Professional Documents
Culture Documents
Topic Page #
Introduction to CMA 01
Joint and By Product 15
Process Costing 39
Variance Analysis Part I 77
Marginal and Absorption Costing 155
Test Questions 177
Raw materials
Opening inventory 25,000
Purchases 150,000
175,000
Less: Closing inventory (20,000)
Raw materials consumed 155,000
Manufacturing wages 100,000
Prime cost 255,000
Factory Overheads
Light and power 72,000
Depreciation of production machinery 40,000
Depreciation of factory 50,000_
162,000
Manufacturing costs/Factory cost 417,000
Opening work in progress 85,000
Closing work in progress (95,000)
Cost of goods made/Manufactured 407,000
Page 1 of 13
Q:1 XYZ limited manufactures four products. The related data for the year ended Dec31, 2009 is as
follows:
A B C D
Opening stock:
• Units 10,000 15,000 20,000 25,000
• Cost 70,000 120,000 180,000 310,000
• NRV 75,000 110,000 180,000 300,000
Production(units) 50,000 60,000 75,000 100,000
Cost of goods produced 400,000 600,000 825,000 1,200,000
Closing stock(units) 5,000 10,000 15,000 24,000
Stock valuation method Weighted Weighted FIFO FIFO
Average Average
Required:
Q:2 Inventory balance of Waqar Corporation at the end of its financial year were as follows:
January December
01,2015 31,2015
Finished goods 100,000 72,000
Work-in-process 160,000 192,000
Materials 88,000 120,000
Following transaction occurred during the year
Material purchased 1,200,000
Supplies & indirect material purchase 200,000
Direct labour cost 480,000
Indirect labour cost 240,000
Depreciation-Factory building 80,000
Depreciation-office building(50% to sale office and 50%to head office) 60,000
Utilities(75%tofactory, 10% to sale office and 15%to head office) 200,000
Supplies & indirect material issue 160,000
Sale office salaries 160,000
Head office salaries 96,000
Sales 2,920,000
Required:
i. Cost of goods manufactured statement for the year ended 31 December 2015.
ii. Income statement for the year ended 31 December 2015.
Page 2 of 13
Life is a journey from Allah to Allah.
Q:3 the following data in respect of New Cool Co. Ltd, manufacturing AIR CONDITIONERS, for the year 2015,
is made available to you:
Rupees
Raw material purchased 2,728,000
Direct labour 825,000
Fuel consumed 1,260,000
Indirect labour 206,800
Custom duty paid on purchase of raw material 532,000
Factory manager’s salary 95,800
H.O building depreciation 20,400
Factory depreciation 442,700
Profit on sale of fixed asset 12,600
Intrest Income 31,500
Raw Material-Opening inventory 168,000
Raw Material-Closing inventory 198,600
Work in Process-Opening inventory 183,000
Work in Process-Closing inventory 104,700
Finished goods opening inventory 228,795
Dividend paid 300,000
Air Conditioner-opening inventory 600 units
Air Conditioner-closing inventory 840 units
Air Conditioner sold during the year 7,760units @ Rs.1,440 per unit
You are required to prepare:
i. The cost of goods sold statement.
ii. Unit cost of finished goods inventory (FIFO Basis)
iii. Gross profit per unit.
A.1
Units A B C D
Amount
Page 3 of 13
A.2
Waqar Corporation
Cost of goods sold statement
For the year ended Dec 31,2015
Rs. Rs.
Material consumed:
Opening Stock 88,000
Purchases 1,200,000
Closing Stock (120,000) 1,168,000
Direct Labor 480,000
Factory Overheads:
Supplies and Indirect material issued 160,000
Indirect labor 240,000
Depreciation factory building 80,000
Utilities (200,000 x 75%) 150,000
630,000
Total Manufacturing Cost 2,278,000
Opening WIP 160,000
Closing WIP (192,000)
Cost of goods manufactured 2,246,000
Opening Finished Goods 100,000
Closing Finished Goods (72,000)
Cost of Goods Sold 2,274,000
Waqar Corporation
Income statement
For the year ended Dec 31,2015
Rs.
Sales 2,920,000
Cost of Sales (2,274,000)
Gross Profit 646,000
Selling Expenses (Note 1) 210,000
Admin Expenses (Note 2) 156,000
Profit for the period 280,000
Notes:
1) Selling Expenses:
Depreciation (60,000 x 50%) 30,000
Utilities (200,000 x 10%) 20,000
Sales salaries 160,000
210,000
2) Admin Expenses:
Depreciation (60,000 x 50%) 30,000
Utilities (200,000 x 15%) 30,000
Office salaries 96,000
156,000
Page 4 of 13
Do not loose hope, nor be sad [Quran 3:139]
A.3
New Cool Co. LTD
Cost of goods sold statement
Rupees
Direct Material
Raw Material – Opening 168,000
Purchases 2,728,000
Custom Duty 532,000
Raw Material – Closing (198,600)
Raw material Consumed 3,229,400
Direct Labor 825,000
Prime cost 4,054,400
Factory Overheads
Fuel consumed 1,260,000
Indirect Labor 206,860
Manager salary 95,800
Factory Depreciation 442,700
2,005,300
Factory Cost 6,059,700
Work in progress – Opening 183,000
- Closing (104,700)
Cost of goods Manufactured 6,138,000
Finished Goods – Opening 228,795
- Closing (ii) (644,490)
Cost of goods Sold 5,722,305
Notes:
Page 5 of 13
(iii) Gross Profit per unit (Sold)
Rs
Sales per Unit 1,440
Cost of sales per unit (5,722,305/7,760) (737)
Gross Profit per unit 703
Material
b/d 168,000 WIP 3,229,400
Purchase 2,728,000
Custom Duty 532,000 c/d 198,600
Payroll
Cash/Payable 825,000 WIP 825,000
Cash/Payable 206,800 FOH 206,000
Cash/Payable 95,800 FOH 95,800
Factory Overhead
Payroll 206,800
Payroll 95,000 WIP 2,005,300
Fuel 1,260,000
Depreciation 442,000
WIP
b/d 183,000 F.G 6,138,000
Material 3,229,400
Payroll 825,000 c/d 104,700
FOH 2,005,300
Finished Goods
b/d 228,795 Cost of sale 5,722,305
WIP 6,138,000
c/d 644,490
Page 6 of 13
ALLAH makes the impossible possible.
Variable costs
Variable costs are costs that increase by the same amount, for each additional unit of product that is made.
The variable cost of a cost unit is also called the marginal cost of the unit. The variable cost per unit is often
the same amount for each additional unit of output or unit of activity. This means that total variable costs
increase in direct proportion to the total volume of output or activity.
Examples of variable cost items.
❑ The cost of buying raw material is Rs.500 per litre regardless of purchase quantity. The variable cost is:
• the total cost of buying 1,000 litres is Rs.500,000
• the total cost of buying 2,000 litres would be Rs.1,000,000.
❑ The rate of pay for hourly-paid workers is Rs.150 per hour.
• 400 hours of labour would cost Rs.60,000; and
• 500 hours would cost Rs.75,000.
❑ The time needed to produce an item of product is 4 minutes and labour is paid Rs.150 per hour.
• direct labour is a variable cost and the direct labour cost per unit produced is Rs.10 (= Rs.150 × 4/60).
❑ The cost of telephone calls is Rs.1 per minute.
• The cost of telephone calls lasting 6,000 minutes in total would be Rs.6,000.
Note that as activity levels increase the cost per unit remains fixed. However, total cost increases as more
units are being made
Semi-variable costs
A semi-variable cost, is a cost that is partly fixed and partly variable.
An item of cost that is a mixed cost is an item with a fixed minimum cost per period plus a variable cost for
every unit of activity or output.
Example:
A company uses a photocopier machine under a rental agreement. The photocopier rental cost is Rs.4,000 per
month plus Rs.2 per copy produced. The company makes 15,000 copies during a month:
Total cost is as follows:
Rs.
Fixed cost 4,000
Variable cost (15,000 *Rs. 2) 30,000
Total cost for month 34,000
Example:
The management accountant of a manufacturing company has estimated that production costs in a factory
that manufactures Product Y are fixed costs of Rs.250,000 per month plus variable costs of Rs.30 per unit of
Product Y output. The expected output next month is 120,000 units of Product Y.
Expected total costs are therefore:
Rs.
Variable costs (120,000 × Rs.30) 3,600,000
Fixed costs 250,000
Total costs 3,850,000
Page 7 of 13
Summary of the discussion
A. Fixed cost
In total Constant
Per unit Decrease with increase in production
Increase with decrease in production.
B. Variable cost
C. Total cost
The total cost function can be used to estimate costs associated with different levels of activities. This is very
useful in forecasting and decision making.
There are two methods of constructing the total cost function equation and segerating fixed cost and variable
cost:
❑ High/low analysis
❑ Linear regression analysis.
For example lets assume a business has a following data in previous periods:
Months Units Total cost(Rs.)
January 100 300
February 200 400
March 300 500
April 400 600
Required:
Calculate
• Per unit variable cost; and
• Fixed cost per month.
Page 8 of 13
My ALLAH has always been kind to me. [Quran 19:49]
High/low analysis
High/low analysis can be used to estimate fixed costs and variable costs per unit as follows:
• Take the highest and the lowest activity levels.
• Take the difference of both levels.(the difference between total cost at highest level of activity and the
lowest level of activity is entirely variable because difference in cost is increased because of increase
in production.)
I. Step 1: Identify the highest and lowest activity levels and note the costs associated with each
level.
Production (units) Total cost (Rs.)
March 8,200 48,700
January 5,800 40,300
Step 2: Compare the different activity levels and associated costs and calculate the variable cost:
Production (units) Total cost (Rs.)
March 8,200 48,700
January 5,800 40,300
2,400 8,400
Therefore: 2,400 units cost an extra Rs. 8,400.
Therefore: The variable cost per unit = Rs. 8,400/2,400 units = Rs. 3.5 per unit
Step 3: Substitute the variable cost into one of the cost functions (either high or low).
Total cost of 8,200 units:
Fixed cost + Variable cost = Rs. 48,700
Fixed cost + 8,200 *Rs. 3.5 = Rs. 48,700
Fixed cost + Rs. 28,700 = Rs. 48,700
Fixed cost = Rs. 48,700 -Rs. 28,700 = Rs. 20,000
Step 4: Construct total cost function
Total cost = a +bx = 20,000 + 3.5x
Note that at step 3 it does not matter whether the substitution of variable cost isinto the high figures or the
low figures.
Page 9 of 13
Example: Cost of other levels of activity
Returning to step 3 above but this time substituting into the low figures.
Step 3: Substitute the variable cost into one of the cost functions (either high or low).
Total cost of 5,800 units:
Fixed cost + Variable cost = Rs. 40,300
Fixed cost + 5,800 *Rs. 3.5 = Rs. 40,300
Fixed cost + Rs. 20,300 = Rs. 40,300
Fixed cost = Rs. 40,300 -Rs. 20,300 = Rs. 20,000
Once derived, the cost function can be used to estimate the cost associated with
other levels of activity.
Linear regression analysis is a better technique than high-low analysis because it is more reliable.
Units(x) Cost(y) xy X2
100 300 30,000 10,000
200 400 80,000 40,000
300 500 150,000 90,000
400 600 240,000 160,000
1,000 1,800 500,000 300,000
b= 4(500,000) – (1000)x(1800)
4(300,000) – (1000)2
Page 10 of 13
Allah is closer to you than your Jugular Vein.
a= (1800) – 1(1000)
4
a= Rs.200 / month
Working:
x y x2 xy
January 5.8 40.3 33.64 233.74
February 7.7 47.1 59.29 362.67
March 8.2 48.7 67.24 399.34
April 6.1 40.6 37.21 247.66
May 6.5 44.5 42.25 289.25
June 7.5 47.1 56.25 353.2
x= 41.8 y=268.3 x2 =295.88 xy=1885.91
Page 11 of 13
Further practice questions:
Q. The records of direct labour hours and total factory overheads of IMI Limited over first six months of
its operations are given below:
n( XY ) − ( X )( Y )
b (var iable Cost =
n( X 2 ) − ( X ) 2
[6 *8,611,000] − (450)(105,750)
=
6(38,500 − (450) 2
= 143.1053
Page 12 of 13
ALLAH is sufficient for us
Q. Bulbul Limited (BL) produces a specialized product for industrial customers. Following are
the details of BL’s monthly production and associated cost for the past six months:
n( XY ) − ( X )( Y )
b (var iable Cost =
n( X 2 ) − ( X ) 2
[6 *465,550] − (480)(5,640)
=
6(39,900) − (480) 2
= 9.57/Unit
= 1,229
Page 13 of 13
Do start with BISMILLAH!
Grease
In some process manufacturing system, two or more different products are produced from a common
manufacturing process.
Manufacturing Process
In this method total joint production cost is to be apportioned on the basis of physical units of
production e.g
Assume joint processing cost is Rs 120,000
Page 1 of 24
2. Sale-value ta split-off point
This method enjoys great popularity because of the argument that market value of any product reflects
the cost incurred in its production, means that if a product sells for more than another it is because
more cost was expended to produce it. To apply the method we need to have number of units produced
and their market or sale values at split off point e.g
Assume that joint processing costs are Rs 10,000.
Products Units Produced Sale Price/Unit Market Value Allocation
A 1,000 2 2,000 1,000
{(2,000÷20,000)×10,000}
B 2,000 3 6,000 3,000
(6,000/20,000x10,000)
C 3,000 4 12,000 6,000
(12,000/20,000x10,000)
20,000 10,000
Some products are not saleable at the split off point and therefore without any market value; require
additional processing to place them in marketable condition. In such cases, the basis of allocation of the
joint production cost is a hypothetical market value at the split off point.
To arrive at the basis for apportionment, it is necessary to use a working back procedure whereby the
after split off processing cost is subtracted from the ultimate sales value to find a hypothetical market
value at split off point e.g:
A Rs.1,700 (500+1,200)
B Rs.5,000 (1,000+4,000)
C Rs.10,000 (2,000+8,000)
In the given situation, certain of joint products may be saleable at the split off point while others are
not, the market values at the split off point would be used for former group while for the latter group
hypothetical market values would values would be used.
Page 2 of 24
Indeed, help of ALLAH is near. [2:214]
Treatment Of By Product
Cost is not allocated to by product. Instead its sale proceeds (if any) are accounted for by using any of
the following methods.
1. As revenue
Cash/Receivable ***
Revenue ***
2. As other income
Cash/Receivable ***
Other Income ***
3. As a deduction from joint process cost
Cash/Receivable ***
Joint process cost ***
The expected sale proceeds of by-product are deducted from the joint processing costs. After this
deduction, net joint processing costs are apportioned among the joint products.
Note: if the question is silent then use 3rd method as given above.
Example: By-product and joint products
Two joint products XX and YY, are produced from a common process.
During July, 11,000 units of materials were input to the process. Total costs of processing (direct
materials and conversion costs) were Rs 100,000.
Output was 6,000 units of XX and 4,000 units of YY and 1,000 units of by-product Q.
XX has a sales value of Rs. 24 per unit when it is output from the process.
YY has a sales value of Rs. 12 per unit when it is output from the process.
Q has a sales value of Rs.1 per unit
The company’s policy is to apportion joint costs based on sales value at the point of split off.
80% of the output of both XX and YY was sold by the month end.
The proceeds of sale of the by-product could be treated in one of the following ways.
a) As a separate revenue; or
b) As other income; or
c) As deduction from joint production cost
Required:
Prepare an income statement for the month of July assuming each of the above treatment for by-
products separately.
Solution
a) Proceeds from sale of by-product are treated as a separate
revenue
Income statement Rs.
Revenue:
Sales of XX (80% x 6,000 units x Rs. 24) 115,200
Sales of YY (80% x 4,000 units x Rs. 12) 38,400
By-product 1,000
154,600
Page 3 of 24
Cost of sales:
Production costs 100,000
Less: Closing inventory (W-1) (20,000)
(80,000)
Gross profit 74,600
Allocation of Joint cost Rs.
Sales value Rs.
XX (6,000 units x Rs. 24) 144,000
YY (4,000 units x Rs. 12) 48,000
192,000
Income statement
Revenue:
Rs.
Sales of XX (80% x 6,000 units x Rs. 24) 115,200
Sales of YY (80% x 4,000 units x Rs. 12) 38,400
153,600
Cost of sales:
Production costs 100,000
Less: Closing inventory (W-1) (20,000)
(80,000)
Gross profit 73,600
Other income 1,000
Profit 74,600
Allocation of Joint cost
Sales value Rs.
XX (6,000 units x Rs. 24) 144,000
YY (4,000 units x Rs. 12) 48,000
192,000
Rs.
XX: Rs. 144,000/ Rs. 192,000 x Rs 100,000 75,000
YY: Rs. 48,000/ Rs. 192,000 x Rs 100,000 25,000
100,000
W-1 Valuation of Closing Stock
XX 75,000/6,000 x 1,200 15,000
YY 25,000/4,000 x 800 5,000
20,000
Page 4 of 24
Life is journey from ALLAH to ALLAH
c)Proceeds of sale of the by-product are deducted from the joint process cost
Income statement
Rs.
Revenue:
Sales of XX (80% x 6,000 units x Rs. 24) 115,200
Sales of YY (80% x 4,000 units x Rs. 12) 38,400
153,600
Cost of sales:
Production costs (100,000-1,000) 99,000
Less: Closing inventory (W-1) (19,800)
(79,200)
Profit 74,400
The profit in the (a) and (b) is higher than the profit in (c) by Rs. 200 because of higher value of closing
stock.
Q.1 The CBA Company produces three joint products. C, B and A. During February, the following information
was recorded:
C B A Total
Joint materials — — — Rs 5,000
Joint processing — — — Rs 23,000
Separate processing Rs 8,000 Rs 5,000 Rs 2,000 Rs 15,000
costs
Output in kilograms 2 000 kg 5 000 kg 3 000 kg 10,000 kg
Sales in kilograms 1 500 kg 4 200 kg 2 400 kg 8,100 kg
Sales price per kilogram Rs 10 Rs 6 Rs 7 —
Required:
Total cost for each product, using the market value method (means sale value method).
Note: Even if it is not mentioned in market value method, always use sale value at split-off point
method.
Page 5 of 24
Q.2 M Company buys Zeon for processing. At the end of processing in Department 1, Zeon splits off into
Products A, B, and C. A is sold at the split-off point with no further processing; B and C require further
processing before they can be sold; B is processed in Department 2; and C is processed in Department 3.
The following is a summary of costs and other related data for the year ended June 30, 2015:
Department
1 2 3
Rupees
Cost of Zeon 96,000 - -
Direct labor 14,000 45,000 65,000
Factory overhead 10,000 21,000 49,000
Products
A B C
Units sold 20,000 30,000 45,000
Units on hand at June 30, 2015 10,000 - 15,000
Sales (in Rupees) 30,000 96,000 141,750
There were no inventories on hand at July 1, 2014 and there was no Zeon on hand at June 30, 2015. All
units on hand at June 30 2015, were complete as to processing. M company uses the market value at
split-off point to allocate joint cost.
Required:
(1) The market value at the split-off point for Product A’s total units produced for the year.
(2) The total joint cost for the year ended June 30, 2015, to be allocated.
(3) The cost of Product B sold for the year ended June 30, 2015.
(4) The cost assigned to the Product A ending inventory.
(5) The cost assigned to the Product C ending inventory.
Diagram missing
FIFO:
Units Amount
Opening Stock 5,000 90,000
Add: cost of goods manufactured 50,000 1,000,000
Less: Closing Stock (10,000) (200,000)*
Cost of sales 45,000 890,000
*[1,000,000 / 50,000) x 10,000
Page 6 of 24
There is no might nor power except in ALLAH.
Weighted Average:
Units Amount
Opening Stock 5,000 90,000
Add: cost of goods manufactured 50,000 1,000,000
Less: Closing Stock (10,000) (198,182)*
Cost of sales 45,000 891,818
*working:
90,000 + 1,000,000
=
5,000 + 50,000
= 19.8182 × 10,000
= 198,182
Conclusion:
Answer of FIFO and weighted Average will be different only when there is opening stock.
Q.3 Binary Limited manufactures three joint products viz. Aay, Bee and Cee in one common
process. Following this process, product Aay and Bee are sold immediately while product Cee is
subjected to further processing. Following information is available for the period ended June 30, 2007:
1.
Aay Bee Cee
Opening stock in kg Nil Nil Nil
Production in kg 335,000 295,000 134,000
Sales in kg 285,000 212,000 -
Sales price per kg (Rs.) 30.85 40.38 -
2. Total costs of production were Rs 17,915,800.
3. 128,000 kg of Cee were further processed during the period and converted into 96,000 kg of
Zee. The additional costs of further processing were as follows:
Direct labor Rs. 558,500
Production overhead Rs. 244,700
4. 94,000 kg of Zee was sold during the period, with total revenue of Rs. 3,003,300. Opening stock
of Zee was 8,000 kg, valued at Rs 172,800. FIFO method is used for pricing transfers of Zee to
cost of sales.
5. 8,000 kg of a bye-product Vee was also produced during further processing and sold @ Rs. 10
per kg. Sales proceeds of bye-product are adjusted against production cost of product
Zee.(treatment of by-product).
6. The cost of production is apportioned among Aay, Bee and Cee on the basis of weight of output
(means physical units basis).
7. Selling and administration costs of Rs. 2,500,000 were incurred during the period. These are
allocated to all the main products based on sales value.
Required:
Prepare a profit and loss account for the period, identifying separately the profitability of each of the
three main products. (19 Marks)[Autumn 2007]
Note: If nothing is mentioned in question then assume that any loss is normal loss.
Also solve the same question by weighted average.
Diagram missing
Page 7 of 24
Treatment of Losses
Normal Loss Abnormal Loss
(Expected loss that is uncontrollable) (Unexpected loss)
E.g 1000 units of raw material are imported @ 500 per unit = Rs 500,000.
Suppose it is expected that 50 units of raw material will be of no use (means normal loss).
No cost is allocated to normal loss, cost of normal loss units is absorbed by remaining units.
Therefore simply per unit cost of remaining units will be 500,000 = 526.31/unit
950
If normal loss has recovery value then; (let’s assume 50 units can be sold @ 100/unit as scrap)
500,000-5,000 = 521.05/unit
950
Abnormal Loss:
Suppose 50 units are abnormal loss instead of normal loss (means suppose loss was not expected). Cost
is allocated to abnormal loss units just like good units. Therefore:
500,000 = 500/unit
1,000
50 x 500 = 25,000 will be recognized as abnormal loss in income statement. If it has some recovery value
then it is adjusted against cost of abnormal loss.
Q.4 Platinum Limited (PL) manufactures two joint products Alpha and Beta and a by-product
Zeta from a single production process. Following information is available from PL’s records for the
month of February 2012:
Overheads are allocated to the products at the rate of Rs. 10 per direct labour hour. The normal loss is
sold as scrap at the rate of Rs. 8 per kg.
Following data relates to the output from the process:
Page 8 of 24
Remember success calls you five times a day.
Alpha is further processed at a cost of Rs. 30 per unit, before being sold in the market. Joint costs are
allocated on the basis of net realizable value (sale value at split off point less selling expenses (if any)).
Required:
Compute the total joint manufacturing costs for February 2012. Also calculate the profit per kg for Alpha
and Beta. (10 marks)
Note: treatment of normal loss is like by-product (i.e deduct the sale proceeds from cost of production).
No cost is allocated to normal loss.
Diagram missing
Q.5 Colon Limited (CL) manufactures two joint products Pollen and Stigma in the ratio of 65:35.
The company has two production departments A and B. Pollen can either be sold at split off point or can
further be processed at department-B and sold as a new product Seeds. Stigma is sold without further
processing. Following information relating to the three products is available from CL’s records:
Pollen Stigma Seeds
---------------Rupees---------------
Sales price per kg 90 300 125
Total selling expenses 135,000 306,000 180,000
Following further information relating to the two departments is available:
Department A Department B
Material X 75,000 kg at Rs. 60 per kg -
Material Y - 12,000 kg at Rs. 25 per kg
Labor @ Rs. 150 per hour 12,000 hours 3,600 hours
Variable overheads Rs. 125 per labor hour Rs. 65 per labor hour
Fixed overheads Rs. 100 per labor hour Rs. 50 per labor hour
Material input output ratio 100:88 100:96
Material is added at the beginning of the process. Joint costs are allocated on the basis of net realizable
value at split off point (sale value at split-off point less selling expenses).
Required:
a) Calculate the joint costs and apportion them to the two products. (10 Marks)
b) Advise CL whether it should produce Seeds or sell Pollen without further processing. (6 Marks)
Note:
1) If nothing is mentioned then assume that loss is normal.
2) If no information of stocks then assume stocks are nil.
Q.6 Binary Ltd. (BL) manufactures three products, A, B and C. It is the policy of the company to
apportion the joint costs on the basis of estimated sales value at split off point. BL incurred the following
joint costs during the month of August 2008:
Rs. in ‘000
Direct material 16,000
Direct labor 3,200
Overheads (including depreciation) 2,200
Total joint costs 21,400
During the month of August 2008 the production and sales of Product A, B and C were 12,000, 16,000
and 20,000 units respectively. Their average selling prices were Rs. 1,200, Rs. 1,400 and Rs 1,850 per
unit respectively.
Page 9 of 24
In August 2008, processing costs incurred on Product A after the split off point amounted to
Rs 1,900,000.
Product B and C are sold after being packed on a specialized machine. The packing material costs Rs. 40
per square foot and each unit requires the following:
Product Square feet
B 4.00
C 7.50
The monthly operating costs associated with the packing machine are as follows:
Rupees
Depreciation 480,000
Labor 720,000
Other costs 660,000
All the above costs are fixed and are apportioned on the basis of packing material consumption in
square feet.
Required:
a) Calculate the joint costs to be apportioned to each product. (13 Marks)
b) BL has received an offer from another company to purchase the total output of Product B
without packaging, at Rs. 1,200 per unit. Determine the viability of this offer. (03Marks)
Note: Always remember if production is equal to sales then there is no of finished stock.
Q.7 J Ltd. manufactures two products Orange and Mango by processing a raw material in Department 1.
Orange is then further processed in Department 2 with no loss. Mango is further processed in
department 3. By-product Leaf is also produced in department 3 which can be sold in the market.
It is estimated that after processing in Department 1, 55% of the raw material is converted into
processed Orange and 40% into processed Mango. No product is in a saleable condition at this stage.
The selling price of Orange is Rs 45 per kilo and Mango is Rs 64 per kilo. Leaf can be sold at Rs. 12 per
kilo.
It is estimated that in department 3, 10% of all input becomes leaf and 88% becomes Mango.
During the month of January 198,000 kilos of Orange were produced.
It is company policy to subtract revenue of by products from total costs of the departments in which
they are produced. Joint costs are allocated on the basis of hypothetical market value at split-off point.
Labour Overheads
Department 1 1,060,000 795,000
Department 2 720,000 540,000
Department 3 880,000 660,000
Raw material consumed per unit started is Rs. 32 per kilo.
Required:
a) Calculate the product wise and total profit for the month of January assuming all output is sold.
b) Assume Finished Goods of Orange and Mango is left in stock prepare product wise and in total
income statement for the month of January.
Suppose Stock Left is:
• Orange = 9,800 kgs.
• Mango = 5,500 kgs.
Page 10 of 24
ALLAH has already planned your life, if something goes wrong, it went wrong for a reason
Assuming that 100% loss of Cee while further processing in to Zee is abnormal less identified at
the end offurther processing)
It means 24,000 kg. of Cee was abnormal loss as follows:
A 96,000 Zee
B 8,000 by Product
(6,000)
128,000
Income statement
Aay Bee Zee Total
Sales 8,792,250 8,560,560 3,003,300 20,356,110
Cost of sales
Opening Stock -- -- 172,800 172,800
Cost of goods 7,855,750 6,917,750 2,979,840 (W-1) 17,753,340
manufactured
Closing Stock (1,172,500) (1,946,350) (310,400) (W-2) (3,429,250)
(6,683,250) (4,971,400) (2,842,240) (14,496,890)
Gross Profit 2,109,000 3,589,160 161,060 5,857,220
Selling & Admin (1,079,805) (1,051,350) (368,845) (2,500,000)
Abnormal Loss -- -- (744,960) (744,960)
Profit/ (loss) 1,029,195 2,537,810 (952,745)* 2,612,260
*Loss is increased by 77,600 because value of closing stock of Zee is decreased by 77,600
(388,000 – 310,400)
WORKINGS:
W-1 Cost of goods manufactured of Zee
Raw Material: (Cee)
Opening --
COGM 3,142,300 (Cost of 134,000 kgs)
Closing (140,700) (Cost of 6,000 kgs)
3,001,600 (Cost of 128,000 kgs)
Direct Labor 558,500
Factory overheads 244,700
Total Manufacturing Cost 3,804,800 (Cost of 128,000 kgs)
Recovery Value of by product (80,000) (Recovery value of 8,000 kgs)
Net manufacturing cost 3,724,800 (Net cost of 120,000 kgs)
Less: Cost of Abnormal less
3,724,800
24,000 = (744,960) (Cost of 24,000 kgs)
120,000
Net Manufacturing cost of Zee 2,979,840 (Cost of 96,000 kgs)
Page 11 of 24
W-2 Calculation of Closing Stock of Zee (FIFO)
2,979,840 ÷ 96,000 × 10,000 = 310,400
128,000
Income statement
Aay Bee Zee Total
Sales 8,792,250 8,560,560 3,003,300 20,356,110
Cost of sales
Opening Stock -- -- 172,800 172,800
Cost of goods 7,855,750 6,917,750 3,335,642 18,109,142
manufactured
Closing Stock (1,172,500) (1,946,350) (347,463) (3,466,313)
(6,683,250) (4,971,400) (3,160,979) (14,815,629)
Gross Profit 2,109,000 3,589,160 (157,679) 5,540,481
Selling & Admin (1,079,805) (1,051,350) (368,845) (2,500,000)
Abnormal Loss -- -- (389,158) (389,158)
Profit/ (loss) 1,029,195 2,537,810 (915,682) 2,651,323
Loss is increased by 40,537 because value of closing stock of Zee is decreased by 40,537
(388,000 – 347,463).
WORKINGS:
W-1 Cost of goods manufactured of Zee
Raw Material: (Cee)
Opening --
Cost of goods manufactured 3,142,300 (Cost of 134,000 kgs)
Closing (140,700) (Cost of 6,000 kgs)
3,001,600 (Cost of 128,000 kgs)
Direct Labor 558,500
Factory overheads 244,700
Total Manufacturing Cost 3,804,800 (Cost of 128,000 kgs)
Less: Recovery Value of by (80,000) (Recovery value of 8,000 kgs)
product
Net manufacturing cost 3,724,800 (Net cost of 120,000 kgs
but because of normal loss of
12,800 kg it is now cost of
107,200 kg)
Less: Cost of Abnormal less
Page 12 of 24
ALLAH loves those who fears him. [3:76]
3,724,800
11,200 = (389,158) (Cost of 11,200 kgs)
107,200
Net Manufacturing cost of Zee 3,335,642 (Cost of 96,000 kgs)
W-2 Calculation of Closing Stock of Zee
FIFO:
3,335,642
10,000 = 347,463
96,000
Page 13 of 24
Solutions:
A.1
Product Ultimate Market Units Ultimate Separable Hypothetical Joint Cost Total Cost
Value per unit Produced Market Processing Market Allocation
Value Costs Value
A.2
2) Department
Page 14 of 24
Insulting others is never a way of correcting them.
