SP JAIN | COST ACCOUNTING | Sept 2021 to December 2021 |

Case study
Copyrights: Dr. Milind Vinod FCA | CPA | MBA (Finance)| MFT | LLB (Gen)
milind_vinod@yahoo.co.in | 00971 50 80735 25 | 0091 882 893 9158
This comprehensive case study introduces you to some basic cost accounting
terminologies, calculations, explains range of costing principles and the fundamental
process of product costing. The idea of this case study is to introduce you to the
process of costing a product. We will build on these concepts in later chapters. (3-9)
In the end you are required to summarise the process and submit an essay which
will count towards your internal assessment.

A1 Garage and Service Centre

Background Information
A1 garage and service centre offers vehicles repairing and routine maintenance
services. The financial accountant produces monthly accounts, but the management
is not happy with the profitability of statements. The customers are billed at a
standardised rate which are at best based on the estimates provided by the
workshop manager for each job. Currently customers are billed @ 400% of the cost
of spare parts and materials. However, the manager feels that this is leading to some
jobs being over charged and some being undercharged. The management has hired
you as a professional cost accountant and has asked you to install a detailed job
costing system at its workshop. You have studied the operations of the garage and
the monthly financial statements and have made the following notes.
Operational information
The workshop has three divisions, namely Finishing division where Denting Painting
jobs are carried out, the Mechanical & Electrical where technical services are offered
and servicing. In addition, there is an administration department and a centralised
store. The broad roles of these departments and the workflow runs as under.
Administration department.
The broad role of this department is to receive vehicles, inspect them and open a job
card indicating the broad nature of the work. It comprises of an insurance surveyor
and accountant and a general manager. The accounts department values the
materials based on stores issue note and bills the customers. The general manager
is involved in procuring the business and for overall supervision of the workshop. 3
people work in this department and draw an average wage of 1200.
Stores Department
The stores department is fully responsible for procurements of all the spares and for
issuing them to the floor manager based on the requisition slips. The storekeeper is
also responsible for inventory and custody of tools and equipment’s used by the
other departments. Lone storekeeper manages the stores and is paid 600 per
month.
Denting Painting Department (Finishing division)
This department is responsible for external refurbishing and carrying out the denting
painting and related jobs. The main item consumed are paint, thinner which accounts
for almost 90% of the consumption value wise. The manpower is mostly unskilled.
There are 5 workers who are paid an average wage of 1500 per month and are
provided staff accommodation. They work for on an average 22 days a month 12
hours a day.
Mechanical and Electrical division
This division comprises of highly skilled technicians and the nature of each job varies
vastly from each other. 4 workers each drawing a wage of 2500 per month, man this
division and all are provided staff accommodation. The average days put in by each
of them are 22 and each day comprises of 12 hours
Servicing
This division sees a steady flow of walk-in customers who mainly opt for car
washing, routine Oil filter change services and comprises of 7 semi-skilled workers.
They draw on an average 1000 per month and are provided with accommodation
too. They put in 25 days a month and work for 15 hours a day.
Financial and other Quantitative information
The following information summarises the overall costs structure of the divisions.
1. All the workmen are insured comprehensively under the group insurance
policy which costs the workshop 12,000 per month.
2. Workshop rental amounts to 60,000, the staff accommodation costs 16,000,
general heating and lighting for workshop amounts to 2500 per month.
3. The stores mainly services the three production departments Finishing,
Technical and Servicing estimated at 20%, 30% and 50 % respectively.
4. The administrative department provides services to all the 3 production
departments and to stores in the ratio of 20% 20% 50% and 10% respectively.
5. The accountant has proposed three different bases for absorption of
overheads on to the jobs namely: % of materials costs for finishing division,
(expected value (M) 97000), number of labour hours (#1096) for the technical
division and number of vehicles (#1000) to be serviced for the servicing
division.
6. Depreciation is on heavy equipment and machinery installed in three sections
and is based on budgeted machine hours. Power consumption is closely
monitored as different rates are prescribed by the local electricity supplier.
 7. Cost accountant is proposing a margin of 200% on the total cost of Job.

8. The following table summarises the other quantitative and financial

information for each of the 5 departments. (M): Monetary value (#) Units

Departments Finishing Technical Servicing Administrative Stores Total

Expenses
Depreciation (M) 4850 6025 3000 0 0 13875
Rent workshop (M) 60000
Rent 16000
accommodation(M
)
Electrical watt (#) 100 200 400 25 75 800
Unit rate @ (M) 2 2 3 1 1
Printing and
Stationery (M) 600 1200 1800
Administrative (M) 100 100 250 150 200 800
areas occupied (#) 900 1200 1500 300 600 4500

Cost Details Job# 53 Job# 84 Job# 3

Oil filter (M) 24
Spray paint (M) 543
Electrical parts (M) 257
Mechanical parts 753
(M)
Labour hours (#) 8 64 1
Electricity hours 7 25 1
(#)

Exercise (The problem will be solved in the classroom)

A: Produce invoices for jobs #53, #84, and #3, using Accountant’s approach.
B: Produce invoices for jobs #53, #84, and #3, using Cost Accountant’s approach.

Required: (Group assignment for the students)

Using the above data write a critical essay of around 500 words on the approaches
adopted by the two Accountants.

Assignment is due in week: