Introduction to Cost and

1 Management Accounting
Question-1
STATE the Cost Control and Cost Reduction objectives of Cost and Management Accounting
system.
Answer:
Among other objectives of cost and management accounting system, cost control and cost
reduction are principal objectives. Cost control objective ensures the compliance with the set
standard of procedures, Cost Reduction objective explores the possibilities of improvements in
terms of both quantitative and qualitative aspects. Both objectives are briefly explained as
below:
Cost Control: Maintaining discipline in expenditure is one of the main objectives of a good
cost and management accounting system. It ensures that expenditures are in consonance with
predetermined set standard and any variation from these set standards is noted and reported
on continuous basis. To exercise control over cost, following steps are followed:
(a) Determination of pre-determined standard or results: Standard cost or performance
targets for a cost object or a cost centre is set before initiation of production or service
activity. These are desired cost or result that need to be achieved.
(b) Measurement of actual performance: Actual cost or result of the cost object or cost
centre is measured. Performance should be measured in the same manner in which the
targets are set i.e. if the targets are set up operation-wise, and then the actual costs
should also be collected and measured operation-wise to have a common basis for
comparison.
(c) Comparison of actual performance with set standard or target: The actual performance
so measured is compared against the set standard and desired target. Any deviation
(variance) between the two is noted and reported to the appropriate person or authority.
(d) Analysis of variance and action: The variance in results so noted are further analysed to
know the reasons for variance and appropriate action is taken to ensure compliance in
future. If necessary, the standards are further amended to take developments into
account.
Cost Reduction: It may be defined "as the achievement of real and permanent reduction in
the unit cost of goods manufactured or services rendered without impairing their suitability for
the use intended or diminution in the quality of the product."
Cost reduction is an approach of management where cost of an object is believed to be further

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 Introduction to Cost and Management Accounting 1.2

reduced. No cost is termed as lowest and every possibility of cost reduction is explored. To do
cost reduction, the following action is taken:
(a) Each activity within an entity is segmented to analyse and identify value added and non-
value added activities. All non-value added activities are eliminated without affecting the
essential characteristics of the product or process. Value chain Analysis, a strategic tool,
developed by Michael Porter, is one of the methods to do value analysis.
(b) Conducting continuous research and study to know better way to do anything.
The three-fold assumptions involved in the definition of cost reduction may be summarised as
under:
(i) There is a saving in unit cost.
(ii) Such saving is of permanent nature.
(iii) The utility and quality of the goods and services remain unaffected, if not improved.

Question-2
STATE in brief how Cost Accounting and Management Accounting is related or different from
each other.
Answer:
The term Cost Accounting and Management Accounting is interchangeably by various
laureates as both the disciplines are interrelated. Management accounting to enable its
users to take timely and judicious decisions takes inputs from cost accounting, financial
accounting, statistics and operation management tools etc. Among other sources of
information Cost Accounting system provides cost related information. There are few
differences between these two disciplines which are tabulated as below:
Difference between Cost Accounting and Management Accounting
Basis Cost Accounting Management Accounting
(i) Nature It records the quantitative aspect It records both qualitative and
only. quantitative aspect.
(ii) Objective It records the cost of producing a It Provides information to
product and providing a service. management for planning and
co-ordination.
(iii) Area It only deals with cost It is wider in scope as it includes
Ascertainment. financial accounting, budgeting,
taxation, planning etc.

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 1.3 Cost and Management Accounting

(iv) Recording of It uses both past and present It is focused with the projection
data figures. of figures for future.
(v) Development Its development is related to It develops in accordance to the
industrial revolution. need of modern business world.
(vi) Rules and It follows certain principles and It does not follow any specific
Regulation procedures for recording costs rules and regulations.
of different products.

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 2 Material Cost
Question 1 (Economic Order Quantity):
Arnav Ltd. manufactures a product X which requires two raw materials A and B in a ratio of
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.
Stock position at the beginning of the year is as below:
Product- X 12,000 units
Material A 24,000 units
Material B 52,000 units
To place an order the company has to spend `15,000. The company is financing its
working capital using a bank cash credit @13% p.a.
Product X is sold at `1,040 per unit. Material A and B is purchased at `150 and `200
respectively.
Required:
COMPUTE economic order quantity (EOQ):
(i) If purchase order for the both materials is placed separately.
(ii) If purchase order for the both materials is not placed separately.

Answer:
Workings:
Annual production of Product X = Annual demand – Opening stock
= 5,00,000 – 12,000 = 4,88,000 units
Annual requirement for raw materials = Annual production × Material per unit – Opening
stock of material
Material A = 4,88,000 × 4 units – 24,000 units = 19,28,000 units
Material B = 4,88,000 × 16 units – 52,000 units = 77,56,000 units
(i) Computation of EOQ when purchase order for the both materials is placed
separately

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 Material Cost 2.2

2  AnnualRe quirement for material  Orderingcos t

EOQ =
Carryingcos t per unit per annum

2  19,28,000units `15,000 38,56,000 `15,000

Material A = = = 54,462 units
13%of `150 `19.5

2  77,56,000units `15,000 1,55,12,000 `15,000

Material B = = = 94,600 units
13%of `200 `26

(ii) Computation of EOQ when purchase order for the both materials is not placed
separately
2  (19,28,000  77,56,000)units `15,000
Material A & B =
13%of `190

1,93,68,000 `15,000
= = 1,08,452 units
`24.7
1,08,452  19,28,000
Material A = = 21,592 units
96,84,000
1,08,452  77,56,000
Material A = = 86,860 units
96,84,000
(`150  19,28,000)  (`200  77,56,00)
* = `190
(19,28,000  77,56,000)

Question 2 (Stock levels):

A company manufactures 5,00,000 units of a product per month. The cost of placing an order
is `1,000. The purchase price of the raw material is `50 per kg. The re-order period is 4 to 8
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.
You are required to CALCULATE
(i) Re-order quantity (ii) Re-order level
(iii) Maximum level (iv) Minimum level
(v) Average stock level
Answer:
(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

= 18,000 kg. × 8 days = 1,44,000 kg.
(iii) Maximum level = ROL + ROQ – (Min. usage × Min. re-order period)
= 1,44,000 kg. + 34,176 kg. – (14,000 kg.× 4 days)
= 1,22,176 kg.
(iv) Minimum level = ROL – (Normal usage × Normal re-order period)
= 1,44,000 kg. – (16,000 kg. × 6 days)
= 48,000 kg.
1
(v) Average stock level = (Maximum level + Minimum level)   
2
1
  = (1,22,176 kg. + 48,000 kg.) = 85,088 kg.
2
OR
1
= Minimum level + ROQ
2
1
= 48,000 kg. + × 34,176 kg. = 65,088 kg.
2
Working Note
Annual consumption of raw material (A) = (16,000 kg. × 365 days) = 58,40,000 kg.
Cost of placing an order (O) = ` 1,000
Carrying cost per kg. Per annum (c × i) = ` 50 × 20% = ` 10
2AO
Economic order quantity (EOQ) =
C×i

2  58,40,000 kgs.  `1,000

= = 34,176 kg.
` 10

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 Employee Cost and Direct
3 Expenses
Question 1:
The following particulars have been extracted from the records of MJ Ltd.
Workers
A B C
Actual hours worked in a month 152 160 136
Hourly rate of wages ` 50 ` 55 ` 48
Production in units
Product- P 84 - 240
Product- Q 144 - 540
Product -R 184 100 -
Standard time allowed per unit of each product is:
P Q R
Minutes 12 18 30
For the purpose of piece rate, each minute is valued at `1/-
You are required to CALCULATE the wages of each worker under:
(i) Guaranteed hourly rates basis
(ii) Piece work earnings basis, but guaranteed at 75% of basic pay (guaranteed hourly rate)
if the earnings are less than 50% of basic pay.
(iii) Premium bonus basis where the worker receives bonus based on Rowan scheme.
Answer:
(i) Computation of wages of each worker under guaranteed hourly rate basis
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

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 Employee Cost and Direct Expenses 3.2

C 136 48 6,528
(ii) Computation of wages of each worker under piece work earnings basis
Worker A Worker B Worker C
Product Rate per Units Wages Units Wages Units Wages
unit (`) (`) (`)
(a) (b) (c) (d= b*c) (e) (f = b*e) (g) (h=b*g)
P 12 84 1,008 - - 240 2,880
Q 18 144 2,592 - - 540 9,720
R 30 184 5,520 100 3,000 - -
9,120 3,000 12,600
Since each worker has been guaranteed at 75% of basic pay, if their earnings are less
than 50% of basic pay (guaranteed hourly rate), earning of the workers will be as follows:
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
`6,600 i.e. 75% × `8,800 .
Working Notes:
1. Piece rate / per unit
Product Standard time per Piece rate each Piece rate per unit
unit in minutes minute (`) (`)
(a) (b) (c) (d) = (b) × (c)
P 12 1.00 12.00
Q 18 1.00 18.00
R 30 1.00 30.00
2. Time allowed to each worker
Worker A = (84 units × 12 minutes) + (144 units × 18 minutes) + (184 units × 30
minutes)
= 9,120 minutes or 152 hours
Worker B = 100 units × 30 minutes
= 3,000 minutes or 50 hours
Worker C = (240 units × 12 minutes) + (540 units × 18 minutes)
= 12,600 minutes or 210 hours

