SOLUTION

(QUIZ NO. 1)
Question 1

X Limited
Income Statement – Marginal Costing
For the month ended December, 2009
Aye Bee Total
(Rs.) (Rs.) (Rs.)
Sales Revenue
(Rs. 90 p.u. x 2,300 units) (Rs. 75 p.u x 1,600 units) 207,000 120,000 327,000
Less: Variable cost of sales
Variable production cost
(Rs. 15 + 18 + 12) = Rs. 45 p.u. x 2,500 units,(Rs. 42 p.u. x 1,750 units) 112,500 73,500 186,000
Less: Variable cost of closing stock
(Rs. 45p.u x 200 units) ( Rs. 42 p.u. x 150 units) (9,000) (6,300) (15,300)

(103,500) (67,200) (170,700)

= Contribution Margin 103,500 52,800 156,300

Less: Total Fixed cost (110,000)

= Gross Profit 46,300

X Limited
Income Statement – Absorption Costing
For the month ended December, 2009
Aye Bee Total
(Rs.) (Rs.) (Rs.)
Sales Revenue
(Rs. 90 p.u. x 2,300 units) (Rs. 75 p.u x 1,600 units) 207,000 120,000 327,000
Less: Full Cost of sales
Variable production cost
(Rs. 15 + 18 + 12) = Rs. 45 p.u. x 2,500 units,(Rs. 42 p.u. x 1,750 units) 112,500 73,500 186,000
Fixed production overheads absorbed cost
(Rs. 33 p.u. x 2,500 units,(Rs.22 p.u. x 1,750 units) 82,500 38,500 121,000
= Full production cost for the month of December 195,000 112,000 307,000
Less: Full cost of closing stock
(Rs. 78p.u x 200 units) ( Rs. 64 p.u. x 150 units) (15,600) (9,600) (25,200)

= Cost of sales unadjusted 179,400 102,400 281,800

Fixed FOH variance
Less: over absorbed variance (11,000)

= Cost of sales adjusted (270,800)

= Gross profit 56,200

Profit Reconciliation
Rs.
Marginal Costing profit 46,300
Add: Difference in cost of closing stock under both methods
(Rs. 25,200 – Rs. 15,300) 9,900
Absorption costing profit 56,200

(W – 1) Fixed FOH cost per unit

Fixed FOH Absorption rate per hour = Budgeted Total Fixed FOH cost
Normal Capacity (in direct labour hours)
= Rs. 110,000 = Rs. 11 per hour
10,000 direct labour hours
Normal Capacity (in direct labour hours)
Aye: Rs. 18 per unit ÷ Rs. 6 per hour = 3 labour hours per unit x 2,000 units = 6,000 total labour hours
Bee: Rs. 12 per unit ÷ Rs. 6 per hour = 2 labour hours per unit x 2,000 units = 4,000 total labour hours
10,000 total labour hours

Fixed FOH cost per unit Aye Bee

Fixed FOH Rate per hour Rs. 11 per hour Rs. 11 per hour
Direct labour hours per unit x 3 hours per unit x 2 hours per unit
= Fixed FOH cost per unit Rs. 33 per unit Rs. 22 per unit

(W – 2) Fixed FOH Variance

= Fixed FOH absorbed – Fixed FOH actual
= Rs. 121,000 – Rs. 110,000 = Rs. 11,000 over absorbed

Note: It is assumed that budgeted Fixed FOH cost and actual Fixed FOH costs are same.
Question 2
Note Rs. Marks
Material Cost
Material A N-1 15,000 1
Material B N-2 23,400 2
Material C N-3 16,000 2
Material D N-4 (2,000) 2
Labour cost
Grade I Labour N-5 6,000 1
Grade II Labour N-6 17,200 2
Grade III Labour N-7 11,250 2
Grade IV Labour N-8 6,000 2
Grade V Labour N-9 3,200 1
Variable production overheads (Rs. 7 per hour x 5,300 hours) 37,100 1
Rent of workshop 5,000 0.5
Hire of machine 2,000 0.5
= Total Relevant cost 140,150 1
1 mark for N-10.
1 mark for N-11.