W-2
Cost of Closing Stock
Aay = 7,858,750/335,000 x 50,000 = 1,172,500
Bee = 6,917,750/295,000 x 83,000 = 1,946,350
Cee = 3,142,300/134,000 x 6,000 = 140,700
Units of Closing Stock
Aay=335,000-285,000=50,000
Bee=295,000-212,000=83,000
Cee=134,000-128,000=6,000
W-3
Closing Stock of Zee (By using FIFO)
=3,724,800/96,000 x 10,000 = 388,000
Page 15 of 24
If weighted average then:
172,800 + 3,724,800 x 10,000 = 374,769
8, 000 + 96,000
A.4
PLATINUM LIMITED
(i) Total cost of output: Kg. Rupees
Direct material [25,000 x 25] 25,000 625,000
Direct Labour 432,000
Overheads [ 432,000 / Rs. 15 x Rs. 10] 288,000
1,345,000
Less: Sale of normal loss units [ 25,000 x 20% x Rs. 8] (5,000) (40,000)
Total cost of production 20,000 1,305,000
Product Kg output % NRV at split off point Total NRV Joint cost allocation
Page 16 of 24
Man gets and forgets, ALLAH gives and forgives.
A.5
(a) Calculation of Joint costs:
Dept. A
Rupees in ‘000
Material X [75,000 × Rs. 60] 4,500
Labor [12,000 × Rs. 150] 1,800
Variable overheads [12,000 × Rs. 125] 1,500
Fixed overheads [12,000 × Rs. 100] 1,200
Total cost 9,000
Apportionment of joint costs:
Input of material X in dept. A 75,000 kg
Yield (88% of input material X) 66,000 kg
Ratio of output for Pollen and Stigma 65:35
Quantity of Pollen produced at split off point (66,000 × 65/100) 42,900 kg
Quantity of Stigma produced at split off point (66,000 × 35/100) 23,100 kg
(b) Advise to CL whether it should produce Seeds or sell Pollen without further processing:
If Pollen is sold without further processing, then the profitability would be as under:
Rs 000
Sales (42,900 x 90) 3,861
Less Expenses
Joint costs – Allocated as above (3,240)
Selling expenses (135)
Profit from Pollen 486
Page 17 of 24
NOTE: if Pollen would be sold then no cost will be incurred in department B (as it would not be
required).
Advise: The Company’s profit has increased by Rs. 1,428,000 (i.e. Rs. 1,914,000 – Rs. 486,000) on further
processing of Pollen into Seeds. Therefore, it is advisable to CL to further process Pollen into Seeds.
W-1: Cost incurred in Department B
Dept. B
Rupees in 000
Material Y [12,000 × Rs. 25] 300
Labor [3,600 × Rs. 150] 540
Variable overheads [3,600 × Rs. 65] 234
Fixed overheads [3,600 × Rs. 50] 180
Total cost 1,254
A.6
a) Allocation on the basis of sale value at split-off point
Product A Product B Product C Total
Units produced 12,000 16,000 20,000
Sale price/unit 1,200 1,400 1,850
Total Sale value 14,400,000 22,400,000 37,000,000
Cost after split off point (1,900,000) (3,116,262) (7,303,738)
(Given) (W-1) (W-1)
Sale value at split off point 12,500,000 19,283,000 29,696,262 61,480,000
(hypothetical market value)
Allocation of Joint cost:
A 12,500,000/61,480,000 x 21,400,000 = 4,351,008
B 19,283,000 / 61,480,000 x 21,400,000 = 6,712,040
C 29,696,262 / 61,480,000 x 21,400,000 = 10,336,695
Workings
W-1 Total Further processing cost of Product B and C
a) Packing material cost
Product B Product C Total
Units 16,000 20,000
Packing material/unit 4 sq feet 7.5 sq feet
Total packing material 64,000 150,000 214,000
in sq feet
Cost of packing material 2,560,000 6,000,000 8,560,000
(sq feet x 40)
b)
Operating cost = 1,860,000 (480,000+720,000+660,000)
Page 18 of 24
And HE(ALLAH) is with you wherever you are. [57:4]
A.7 a)
Kg
Output of Orange 198,000
Quantity of Mango at split off point (198,000÷55 x40) 144,000
Quantity of good output of Mango (144,000 x 88%) 126,720
Quantity of good output of Leaf (14,400 x 10%) 14,400
Loss in Department 1 (198,000÷55 x 5) 18,000
Rs.
Cost of Raw material in Department 1 (360,000 x 32) 11,520,000
Page 19 of 24
Orange 7,108,984
(7,650,000/14,392,880 x 13,375,000)
Mango 6,226,016
Product Revenue Apportioned costs Further processing costs Profit
Orange 8,910,000 (7,108,984) (1,260,000) 541,016
Mango 8,110,080 (6,226,016) (1,367,200) 476,864
Total Profit for the month of January 1,017,880
b)
Income statement for the month of January:
Orange Mango Total
Sales 8,469,000 7,758,080 16,227,080
(198,000-9,800)×45 (126,720-5,500)×64
Cost
Opening Stock -- -- -
Cost of goods 8,368,984 7,633,216 16,002,200
manufactured
(7,108,984+1,260,000) (6,266,016+1,367,200)
Closing Stock (W 1) (414,222) (331,303) (745,525)
(7,954,762) (7,301,913) (15,256,675)
Gross profit 514,238 456,167 970,405
Page 20 of 24
Do your best and Allah will do the rest.
Extra practice questions
Question No. 1
Oceanic Chemicals manufactures two joint products Sigma and Beta in a single process at its production
department. Incidental to the production of these products, it produces a by product known as ZEE.
Sigma and ZEE are sold upon completion of processing in production department whereas Beta goes to
refining department where it is converted into Theta.
Joint costs are allocated to Sigma and Beta on the basis of their net realizable values. Proceeds from
sale of by product are treated as reduction in joint costs. In both the departments, losses upto 5% of the
input are considered as a normal loss.
Actual data for the month of June 2015:
Department
Production Refining
Cost ------ Rs. In ‘000’------
Material input at Rs. 50 per liter 3,000 -
Direct labour at Rs. 100 per hour 2,500 350
Production overheads 1,850 890
Output ---------- Liters -----------
Sigma 34,800 -
Beta 16,055 -
ZEE (by product) 5,845 -
Theta - 15,200
Sigma, Theta and by product ZEE were sold at Rs. 300, Rs. 500 and Rs. 40 per liter respectively. There
was no work in process at the beginning and the end of the month.
Required:
Compute the cost per liter of Sigma and Theta, for the month of June 2015.
Question No. 2
ABC Ltd. Produces two joint products, COCO and SODA. A further product CRUST, is also made as a by
product of one of the processes for making SODA. Each product is sold in bottles of one litre capacity.
It is now December 2002. You are a cost accountant for ABC Ltd. You have been instructed to allocate
the company’s joint costs for the year October 2001 to September 2002 between COCO and SODA, but
not to the by-product CRUST.
During the year, 2 million litres of a raw material, Neckter, costing Rs. 3 million were processed in
Department Alpha with no wastage. The processing costs were Rs. 1.675 million.
50% of the output of Department Alpha was unfinished COCO, for which there was no external market. It
was transferred to Department Beta where it was further processed at an additional cost of Rs. 8.1
million. Normal wastage by evaporation was 16% of the input of unfinished COCO. The remaining good
output of finished COCO was sold for Rs. 10 per litre in the outside market.
The other 50% of the output from the joint process in department Alpha was in the form of processed
Neckter. It was all transferred to Department Gamma, as there was no outside market for processed
Neckter. In Department Gamma it was further processed, with no wastage, at cost of Rs. 30.9 million.
72% of the output of Department Gamma was in the form of unfinished SODA, for which there was no
external market. It was transferred to Department Delta, were it was subjected to a finishing process at a
further cost of Rs. 719,000. Normal spoilage of 16.67% of the input to the finishing process was
observed. The spoiled material was disposed off without charge, as effluent. The remaining finished
SODA was sold in the outside market for Rs. 60 per litre.
Page 21 of 24
The remaining 28% of the output of Department Gamma was in the form of finished CRUST, the by
product. It was sold in outside market for Rs. 8 per litre, but due to its dangerous nature, special delivery
costs of Rs. 70,000 were incurred in respect of it.
Required:
(a) To allocate the appropriate joint costs between COCO and SODA on the basis of relative sales
value at split off point.
(b) To prepare a statement showing profit or loss attributed to each of the products and the total profit
or loss for the year on basis of the information above and allocating joint costs as in (a) above.
Answer No. 1
Oceanic Chemicals
Product wise cost of Sigma and Theta
Sigma Theta
------ Rs. In ‘000’------
Joint cost of Production (W-2) 4,395.23 2,679.24
Cost of refining (W-2) 1,236.00
4,395.23 3,915.24
No. of units produced (litres) 34,800 15,200
Cost per litre 126.30 257.58
Workings:
(W-1)
Joint Production
(3,000,000 / 50) Cost: Further Processing Costs:
= [3,000 + 2,500 + 1,850 – (5,845 × 40)] = 7,116,200 [350 + 890] = 1,240
Treatment of by-product is similar to treatment of 1,240
normal loss. Cost of Ab. Loss: × 52 = 4,228
15,200 + 52
7,116,200 1,240
Cost of abnormal loss: × 300
34,800 + 16,055 + 300
Cost of Theta: 15,200
15,200 + 52
= 41,733
=1,235,772
Net Cost of Direct products to be allocated to Sigma and Beta: 7,116,200 – 41,733 = 7,074,470
Page 22 of 24
My Allah has always been kind to me. [Quran 19:49]
(W-2)
Allocation of Joint Cost:
350,000 + 890,000
* × 15,200 = 1,235,772
15,200 + 52
Allocation of Joint Cost:
Rs.000
Sigma (10,440/16,804) × 7,074,470 = 4,395.23
Beta (6,364/16,804) × 7,074,470 = 2,679.24
7,074.47
Answer:
(i) Joint Cost Allocation:
Total Joint Cost:
Rs. ‘000’
Raw Material = 3,000
Processing Cost = 1,675
4,675
Allocation: (W-1)
COCO = 300/6,851 × 4,675 = 205
SODA = 6,551/6,851 × 4,675 = 4,470
4,675
Workings:
(W-1) Sale Value at Split off Point:
Further
Qty S.P/Unit Ultimate MV S.P at Split off
Processing Cost
COCO 840 10 8,400 8,100 300
SODA 600 60 36,000 29,449 6,551
(28,730 + 719)
6,851
Page 23 of 24
(ii) Income Statement
Rs. ‘000’ Rs. ‘000’ Rs. ‘000’
COCO SODA Total
Sales 8,400 36,000 44,400
Cost of sale:
Opening Stock -- -- --
Cost of goods Manufactured:
Joint Cost 205 4,470 4,675
In Beta 8,100 8,100
In Gamma 28,730 28,730
In Delta 719 719
8,305 33,919 42,224
Closing Stock (--) (--) (--)
(8,305) (33,919) (42,224)
Gross Profit 95 2,081 2,176
Page 24 of 24
186 جب کوئی دعا مانگنے واال مجھ سے دعا مانگتا ہے تو میں اس کی دعا قبول کرتا ہوں ۔ ( سورہ االبقرہ آیت
Process Costing
In this topic will be learn to prepare a work in process account.
Discussion of factory ledgers
Normal loss:
Loss which is uncontrollable in production process considering the nature of the product and production
process /environment. Cost is not allocated to normal loss. If it has some recovery value then it is
deducted from production cost (as a recovery against cost of production).
Abnormal Loss:
Loss which is controllable, but has not been controlled. This is that loss which is over and above the
expected loss (Normal loss). Cost is allocated to abnormal loss just like other units and recognized as an
expense in income statement (after deducting recovery value if any).
Abnormal gain:
Reduction in the units of normal loss. Units of abnormal gain are measured like other units.
Scenario No.1
Normal loss has no recovery value.
Process A/C
Particulars Units Rs. Particulars Units Rs.
Input Units 1,000 100,000 Output 900 100,000
Normal loss (10% of 100 -
input)
100,000÷900 = 111.111/unit
Scenario No.2
Normal loss has some recovery value
Process A/C
Particulars Units Rs. Particulars Units Rs.
Input Units 1,000 100,000 Output 900 99,500
Normal loss(10% of 100 (×5) 500
input)
Page 1 of 39
Scenario No.4
Abnormal gain.
Process A/C
Particulars Units Rs. Particulars Units Rs.
Input Units 1,000 100,000 Output 920 101,715
Normal loss (10 % of 100 (×5) 500
input)
Abnormal gain (bal) 20 2,215
Q.1
Castrol is an industrial lubricant which is formed by subjecting crude chemicals to two successive
processes. The output of process-1 is transferred to process-2 where other chemicals are added. The
process-1 and 2 were as follows;
Process-1
Material 3,000 lbs @0.25/lb
Labor Rs.120
Process plant time 12 hours @ 20/hour
Process-2
Material 2,000 lbs @0.4/lb
Labor Rs.84
Process plant time 20 hours @ 13.5/hour
Other production overheads for the period amounted to Rs.357 and is to be allocated to the processes
on the basis of labor cost. The normal output of processs-1 is 80% of input and of process-2 is 90% of
input. Wastage from process-1 is sold for Rs.0.2/lb and that from process-2 for Rs.0.3/lb.
The output from processes were as follows;
Process-1 2,300 lbs
Process-2 4,000 lbs
There is no stock of work in process at either the beginning or the end of the period and assume that all
available waste had been sold at prices indicated above.
Required:
You are required to show that how the above data would be recorded in a system of cost accounts by
preparing Process Account No. 1 & 2, Normal loss account and Abnormal gain/loss account.
Page 2 of 39
ALLAH knows what is best for us and when it is best for us to have it.
Estimated factory overhead
Factory overhead are entered on the job order cost sheets on the basis of a predetermined factory overhead
rate based on an appropriate base like direct labour hours, direct labour cost, machine hours etc. The
procedure is as follows:
Suppose accountant determines a relationship between two factors such as direct labour hours and factory
overhead and uses this relationship as the means of charging factory overhead to jobs. For example,
company’s direct labour hours for the month were estimated to be 7,000 hours and factory overhead were
estimated to 15,400 / month. These estimates lead to the assumption that for each hour of direct labour
there is Rs. 2.2 (15,400/7,000 hours) of factory overhead. The job order cost sheet for any job done during
the period would disclose the factory overheads applicable to the job (direct labour hours worked on the
job multiplied by the factory overhead rate) (e.g. 1,000 hrs × 2.2) = 2,200.
The cost accounting entry of applied factory overheads is:
WIP A /c 2,200
F OH A /c 2,200
The actual amounts of factory overheads are recorded during the period by using the following entry, e.g:
F OH A /c xx
Cash / payable xx
At the end of the period, the difference if any in the factory overheads account is adjusted as over / under
applied overheads either as an adjustment in cost of sales or in gross profit. (Preferably in cost of sales)
Q.2 A chemical is manufactured by passing through two processes X and Y using two types of direct
material, A and B. In process Y, a by-product is also produced which is then transferred to process Z
where it is completed. For the first week of a month, the actual data has been as follows:
Process
X Y Z
Output of main product (kgs) 9,400 8,000
Output of byproduct (kgs) 1,400 1,250
Direct material - A (9,500 units) (Rs.) 123,500
Direct material - B added in process (kgs) 500 300 20
Direct material - B added in process (Rs.) 19,500 48,100 1,651
Direct wages (Rs.) 15,000 10,000 500
Scrap value (Rs. per unit) 5 10 6
Normal loss of units in process (%) 4 5 5
The factory overheads are budgeted @ 240% of direct wages. Actual factory overheads for the week
amounted to Rs. 65,000. Estimated sales value of the by-product at the time of transfer to process Z was
Rs. 22 per unit.
Required:
Prepare the following:
a) Process accounts for X, Y and Z.
b) Normal loss, abnormal loss and abnormal gain accounts.
c) Factory overhead account.
Note: if nothing is mentioned then % of loss is on the basis of input.
Page 3 of 39
Q. 3 Star Chemicals Limited uses three processes to manufacture a product “ST”. After the third process
the product is transferred to finished goods warehouse.
The following data for the month of January 2007 is available:
PROCESS
I II III
----------Rs. in thousands-------
Raw material – A 1,500 - -
Other direct materials 2,500 3,200 4,000
Direct wages 5,000 6,000 8,000
Direct expenses 1,600 1,885 2,020
Following additional information is also available:
I. Production overheads are absorbed @ 80% of direct wages;
II. 20,000 units of raw material ‘A’ having a cost of Rs. 1,500,000 were initially put in process-I.
III. In each process, an amount of Rs. 500,000 has been wrongly classified as direct wages, instead of
indirect wages.
IV. The actual output obtained during the month was as under:
Process I 18,500 units
Process II 16,000 units
Process III 16,000 units
Normal loss in each process is 10%, 10% and 5% respectively. Scrap value per unit is Rs. 100 for process-
I, Rs. 200 for process-II and Rs. 300 for process-III.
(vi) There was no stock at the start or at the end of any process.
Required:
Prepare the following in the books of Star Chemicals Limited:
(a) Ledger account for each process;
(b) Normal loss and abnormal gain/ (loss) account.
7.1 QB
Work in process
In three hours, 6 questions have been 50% completed, so 6 x 50% = 3 questions are completed.
In three hours out of 6, 3 questions are 100 % completed, 1 is 60% completed,1 not started and 1 is 50%
completed.
So, 3+0.6+0+0.5 = 4.1 question completed
Sometimes all units started in a process during an accounting period are not fully completed in that
accounting period. For example, let’s assume during the year ended 30-06-2010:
Input 1,000 units
Output 800 units
Closing work in process (40% completed) 200 units
Cost incurred during the period 100,000
On how many units the work has been done. Definitely 1,000 units, but all units are not converted into
finished goods. In these circumstances to allocate the cost, equivalent production units are calculated.
These 200 units are equal to 80 completed units; so on 200 units cost of 80 completed units should be
allocated.
Per unit cost = (100,000 ÷ 880) = 113.63/unit
Therefore cost is allocated as follows:
Cost of output = 800 × 113.63 = Rs.90,909
WIP = 200 × 40% × 113.63 = Rs.9,090
Page 4 of 39
بے شک یہ قیامت کے دن اپنے پڑھنے والے کی سفارش کرے گا۔،قرآن پاک کی تالوت کیا کرو
Scenario 2:
Process A/C (Incomplete)
Particulars Units Rs. Particulars Units Rs.
Input 4,000 16,000 Output 2,750 ?
Direct Labor 8,125 Normal loss (10% of 400 700
input)
FOH 3,498 Abnormal Loss 150 ?
c/d 700 ?
4,000 27,623 4,000 ?
Closing WIP is completed as follows:
Material= 100%
Labor= 50%
FOH = 40%
If nothing is mentioned then assume that abnormal loss units are identified at the end of the process.
Equivalent Units:
Material Labor FOH
Output 2,750 2,750 2,750
Abnormal Loss 150 150 150
Closing WIP 700 350 280
3,600 3,250 3,180
Cost per unit:
Material = (16,000 – 700) =15,300 ÷ 3,600 =4.25
Labor =8,125 ÷ 3,250 =2.50
FOH = 3,498 ÷ 3,180 =1.10
7.85
Cost of output = 2,750 × 7.85 = Rs.21,587
Abnormal loss =150 × 7.85 = Rs.1,178
WIP:
- Material = 700 × 100% × 4.25 = 2,975
- Labor = 700 × 50% × 2.50 = 875
- FOH = 700 × 40% × 1.1 = 308 = Rs.4,158 .
Total Rs.26,923
Opening work in process: if there is opening work in process, then the total equivalent units are
calculated either by using FIFO or weighted average.
Basic discussion:
Units Amount
Opening Stock -- --
Add: Purchases 10,000 500,000
Less: Closing stock (500) (25,000)
Cost of sales 9,500 475,000
‘or’ 9,500 × 50
If there is no opening stock, there is no need of FIFO or weighted average (in any case answer will be
same)
Opening stock (FIFO)
Units Amount
Opening Stock 10,000 1,000,000
Add: Purchases 70,000 8,400,000
Less: Closing stock (8,000) (960,000)*
72,000 8,440,000**
Page 5 of 39
*8,400,000 / 70,000 x 8,000 = 960,000
**or 10,000 = 1,000,000
+ 8,400,000 / 70,000
x 62,000 = 7,440,000
8,440,000
Opening stock (Weighted Average)
Units Amount
Opening Stock 10,000 1,000,000
Add: Purchases 70,000 8,400,000
Less: Closing stock (8,000) (940,000)*
72,000 8,460,000**
If there is opening work in process then Process Account can be prepared by using either:
Q. 5 On 1st September, 1908 Company’s opening inventory was 400 units, complete as to material and
50% as to conversion. The material cost of opening stock was 12,000 and the conversion cost was 4,000.
During September, 1,100 units were started and 1,300 were completed. The closing stock was complete
as to materials and ¾ complete as to conversion. Raw material purchases during September were
20,000. Manufacturing cost of September comprise of:
▪ Raw material consumed of 22,550
▪ Conversion cost is 15,750
Required:
Prepare a process account for the period of September by using.
(i) FIFO ; and
(ii) Weighted Average
Page 6 of 39
AND that is He (ALLAH) Who enriches and suffices. [53:48]
Q. 6 Yahya Limited produces a single product that passes through three departments, A, B and C.
The company uses FIFO method for process costing. A review of department A’s cost records for the
month of January 2008 shows the following details:
Units Material Rs. Labor Rs.
` Work in process inventory as at January 1, 2008 16,000 64,000 28,000
(75% complete as to conversion costs)
Additional units started in January 2008 110,000 - -
Material costs incurred - 430,500 -
Labor costs incurred - - 230,000
Work in process inventory as at January 31, 2008 18,000 - -
(50% complete as to conversion costs)
Units completed and transferred in January 2008 100,000 - -
Overheads are applied at the rate of 120% of direct labor. Normal spoilage is 5% of output.
The spoiled units are sold in the market at Rs. 6 per unit.
Required:
Compute the following for the month of January:
a) Equivalent production units.
b) Costs per unit for material, labor and factory overhead.
c) Cost of abnormal loss (or gain), closing work in process and the units transferred to the next
process.
Note: if nothing is mentioned then assume that units are 100 % complete with respect to material.
Important Points:
Whether we should use FIFO or Weighted Average: (In case of a silent question)
➢ Use of FIFO is only possible where completion stage in terms of % of each cost component (means
Material / Labour / Overhead) of opening WIP is available.
➢ Average method can only be applied in a situation where analysis in terms of amount of opening
WIP is available (means breakup of amount of opening WIP into of Material, Labour and Overhead
amounts are available).
➢ If both are available then make an assumption and then use FIFO because it is a better approach.
Second or Subsequent Department or Processes
Example:
Department – I
Blending Department
Rs.
Opening WIP --
Units started during the period 50,000
Cost incurred during the period in the department:
Material 24,500
Labor 29,140
Factory overheads 28,200
Units transferred to next department = 45,000 units
Closing work in process = 4,000 units (all material, ½ conversion)
Normal loss = 1,000 units
Department – II
Testing Department
Rs.
Opening WIP --
Units received from Department – I 45,000
Cost incurred during the period in the department:
Labor 37,310
Factory overheads 32,800
Page 7 of 39
Units transferred to next department = 40,000
Closing work in process = 3,000 units ( 1/3 conversion)
Normal loss = 2,000 units.
Solution:
(a) Process Account
Blending Department (Department – I)
Units Amount Units Amount
b/d WIP -- --
Input 50,000 Transferred to P II 45,000 77,400
Material 24,500 Normal loss 1,000
Labor 29,140
F-OH 28,200 c/d WIP 4,000 4,440
50,000 81,880 50,000 81,880
WORKINGS:
Equivalent Units:
Material Conversion
Transferred out 45,000 45,000
Closing WIP 4,000 (100%) 2,000 (50%)
49,000 47,000
Page 8 of 39
The bigger the desire for a sin, the bigger will be your Iman if you leave it.
Cost Accounted For:
Transferred out = (40,000 × 3.51) 140,400
Closing WIP = (3,000 × 1.8 + 1,000 × 0.91 + 1,000 × 0.8) = 7,110
7.2 Hornbill QB
Hornbill solution:
Process Account – Department B
Units Amount Units Amount
b/d -- -- Transferred out 39,500 117,710
Previous department 55,000 99,000 N. Loss (balance) 5,000 --
Direct labour 27,520
F-OH 15,480 c/d WIP 10,500 24,290
55,000 142,000 55,000 142,000
WORKINGS:
Equivalent Units:
Previous Direct
F-OH
Department Labour
Transferred out 39,500 39,500 39,500
Closing WIP 10,500 3,500* 3,500*
50,000 43,000 43,000
(should be complete with respect to previous
department)
*Units in Process (for labour & F-OH)
10,500 × 50% × 40% = 2,100
10,500 × 20% × 30% = 630
10,500 × 30% × 24.5% = 770
3,500
Cost/Unit:
Previous Department = 99,000 ÷ 50,000 = 1.98
Labour = 27,520 ÷ 43,000 = 0.64
F-OH = 15,480 ÷ 43,000 = 0.36
2.98
Cost Accounted For:
39,500 × 2.98 = 117,710
c/d work in process = (10,500 × 1.98 + 3,500 × 0.64 + 3,500 × 0.36) = 24,290
142,000
Q. 7 The M S C manufactures a single product on a continuous plan in three departments. On November
1, the work in process inventory in Department 2 was:
Page 9 of 39
department; its cost is to be absorbed by all the finished and unfinished production of the department
(means a normal loss). [if in question, nature of loss is not available then assume it is a normal loss]
Required:
A November process account for Department 2, using the average costing method for beginning work in
process inventories.
Note: breakup of cost of opening work in process is given which is required in weighted average
method.
Q.8 F C C Inc. operates three producing departments—Molding, Painting, and Finishing. During August,
the Painting Department transferred 12,400 units to the Finishing Department, lost 500 units, and had
800 units in process at the end of August. There were 2,400 units in process on August 1 in the Painting
Department. The remaining units started in the Painting Department during August were received from
the Molding Department. The costs incurred in the Painting Department during August were: materials,
Rs.5,886; labor, Rs.7,830; and factory overhead, Rs.1,134. The work in process inventory on August 1
was Rs.6,656. The costs transferred to the Painting Department from the Molding Department
amounted to Rs.23,797.80. The Painting Department work in process inventory was three-fourths
complete on August 1 and one-fourth complete on August 31.
Required:
The August process account for the painting department using the FIFO method of accounting for
beginning inventories.(Carry unit cost computation to four decimal places)
Note: no need of breakup of amount of opening work in process if FIFO is to be used. Only stage of
completion in terms of % of opening work in process is required.
Question Fowl Limited from question bank 7.3
Fowl Limited
Process Account
Units Amount Units Amount
b/d 15,000 115,000 Transferred
(90,000+25,000) X 50,000
750,000
Input (balance) 82,500 Y 25,000
Normal loss is 10% of tested units. No normal loss from opening WIP in current period because opening
WIP is 75% complete (and would have been tested last period). However closing WIP would have been
tested during the period as it is also 75% complete. It means all input during the period would have been
tested therefore 10% of input is normal loss i.e 82,,500 × 10% = 8,250.
Abnormal loss = Total Loss – Normal Loss
= 12,500 – 8,250
= 4,250
Page 10 of 39
اپنے ماں باپ کو اف تک بھی نا کہو اور ان کے لئے دعا کرتے رہا کرو ۔
Equivalent Production Units:
Material Conversion
Output 75,000 75,000 75,000
Abnormal loss 4,250 4,250 2,125 (50%)
Closing WIP 10,000 10,000 7,500 (75%)
(material at beginning)
89,250 84,625
25,000 + 228,875
Conversion = = 3/unit
84,625
Total = 10/unit
Calculation of Cost:
Q.9 KS Limited operates two production departments A and B to produce a product XP-29. Following
information pertains to Department A for the month of December 2014.
Required:
• Equivalent production units
• Cost of goods transferred to Department B
• Accounting entries in the cost accounting system.
Page 11 of 39
Note: if nothing is mentioned then % of loss should be on the basis of inspected units (if inspection stage
is available)
Q.11 K International manufactures a single product. The product is processed in three different
departments. The company uses first-in-first-out method for process costing.
During November 2015, the costs incurred and units processed in department 2 were as follows:
Units Rs.
Opening work in process 2,000 128,750
Units received from department 1 53,000 2,057,500
Cost added by department 2
Materials 988,000
Direct labor 488,000
Production overheads 244,000
Units transferred to department 3 48,000
Closing work in process 5,000
Defective units 2,000
The normal loss is 5% of the units produced (including defective units) and is identified at the start of the
process. The defective units are sold at Rs. 15 per unit. Details of percentage of completion of opening and
closing work in process are as follows:
Work in Process
Opening Closing
Materials 80% 70%
Labour and production overheads 60% 50%
Required:
Prepare process account of department 2 for the month of November 2015.
Note: Question cannot be solved by using weighted Average because breakup of the cost components of
opening WIP is not available.
Q.12 K International manufactures a single product. The product is processed in three different
departments. The company uses first-in-first-out method for process costing.
During November 2015, the costs incurred and units processed in department 2 were as follows:
Units Rs.
Opening work in process 2,000 128,750
Units received from department 1 53,000 2,057,500
Cost added by department 2
Materials 988,000
Direct labor 488,000
Production overheads 244,000
Units transferred to department 3 48,000
Closing work in process 5,000
Defective units (normal loss) 2,000
The defective units are sold at Rs. 15 per unit. Details of percentage of completion of opening and closing
work in process are as follows:
Work in Process
Opening Closing
Materials 80% 70%
Labour and production overheads 60% 50%
Required:
Prepare process account of department 2 for the month of November 2015.
Page 12 of 39
Worldly life is very short, so turn to ALLAH before you return to ALLAH.
Page 13 of 39
SOLUTIONS
A.1
Process - I
Qty. Value Qty. Value
Material 3,000 750 Process-II (Given ) 2,300 [0.5] 1,150
Labor 120 Normal loss (20% of 3,000) 600 [0.2] 120
Plant time (12×20) 240 Abnormal loss 100 [0.5] 50
Overheads 210
(120/204)×357
3,000 1,320 3,000 1,320
1,320 − 120
= = 0.5 / unit.
2,300 + 100
Process - II
Qty. Value Qty. Value
Process I 2,300 1,150 Finished Goods (Given) 4,000 [0.6] 2,400
Material 2,000 800 Normal loss 430 [0.3] 129
Labor 84 4,300 x 1%
Plant time (20×135) 270
Overheads (84/204×357) 147
Abnormal Gain 130 [0.6] 78
2,451 − 129
(1,150 + 800 + 84 + 270 + 147) = 0.6 / unit
4,000 − 130
194,000 − 2,000
Per Unit Cost = = 20 / unit
9,400 + 200
Page 14 of 39
What if worldly life is not perfect? It is not Jannah. Worldy life is a test.