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 3.3 Cost and Management Accounting

(iii) Computation of wages of each worker under Premium bonus basis (where each
worker receives bonus based on Rowan Scheme)
Workers Time Time Time Wage Earnings Bonus Total of
allowed taken saved rate/hour earning &
hours hours hours bonus
(`) (`) (`) (`)
A 152 152 - 50 7,600 - 7,600
B 50 160 - 55 8,800 - 8,800
C 210 136 74 48 6,528 2,300* 8,828
Time saved
* Bonus under Rowan scheme = × Time taken × Rate per hour
Time allowed
74 hours
= × 136 hours × `48 = `2,300
210hours

Question 2 :
The existing incentive system of Alpha Limited is as under:
Normal working week 5 days of 8 hours each plus 3 late shifts of 3
hours each
Rate of Payment Day work: `160 per hour
Late shift: `225 per hour
Average output per operator for 49-hours 240 articles
week i.e. including 3 late shifts
In order to increase output and eliminate overtime, it is 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 : 2.5 hours
articles
Piece-work rate : Add 20% to basic piece-
rate
Premium Bonus : Add 50% to time.
If during the last week 270 articles are produced in a 40-hour week.
Required:

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 Employee Cost and Direct Expenses 3.4

(i) CALCULATE weekly earnings, number of articles produced and labour cost per article for
one operator under the following systems:
(a) Existing time-rate
(b) Straight piece-work
(c) Rowan system
(d) Halsey premium system
(ii) PREPARE a Statement showing hours worked, weekly earnings, number of articles
produced and labour cost per article for one operator under the above systems.
Answer:
(i) (a) Existing time rate
Weekly wages:
Normal shift (40 hours × `160): `6,400
Late shift (9 hours × `225) `2,025
`8,425
(b) Piece Rate System
15 articles are produced in 2.5 hours
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 

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 3.5 Cost and Management Accounting

 27.5hours 
= (40hours× ` 160)+  ×40hours× ` 160  = `9,007.41
 67.5hours 
(d) Halsey Premium System
1
= (Time taken×Rate per hour)+ ( ×Time saved×Rate per hour)
2
1 
= (40hours× ` 160)+  ×27.5hours× ` 160  = `6,400 + `2,200 = `8,600
2 
(ii) Statement showing hours worked, weekly earnings, number of articles produced and
cost per article
Method of Payment Hours Weekly Number of Labour cost
worked earnings articles per article
(`) produced (`)
Existing time rate 49 8,425.00 240 35.10
Straight piece rate system 40 8,640.00 270 32.00
Rowan Premium System 40 9,007.41 270 33.36
Halsey Premium System 40 8,600.00 270 31.85

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 Overhead: Absorption
4 Costing Method
Question 1 (Re-apportionment of overheads using Trial and Error Method):
SA Ltd. has three production (M1, M2 and A1) and three service departments (Stores,
Engineering services and General service). Engineering department serves the M1 and M2
only.
The relevant information related with Product X and Y are as follows:
Product X Product Y
M1 10 Machine hours 6 Machine hours
M2 4 Machine hours 14 Machine hours
A1 14 Direct labour hours 18 Direct labour hours
The annual budgeted overhead cost for the year is
Indirect Wages (`) Consumable Supplies(`)
M1 9,30,400 2,52,000
M2 8,26,800 3,64,000
A1 3,24,400 84,000
Stores 1,64,000 56,000
Engineering Service 1,06,800 84,000
General Service 1,50,400 64,000

(`)
 Depreciation on Machinery 7,92,000
 Insurance of Machinery 1,44,000
 Insurance of Building 64,800 (Total building insurance cost for M1 is
one third of annual premium)
 Power 1,29,600
 Light 1,08,000
 Rent 2,53,500 (The general service deptt. is located in a

