systems. 2 
Answer: (ii) Statement showing hours worked, weekly earnings, number of articles produced and
cost per article
(i) (a) Existing time rate
Method of Payment Hours Weekly Number of Labour cost
Weekly wages: worked earnings articles per article
Normal shift (40 hours × `160): `6,400 (`) produced (`)
Late shift (9 hours × `225) `2,025 Existing time rate 49 8,425.00 240 35.10
`8,425
Straight piece rate system 40 8,640.00 270 32.00
(b) Piece Rate System
Rowan Premium System 40 9,007.41 270 33.36
15 articles are produced in 2.5 hours
Halsey Premium System 40 8,600.00 270 31.85
2.5hours
Therefore, to produce 270 articles, hours required is ×270articles = 45 hours.
15articles
Cost of producing 270 articles:
At basic time rate (45 hours × `160) = `7,200
Add: Bonus @ 20% on basic Piece rate `1,440
Earning for the week `8,640
(c) Rowan Premium System
 2.5hours 
(i) Time allowed for producing 270 articles  ×270articles×150%  = 67.5 hours
 15articles 
(ii) Time taken to produce 270 articles = 40.0 hours
(iii) Time Saved = 67.5 – 40 = 27.5 hours
Earnings under Rowan Premium system:
 Time saved 
= (Time taken×Rateper hour)+  ×Time taken×Rate per hour 
 Time allowed 

© The Institute of Chartered Accountants of India © The Institute of Chartered Accountants of India
 Overhead: Absorption costing method 4.2

building owned by the company. It is

Overhead: Absorption valued at `1,20,000 and is charged into

4 Costing Method
cost at notional value of 8% per annum.
This cost is additional to the rent shown
above)
The value of issues of materials to the production departments are in the same proportion
Question 1 (Re-apportionment of overheads using Trial and Error Method): as shown above for the Consumable supplies.
SA Ltd. has three production (M1, M2 and A1) and three service departments (Stores, The following data are also available:
Engineering services and General service). Engineering department serves the M1 and M2
Department Book value Area Effective Production Capacity
only. Machinery (`) (Sq. ft.) H.P. hours % Direct Labour Machine
The relevant information related with Product X and Y are as follows: hour hour

Product X Product Y M1 24,00,000 5,000 50 2,00,000 40,000

M1 10 Machine hours 6 Machine hours M2 18,00,000 6,000 35 1,50,000 50,000
M2 4 Machine hours 14 Machine hours A1 6,00,000 8,000 05 3,00,000 
A1 14 Direct labour hours 18 Direct labour hours Stores 2,40,000 2,000   
The annual budgeted overhead cost for the year is Engg. Service 7,20,000 2,500 10  
Indirect Wages (`) Consumable Supplies(`) General 2,40,000 1,500   
Service
M1 9,30,400 2,52,000
M2 8,26,800 3,64,000 Required:
A1 3,24,400 84,000 (i) PREPARE an overhead analysis sheet, showing the bases of apportionment of overhead
to departments.
Stores 1,64,000 56,000
(ii) PREPARE a statement allocating service department overheads to production
Engineering Service 1,06,800 84,000 department ignoring the apportionment of service department costs among service
General Service 1,50,400 64,000 departments.
(iii) CALCULATE suitable overhead absorption rate for the production departments.
(`) (iv) CALCULATE the overheads to be absorbed by two products, X and Y.

 Depreciation on Machinery 7,92,000 Answer:

 Insurance of Machinery 1,44,000 (i) Summary of Apportionment of Overheads
(`)
 Insurance of Building 64,800 (Total building insurance cost for M1 is
one third of annual premium) Basis of Total Production Deptt. Service Deptt.
Amount
 Power 1,29,600 Items Apportionment M1 M2 A1 Store Enginee General
Service ring Service
 Light 1,08,000
Service
 Rent 2,53,500 (The general service deptt. is located in a

© The Institute of Chartered Accountants of India © The Institute of Chartered Accountants of India
 4.3 Cost and Management Accounting Overhead: Absorption costing method 4.4