1,250 × 25 = 31,250
99 × 25 = 2,475
Page 15 of 39
A.3
Process Account I
Units Amount Units Amount
Material 20,000 1,500,000 Output (P II) 18,500 13,875,000
Other Direct Material. -- 2,500,000
Direct Expenses -- 1,600,000 Normal loss 2,000 200,000
(20,000×10%)
Direct Wages (5M – 0.5M) -- 4,500,000
F-OH (4,500,000×80%) -- 3,600,000
Abnormal gain (balance) 500 375,000
20,500 14,075,000 20,500 14,075,000
Page 16 of 39
Normal Loss Account جو شخص سیدھی راہ پر چلے گا اسے نا دنیا میں کوئی ڈر ہے اور نا آخرت میں کوئی غم۔
Units Amount Units Amount
Process - I 2,000 200,000 P – I Cash (2,000–500) 1,500 150,000
Process - II 1,850 370,000 P – II Cash 1,850 370,000
Process - III 800 240,000 P – III Cash (800 – -- --
500)
Abnormal gain (bal.) 1,300 290,000
4,650 810,000 4,650 810,000
Abnormal Gain Account
Units Amount Units Amount
Normal Loss Account 1,300 290,000 P-I 500 375,000
P-III 800 2,455,662
P/L Gain (Balance) 2,540,662
1,300 2,830,662 1,300 2,830,662
Per Unit:
500,000
Material = 10.87/unit
46,000
Page 17 of 39
200,000
Conversion cost = 4.31/unit
46,400
15.18/unit
Calculation of Cost:
Cost of output of 46,000 units:
Cost of 8,000 units b/d: 80,000
+ 800 × 10.87 = 8,696
+ 4,800 × 4.31 = 20,688
109,384
70,000 + 500,000
Material = = 10.71 per unit
7,200 + 800 + 38,000 + 7,200
10,000 + 200,000
Conversion cost = = 4.23 per unit
3,200 + 4,800 + 38,000 + 3,600
OR
Equivalent Units:
Material Conversion
Output 46,000 46,000 46,000
c/d WIP 12,000 7,200 (60%) 3,600 (40%)
53,200 49,600
Per Unit:
70,000 + 500,000
Material = = 10.71/unit
53,200
10,000 + 200,000
Conversion cost = = 4.23/unit
49,600
14.94/unit
Cost Calculation:
Output = 46,000 × 14.94 = 687,240
c/d WIP = (7,200 × 10.71) + (3,600 × 4.23) = 92,340
A.5
(i) FIFO Process account
Units Amount Units Amount
b/d 400 16,000 Output 1,300 48,310
Input material 1,100 22,550 c/d 200 5,990
Conversion cost 15,750
1,500 54,300 1,500 54,300
Page 18 of 39
Equivalent Units: There is no might nor power except in ALLAH.
Material Conversion
Completed 400 → -- 200 (400 × 50%)
1,300
900 → 900 900
Closing WIP 200 200 150 (200 × 75%)
Total during the period 1,100 1,250
Cost for the period 22,550 15,750
Per unit 20.5 12.6
Closing WIP
[200 x 20.5 + 150 x 12.6] 5,990
(ii) Weighted average: Process account
Units Amount Units Amount
b/d 400 16,000 Output 1,300 47,650
Input material 1,100 22,550 c/d 200 6,650
Conversion cost 15,750
1,500 54,300 1,500 54,300
Equivalent Units:
Material Conversion
Completed 1,300 1300
Closing WIP 200 150 (200 × 75%)
Total units 1,500 1,450
Total Cost 34,500 (22,550+12,000) 19,750 (15,750 +
4,000)
Per unit 23.03 13.62
Page 19 of 39
A.6
Yahya Limited
Process Account
Units Amount Units Amount
b/d 16,000 125,600 Units Completed 100,000 891,256
Input 110,000 --
Material 430,500
Labour 230,000 Abnormal loss (bal) 3,000 26,622
FOH (230,000×1.2) 276,000 Normal loss (5 %) 5,000 30,000
c/d 18,000 114,192
126,000 1,062,070 126,000 1,062,070
Equivalent Units (FIFO):
Material Conversion Cost
Completed
16,000 -- 4,000 (25%)
100,000
84,000 84,000 84,000
Abnormal loss 3,000 3,000
Closing WIP 18,000 (10%) 9,000 (50%)
105,000 100,000
Cost Calculation:
Units Completed: Rs.
Opening units cost 125,600
Current Period Cost on Opening units:
Labour (16,000 × 25% × 2.3) 9,200
Overheads (16,000 × 25% × 2.76) 11,040
Cost of 84,000 units (84,000 × 8.874) 745,416
891,256
Page 20 of 39
Say O! Muhammad (SAW)] sufficient for me is ALLAH [9:129]
Equivalent Units: (Weighted Average)
Material Conversion
Completed 100,000 100,000 100,000
Abnormal loss 3,000 3,000 3,000
c/d WIP 18,000 18,000 9,000
121,000 112,000
Cost/Unit:
Material = (64,000 + 430,500 – 30,000) = 464,500 ÷ 121,000 = 3.84/unit
Labour = (28,000 + 230,000) = 258,000 ÷ 112,000 = 2.30/unit
FOH = (33,600 + 276,000) = 309,600 ÷ 112,000 = 2.76/unit
8.9/unit
WORKINGS:
Equivalent Units:
Proceeding Department Labor F-OH
Transferred out 60,000 60,000 60,000 60,000
Completed 8,000 8,000 8,000 8,000
Closing WIP 4,000 4,000 2,000 2,000
72,000 70,000 70,000
Calculation of Cost:
Transferred units = 60,000 × 3.01 = 180,600
Completed in hand = 8,000 × 3.01 = 24,080
Closing WIP = (4,000 × 2.75) + (2,000 × 0.21) + (20,000 × 0.05) = 11,520
Page 21 of 39
A.8
Process Account – Painting Department
Units Amount Units Amount
b/d 2,400 6,650 Transferred to Firing 12,400 43,266
From Moulding Dep. (bal.) 11,300 23,797 Normal loss 500 --
Material 5,886
Labor 7,830 c/d WIP 800 2,038
F-OH 1,134
13,700 45,303 13,700 45,303
WORKINGS:
Equivalent Units:
Proceeding Material Labor F-OH
Department
Transferred 2,400 -- 600 600 600
12,400
10,000 10,000 10,000 10,000 10,000
c/d WIP 800 800 200 200 200
10,800 10,800 10,800 10,800
Calculation of Cost:
Finished goods
From Opening Units = 6,656 + 600 × 0.545 + 600 × 0.725 + 600 × 0.105 = 7,481
For the Period = 10,000 × 3.5784 = 35,784
= 43,266
Closing WIP = (800 × 2.2035) + (200 × 0.545) + (200 × 0.725) + (200 × 0.105) = 2,038
A.9 KS Limited
Calculation of normal loss:
15,000 x 5% = 750
(120,000 - 17,000) x 5% = 5,150
Total normal loss = 5,900
(a) Equivalent Production Units (FIFO)
Material Conversion
15,000 -- 3,000 (20%)
Output 110,000
95,000 95,000 95,000
Abnormal loss (At end) 2,100 2,100 2,100
c/d WIP 17,000 17,000 13,600 (80%)
114,100 113,700
Cost / Unit:
36,240,000
Material = = 317.62
114,100
Page 22 of 39
14,224 + 11,379
Conversion = = 225.18
113,700
Total Cost /unit = = 542.80
(b) Cost of Output
15,000 units – opening cost = 7,125
+ 3,000 × 225.18 – cost during the period = 676
= 7,801
+ 95,000 × 542.8 = 51,566
Total Cost = 59,367
Page 23 of 39
Same question if weighted Average Method:
KS Limited
Process Account
Units Amount Units Amount
b/d 15,000 7,125 Output 110,000 59,403
Input units 120,000 Normal loss 5,900 --
Material 36,240 Abnormal loss 2,100 1,134
Labor 14,224
OH (80%) 11,379 c/d 17,000 8,431
135,000 68,968 135,000 68,968
WORKINGS:
Equivalent Units (Weighted Average)
Material Conversion
Output 110,000 110,000 110,000
Abnormal loss (end) 21,000 2,100 2,100
c/d WIP 17,000 17,000 13,600 (80%)
129,100 125,700
Cost / Litre:
Rs.
Material = [5,000 + 36,240) ÷ 129,100 = 319.44
Conversion = [2,125 + 14,224 ÷ 125,700 = 220.59
+ 11,379)
540.03
A.11
Process Account – Department 2
Units Amount Units Amount
b/d 2,000 128,750
Received from dep. 1 53,000 2,057,500 Transferred 48,000 3,598,750
Direct Material 988,000 N. loss (48,000+2,000)5% 2,500 37,000
Direct Wages 488,000 (2,500 x 15)
Production OHs 244,000
Abnormal Gain (bal) 500 37,500 c/d 5,000 307,500
55,500 3,943,750 55,500 3,943,750
Equivalent Production Units: (FIFO)
Previous Material Conversion
2,000 -- 400 (20%) 800 (40%)
Transferred 48,000
46,000 46,000 46,000 46,000
Closing WIP 5,000 5,000 3,500 (70%) 2,500 (50%)
Abnormal Gain (500) (500) (500)
50,500 49,400 48,400
Cost/ Unit:
Rs.
2,057,500 − 37,500
Transferred = = 40
50,500
988,000
Material = = 20
49,400
Page 24 of 39
We should be Proud to be Muslim. ALHAMDULLILAH!
488,000
Wages = = 10
48,800
244,000
OH = = 5
48,800
75
Cost to be accounted for:
Output:
Opening cost of 2,000 units = 128,750
+ 400 × 20 + 800 × 10 + 800 × 5 = 20,000
+ 46,000 × 75 = 3,450,000 3,598,750
A.12
Process Account – Department 2
Units Amount Units Amount
b/d WIP 2,000 128,750 Normal loss (2,000 x 15) 2,000 30,000
Received from dep. I 53,000 2,057,500 Transferred to Dep. III 48,000 3,570,950
Material 988,000
Wages 488,000
F-OH 244,000 c/d WIP 5,000 305,175
55,000 3,906,250 55,000 3,906,250
Equivalent Units: (FIFO)
Department - I Material Labor F-OH
Transferred 2,000 -- 400 800 800
46,000 46,000 46,000 46,000 46,000
Closing WIP 5,000 5,000 3,500 2,500 2,500
51,000 49,900 49,300 49,300
Cost/ Unit:
Rs.
2,057,500 − 30,000
Department – I = = 39.75
51,000
988,000
Material = = 19.8
49,900
488,000
Labor = = 9.9
49,300
244,000
F-OH = = 4.95
49,300
Total 74.4
Cost Calculations:
128,750 + 400 × 19.8 + 800 × 9.9 + 800 ×
2,000 = 148,550
Transferred Units = 48,000 4.95
46,000 46,000 × 74.4 = 3,422,400
= 3,570,950
c/d WIP = 5,000 × 39.75 + 3,500 × 19.8 + 2,500 × 9.9 + 2,500 × 4.95 = 305,175
Page 25 of 39
A.13
Process Account – Department 2
Units Amount Units Amount
b/d WIP 2,000 128,750 Normal loss 2,000 30,000
Received from dep. I (W) 53,000 2,057,500 Transferred to Dep. III 48,000 3,570,950
Material (W) 988,000
Wages 488,000
F-OH 244,000 c/d WIP 5,000 305,175
55,000 3,906,250 55,000 3,906,250
Cost/ Unit:
Rs.
2,057,500 − 30,000
Department – I = = 39.75
51,000
988,000
Material = = 19.8
49,900
488,000
Labor = = 9.9
49,300
244,000
F-OH = = 4.95
49,300
Total 74.4
Cost Calculations:
128,750 + 400 × 19.8 + 800 × 9.9 + 800 ×
2,000 = 148,550
Transferred Units = 48,000 4.95
46,000 46,000 × 74.4 = 3,422,400
= 3,570,950
c/d WIP = 5,000 × 39.75 + 3,500 × 19.8 + 2,500 × 9.9 + 2,500 × 4.95 = 305,175
Page 26 of 39
Extra practice questions
تہجد کا وقت روٹھے رب کو منانے کا وقت ہے ۔
Process Costing Test:
Question 1
Quality Chemicals (QC) produces one of its products through two processes A and B. Following information
has been extracted from the records of process A for the month of January 2016.
Additional information:
(i) Materials are introduced at the beginning of the process. In respect of conversion, opening and
closing work in process inventories were 40% and 60% complete, respectively.
(ii) Inspection is performed when the units are 50% complete. Expected rejection is estimated at 5% of
the inspected units. The rejected units are not processed further and sold at Rs. 100 per unit.
(iii) QC uses ‘weighted average method’ for inventory valuation.
Required:
(a) Compute equivalent production units and cost per unit. (05)
(b) Prepare journal entries to record the above transactions. (06)
Question 2
Ravi Limited (RL) is engaged in production of industrial goods. It receives orders from steel manufactures
and follows job order costing. The following information pertains to an order received on 1 December 2016
for 6,000 units of a product:
Units
Produced and transferred to finished goods 3,200
Delivered to the buyer from the finished goods 3,000
Units rejected during inspection 120
Closing work in process (100% material and 80% conversion) 680
Rupees
Direct material 1,140,000
Direct labour (6,320 hours) 948,000
Factory overheads 800,000
Additional information:
• Factory overheads are applied at Rs. 120 per hour. Under/over applied factory overheads are
charged to profit and loss account.
• Units completed are inspected and transferred to finished goods. Normal rejection is estimated at
10% of the units transferred to finished goods. The rejected units are sold as scrap at Rs. 150 per
unit.
• RL uses weighted average method for inventory valuation.
Required:
(a) Prepare work in process account for the month of December 2016. (08)
(b) Prepare accounting entries to record:
• Over/under applied overheads
• Production losses and gains (05)
Page 27 of 39
Question 2A
Beta Enterprises (BE) produces a chemical that requires two separate processes for its completion.
Following information pertains to process II for the month of August 2016:
Kg Rs. In ‘000’
Opening work in process (85% to conversion) 5,000 2,000
Costs for the month:
Received from process I 30,000 18,000
Material added in process II 15,000 10,000
Conversion cost incurred in process II - 11,000
Finished goods transferred to warehouse 40,000
Closing work in process (60% to conversion) 4,000
In process II, material is added at start of the process and conversion costs are incurred evenly throughout
the process. Process losses are determined on inspection which is carried out on 80% completion of the
process. Process loss is estimated at 10% of the inspected quantity and is sold for Rs. 100 per kg.
BE uses FIFO method for inventory valuation.
Required:
(a) Prepare a statement of equivalent production units. (04)
(b) Compute cost of:
(i) finished goods (ii) closing WIP (iii) abnormal loss/gain (09)
(c) Prepare accounting entries to record production gain/loss for the month. (03)
Q.3 A company manufactures various lines of bicycles. The company uses a process cost system using
the weighted average method to determine unit cost. Bicycle parts are manufactured in the Molding
Department; the parts are consolidated into a single bicycle unit in the Molding Department and transferred
to the Assembly Department, where they are assembled. After assembly, the bicycles are sent to the
Packing Department.
Cost per unit data for the standard model has been completed through the Molding Department. Annual
cost and production figures for the Assembly department are given below:
• Defective bicycles are identified at an inspection point when the assembly labour process is 70%
complete; all assembly materials have been added prior to this point of the process. The normal
rejection % for defective bicycle is 5% of the bicycles reaching the inspection point. Any defective
bicycles above the normal rejection are considered as abnormal spoilage. All defective bicycles are
removed from the production process and disposed off with zero disposal value.
• Assembly Department Cost Data
Assembly
T. in from Assembly
Conversion Total Cost
Molding Materials
Cost
Rs. Rs. Rs. Rs.
Prior Period Costs 82,200 6,660 11,930 100,790
Current Period Costs 1,237,800 96,840 236,590 1,571,230
Total Costs 1,320,000 103,500 248,520 1,672,020
• Assembly Department Production Data
Assembly
T. in Cost Assembly
Bicycles Conversion
% Materials %
Costs %
Beginning Inventory 3,000 100 100% 80%
T. in from molding dep. During the year 45,000 100 - -
T. out to packing dep. during the year 40,000 100 100% 100%
Ending Inventory 4,000 100 50% 20%
Required:
Process Account showing necessary computation, relating to assembly department.
Page 28 of 39
یا ہللا اپنے سوا کسی کا محتاج نا کرنا ۔
Q.4 The following information is obtained in respect of process II for the month of July.
Units Rs.
Opening WIP 1,600 276,000
Stage of Completion of opening WIP:
Material 70%
Labor 60%
Overheads 60%
Transfer from process – I 10,200 510,000
Transfer to process – III 9,200
During the period, following amounts were uncured:
Direct Material 224,000
Direct Labor 657,000
Production Overheads 876,000
Closing WIP 1,800
Stage of Completion of closing WIP:
Material 60%
Labor 40%
Overheads 40%
Normal loss is 1,000 units. Units lost realized Rs. 50/unit.
Required:
(i) Process Account II (Using FIFO)
(ii) Abnormal Gain Account
(iii) Normal Loss Account
Page 29 of 39
Answer 1
Process Account
Rs. ‘000’
Units Amount Units Amount
b/d 5,000 4,212 Output 18,000 15,660
(2,713+1,499)
Input 20,000 N.Loss (5,000+20,000) × 1,250 125
5% (1,250 x
100)
Material 10,000
Conversion 5,760 c/d 6,000 4,404
Ab. Gain (balance) 250 217
25,250 20,189 25,250 20,189
Equivalent Units:
Material Conversion
Output 18,000 18,000 18,000
c/d WIP 6,000 6,.000 3,600 (60%)
Per Unit:
2,713 + 10,000 − 125
Material = = 530
23,750
1,499 + 5,760
Conversion = = 340
21,350
870
Cost Allocation:
Output = 18,000 × 870 = 15,660,000
c/d WIP = 6,000 × 530 + 3,600 × 340 = 4,404,000
Ab. Gain = 250 × 870 = 217,500
Answer 2
Ravi Limited
Work in process for the month of December, 2016
Rs. ‘000’
Units Amount Units Amount
b/d -- -- Finished goods 3,200 2,490,336
Direct material (bal.) 4,000 1,140,000 N. Loss (3,200 × 10%) 320 48,000
(320x150)
Direct labour 948,000
F-OH (6,320 × 120) 758,400 c/d WIP 680 463,714
Ab. Gain 200 155,646
4,200 3,002,046 4,200 3,002,050
Page 30 of 39
Equivalent Units: Faith is trusting ALLAH even when you do not understand his plan.
Material Conversion
Output 3,200 3,200 3,200
c/d WIP 680 680 544 (80%)
Ab. Gain (200) (200) (200)
3,680 3,544
Normal Loss
Abnormal Gain
Page 31 of 39
Answer 2A
Process Account – II
Per Unit:
18,000,000 − 410,000
Process – I = = 430.10
40,900
10,000,000
Material = = 244.50
40,900
11,000,000
Conversion = = 277.29
39,670
(b) Cost Allocation:
Output = 40,000 units
5,000 units from Opening 2,000,000
+ 750 × 277.29 = 307,968
2,207,968
+ 35,000 × 951.89 = 33,316,150
35,524,118
Ab. Loss:
1,900 × 430.1 + 1,900 × 244.5 + 1,520 ×
277.29
1,703,220
c/d WIP:
4,000 × 430.1 + 4,000 × 244.5 + 2,400 ×
277.29
3,419,354
Page 32 of 39
ALWAYS REMEMBER, Allah is watching us anytime, anywhere.
(c)
(i) Abnormal loss 1,703,220
Process Account 1,703,220
(ii) Cash/Receivable (1,900 × 100) 190,000
Abnormal loss 190,000
(iii) Normal loss 410,000
Process Account 410,000
(iv) Cash/receivables 410,000
Normal Loss 410,000
Cost/ Unit:
Rs.
82,200 + 1,237,800
Previous department = = 28.73/unit
45,950
6,660 + 96,840
Material = = 2.35/unit
43,950
11,930 + 236,590
Conversion = = 5.89/unit
42,165
36.97/unit
Calculation of Cost:
Rs.
Output: [40,000 × 36.97] = 1,478,800
Abnormal loss: [1,950 × 28.73 + 1,950 × 2.35 + 1,365 × 5.89] = 68,646
Closing WIP: [4,000 × 28.73 + 2,000 × 2.35 + 800 × 5.89] = 124,332
1,671,778
Page 33 of 39
If FIFO is used:
Process A/C
Units Amount Units Amount
b/d 3,000 100,790 Packing (Output) 40,000 1,478,170
From Molding 45,000 1,237,800
Material 96,840 Normal Loss 2,050 -
Conversion 236,590 Abnormal Loss 1,950 68,923
c/d 4,000 124,760
48,000 1,672,020 48,000 1,671,,853
Equivalent Units
Previous department Material Conversion
A.4
Process Account II
Units Amount Units Amount
b/d 1,600 276,000
From Process I 10,200 510,000 Process III 9,200 2,300,000
Material 224,000 Normal loss (Given) 1,000 50,000
Labor 657,000 (1,000 x 50)
F-OH 876,000
Abnormal Gain 200 50,000 c/d 1,800 243,000
12,000 2,593,000 12,000 2,593,000
WORKINGS:
Equivalent Units: (FIFO)
Previous Material Labor FOH
1,600 -- 480 640 640
Transferred 9,200
7,600 7,600 7,600 7,600 7,600
Closing WIP 1,800 1,800 1,080 720 720
Abnormal Gain (200) (200) (200) (200) (200)
9,200 8,900 8,760 8,760
Page 34 of 39
جب دعا سے بھی بات نا بنے تو فیصلہ ہللا پر چھوڈ دو ہللا تعالی اپنے بندوں کے حق میں بہتر فیصلہ کرنے واال ہے۔
Cost/ Unit:
Rs.
Previous department = (510,000 – 50,000) ÷ 9,200 = 50
Material = (224,000 ÷ 8,960) = 25
Labor = (657,000 ÷ 8,760) = 75
F-OH = (876,000 ÷ 8,760) = 100
250
Page 35 of 39
ICAP QUESTION BANK
PROCESS COSTING
Example 1
1,500 litres of a liquid were input to a process at a cost of Rs.7,200. Normal loss is 20% of
the input quantity. Actual loss was equal to the normal loss.
Example 2
1,500 litres of liquid were input to a process at a cost of Rs.7,200. A normal loss of 20% of
the input is expected. The actual output for the period was only 1,100 litres.
Example 3
1,500 litres of liquid were input to a process at a cost of Rs.7,200. A normal loss of 20% of
the input is expected. Loss is sold as scrap, for a net sales price of Rs.0.40 per litre. The
actual output from the process was 1,200 litres.
Example 4
1,500 litres of liquid were input to a process at a cost of Rs.7,200. The output from the process
was 1,100 litres. Normal loss is 20% of the input quantity. Any lost units have a scrap value
of Rs.0.40 per litre.
Example 5
1,500 litres of liquid were input to a process at a cost of Rs.7,200. Normal loss is 20% of the
input quantity but the actual output for the period was 1,250 litres. Loss has no scrap value.
Example 6
1,500 litres of liquid were input to a process at a cost of Rs.7,200. The output from the process
was 1,250 units. Normal loss is 20% of the input quantity. Any lost units have a scrap value
of Rs.0.40 per litre.
Department B
Opening work in process (Litres) Nil
Closing work in process (Litres) 10,500
Units transferred from Department-A (Litres) 55,000
Units transferred to Department-C (Litres) 39,500
Labour (Rupees) 27,520
Factory overhead (Rupees) 15,480
Materials from Department-A were transferred at the cost of Rs. 1.80 per litre.
The degree of completion of work in process in terms of costs originating in Department-B was
as follows:
WIP Completion %
50% units 40%
20% units 30%
30% units 24.5%
Page 36 of 39
Required Do not go near Adultery. Indeed it is ever an immorality and is evil as a way [17:32]
Prepare the following for department B for the month:
a) A statement of equivalent units.
b) A statement showing cost per equivalent unit.
c) A statement showing the evaluation of output.
d) A process account. (15)
Page 37 of 39
Solution:
Example 1
litres
Input 1,500
Normal loss (20%) 300
Expected output 1,200
Cost per unit of expected output = Rs.7,200/1,200 litres = Rs.6 per litre. Actual
output = 1,200 litres.
Cost of actual output = 1,200 litres × Rs.6 = Rs.7,200. There
is no abnormal loss or abnormal gain.
Example 2
litres
Input 1,500
Normal loss (20%) 300
Expected output 1,200
Actual output 1,100
Abnormal loss 100
Cost per unit = same as in Example 1, Rs.6 per litre. Cost of
actual output = 1,100 litres × Rs.6 = Rs.6,600. Cost of
abnormal loss = 100 litres × Rs.6 = Rs.600.
Example 3
Rs.
Input cost 7,200
Scrap value of normal loss (300 × Rs.0.40) 120
Net cost of the process 7,080
Cost per unit of expected output = Rs.7,080/1,200 litres = Rs.5.90 per litre. Actual
output = 1,200 litres.
Cost of actual output= 1,200 litres × Rs.5.90 = Rs.7,080. There
is no abnormal loss or abnormal gain.
Example 4
Cost per unit = same as in Example 3, Rs.5.90 per litre. Cost of
actual output = 1,100 litres × Rs.5.90 = Rs.6,490. Cost of
abnormal loss = 100 litres × Rs.5.90 = Rs.590.
This cost of abnormal loss is the amount recorded in the process account.
Page 38 of 39
The net cost of abnormal loss is reduced (in the abnormal loss account) by the scrap
value of the lost units.
Rs.
Cost of abnormal loss in the process account 590
Scrap value of abnormal loss (100 × Rs.0.40) (40)
Net cost of abnormal loss (= expense in the income statement) 550
Example 5
litres
Input 1,500
Normal loss (20%) 300
Expected output 1,200
Actual output 1,250
Abnormal gain 50
Cost per unit = same as in Example 1, Rs.6 per litre. Cost of
actual output = 1,250 litres × Rs.6 = Rs.7,500.
Value of abnormal gain = 50 litres × Rs.6 = Rs.300 (= debit entry in the process account)
Example 6
litres
Input 1,500
Normal loss (20%) 300
Expected output 1,200
Actual output 1,250
Abnormal gain 50
Cost per unit = same as in Example 3, Rs.5.90 per litre. Cost of
actual output = 1,250 litres × Rs.5.90 = Rs.7,375. Value of
abnormal gain = 50 litres × Rs.5.90 = Rs.295.
This value of abnormal gain is the amount recorded in the process account (as a debit
entry).
The value cost of abnormal gain is reduced (in the abnormal gain account) by the scrap
value of the units that have not been lost.
Rs.
Value of abnormal gain in the process account 295
Scrap value forgone: (50 × Rs.0.40) (20)
Net value of abnormal gain (= income in the income statement) 275
Page 39 of 39
The worst of our faults is our interest in the faults of others
Variance analysis
Fixed Budget:
The original budget prepared at the beginning of the period is known as fixed budget. A fixed budget is a
budget for a specific volume of output and sales activity, and it is the “master plan” for the financial year
that the company tries to achieve.
For example: A company has budgeted to make and sell 1000 units in January.
Selling price/unit is budgeted at Rs 15.
Budget prepared for January is as follows:
Sales (1000 x 15) 15,000
Cost of Sales
Material (1,000 x 2kg @ 3/kg) 6,000
Labor (1,000 x 1hr @ 2.4/hr) 2,400
Variable overheads (1,000 x 1hr @ 0.96/hr) 960
Fixed overheads (1,000 x 2.4/unit) 2,400
(11,760)
Gross Profit 3,240
One of the main purposes of budgeting is to control costs by comparing budgets with actual results.
Actual results: (At the end of January)
Suppose actual units produced and sold are 900.
Sales (900 x 16) 14,400
Cost of Sales
Material (900 x 1.8kg @ 3.5/kg) 5,670
Labor (900 x 1.2hr @ 2/hr) 2,160
Variable overheads (900 x 1.2hr @ 1/hr) 1,080
Fixed overheads Actual 2,500
(11,410)
Gross Profit 2,990
Page 1 of 78
Variances cannot be calculated by comparing actual results to the fixed budget directly because the figures
relates to different levels of activity. Therefore, a second budget is drawn up at the end of the period (for
comparison) called as flexed budget. It is a budget based on actual level of activity using budgeted
revenue/unit and Standard cost/unit. For example flexed budget at 900 units level will be as follows:
Sales (900 x 15) 13,500
Cost of Sales
Material (900 x 2kg @ 3/kg) 5,400
Labor (900 x 1hr @ 2.4/hr) 2,160
Variable overheads (900 x 1hr @ 0.96/hr) 864
Fixed overheads (900 x 2.4) 2,160
(10,584)
Gross Profit 2,916
Page 2 of 78
Every act of goodness is (considered as) SADQAH (charity) [HADITH].
Subdivision of variances:
Material
SQU for AP x SR
AQU for AP x AR
=900x2x3
=900 x 1.8 x 3.5/kg
=5,400
=5,670
AQU for AP x SR
=900x1.8x3
=4,860
270A
Page 3 of 78
Labor Variance
SHW for AP x SR
AHW for AP x AR
=900x1x2.4
=900x1.2x2
=2,160
=2,160
AHW for AP x SR
=900x1.2x2.4
=2,592
NIL
Page 4 of 78
بہت جلد قبول ہونے والی دعا یہ ہے کہ انسان کسی غیر موجود کے لیے غائبانہ دعا کرے
Required:
(a) Compute the material and labor cost variances.
(b) Reconcile the standard and the actual cost of material and labor.
Actual/Applied
340A
Under absorbed is adverse variance because actual production is less or actual expense is more.
Over absorbed is favorable variance because actual production is more or actual expense is less.
For example: let assume:
= Budgeted fixed overheads / budgeted production
= 100,000 / 1,000
= 100 / unit (fixed overheads absorption rate)
(a) Suppose actual production is 900 x 100 = 90,000 (applied) and if actual expenditure is still 100,000 (equal
to budgeted) then difference is due to production.
(b) Suppose actual production is 1,000 (equal to budgeted) x 100 = 100,000 (applied) and if actual
expenditure is 120,000 (not equal to budgeted) then difference is due to expenditure.
Budgeted
overheads
1,000 x
100 A 2.4 240 A
=2,400
Page 5 of 78
Fixed overheads expenditure variance Fixed overheads volume variance
Actual overheads 2,500 Budgeted overheads 2,400
(1,000 x 2.4)
Budgeted overheads 2,400 Actual production x SR 2,160
(1,000 x 2.4) (900 x 2.4)
100 A 240 A
How much expense was expected and how much It measures the difference in actual production
is actually incurred. If actual fixed overheads are and budgeted production. If actual production is
more; then adverse otherwise favorable. more; then favorable otherwise adverse.
Q.2 M/s Gamma & Sons produces only one product by the name ‘'Gamma" and the standard' manufacturing cost
of the product is as under:
Direct material (4kg @ Rs.3 per kg) 12
Direct labor (5 hours @ Rs.4 per hour) 20
Variable Overhead 5
Fixed Overhead 15
Total standard per unit cost 52
The budgeted quantity to be produced is 10,000 units and actual production was 9,500 units. The actual
consumption and cost during the period was as under:
Rs.
Direct material cost (37,000 kg) 120,000
Direct labor (49,000 hours) 200,000
Variable Overheads 47,000
Fixed Overheads 145,000
512,000
There was no stock of work in process or finished goods at the beginning or end of the period.
Required:
You are required to calculate the relevant cost variances.
Page 6 of 78
O ALLAH I Seek refuge in from Evil diseases.
The above variance can also be calculated in hours for more detailed analysis as follows:
7500A
Actual Consumed
hrs for AP x SR
= 49,000 x 3
= 147,000
Page 7 of 78
Q.3 Brain Ltd produces and sells one product only, the Blob, the standard cost for one unit being as
follows:
Rs.
Direct material A (10 kilograms at Rs 20 per kg) Direct 200
material B (5 liters at Rs 6 per liter) 30
Direct wages (5 hours at Rs 6 per hour) 30
Fixed production overhead (5 hours at Rs 10 per hour) 50
Total standard cost 310
The fixed overhead included in the standard cost is based on an expected monthly output of 900 units. Fixed
production overhead is absorbed on the basis of direct labor hours.
During April, the actual results were as follows:
Production 800 units
Material A 7,800 kg used, costing Rs.159,900
Material B 4,300 liters used, costing Rs.23,650
Direct wages 4,200 hours worked for Rs.24,150
Fixed production overhead Rs.47,000
Required:
a) Calculate price and usage variances for each material.
b) Calculate labor rate and efficiency variances.
c) Calculate fixed production overhead expenditure and volume variances and then subdivide the volume
variance.
Page 8 of 78
Do not carry the anxiety for the future because it is in the hands of Allah.
Summary of Formulas of Labour Variances (If there is any idle time variance as well)
Total Labour Variance (SHW for A.P – S.R) – (AHP × A.R)
Rate *Efficiency
(SR – A.R) × AHP (SHW – AHP) × S.R
Page 9 of 78
SALES VARIANCE [there is no concept of calculating total sales variances]
These variances are calculated on the basis of finished goods units.
Example:
A Company has the following budgeted and actual figures:
Budget Actual
Sales Units 600 620
Selling Price / Unit 30 29
Standard cost of production = 28 / unit.
Required:
Calculate sale variances.
(a) Sales Volume Variance:
(600 – 620) × 2*
= 40 F
*(30 – 28)
(b) Sales Price Variance:
(30 – 29) × 620
= 620 A
Page 10 of 78
O Allah, thank you for choosing me to be a Muslim.
Operating statement: it is a statement prepared for the management which compares actual costs and
revenues with the budgeted figures and shows variances. It reconciles the actual profits with the budgeted
profits.
295,000,000
600 − 480,000 × 480,000
= 7,000,000 F
(b) Sales Volume Variance
[Budgeted Sales – Actual Sales] × Std. Profit / Unit
[500,000 – 480,000] × 215
= 4,300,000 A
(c) Material Price Variance
55,000,000
[SR – AR] × AQP* 50 − × 950,000
950,000
= 7,500,000 A
*(here purchased and consumed is same as no opening & closing inventory)
(d) Material Usage Variance
[SQU for Actual Production – Actual Quantity Used] × S.R
[(480,000 × 2.5) – 950,000] × 50
= 12,500,000 F
Page 11 of 78
(e) Labour Rate Variance
[SR – AR] × AHW
105,000,000
= 100 − × 990,000
990,000
= 6,000,000 A
(f) Labour Efficiency Variance
[SHW for Actual Production – AHW] × S.R
[(480,000 × 2) – 990,000] × 100
= 3,000,000 A
(g) variable overheads expenditure Variance
[SR – AR] × AHW
26,000,000
= 25 − × 990,000
990,000
= 1,250,000 A
(h) Variable OH Efficiency Variance
[SHW for Actual Production – AHW] × S.R
[(480,000 × 2) – 990,000] × 25
= 750,000 A
(i) Fixed OH Expenditure Variance
Budgeted Fixed OH – Actual Fixed OH
(500,000 × 10) – 5,100,000
= 100,000 A
(j) Fixed OH Volume Variance
[Budgeted Fixed OH – Actual Production × S.R]
(500,000 × 10) – (480,000 × 10)
= 200,000 A
Page 12 of 78
اے ہللا ہم سب کو جنت الفردوس میں جگہ عطا فرما
1,350 A
1,250 A 100 A
Page 13 of 78
Moongazer At the end
A.
If there is a stock of raw material and it is measured at std. cost then material price variance should be calculated
on AQP rather than AQU.
Budgeted Gross Profit = (100 – 77) × 450 = 10,350
MOON GAZER
Actual Gross Profit
Rs. Rs.
Sales 47,300
Less: Cost of Sales:
Material 17,700
Less: Closing Inventories (125 × 15*) (1,875)
15,825
Labour 14,637
Variable OHs 3,870
Fixed OHs 2,400 36,732
Actual Gross Profit 10,568
*(at Std. Cost as per Question)
Sales Variance
Price Volume
(BR – AR) × AQS (BQS – AQS) × Std profit /unit
47,300
100 × 430 (450 – 430) × 23
430
4,300 F 460 A
Material
14,637
8.5 − × 1,700 (430 × 4 – 1,700) × 8.5
1,700
187 A 170 F
Variable OHs
3,870
2 − × 1,700 (430 × 3 – 1,700) × 2
1,700
470 A 40 F
Page 14 of 78
One who remembers ALLAH is never lonely.
Fixed OHs
Cost Variances:
Price variance 300 F
Usage variance (3,225) A
Rate variance (187) A
Efficiency variance 170 F
V-OH – Expenditure variance (470) A
V-OH - Efficiency variance 40 F
F-OH – Expenditure variance (150) A
F-OH – Volume variance (100) A
Actual Gross Profit 10,568
VARIANCES:
Material Cost Variances (Material total Variances)
Rs.
For actual production (SQU × S.R) 50,000 × 60 × 0.6 1,800,000
(AQU × A.R) 3,100,000 × 0.5 1,550,000
250,000 F
Page 15 of 78
250,000 F
Price Usage
(S.R – A.R) × AQU* (SQU – AQU) × S.R
(0.6 – 0.5) × 3,100,000 [(50,000 × 60) – 3,100,000] × 0.6
= 310,000 F 60,000 A
*As given in question
Labour Cost Variances (Labour total Variances)
Rs.
(SHW × S.R) 48,000 × 0.5 × 50 = 24,300 × 50 1,215,000
(AHW × A.R) 1,300,000/52 = 25,000 × 52 1,300,000
85,000 U
85,000 U
Rate Efficiency
(S.R – A.R) × AHW (SHW – AHW) × S.R
(50 – 52) × 25,000 [(48,600 × 0.5) – 25,000] × 50
50,000 U (24,300 – 25,000) × 50
35,000 U
Variable Overheads Total Variance
Rs.
Actual Variable Cost (600,000 – 290,000) 310,000
Std. cost for Actual Production (SHW x SR) (48,600 × .5 x 15*) 364,500
*(7.5 x 2) 54,500 F
54,500 F
Expenditure Volume
Actual Fixed OH 290,000 Budgeted F-OH (45,000 × 6.5) 292,500
Budgeted F-OH (45,000 × 6.5) 292,500 Actual Production × S.R (48,600 × 6.5) 315,900
2,500 F 23,400 F
Page 16 of 78
The Dunya is literally just dirt. First under our feet, then over our bodies.
80,400 F
The standard labour hours required for producing one unit of finished product is 30 minutes whereas HL’s
standard operating capacity per month is 15,000 hours.
Actual results for the month of February 2013 were as under:
Actual labour hours consumed by HL for producing 27,000 units was 33 minutes per unit of finished product.
Required:
• Compute material, labour and overhead variances. (14)
• List any four causes of unfavourable material price variance. (02)
Page 17 of 78
Four variance method for overheads:
If a question requires four variance for overheads the following variances shall be calculated:
1. Calculate combined factory overheads expenditures variance (V OH and F OH expenditure)
2. Calculate variable OH efficiency variance as discussed previously, in exactly the same manner.
3. Calculate only the break up of fixed overheads volume variance; i.e subdivide it into:
• Fixed OH capacity variance
• Fixed OH efficiency variance
Discussion of Factory Overhead Expenditure Variance Combined (means sum of VOH Expenditure +
FOH Expenditure)
Data from ABC Ltd. At the end Q.6
Factory overheads expenditure Variance
VOH
Expenditure
(SR – AR) × AHW
26,000,000
= 25 −
990,000
× 990,000 = 1,250,000 A
Fixed OH
Expenditure
Actual fixed overheads = 5,100,000
Budgeted fixed overheads = 5,000,000
(500,000 × 10) 100,000 A
If suppose actual factory overheads are given combined e.g. factory overheads = 31,100 (26,000 + 5,100) or
question requires four overhead variances; then a combined factory overhead expenditure variance can be
calculated as follows:
(Rs. 000)
Actual factory overheads 31,100
Less: Std. Cost of Factory overheads
From Variable overheads: AHW × SR (990,000 × 25) 24,750
29,750
1,250 A
Answer will be equal to sum of variable overheads expenditure and fixed 1,350 A
overheads expenditure variance
100 A
Page 18 of 78
بے شک ہللا ہر چیز پر قادر ہے
667,500
65,000 F
Answer will be equal to sum of variable overheads expenditure and fixed 67,500 F
overheads expenditure variance
2,500 F
Q. 5 Hulk Limited (HL) produces and markets a single product. The company uses standard costing system.
Following is the standard cost card per unit of the finished product:
The standard labour hours required for producing one unit of finished product is 30 minutes whereas HL’s
standard operating capacity per month is 15,000 hours.
Actual results for the month of February 2013 were as under:
Actual labour hours consumed by HL for producing 27,000 units was 33 minutes per unit of finished product.
Required:
• Compute material, labour and overhead variances. Use four variance method (for overheads).
Q.6
SL operates at a normal capacity of 90% against its available annual capacity of 50,000 machine hours and
uses absorption costing.
Actual Production = 4,325 Units
Other Relevant Information:
Std. machine hrs / unit = 10 hrs.
Std. production OH Rate / Unit = 2,000
Estimated Fixed Production Overheads at normal capacity = 3,600,000
Actual Production OHs = 8,750,000 (including 3,750,000 fixed)
Actual Machine hours = 44,000
Required:
Factory overhead variances in full detail
Second Scenario:
Same question except suppose that break-up of actual production overheads is not available and therefore
combined expenditure variance is to be calculated.
Page 19 of 78
Mix & Yield Variances
Material Total Variance
Price Usage
Mix Yield
(If material are substitutable i.e less of on type of
material can be compensated for by more of
another)
Material usage variance can be subdivided into material mix and yield variance, when more than one
material is used in a product.
Example: A company uses two materials F & B to manufacture a chemical. The standard material usage and
cost of one bottle of chemical are as follows
F 5 kg @ 2/kg 10
B 10 kg @ 3/kg 30
15 kg 40
No problem of quantity of materials used for output (yield) only problem, is quantity of materials have not
been mixed according to standard. So mix variances exist. (Problem of mixing of materials for output)
ii)
SQ in SM for AP AQ in AM for AP
F 400 410
(80 x 5)
B 800 820
(80 x 10)
(80 x 15) 1,200 1,230
No problem of mixing, mixing is in standard proportions but quantity of materials used for output is different
than what it should be. So Yield variance exist (problem of quantity of materials for output).
Page 20 of 78
ٰ ہم اتنے عقلمند نہیں کہ ہللا،تقدیر کے لکھے پر کبھی شکوہ نہ کرو
تعالی کے ارادے کو سمجھ سکیں۔
iii)
SQ in SM for AP AQ in SM for AP AQ in AM for AP
F 400 410 500
(80 x 5) (1,230 x 5/15)
B 800 820 730
(80 x 10) (1,230 x 10/15)
(80 x 15) 1,200 1,230 1,230
In the above scenario, neither mix nor yield is standard so both variances.
Usage Variance:
(A – C) × S.R
F (400 – 500) × 2 = 200 A
B (800 – 730) × 3 = 210 F
10 F
Mix Variance:
(B – C) × S.R
F (410 – 500) × 2 = 180 A
B (820 – 730) × 3 = 270 F
90 F
Yield Variance:
(A – B) × S.R
F (400 – 410) × 2 = 20 A
B (800 – 820) × 3 = 60 A
80 A
Page 21 of 78
Q.7 (a) Pelican Limited produces and markets a single product Zeta. The company uses a standard costing
system. Following is the standard material mix for the production of 400 Units of Zeta.
Weight (Kg.) Standard rate per Kg. (Rs.)
Material A 30 240
Material B 25 320
Actual costs on the production of 192 units of Zeta for the month of August 2011 were as follows:
Weight (Kg.) Actual rate per Kg. (Rs.)
Material A 16 230
Material B 13 308
Required:
Calculate the following material variances, from the above data:
(i) Cost variance (ii) Price variance (iii) Mix variance
(iv) Yield variance (v) Usage variance
Q. 8 GHI Company produces 817 kg 'Y’ for which following standard chemical mix is used:
Purchase department, knowing the standard mix, made efforts for reducing the average price of material mix
and achieved the result as under;
Material Rate
A 37.00
B 56.25
C 62.75
Production department concentrating on yield aspect experienced a different ratio of raw material mix and
got 876 kgs out of following mix:
Material Qty (kgs)
A 750
B 185
C 65
Required:
Find out the effect off deviation from standards by calculating:
(a) Price Variance
(b) Mix Variance
(c) Yield Variance
Page 22 of 78
57(ہر نفس نے موت کا مزہ چکھنا ہے اور پھر تم ہماری ہی طرف لوٹ کر آو گے۔ سورہ العنکبوت آیت نمبر
Q.9 The standard raw material mix for 2200 kgs of finished product is as follows:
Materials Weight (Kgs) Price per Kg (Rs )
Salt 1,200 1.50
Ash 600 2.00
Coata 200 3.00
Fog 400 4.00
Materials used during an accounting period were as follows:
Materials Weight (Kg) Price per Kg (Rs.)
Salt 6,000 1.60
Ash 4,800 1.80
Coata 1,600 2.60
Fog 2,500 4.10
Actual production was 12,100 kg calculate the following materials variances:
(a) Cost variance
(b) Price variance
(c) Usage variance
(d) Mix variance
(e) Yield variance
Note:Difference in profit will be only because of fixed cost within stocks; in case of absorption costing.
Volume Price
(BQS – AQS) × Std. Cont./unit (SR – AR) × AQS
580,800
(50,000 – 48,000) × 3.25 12 − × 48,000
48,000
6,500 A 4,800 F
Material
Y M
Page 24 of 78
Whoever believes in ALLAH and last day (i.e. Akhirah) should not hurt his neighbor [Al-Hadith].
Labour
Operating Statement
Budgeted Profit (50,000 × 3.25) – 62,500 100,000
Budgeted Fixed Cost 62,500
Budgeted Contribution 162,500
Sale Volume Variance 6,500 A
Sale price Variance 4,800 F
160,800
Cost Variances:
Material Price A 7,317 F
Material Price B 3,360 A
Material Mix 1,866 A
Material Yield 4,309 F
Labour Rate 1,920 A
Idle Time 1,800 A
Labour Efficiency 16,200 F
Actual Contribution 179,680
Budgeted F-OH 62,500
F-OH Expenditure Variance 1,500 A
Actual F-OH 64,000
Actual Profit 115,680
Actual Profit:
Sales 580,800
Material A 200,000
Material B 84,000
Labour 117,120
Actual Contribution 179,680
Fixed OH (64,000)
Actual Profit 115,680
Part c
Possible explanations for the following variances are discussed below:
i. material price, mix and yield variances for material A;
ii. labor rate, labor efficiency and idle time variances.
The favorable material A price variance indicates that the actual price per kilogram was less than standard.
Possible explanations include buying lower quality material, buying larger quantities of material A and thereby
gaining bulk purchase discounts, a change of supplier, and using an out-of-date standard.
The adverse material A mix variance indicates that more of this material was used in the actual input than
indicated by the standard mix. The favorable material price variance suggests this may be due to the use of
poorer quality material (hence more was needed than in the standard mix), or it might be that more material A
was used because it was cheaper than expected.
Page 25 of 78
The favorable material A yield variance indicates that more output was produced from the quantity of material
used than expected by the standard. This increase in yield is unlikely to be due to the use of poorer quality
material: it is more likely to be the result of employing more skilled labor, or introducing more efficient working
practices.
It is only appropriate to calculate and interpret material mix and yield variances if quantities in the standard mix
can be varied. It has also been argued that calculating yield variances for each material is not useful, as yield
is related to output overall rather than to particular materials in the input mix. A further complication is that mix
variances for individual materials are inter- related and so an explanation of the increased use of one material
cannot be separated from an explanation of the decreased use of another.
The unfavorable labor rate variance indicates that the actual hourly rate paid was higher than standard.
Possible explanations for this include hiring staff with more experience and paying them more (this is consistent
with the favorable overall direct material variance), or implementing an unexpected pay increase. The
favorable labor efficiency variance shows that fewer hours were worked than standard. Possible
explanations include the effect of staff training, the use of better quality material (possibly on Material B
rather than on Material A), employees gaining experience of the production process, and introducing more
efficient production methods. The adverse idle time variance may be due to machine breakdowns; or a
higher rate of production arising from more efficient working (assuming employees are paid a fixed number
of hours per week).