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 Overhead: Absorption costing method 4.2

building owned by the company. It is

valued at `1,20,000 and is charged into
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
as shown above for the Consumable supplies.
The following data are also available:
Department Book value Area Effective Production Capacity
Machinery (`) (Sq. ft.) H.P. hours % Direct Labour Machine
hour hour
M1 24,00,000 5,000 50 2,00,000 40,000
M2 18,00,000 6,000 35 1,50,000 50,000
A1 6,00,000 8,000 05 3,00,000 
Stores 2,40,000 2,000   
Engg. Service 7,20,000 2,500 10  
General 2,40,000 1,500   
Service
Required:
(i) PREPARE an overhead analysis sheet, showing the bases of apportionment of overhead
to departments.
(ii) PREPARE a statement allocating service department overheads to production
department ignoring the apportionment of service department costs among service
departments.
(iii) CALCULATE suitable overhead absorption rate for the production departments.
(iv) CALCULATE the overheads to be absorbed by two products, X and Y.
Answer:
(i) Summary of Apportionment of Overheads
(`)
Basis of Total Production Deptt. Service Deptt.
Items Apportionment Amount M1 M2 A1 Store Enginee General
Service ring Service
Service

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 4.3 Cost and Management Accounting

Indirect Allocation given 25,02,800 9,30,400 8,26,800 3,24,400 1,64,000 1,06,800 1,50,400
wages
Consumable Allocation given 9,04,000 2,52,000 3,64,000 84,000 56,000 84,000 64,000
stores
Depreciation Capital value of 7,92,000 3,16,800 2,37,600 79,200 31,680 95,040 31,680
machine
(20:15:5:2:6:2)
Insurance of Capital value of 1,44,000 57,600 43,200 14,400 5,760 17,280 5,760
Machine machine
(20:15:5:2:6:2)
Insurance on 1/3rd to M1 64,800 21,600 12,960 17,280 4,320 5,400 3,240
Building Balance area
basis
(-:12:16:4:5:3)
Power HP Hr% 1,29,600 64,800 45,360 6,480  12,960 
(10:7:1:-:2:-)
Light Area 1,08,000 21,600 25,920 34,560 8,640 10,800 6,480
(10:12:16:4:5:3)
Rent* Area 2,53,500 53,940 64,720 86,300 21,580 26,960 --
(10:12:16:4:5:-)
Total 48,98,700 17,18,740 16,20,560 6,46,620 2,91,980 3,59,240 2,61,560

*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.

(ii) Allocation of service departments overheads

Production Deptt. Service Deptt.
Service Basis of
Deptt. Apportionment M1 M2 A1 Store Engineering General
Service Service Service
Store Ratio of
consumable 1,05,120 1,51,820 35,040 (2,91,980)  
value (126 :182
: 42)
Engineering In Machine
service hours Ratio of 1,59,660 1,99,580   (3,59,240) 
M1 and M2 (4 :
5)

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 Overhead: Absorption costing method 4.4

General Labour hour

service Basis 80,480 60,360 1,20,720   (2,61,560)
(20 : 15 : 30)
Production 17,18,740 16,20,560 6,46,620
Department
allocated in
(i)
Total 20,64,000 20,32,320 8,02,380

(iii) Overhead Absorption rate

M1 M2 A1
Total overhead allocated 20,64,000 20,32,320 8,02,380
Machine hours 40,000 50,000 
Labour hours   3,00,000
Rate per machine hour 51.60 40.65 
Rate per Direct labour   2.67
(iv) Statement showing overhead absorption for Product X and Y
Machine Deptt. Absorption Rate Product X Product Y
Hours (`) Hours (`)
M1 51.60 10 516.00 6 309.60
M2 40.65 4 162.60 14 569.10
A1 2.67 14 37.38 18 48.06
715.98 926.76

Question 2 (Re-apportionment of overheads using Repeated distribution method):

DT Ltd. is a manufacturing company having three production departments, ‘A’, ‘B’ and ‘C’
and two service departments ‘X’ and ‘Y’. The following budget is for December 20X8:
Total (`) A (`) B (`) C (`) X (`) Y (`)
Direct 20,00,000 40,00,000 80,00,000 40,00,000 20,00,000
material
Direct wages 1,00,00,000 40,00,000 1,60,00,000 20,00,000 40,00,000
Factory rent 80,00,000
Power 50,00,000

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 4.5 Cost and Management Accounting

Depreciation 20,00,000
Other 1,80,00,000
overheads
Additional information:
Area (Sq. ft.) 500 250 500 250 500
Capital value of assets (` 400 800 400 200 200
lakhs)
Machine hours 1,000 2,000 4,000 1,000 1,000
Horse power of machines 50 40 20 15 25