Indirect Allocation given 25,02,800 9,30,400 8,26,800 3,24,400 1,64,000 1,06,800 1,50,400 General Labour hour
wages service Basis 80,480 60,360 1,20,720   (2,61,560)
(20 : 15 : 30)
Consumable Allocation given 9,04,000 2,52,000 3,64,000 84,000 56,000 84,000 64,000
stores Production 17,18,740 16,20,560 6,46,620
Department
Depreciation Capital value of 7,92,000 3,16,800 2,37,600 79,200 31,680 95,040 31,680 allocated in
machine (i)
(20:15:5:2:6:2)
Total 20,64,000 20,32,320 8,02,380
Insurance of Capital value of 1,44,000 57,600 43,200 14,400 5,760 17,280 5,760
Machine machine (iii) Overhead Absorption rate
(20:15:5:2:6:2) M1 M2 A1
Insurance on 1/3rd to M1 64,800 21,600 12,960 17,280 4,320 5,400 3,240 Total overhead allocated 20,64,000 20,32,320 8,02,380
Building Balance area
basis Machine hours 40,000 50,000 
(-:12:16:4:5:3) Labour hours   3,00,000
Power HP Hr% 1,29,600 64,800 45,360 6,480  12,960  Rate per machine hour 51.60 40.65 
(10:7:1:-:2:-)
Rate per Direct labour   2.67
Light Area 1,08,000 21,600 25,920 34,560 8,640 10,800 6,480
(10:12:16:4:5:3) (iv) Statement showing overhead absorption for Product X and Y
Rent* Area 2,53,500 53,940 64,720 86,300 21,580 26,960 -- Machine Deptt. Absorption Rate Product X Product Y
(10:12:16:4:5:-) Hours (`) Hours (`)
Total 48,98,700 17,18,740 16,20,560 6,46,620 2,91,980 3,59,240 2,61,560 M1 51.60 10 516.00 6 309.60
M2 40.65 4 162.60 14 569.10
*Rent to be apportioned among the departments which actually use the rented building. The notional
rent is imputed cost and is not included in the calculation. A1 2.67 14 37.38 18 48.06
715.98 926.76

(ii) Allocation of service departments overheads

Question 2 (Re-apportionment of overheads using Repeated distribution method):
Production Deptt. Service Deptt.
Service Basis of DT Ltd. is a manufacturing company having three production departments, ‘A’, ‘B’ and ‘C’
Deptt. Apportionment M1 M2 A1 Store Engineering General
and two service departments ‘X’ and ‘Y’. The following budget is for December 20X8:
Service Service Service
Store Ratio of Total (`) A (`) B (`) C (`) X (`) Y (`)
consumable 1,05,120 1,51,820 35,040 (2,91,980)   Direct 20,00,000 40,00,000 80,00,000 40,00,000 20,00,000
value (126 :182
: 42) material
Engineering In Machine Direct wages 1,00,00,000 40,00,000 1,60,00,000 20,00,000 40,00,000
service hours Ratio of 1,59,660 1,99,580   (3,59,240)  Factory rent 80,00,000
M1 and M2 (4 :
Power 50,00,000
5)

© The Institute of Chartered Accountants of India © The Institute of Chartered Accountants of India
 4.5 Cost and Management Accounting Overhead: Absorption costing method 4.6

Depreciation 20,00,000 (ii) Redistribution of Service Department’s expenses

Other 1,80,00,000 A (`) B (`) C (`) X (`) Y (`)
overheads Total overheads 54,00,000 74,00,000 1,20,00,000 95,00,000 1,07,00,000
Additional information: Dept. X overhead 42,75,000 14,25,000 28,50,000 (95,00,000) 9,50,000
Area (Sq. ft.) 500 250 500 250 500 apportioned in the ratio
(45:15:30: —:10)
Capital value of assets (` 400 800 400 200 200
lakhs) Dept. Y overhead 69,90,000 40,77,500  5,82,500 (1,16,50,000)
apportioned in the ratio
Machine hours 1,000 2,000 4,000 1,000 1,000 (60:35: —:5: —)
Horse power of machines 50 40 20 15 25 Dept. X overhead 2,62,120 87,380 1,74,760 (5,82,500) 58,240
apportioned in the ratio
A technical assessment of the apportionment of expenses of service departments is as (45:15:30: —:10)
under:
Dept. Y overhead 34,940 20,380  2,920 (58,240)
A B C X Y apportioned in the ratio
(60:35: —:5: —)
Service Dept. ‘X’ (%) 45 15 30 – 10
Dept. X overhead 1,300 440 880 (2,920) 300
Service Dept. ‘Y’ (%) 60 35 – 5 – apportioned in the ratio
Required: (45:15:30: —:10)
Dept. Y overhead 180 120 - - (300)
(i) PREPARE a statement showing distribution of overheads to various departments.
apportioned in the ratio
(ii) PREPARE a statement showing re-distribution of service departments expenses to (60:35: —:5: —)
production departments.
1,69,63,540 1,30,10,820 1,50,25,640  
(iii) CALCULATE machine hour rates of the production departments ‘A’, ‘B’ and ‘C’.
Answer: (iii) Machine hour rate:
(i) Overhead Distribution Summary A B C
Basis Total (`) A (`) B (`) C (`) X (`) Y (`) A Total overheads (`) 1,69,63,540 1,30,10,820 1,50,25,640
Direct Direct – – – – 40,00,000 20,00,000 B Machine hours 1,000 2,000 4,000
materials C Machine hour rate (`) [A ÷ B] 16,963.54 6,505.41 3,756.41
Direct wages Direct – – – – 20,00,000 40,00,000
Factory rent Area 80,00,000 20,00,000 10,00,000 20,00,000 10,00,000 20,00,000
Power H.P. × 50,00,000 10,00,000 16,00,000 16,00,000 3,00,000 5,00,000
Machine
Hrs.
Depreciation Capital 20,00,000 4,00,000 8,00,000 4,00,000 2,00,000 2,00,000
value
Other Machine 1,80,00,000 20,00,000 40,00,000 80,00,000 20,00,000 20,00,000
overheads hrs.
54,00,000 74,00,000 1,20,00,000 95,00,000 1,07,00,000

© The Institute of Chartered Accountants of India © The Institute of Chartered Accountants of India
 Activity Based Costing (ABC) 5.2

(ii) Calculation of cost driver rate:

Activity Based Cost Pools Cost (`) Cost Drivers Rate per cost
driver (`)

5 Costing (ABC) Machine operating

cost
Machine set-up
34,50,000

4,36,000
2,20,000 machine hours
{(10,000×6)+(15,000×4)+(20,000×5)}
75 set-ups
15.68

5,813.33
cost (20+25+30)
Question-1
Order processing 2,56,000 37 orders 6,918.92
A company manufactures three products namely A, B and C in a factory. The following cost data
cost (15+12+10)
for the month of March, 20X8 are as under:
Activity A B C (iii) Calculation of overhead rate per unit using ABC:
Unit produced 10,000 15,000 20,000 Activity Cost Products
Direct labour hour per unit 3 4.5 4 driver A B C
rate (`)
Machine hour per unit 6 4 5 Total Cost Rate Rate Rate
Set-up of machines 20 25 30 per per per
unit unit unit
Number of orders 15 12 10
(i) (ii) = (i)×Cost (iii) ÷ (ii) = (i)×Cost (iii) (ii) = (i)×Cost (iii)
Machine operating cost (`) 34,50,000
driver units driver ÷ driver ÷
Machine set-up cost (`) 4,36,000 unit unit
Order processing cost (`) 2,56,000 s s
Machine 15.68 9,40,800 94.08 9,40,800 62.72 15,68,000 78.40
operating
Required: (15.68×60000) (15.68×60000) (15.68×1,00000)
cost
(i) IDENTIFY Cost pool, Cost drivers. Machine 5,813.33 1,16,267 11.63 1,45,333 9.69 1,74,400 8.72
set-up
(ii) CALCULATE cost driver rate. (5,813.33×20) (5,813.33×25) (5,813.33×30)
cost
(iii) CALCULATE overheads rate per unit using activity- based costing method. Order 6,918.92 1,03,784 10.38 83,027 5.54 69,189 3.46
Answer: processi
(6,918.92×15) (6,918.92×12) (6,918.92×10)
ng cost
(i) Identification of Cost pools and cost drivers:
Cost Pools Cost Drivers
Question-2
Machine operating cost No. of machine hours
CDE Ltd. is following Activity based costing. Budgeted overheads, cost drivers and volume are
Machine set-up cost No. of machine set-ups as follows:
Order processing cost No. of orders
Cost pool Budgeted Cost driver Budgeted volume
overheads (`)

© The Institute of Chartered Accountants of India © The Institute of Chartered Accountants of India
 5.3 Cost and Management Accounting Activity Based Costing (ABC) 5.4

Material 18,42,000 No. or orders 1,200 - Material procurement (`1,535×56 orders) 85,960.00
procurement - Material handling (`685.48×84 movements) 57,580.32
Material handling 8,50,000 No. of movement 1,240 - Maintenance (`139.94×1,420 hours) 1,98,714.80
Maintenance 24,56,000 Maintenance hours 17,550 - Set-up (`628.97×60 set-ups) 37,738.20
Set-up 9,12,000 No. of set-ups 1,450 - Quality control (`242.86×18 inspections) 4,371.48 3,84,364.80
Quality control 4,42,000 No. of inspection 1,820 Total Cost 33,14,864.80
The company has produced a batch of 7,600 units, its material cost was `24,62,000 and wages No. of units 7,600
`4,68,500. Usage activities of the said batch are as follows:
Cost per units 436.17
Material orders 56
Material movements 84
Maintenance hours 1,420 hours Question-3
Set-ups 60 MST Limited has collected the following data for its two activities. It calculates activity cost rates
No. of inspections 18 based on cost driver capacity.
Required: Activity Cost Driver Capacity Cost (`)
(i) CALCULATE cost driver rates. Power Kilowatt hours 50,000 kilowatt hours 40,00,000
(ii) CALCULATE the total and unit cost for the batch. Quality Inspections Number of 10,000 Inspections 60,00,000
Inspections
Answer:
The company makes three products M, S and T. For the year ended March 31, 20X7, the following
(i) Calculation of cost driver rate:
consumption of cost drivers was reported:
Cost pool Budgeted Cost driver Cost driver Product Kilowatt hours Quality Inspections
overheads (`) rate (`)
M 10,000 3,500
Material 18,42,000 1,200 1,535.00
S 20,000 2,500
procurement
T 15,000 3,000
Material handling 8,50,000 1,240 685.48
Maintenance 24,56,000 17,550 139.94 Required:
(i) PREPARE a statement showing cost allocation to each product from each activity.
Set-up 9,12,000 1,450 628.97
Quality control 4,42,000 1,820 242.86 (ii) CALCULATE the cost of unused capacity for each activity.
(iii) STATE the factors the management considers in choosing a capacity level to compute the
(ii) Calculation of cost for the batch: budgeted fixed overhead cost rate.
Particulars Amount (`) Amount (`) Answer:
Material cost 24,62,000.00 (i) Statement of cost allocation to each product from each activity
Wages 4,68,500.00
Product
Overheads:
M (`) S (`) T (`) Total (`)

© The Institute of Chartered Accountants of India © The Institute of Chartered Accountants of India
 5.5 Cost and Management Accounting

Power 8,00,000 16,00,000 12,00,000 36,00,000

(Refer to
working note)
Quality
Inspections
(10,000 kWh ×`80)

21,00,000
(3,500 inspections
(20,000 kWh ×`80)

15,00,000
(2,500 inspections
(15,000 kWh ×`80)

18,00,000
(3,000 inspections
54,00,000
6 Cost Sheet
(Refer to ×`600) ×`600) ×`600)
working note) Question 1:
Arnav Inspat Udyog Ltd. has the following expenditures for the year ended 31st March, 20X8:
Working Note:
Rate per unit of cost driver: Sl. Amount (`) Amount (`)
No.
Power :(`40,00,000 ÷ 50,000 kWh) = `80/kWh
Quality Inspection :(`60,00,000 ÷ 10,000 inspections) = `600 per inspection (i) Raw materials purchased 10,00,00,000
(ii) Calculation of cost of unused capacity for each activity: (ii) GST paid on the above purchases @18% (eligible for 1,80,00,000
input tax credit)
(`)
(iii) Freight inward 11,20,600
Power 4,00,000
(iv) Wages paid to factory workers 29,20,000
(`40,00,000 – `36,00,000)
(v) Contribution made towards employees’ PF & ESIS 3,60,000
Quality Inspections 6,00,000
(`60,00,000 – `54,00,000)
(vi) Production bonus paid to factory workers 2,90,000
(vii) Royalty paid for production 1,72,600
Total cost of unused capacity 10,00,000
(viii) Amount paid for power & fuel 4,62,000
(iii) Factors management consider in choosing a capacity level to compute the budgeted fixed
(ix) Amount paid for purchase of moulds and patterns (life 8,96,000
overhead cost rate:
is equivalent to two years production)
- Effect on product costing & capacity management (x) Job charges paid to job workers 8,12,000
- Effect on pricing decisions.
(xi) Stores and spares consumed 1,12,000
- Effect on performance evaluation
(xii) Depreciation on:
- Effect on financial statements
- Regulatory requirements. - Factory building 84,000
- Difficulties in forecasting for any capacity level. - Office building 56,000
- Plant & Machinery 1,26,000
- Delivery vehicles 86,000 3,52,000
(xiii) Salary paid to supervisors 1,26,000
(xiv) Repairs & Maintenance paid for: 48,000
- Plant & Machinery
- Sales office building 18,000
- Vehicles used by directors 19,600 85,600
(xv) Insurance premium paid for:
- Plant & Machinery 31,200