N-1
The material required for production is 1,000 kgs. 200 kgs of material A is available in stock and
constantly used in production by the business. Therefore, all the quantity required will be purchased from
external supplier at current purchase cost.
Current Purchase Cost = Rs. 15 per kg x 1,000 kgs
= Rs. 15,000
N-2
There are 2,000 kgs of material B required for production. There are 1,000 kgs of material B available in
stock and has no alternative use. Therefore, the relevant cost of this 1,000 kgs is the scrap value of Rs. 4
per kg less delivery cost of Rs. 600. The remaining 1,000 kgs will be purchased at current purchase cost
Current Purchase Cost = Rs. 20 per kg x 1,000 kgsRs. 20,000
Add: Scrap value forgone = Rs. 4 per kg x 1,000 kgs Rs. 4,000
Less: Delivery cost = Rs. (600)
Rs. 23,400
N-3
The material C required for production is 500 kgs. There are 500 kgs available in stock which has no
regular use. There are two alternative use for this material. First option is to scrap the material C at Rs.
12,000. Second option is to use as substitute for material Z, which would save cost of Rs. 16,000.
Higher of:
Scrap value = Rs. 12,000
Cost savings from material Z = Rs. 16,000
N-4
The required material D is 50 litres. There are 100 litres of material D available in stock. If it is not used
in this contract, it would have to be disposed off at cost of Rs. 40 per litre. Therefore, the disposal cost
savings will be taken in this contract for material D.
Savings of disposal cost = Rs. 40 per litre x 50 litres
= Rs. 2,000
N-5
The are 1,000 hours required for Grade I labour. 400 hours of Grade I labour is available as spare
capacity for which relevant cost will be NIL. The remaining 600 hours will be obtained from hiring of
Additional Hiring cost = Rs. 10 per hour x 600 hours.
= Rs. 6,000
N-6
There are 1,000 hours of Grade II labour required for production. The 600 hours are available as spare
capacity and labour is partly paid for spare time at 40%. Therefore, the relevant cost for spare hours will
be partial rate at 60% and for remaining 400 hours extra workers will be hired at Rs. 25 per hour.
Partial Rate of spare capacity = Rs. 20 per hour x 600 hours x 60% 7,200
Additional Hiring cost = Rs. 25 per hour x 400 hours 10,000
Rs. 17,200
N-7
The required hours of Grade III for the production is 2,000 hours. There are 1,500 hours of Grade III
labour available in spare capacity for which relevant cost will be NIL. The remaining 500 hours will be
obtained at lower of these two options. One is to pay overtime at basic rate and a half (Rs. 15 per hour x
1.5) = Rs. 22.5 per hour. Second is to hire extra labour at Rs. 24 per hour.
Lower of:
Overtime payment = Rs. 22.5 per hour x 500 hours 11,250
Additional Hiring cost = Rs. 24 per hour x 500 hours 12,000

N-8
There are 500 hours of Grade IV labour required for production. All workers are fully employed and has
no spare capacity. Therefore, workers will be switch from other work which will cost Rs. 4 per hour as
opportunity cost. The relevant cost of this divertion will be basic wage rate per hour + contribution
forgone per hour. However, the other option is to hire extra workers at Rs. 16 per hour. The lower of
Lower of: i) Additional Hiring (500 hrs x Rs. 16 per hr.) = Rs. 8,000 [OR]
ii) Divert cost (500 hrs. x (Rs. 8 + Rs. 4) per hr.) = Rs. 6,000
N-9
There are 1,000 hours of Grade V labour availble as spare capacity and only 800 hours are required.
However, the spare capacity labour is currently diverted in place of Grade Vi labour. The additional
hiring of Grade VI labour will cost Rs. 4 per hour.
Divertion Cost = Rs. 4 per hour x 800 hours
= Rs. 3,200
N-10
Fixed Production Overheads of Rs. 5 are allocated fixed overheads. Therefore, it will be not be taken as
relevant cost.
N-11
The hourly rate of Rs. 100 per hour to Mr. Lockstock will not be taken as it is a sunk cost.
Question 3