A technical assessment of the apportionment of expenses of service departments is as

under:
A B C X Y
Service Dept. ‘X’ (%) 45 15 30 – 10
Service Dept. ‘Y’ (%) 60 35 – 5 –
Required:
(i) PREPARE a statement showing distribution of overheads to various departments.
(ii) PREPARE a statement showing re-distribution of service departments expenses to
production departments.
(iii) CALCULATE machine hour rates of the production departments ‘A’, ‘B’ and ‘C’.
Answer:
(i) Overhead Distribution Summary
Basis Total (`) A (`) B (`) C (`) X (`) Y (`)
Direct Direct – – – – 40,00,000 20,00,000
materials
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

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 Overhead: Absorption costing method 4.6

(ii) Redistribution of Service Department’s expenses

A (`) B (`) C (`) X (`) Y (`)
Total overheads 54,00,000 74,00,000 1,20,00,000 95,00,000 1,07,00,000
Dept. X overhead 42,75,000 14,25,000 28,50,000 (95,00,000) 9,50,000
apportioned in the ratio
(45:15:30: —:10)
Dept. Y overhead 69,90,000 40,77,500  5,82,500 (1,16,50,000)
apportioned in the ratio
(60:35: —:5: —)
Dept. X overhead 2,62,120 87,380 1,74,760 (5,82,500) 58,240
apportioned in the ratio
(45:15:30: —:10)
Dept. Y overhead 34,940 20,380  2,920 (58,240)
apportioned in the ratio
(60:35: —:5: —)
Dept. X overhead 1,300 440 880 (2,920) 300
apportioned in the ratio
(45:15:30: —:10)
Dept. Y overhead 180 120 - - (300)
apportioned in the ratio
(60:35: —:5: —)
1,69,63,540 1,30,10,820 1,50,25,640  

(iii) Machine hour rate:

A B C
A Total overheads (`) 1,69,63,540 1,30,10,820 1,50,25,640
B Machine hours 1,000 2,000 4,000
C Machine hour rate (`) [A ÷ B] 16,963.54 6,505.41 3,756.41

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 Activity Based
5 Costing (ABC)
Question-1
A company manufactures three products namely A, B and C in a factory. The following cost data
for the month of March, 20X8 are as under:
Activity A B C
Unit produced 10,000 15,000 20,000
Direct labour hour per unit 3 4.5 4
Machine hour per unit 6 4 5
Set-up of machines 20 25 30
Number of orders 15 12 10
Machine operating cost (`) 34,50,000
Machine set-up cost (`) 4,36,000
Order processing cost (`) 2,56,000

Required:
(i) IDENTIFY Cost pool, Cost drivers.
(ii) CALCULATE cost driver rate.
(iii) CALCULATE overheads rate per unit using activity- based costing method.
Answer:
(i) Identification of Cost pools and cost drivers:
Cost Pools Cost Drivers
Machine operating cost No. of machine hours
Machine set-up cost No. of machine set-ups
Order processing cost No. of orders

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 Activity Based Costing (ABC) 5.2

(ii) Calculation of cost driver rate:

Cost Pools Cost (`) Cost Drivers Rate per cost
driver (`)
Machine operating 34,50,000 2,20,000 machine hours 15.68
cost {(10,000×6)+(15,000×4)+(20,000×5)}
Machine set-up 4,36,000 75 set-ups 5,813.33
cost (20+25+30)
Order processing 2,56,000 37 orders 6,918.92
cost (15+12+10)

(iii) Calculation of overhead rate per unit using ABC:

Activity Cost Products
driver A B C
rate (`)
Total Cost Rate Rate Rate
per per per
unit unit unit
(i) (ii) = (i)×Cost (iii) ÷ (ii) = (i)×Cost (iii) (ii) = (i)×Cost (iii)
driver units driver ÷ driver ÷
unit unit
s s
Machine 15.68 9,40,800 94.08 9,40,800 62.72 15,68,000 78.40
operating
(15.68×60000) (15.68×60000) (15.68×1,00000)
cost
Machine 5,813.33 1,16,267 11.63 1,45,333 9.69 1,74,400 8.72
set-up
(5,813.33×20) (5,813.33×25) (5,813.33×30)
cost
Order 6,918.92 1,03,784 10.38 83,027 5.54 69,189 3.46
processi
(6,918.92×15) (6,918.92×12) (6,918.92×10)
ng cost

Question-2
CDE Ltd. is following Activity based costing. Budgeted overheads, cost drivers and volume are
as follows:
Cost pool Budgeted Cost driver Budgeted volume
overheads (`)

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 5.3 Cost and Management Accounting