© The Institute of Chartered Accountants of India © The Institute of Chartered Accountants of India
 Cost Sheet 6.2 6.3 Cost and Management Accounting

- Factory building 18,100 From the above data you are requested to PREPARE Statement of cost for Arnav Ispat Udyog
- Stock of raw materials & WIP 36,000 85,300 Ltd. for the year ended 31st March, 20X8, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of
Production, (iv) Cost of goods sold and (v) Cost of sales.
(xvi) Expenses paid for quality control check activities 19,600
Answer:
(xvii) Salary paid to quality control staffs 96,200
(xviii) Research & development cost paid improvement in 18,200 Statement of Cost of Arnav Ispat Udyog Ltd. for the year ended 31st March, 20X8:
production process Sl. Particulars Amount (`) Amount (`)
(xix) Expenses paid for pollution control and engineering & 26,600 No.
maintenance (i) Material Consumed:
(xx) Expenses paid for administration of factory work 1,18,600 - Raw materials purchased 10,00,00,000
(xxi) Salary paid to functional mangers: - Freight inward 11,20,600
- Production control 9,60,000 Add: Opening stock of raw materials 18,00,000
- Finance & Accounts 9,18,000 Less: Closing stock of raw materials (9,60,000) 10,19,60,600
- Sales & Marketing 10,12,000 28,90,000 (ii) Direct employee (labour) cost:
(xxii) Salary paid to General Manager 12,56,000 - Wages paid to factory workers 29,20,000
(xxiii) Packing cost paid for: - Contribution made towards employees’ PF 3,60,000
- Primary packing necessary to maintain 96,000 & ESIS
quality - Production bonus paid to factory workers 2,90,000 35,70,000
- For re-distribution of finished goods 1,12,000 2,08,000 (iii) Direct expenses:
(xxiv) Interest and finance charges paid 7,20,000 - Royalty paid for production 1,72,600
(xxv) Fee paid to auditors 1,80,000 - Amount paid for power & fuel 4,62,000
(xxvi) Fee paid to legal advisors 1,20,000 - Amortised cost of moulds and patterns 4,48,000
(xxvii) Fee paid to independent directors 2,20,000 - Job charges paid to job workers 8,12,000 18,94,600
(xxviii) Performance bonus paid to sales staffs 1,80,000 Prime Cost 10,74,25,200
(xxix) Value of stock as on 1st April, 20X7: (iv) Works/ Factory overheads:
- Raw materials 18,00,000 - Stores and spares consumed 1,12,000
- Work-in-process 9,20,000 - Depreciation on factory building 84,000
- Finished goods 11,00,000 38,20,000 - Depreciation on plant & machinery 1,26,000
(xxx) Value of stock as on 31st March, 20X8: - Repairs & Maintenance paid for plant & 48,000
- Raw materials 9,60,000 machinery
- Work-in-process 8,70,000 - Insurance premium paid for plant & 31,200
- Finished goods 18,20,000 36,50,000 machinery
- Insurance premium paid for factory building 18,100
Amount realized by selling of scrap and waste generated during manufacturing process – - Insurance premium paid for stock of raw 36,000
`86,000/- materials & WIP

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 Cost Sheet 6.4 6.5 Cost and Management Accounting

- Salary paid to supervisors 1,26,000 (assuming related with non-equity fund)

- Expenses paid for pollution control and (xi) Selling overheads:
engineering & maintenance 26,600 6,07,900 - Repairs & Maintenance paid for sales office 18,000
Gross factory cost 10,80,33,100 building
Add: Opening value of W-I-P 9,20,000 - Salary paid to Manager- Sales & Marketing 10,12,000
Less: Closing value of W-I-P (8,70,000) - Performance bonus paid to sales staffs 1,80,000 12,10,000
Factory Cost 10,80,83,100 (xii) Distribution overheads:
(v) Quality control cost: - Depreciation on delivery vehicles 86,000
- Expenses paid for quality control check 19,600 (xiii) - Packing cost paid for re-distribution of
activities finished goods 1,12,000 1,98,000
- Salary paid to quality control staffs 96,200 1,15,800 Cost of Sales 11,35,03,300
(vi) Research & development cost paid improvement in 18,200
production process
Notes:
(vii) Administration cost related with production:
- Expenses paid for administration of factory 1,18,600 (i) GST paid of purchase of raw materials would not be part of cost of materials as it is eligible for
work input credit.
- Salary paid to Production control manager 9,60,000 10,78,600
(viii) Less: Realisable value on sale of scrap and waste (86,000)
(ix) Add: Primary packing cost 96,000
Cost of Production 10,93,05,700
Add: Opening stock of finished goods 11,00,000
Less: Closing stock of finished goods (18,00,000)
Cost of Goods Sold 10,86,05,700
(x) Administrative overheads:
- Depreciation on office building 56,000
- Repairs & Maintenance paid for vehicles 19,600
used by directors
- Salary paid to Manager- Finance & 9,18,000
Accounts
- Salary paid to General Manager 12,56,000
- Fee paid to auditors 1,80,000
- Fee paid to legal advisors 1,20,000
- Fee paid to independent directors 2,20,000
- Interest and finance charges paid 7,20,000 34,89,600

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 Unit & Batch Costing 8.2

Total cost 1,99,57,500 8,85,82,500 10,85,40,000

8
Question-1
Unit & Batch Costing Desired profit
Sales value
Average selling price per unit
-
-
-
-
10,00,000
10,95,40,000
531.10
A factory can produce 1,80,000 units per annum at its 60% capacity. The estimated costs of Question-2
production are as under:
Star study centre provides coaching classes to school students. The study centre has taken
Direct material `300 per unit an auditorium of 250 seat capacity on rent of `3,75,000 per month. It has also hired some
Direct employee cost `160 per unit renowned teachers for taking classes. A teacher takes `3,000 per hour. The study centre has
decided to conduct a batch of 2-hour per day for 3 days a week for 4 months.
Indirect expenses:
- Fixed `32,50,000 per annum (i) CALCULATE the total cost per batch.
- Variable `50 per unit (ii) COMPUTE the minimum fee to be charged per student in a batch, if the centre operates
at 60% capacity.
- Semi-variable `80,000 per annum up to 50% capacity and `15,000 for
every 20% increase in the capacity or part thereof. (iii) DETERMINE the fee per student if the study centre desires to earn a profit of 50% and
If production program of the factory is as indicated below and the management desires to study centre operates at 50% capacity.
ensure a profit of `10,00,000 for the year, DETERMINE the average selling price at which Answer:
each unit should be quoted:
(i) Calculation of total cost per batch:
First three months of the year- 50% of capacity;
Particulars Amount (`)
Remaining nine months of the year- 75% of capacity.
(i) Auditorium hire charges (`3,75,000 × 4 months) 15,00,000
Answer:
(ii) Teachers’ remuneration (`3,000 × 2 hours × 3 days × 4 2,88,000
Statement of Cost weeks × 4 months)
First three Remaining nine Total (`) Total cost 17,88,000
months (`) months (`)
(ii) Computation of minimum fee per student per batch:
37,500 units 1,68,750 units 2,06,250 units
Direct material 1,12,50,000 5,06,25,000 6,18,75,000
TotalCost `17,88,000
Direct employee cost 60,00,000 2,70,00,000 3,30,00,000 Minimum fee to be charged = = = `11,920/-
No. of students 150 students
Indirect- variable expenses 18,75,000 84,37,500 1,03,12,500
Total Cost + Profit `17,88,000 +`8,94,000
Indirect – fixed expenses 8,12,500 24,37,500 32,50,000 (iii) Fee to be charged per student = =
No. of students 125 students
Indirect- semi-variable expenses
- For first three months @ `80,000 20,000 `26,82,000
= `21,456/-
p.a. 125 students
- For remaining nine months @ 82,500 1,02,500
`1,10,000 p.a.