Material 18,42,000 No. or orders 1,200

procurement
Material handling 8,50,000 No. of movement 1,240
Maintenance 24,56,000 Maintenance hours 17,550
Set-up 9,12,000 No. of set-ups 1,450
Quality control 4,42,000 No. of inspection 1,820
The company has produced a batch of 7,600 units, its material cost was `24,62,000 and wages
`4,68,500. Usage activities of the said batch are as follows:
Material orders 56
Material movements 84
Maintenance hours 1,420 hours
Set-ups 60
No. of inspections 18
Required:
(i) CALCULATE cost driver rates.
(ii) CALCULATE the total and unit cost for the batch.
Answer:
(i) Calculation of cost driver rate:
Cost pool Budgeted Cost driver Cost driver
overheads (`) rate (`)
Material 18,42,000 1,200 1,535.00
procurement
Material handling 8,50,000 1,240 685.48
Maintenance 24,56,000 17,550 139.94
Set-up 9,12,000 1,450 628.97
Quality control 4,42,000 1,820 242.86
(ii) Calculation of cost for the batch:
Particulars Amount (`) Amount (`)
Material cost 24,62,000.00
Wages 4,68,500.00
Overheads:

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 Activity Based Costing (ABC) 5.4

- Material procurement (`1,535×56 orders) 85,960.00

- Material handling (`685.48×84 movements) 57,580.32
- Maintenance (`139.94×1,420 hours) 1,98,714.80
- Set-up (`628.97×60 set-ups) 37,738.20
- Quality control (`242.86×18 inspections) 4,371.48 3,84,364.80
Total Cost 33,14,864.80
No. of units 7,600
Cost per units 436.17

Question-3
MST Limited has collected the following data for its two activities. It calculates activity cost rates
based on cost driver capacity.
Activity Cost Driver Capacity Cost (`)
Power Kilowatt hours 50,000 kilowatt hours 40,00,000
Quality Inspections Number of 10,000 Inspections 60,00,000
Inspections
The company makes three products M, S and T. For the year ended March 31, 20X7, the following
consumption of cost drivers was reported:
Product Kilowatt hours Quality Inspections
M 10,000 3,500
S 20,000 2,500
T 15,000 3,000
Required:
(i) PREPARE a statement showing cost allocation to each product from each activity.
(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
budgeted fixed overhead cost rate.
Answer:
(i) Statement of cost allocation to each product from each activity
Product
M (`) S (`) T (`) Total (`)

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 5.5 Cost and Management Accounting

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

(Refer to (10,000 kWh ×`80) (20,000 kWh ×`80) (15,000 kWh ×`80)
working note)
Quality 21,00,000 15,00,000 18,00,000 54,00,000
Inspections (3,500 inspections (2,500 inspections (3,000 inspections
(Refer to ×`600) ×`600) ×`600)
working note)

Working Note:
Rate per unit of cost driver:
Power :(`40,00,000 ÷ 50,000 kWh) = `80/kWh
Quality Inspection :(`60,00,000 ÷ 10,000 inspections) = `600 per inspection
(ii) Calculation of cost of unused capacity for each activity:
(`)
Power 4,00,000
(`40,00,000 – `36,00,000)
Quality Inspections 6,00,000
(`60,00,000 – `54,00,000)
Total cost of unused capacity 10,00,000
(iii) Factors management consider in choosing a capacity level to compute the budgeted fixed
overhead cost rate:
- Effect on product costing & capacity management
- Effect on pricing decisions.
- Effect on performance evaluation
- Effect on financial statements
- Regulatory requirements.
- Difficulties in forecasting for any capacity level.

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 6 Cost Sheet
Question 1:
Arnav Inspat Udyog Ltd. has the following expenditures for the year ended 31st March, 20X8:
Sl. Amount (`) Amount (`)
No.
(i) Raw materials purchased 10,00,00,000
(ii) GST paid on the above purchases @18% (eligible for 1,80,00,000
input tax credit)
(iii) Freight inward 11,20,600
(iv) Wages paid to factory workers 29,20,000
(v) Contribution made towards employees’ PF & ESIS 3,60,000
(vi) Production bonus paid to factory workers 2,90,000
(vii) Royalty paid for production 1,72,600
(viii) Amount paid for power & fuel 4,62,000
(ix) Amount paid for purchase of moulds and patterns (life 8,96,000
is equivalent to two years production)
(x) Job charges paid to job workers 8,12,000
(xi) Stores and spares consumed 1,12,000
(xii) Depreciation on:
- Factory building 84,000
- 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

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 Cost Sheet 6.2

- Factory building 18,100

- Stock of raw materials & WIP 36,000 85,300
(xvi) Expenses paid for quality control check activities 19,600
(xvii) Salary paid to quality control staffs 96,200
(xviii) Research & development cost paid improvement in 18,200
production process
(xix) Expenses paid for pollution control and engineering & 26,600
maintenance
(xx) Expenses paid for administration of factory work 1,18,600
(xxi) Salary paid to functional mangers:
- Production control 9,60,000
- Finance & Accounts 9,18,000
- Sales & Marketing 10,12,000 28,90,000
(xxii) Salary paid to General Manager 12,56,000
(xxiii) Packing cost paid for:
- Primary packing necessary to maintain 96,000
quality
- For re-distribution of finished goods 1,12,000 2,08,000
(xxiv) Interest and finance charges paid 7,20,000
(xxv) Fee paid to auditors 1,80,000
(xxvi) Fee paid to legal advisors 1,20,000
(xxvii) Fee paid to independent directors 2,20,000
(xxviii) Performance bonus paid to sales staffs 1,80,000
(xxix) Value of stock as on 1st April, 20X7:
- Raw materials 18,00,000
- Work-in-process 9,20,000
- Finished goods 11,00,000 38,20,000
(xxx) Value of stock as on 31st March, 20X8:
- Raw materials 9,60,000
- Work-in-process 8,70,000
- Finished goods 18,20,000 36,50,000

Amount realized by selling of scrap and waste generated during manufacturing process –
`86,000/-

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 6.3 Cost and Management Accounting

From the above data you are requested to PREPARE Statement of cost for Arnav Ispat Udyog
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.
Answer:
Statement of Cost of Arnav Ispat Udyog Ltd. for the year ended 31st March, 20X8:
Sl. Particulars Amount (`) Amount (`)
No.
(i) Material Consumed:
- Raw materials purchased 10,00,00,000
- Freight inward 11,20,600
Add: Opening stock of raw materials 18,00,000
Less: Closing stock of raw materials (9,60,000) 10,19,60,600
(ii) Direct employee (labour) cost:
- Wages paid to factory workers 29,20,000
- Contribution made towards employees’ PF 3,60,000
& ESIS
- Production bonus paid to factory workers 2,90,000 35,70,000
(iii) Direct expenses:
- Royalty paid for production 1,72,600
- Amount paid for power & fuel 4,62,000
- Amortised cost of moulds and patterns 4,48,000
- Job charges paid to job workers 8,12,000 18,94,600
Prime Cost 10,74,25,200
(iv) Works/ Factory overheads:
- Stores and spares consumed 1,12,000
- Depreciation on factory building 84,000
- Depreciation on plant & machinery 1,26,000
- Repairs & Maintenance paid for plant & 48,000
machinery
- Insurance premium paid for plant & 31,200
machinery
- Insurance premium paid for factory building 18,100
- Insurance premium paid for stock of raw 36,000
materials & WIP

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 Cost Sheet 6.4

- Salary paid to supervisors 1,26,000

- Expenses paid for pollution control and
engineering & maintenance 26,600 6,07,900
Gross factory cost 10,80,33,100
Add: Opening value of W-I-P 9,20,000
Less: Closing value of W-I-P (8,70,000)
Factory Cost 10,80,83,100
(v) Quality control cost:
- Expenses paid for quality control check 19,600
activities
- Salary paid to quality control staffs 96,200 1,15,800
(vi) Research & development cost paid improvement in 18,200
production process
(vii) Administration cost related with production:
- Expenses paid for administration of factory 1,18,600
work
- 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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 6.5 Cost and Management Accounting

(assuming related with non-equity fund)

(xi) Selling overheads:
- Repairs & Maintenance paid for sales office 18,000
building
- Salary paid to Manager- Sales & Marketing 10,12,000
- Performance bonus paid to sales staffs 1,80,000 12,10,000
(xii) Distribution overheads:
- Depreciation on delivery vehicles 86,000
(xiii) - Packing cost paid for re-distribution of
finished goods 1,12,000 1,98,000
Cost of Sales 11,35,03,300

Notes:

(i) GST paid of purchase of raw materials would not be part of cost of materials as it is eligible for
input credit.