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 Service Costing 12.2

2. Car and SUVs 20%

12 Service Costing
3.
4.
Bus and LCV
Heavy commercial vehicles
30%
45%

Required:
Question 1 (Costing of Toll Roads):
(i) CACULATE the total project cost per day of concession period.
SLS Infrastructure built and operates 110 k.m. highway on the basis of Built-Operate-Transfer
(ii) COMPUTE toll fee to be charged for per vehicle of each type, if the company wants earn a profit
(BOT) for a period of 25 years. A traffic assessment has been carried out to estimate the traffic
of 15% on total cost.
flow per day shows the following figures:
[Note: Concession period is a period for which an infrastructure is allowed to operate and recovers its
Sl. No. Type of vehicle Daily traffic volume investment]
1. Two wheelers 44,500 Answer:
2. Car and SUVs 3,450
(i) Calculation of total project cost per day of concession period:
3. Bus and LCV 1,800
Activities Amount (` in lakh)
4. Heavy commercial vehicles 816
Site clearance 170.70
The following is the estimated cost of the project: Land development and filling work 9,080.35
Amount (` in Sub base and base courses 10,260.70
Sl. no. Activities lakh) Bituminous work 35,070.80
1 Site clearance 170.70 Bridge, flyovers, underpasses, Pedestrian subway, footbridge, etc 29,055.60
2 Land development and filling work 9,080.35 Drainage and protection work 9,040.50
3 Sub base and base courses 10,260.70 Traffic sign, marking and road appurtenance 8,405.00
4 Bituminous work 35,070.80 Maintenance, repairing and rehabilitation 12,429.60
5 Bridge, flyovers, underpasses, Pedestrian subway, footbridge, etc 29,055.60 Environmental management 982.00
6 Drainage and protection work 9,040.50 Total Project cost 114,495.25
7 Traffic sign, marking and road appurtenance 8,405.00 Administration and toll plaza operation cost 1,120.00
8 Maintenance, repairing and rehabilitation 12,429.60 Total Cost 115,615.25
9 Environmental management 982.00 Concession period in days (25 years × 365 days) 9,125
Total Project cost 114,495.25 Cost per day of concession period (` in lakh) 12.67

An average cost of `1,120 lakh has to be incurred on administration and toll plaza operation.
(ii) Computation of toll fee:
On the basis of the vehicle specifications (i.e. weight, size, time saving etc.), the following weights
has been assigned to the passing vehicles: Cost to be recovered per day = Cost per day of concession period + 15% profit on cost
= `12,67,000 + `1,90,050 = `14,57,050
Sl. No. Type of vehicle
1. Two wheelers 5%

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 12.3 Cost and Management Accounting

`14,57,050
Cost per equivalent vehicle = = `19.06 per equivalent vehicle
76,444units(Re fer workingnote)
Vehicle type-wise toll fee:
Sl. Type of vehicle Equivalent cost Weight Toll fee per vehicle
No. [A] [B] [A×B]
1. Two wheelers `19.06 1 19.06
2. Car and SUVs `19.06 4 76.24
3. Bus and LCV `19.06 6 114.36
4. Heavy commercial vehicles `19.06 9 171.54

Working Note:
The cost per day has to be recovered from the daily traffic. The each type of vehicle is to be
converted into equivalent unit. Let’s convert all vehicle types equivalent to Two-wheelers..
Sl. Type of vehicle Daily traffic Weight Ratio [B] Equivalent Two-
No. volume [A] wheeler [A×B]
1. Two wheelers 44,500 0.05 1 44,500
2. Car and SUVs 3,450 0.20 4 13,800
3. Bus and LCV 1,800 0.30 6 10,800
4. Heavy commercial 816 0.45 9 7,344
vehicles
Total 76,444

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