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 8
Question-1
Unit & Batch Costing
A factory can produce 1,80,000 units per annum at its 60% capacity. The estimated costs of
production are as under:
Direct material `300 per unit
Direct employee cost `160 per unit
Indirect expenses:
- Fixed `32,50,000 per annum
- Variable `50 per unit
- Semi-variable `80,000 per annum up to 50% capacity and `15,000 for
every 20% increase in the capacity or part thereof.
If production program of the factory is as indicated below and the management desires to
ensure a profit of `10,00,000 for the year, DETERMINE the average selling price at which
each unit should be quoted:
First three months of the year- 50% of capacity;
Remaining nine months of the year- 75% of capacity.
Answer:
Statement of Cost

First three Remaining nine Total (`)

months (`) months (`)
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
Direct employee cost 60,00,000 2,70,00,000 3,30,00,000
Indirect- variable expenses 18,75,000 84,37,500 1,03,12,500
Indirect – fixed expenses 8,12,500 24,37,500 32,50,000
Indirect- semi-variable expenses
- For first three months @ `80,000 20,000
p.a.
- For remaining nine months @ 82,500 1,02,500
`1,10,000 p.a.

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 Unit & Batch Costing 8.2

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

Desired profit - - 10,00,000
Sales value - - 10,95,40,000
Average selling price per unit 531.10
Question-2
Star study centre provides coaching classes to school students. The study centre has taken
an auditorium of 250 seat capacity on rent of `3,75,000 per month. It has also hired some
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.
(i) CALCULATE the total cost per batch.
(ii) COMPUTE the minimum fee to be charged per student in a batch, if the centre operates
at 60% capacity.
(iii) DETERMINE the fee per student if the study centre desires to earn a profit of 50% and
study centre operates at 50% capacity.
Answer:
(i) Calculation of total cost per batch:
Particulars Amount (`)
(i) Auditorium hire charges (`3,75,000 × 4 months) 15,00,000
(ii) Teachers’ remuneration (`3,000 × 2 hours × 3 days × 4 2,88,000
weeks × 4 months)
Total cost 17,88,000
(ii) Computation of minimum fee per student per batch:

TotalCost `17,88,000
Minimum fee to be charged = = = `11,920/-
No. of students 150 students

Total Cost + Profit `17,88,000 +`8,94,000

(iii) Fee to be charged per student = =
No. of students 125 students

`26,82,000
= `21,456/-
125 students

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 12 Service Costing
Question 1 (Costing of Toll Roads):
SLS Infrastructure built and operates 110 k.m. highway on the basis of Built-Operate-Transfer
(BOT) for a period of 25 years. A traffic assessment has been carried out to estimate the traffic
flow per day shows the following figures:
Sl. No. Type of vehicle Daily traffic volume
1. Two wheelers 44,500
2. Car and SUVs 3,450
3. Bus and LCV 1,800
4. Heavy commercial vehicles 816

The following is the estimated cost of the project:

Amount (` in
Sl. no. Activities lakh)
1 Site clearance 170.70
2 Land development and filling work 9,080.35
3 Sub base and base courses 10,260.70
4 Bituminous work 35,070.80
5 Bridge, flyovers, underpasses, Pedestrian subway, footbridge, etc 29,055.60
6 Drainage and protection work 9,040.50
7 Traffic sign, marking and road appurtenance 8,405.00
8 Maintenance, repairing and rehabilitation 12,429.60
9 Environmental management 982.00
Total Project cost 114,495.25
An average cost of `1,120 lakh has to be incurred on administration and toll plaza operation.
On the basis of the vehicle specifications (i.e. weight, size, time saving etc.), the following weights
has been assigned to the passing vehicles:
Sl. No. Type of vehicle
1. Two wheelers 5%

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 Service Costing 12.2

2. Car and SUVs 20%

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

Required:
(i) CACULATE the total project cost per day of concession period.
(ii) COMPUTE toll fee to be charged for per vehicle of each type, if the company wants earn a profit
of 15% on total cost.
[Note: Concession period is a period for which an infrastructure is allowed to operate and recovers its
investment]
Answer:
(i) Calculation of total project cost per day of concession period:
Activities Amount (` in lakh)

Site clearance 170.70

Land development and filling work 9,080.35
Sub base and base courses 10,260.70
Bituminous work 35,070.80
Bridge, flyovers, underpasses, Pedestrian subway, footbridge, etc 29,055.60
Drainage and protection work 9,040.50
Traffic sign, marking and road appurtenance 8,405.00
Maintenance, repairing and rehabilitation 12,429.60
Environmental management 982.00
Total Project cost 114,495.25
Administration and toll plaza operation cost 1,120.00
Total Cost 115,615.25
Concession period in days (25 years × 365 days) 9,125
Cost per day of concession period (` in lakh) 12.67

(ii) Computation of toll fee:

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

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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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