Lettuce At the end (Marginal Costing)
Solution:
(a)
Budgeted Profit (W-1) 5,700
Budgeted Fixed Cost 6,000
Budgeted Contribution 11,700
Sale Price 2,200 F
Sale Volume 1,800 A
Variable Cost Variances:
Material Price 3,300 A
Material Usage 3,200 A
Labour Rate 180 F
Labour Efficiency 1,200 A
V OH. Expenditure 900 A
V OH. Efficiency 900 A
Actual Contribution 2,780
Budgeted Fixed Cost 6,000
Fixed Overhead Expenditure 2,000 F (4,000)
Actual Loss (W 2) (1,220)
Calculation of variances:
Sale
Page 26 of 78
Whoever believes in ALLAH and last day (i.e. Akhirah) should serves his guests generously [Al-Hadith]
Labour
FOH
OR
* Sale price per unit 50
Variable cost per unit 41
Contribution per unit 9
(1,300 × 9) 11,700
Fixed Cost 6,000
Budgeted profit 5,700
W 2 ACTUAL PROFIT/LOSS
Sales 57,200
Less: Variable Cost of sales
Opening Stock --
Cost of goods manufactured:
Raw Material Purchase 29,700
Closing Stock (300 × 4) (1,200) 28,500
Direct Labour (14,220)
VOH (11,700)
(54,420)
Page 27 of 78
Contribution 2,780
Fixed Cost (4,000)
Actual Loss (1,220)
(b) If company uses absorption costing with a direct labour hour absorption rate, we can calculate a fixed
overheads volume variance and then can sub-divide it.
The first step is to calculate budgeted absorption rate / hour.
Budgeted labour hours = 1,300 × 3 = 3,900 hrs.
Budgeted fixed cost = 6,000
Budgeted Absorption rate = 6,000 / 3,900 = 1.54/hr
OR 6,000/1,300 = 4.61/unit (1.54 * 3)
Fixed OH Expenditure Variance will be same
Volume Variance
1,300 × 4.61 6,000
1,100 × 4.61 5,077
923 A
923 A
Capacity Efficiency
1,300 × 3 × 1.54 6,006 3,600 × 1.54 5,544
3,600 × 1.54 5,544 1,100 × 3 × 1.54 5,082
462A 462 A
29,700
Material Price 4 − × 6,300 = 3,150 A 3,150 A
6,600
Material Usage 3,200 A
Labour Rate 180 F
Labour Efficiency 1,200 A
V-OH Expenditure 900 A
V-OH Efficiency 900 A
Actual Contribution 2,930
Budgeted Fixed Cost 6,000
F-OH Expenditure Variance 2,000 F (4,000)
Actual Loss (Working below) (1,070)
Page 28 of 78
Whoever believes in ALLAH and last day (i.e. Akhirah) should speak what is good or keep silent [Al-Hadith].
Reverse working:
Calculation of Std. costs from variances and actual cost:
At the end standard cost sheet
Solution:
Standard Cost Card:
Direct Material (8 @ 1.5) 12.0
Direct labour (2 @ 4) 8.0
Variable overheads (2 @ 1) 2.0
Std. Marginal Cost 22.0
Workings:
Material (8 × 1.5) = 12
Page 29 of 78
Example:
The standard direct material cost of product X is Rs. 96 (16 kgs × Rs. 6 per kg) and the standard direct labour
cost is Rs. 72 (6 hours × Rs. 12 per hour). The following variances were among those reported in relation to
product X.
Direct material price: Rs. 18,840 favourable; Direct labour rate: Rs. 10,580 adverse
Direct material usage: Rs. 480 adverse; Direct labour efficiency: Rs. 8,478 favourable
Actual direct wages cost Rs. 171,320 and Rs. 5.50 was paid for each kg of direct material. There was no opening
or closing stocks of the material.
Required:
Calculate the following:
(a) Actual output.
(b) Actual hours worked.
(c) Average actual wage rate per hour.
(d) Actual number of kilograms purchased and used.
Solution of Example
Material
Page 30 of 78
Being grateful is not just an Act of saying ALHAMDULILAH. Being grateful is an
attitude. It’s a life style. It is a way of thinking.
Q. 10 You have recently been appointed as the Financial Controller of Watool Limited. Your immediate task is
to prepare a presentation on the company’s performance for the recently concluded year. You have noticed
that the records related to cost of production have not been maintained properly. However, while scrutinizing
the files you have come across certain details prepared by your predecessor which are as follows:
i) Annual production was 50,000 units which is equal to the designed capacity of the plant.
ii) The standard cost per unit of finished product is as follows:
Raw material X 6 kg at Rs. 50 per kg
Raw material Y 3 kg at Rs. 30 per kg
Labour- skilled 1.5 hours at Rs. 150 per hour
Labour- unskilled 2 hours at Rs. 100 per hour
Factory overheads Variable overheads per hour are Rs. 100 for skilled labour and Rs.
80 for unskilled labour. Fixed overheads are Rs. 4,000,000.
• Opening raw material inventories comprised of 25 days of standard consumption whereas closing
inventories comprised of 20 days of standard consumption.
• Actual labour rate for skilled and unskilled workers was 10% and 5% higher respectively.
• Actual hours worked by the workers were 168,000 and the ratio of skilled and unskilled labour hours
was 3:4 respectively.
• Actual variable overheads during the year amounted to Rs. 16,680,000. Fixed overheads were 6%
more than the budgeted amount.
• Raw material stocks are measured at standard costs.
.
Required:
• Actual purchases of each type of raw materials.
• Labour and overhead variances.
Q. 11 Hexa Limited is a manufacturer of various machine parts. Following information has been extracted from
the cost records of one of its products AXE for the month of June 2014:
Standard cost per unit:
Rupees
Raw material 170.00
Direct labour (1.25 hours) 150.00
Overheads 137.50
i) Based on normal capacity of 128,000 direct labour hours, fixed overheads are estimated at Rs.
2,560,000.
Following information pertains to production of 100,000 units of product AXE:
Actual direct labour hours worked 130,000
Unfavorable material usage variance Rs. 820,000
Unfavorable material price variance Rs. 600,000
Actual direct labour cost Rs. 16,250,000
Actual fixed and variable overheads (fixed:
2,500,000) Rs. 15,500,000
Required:
Compute the following for the month of June 2014:
(a) Actual material cost (02)
(b) Labour variances (04)
(c) Overhead variances (10)
Page 31 of 78
Q. 12 Hexa Limited is a manufacturer of various machine parts. Following information has been extracted from
the cost records of one of its products AXE for the month of June 2014:
Standard cost per unit:
Rupees
Raw material 170.00
Direct labour (1.25 hours) 150.00
Overheads 137.50
Based on normal capacity of 128,000 direct labour hours, fixed overheads are estimated at Rs. 2,560,000.
Required:
Compute the following for the month of June 2014:
(a) Actual material cost (02)
(b) Labour variances (04)
(c) Overhead variances, using four variance method (10)
Page 32 of 78
Being a Muslim is more than just going to the Masjid: ALLAH wants your “attention” not just your “attendance”.
Solution:
A.1
(a) Material Price Variance
(SR – AR) × AQU
(48 – 50) × 5,900 = 11,800 A
(b) Material Usage Variance
(SQU for Actual Production – AQU) × S.R
(100 × 60 – 5,900) × 48
= 4,800 F
(c) Labour Wage Rate Variance
(SR – AR) × AHW
(8 – 9) × 47,500
47,500 A
(d) Labour Efficiency Variance
(SHW for Actual Production - AHW) × S.R
(100 x 480 – 47,500) × 8
4,000 F
(B) Reconciliation of Material Cost:
Std Material Cost (100 × 60 × 48) = 288,000
Material Price Variance = 11,800 A
Material Usage Variance = (4,800) F
Actual Material Cost (5,900 × 50) 295,000
A.2
M/s Gamma & Son
(i) Material Total Cost Variance
Page 33 of 78
(ii) Labour Total Cost Variance
500 F
Expenditure Volume
[Actual F-OH – Budgeted F-OH] [Budgeted F-OH – Actual Production × S.R]
145,000 – 10,000 × 15 10,000 × 15 – 9,500 × 15
5,000 F 150,000 – 142,500
7,500 U
Page 34 of 78
O My ALLAH! Truly I am in need of whatever good that you bestow on me [28:24]
2000 F 5,000 F
A.3
Material Variance
Material A
Price Usage
159,900
20 − 7,800 × 7,800 [(800 × 10) – 7,800] × 20
3,900 A 4,000 F
Material B
Price Usage
23,650
6 − 4,300 × 4,300 [(800 × 5) – 4,300] × 6
2,150 F 1,800 A
Page 35 of 78
Labour Variances
Rate Efficiency
24,150
6 − 4,200 ×4,200 [(800 × 5) – 4,200] × 6
1,050 F 1,200 A
a) Fixed OH Variance
Total Variance = Actual – Applied
= 47,000 – 800 × 50
= 7,000 A
A.4
(a) Material
Price Usage
(6.75 – 6.25) × 80,640 (27,000 × 2.8 – 8,640) × 6.75
40,320 F 34,020 A
Labour
Rate Efficiency
(27,000)
(150 – 160) × 14,850 60 30 − 14,850 × 150
148,500 A 202,500 A
Total Variable OH variance:
(SHW for A.P × S.R) – (AHW × A.R)
(27,000 × 0.5 × 12) – 175,000 = 13,000 A
175,000
12 − 14,850 14,850 [13,500 – 14,850] × 12
3,200 F 16,200 A
Page 36 of 78
There is no might nor power except in ALLAH.
Expenditure Volume
Actual (14,850 × 17) 252,450 Budgeted (30,000 × 9) 270,000
Budgeted (30,000 × 9) 270,000 Applied (27,000 × 18/2) 243,000
17,550 F 27,000 A
27,000 A
Capacity Efficiency
15,000 × 18 270,000 14,850 × 18 267,300
14,850 × 18 267,300 13,500* × 18 243,000
2,700 A 24,300 A
*(27,000 × 30/60)
(b) Unfavourable price variance may be caused by:
• Inaccurate Std. prices
• Inflationary cost increases
• Scarcity in raw material supplies resulting in higher prices
• Purchase department inefficiency
• Purchase of better quality products.
A. 5
HULK Limited (by Using Four Variances)
Material Variance
27,000
(150 – 160) × 14,850 30 − 14,850 × 150
60
148,500 A 202,500 A
Factory Overhead Variance (Four Variances)
(i) Factory Overhead Expenditure Variance
Rs.
Actual (175,000 + 14,850* × 17) *[27,000 x 33 / 60 = 14,850 hours] = 427,450
Less: Std. Cost of Factory OHs
AHW × S.R (27,000 × 0.55 × 12) = 178,200
Budgeted Production × S.R (30,000* × 18/12) = 270,000
448,200
*(15,000 × 2) 20,750 F
Page 37 of 78
20,750 F
3,200 F 17,550 F
(ii) V-OH Efficiency Variance
= (13,500 – 14,850) × 12
= 16,200 A
(iii) Fixed OH Capacity Variance:
15,000 × 18 = 270,000
14,850 × 18 = 267,300
2,700 A
Hulk Limited
Total factory OH variance
33
Actual F-OH = 427,450 [175,000 + ( 27,000 17 )]
60
Actual Production x S.R = 40,500
30
27,000 [(12 + 18) ]
60
22,450A
3,200 F 17,550 F
Page 38 of 78
ALHAMDULILAH for the chances ALLAH has given us to be able to ask for forgiveness.
A.6
Total Variable OH Variance
(SHW for A.P × S.R) – (AHW × A.R)
5,000,000
(4,325 × 10 × 120) – 44,000
44,000
Expenditure Efficiency
5,000,000
120 × 44,000 (4,325 10 − 44,000) × 120
44,000
280,000 F OR 90,000 A
AHW × S.R = 44,000 × 120 = 5,250,000
Actual VOH = 5,000,000
280,000 F
Expenditure Volume
Budgeted F-OH (4,500* x 800) 3,600,000 Budgeted F-OH (4,500 × 800) 3,600,000
Actual F-OH = 3,750,000 Actual Production × S.R (4,325×800) 3,460,000
*45,000 / 10 = 4,500 150,000 A 140,000 A
140,000 A
Capacity Efficiency
45,000 × 80 3,600,000 44,000 × 80 3,520,000
44,000 × 80 3,520,000 4,325 × 10 × 80 3,460,000
80,000 A 60,000 A
Std. rate
Factory OH/Unit = 2,000 ÷ 10 = 200/hrs.
Fixed OH rate / hr = 3,600,000 ÷ 45,000 = 80/hr.
Variable OH rate / hr. (200 – 80) = 120/ hr.
Fixed OH rate / unit = 80 × 10 = 800
Variable OH rate / unit = 120 × 10 = 1,200
Total factory overheads rate per unit 2,000
Page 39 of 78
A. Second Scenario:
Rs.
Actual factory overheads = 8,750,000
100,000 A
A.7
(1) Material Cost Variance (Material total Variance) (SQU x SR) – (AQU x AR):
A 30
400
192 240 - [16 × 230] = 224 U
388 U
B 25 192 320 - [13 × 308] = 164 U
400
Page 40 of 78
The DUNIYA is not the RESTING place it is the TESTING place.
Mix variance:
A (15.82 - 16) x 240 = 43.2 A
B (13.18 - 13) x 320 =57.6 F
14.4 F
A. 8
Material Cost Variance
Price Usage
[S.R – A.R] × AQU [SQU – AQU] × SR
A [38 – 37] × 750 = 750 F A 750 817 876− 750 38 = 2,052 F
Page 41 of 78
A.9
(i) Material Cost Variance:
S (1,200/2,200 × 12,100 × 1.5) – (6,000 × 1.6) = 300 F
A (600/2,200 × 12,100 × 2) – (4,800 × 1.8) = 2040 U
C (200/2,200 × 12,100 × 3) – (1,600 × 2.6) = 860 U
F (400/2,200 × 12,100 × 4) – (2,500 × 4.1) = 1,450 U
4,050 U
4,050 U
750 F 4,800 U
4,800 U
S 1,200 1,200
2,200 × 12,100 = 6,600
2,400 × 14,900 = 7,450 6,000
Yield Mix
(ii) Mix Variance:
S (7,450 – 6,000) × 1.5 = 2,175 F
A (3,725 – 4,800) ×2 = 2,150 A
C (1,242 – 1,600) ×3 = 1,074 A
F (2,483 – 2,500) ×4 = 68 A
1,117 A
Yield Variance:
S (6,600 – 7,450) × 1.5 = 1,275 A
A (3,300 – 3,725) ×2 = 850 A
C (1,100 – 1,242) ×3 = 426 A
F (2,200 – 2,483) ×4 = 1,132 A
3,683 A
Page 42 of 78
The road to Jannah is not easy, but ALLAH will be with that who have patience.
A.10
(a) Material X:
Price Variance = 95,000 A
Quantity Variance = NIL
50,000 6
Opening RM Inventory =
365 × 25 = 20,548 kgs.
50,000 6
Closing RM Inventory =
365 × 20 = 16,438 kgs.
Material Quantity Variance (usage) = (SQU for Actual Production – AQU) × S.R
0 = (50,000 × 6 – AQU) × 50
= (300,000 – AQU) × 50
50 AQU = 15,000,000
AQU = 15,000,000 ÷ 50
= 300,000 kgs.
Quantity Purchased = Consumed + Closing – Opening
= 300,000 + 16,438 – 20,548
= 295,890 kgs.
Also material price variance = (SR – AR) × AQP
(95,000) = (50 – AR) × 295,890
(95,000) = 14,794,500 – 295,890 A.R
295,890 AR = 14,794,500 + 95,000
14,889,500
AR =
295,890
Actual Rate = 50.32
Actual Purchase = 295,890 × 50.32 = 14,889,500.
Material Y:
Quantity Variance = 150,000 A
50,000 3
Opening RM = × 25 = 10,274 kgs.
365
50,000 3
Closing RM = × 20 = 8,219 kgs.
365
Material Quantity Variance (usage) = (SQU for Actual Production – AQU)×S.R Rate prod.
(150,000) = (50,000 × 3 – AQU) × 30
(150,000) = (150,000 – AQU) × 30
(150,000) = 4,500,000 – 30 AQU
30 AQU = 4,500,000 + 150,000
AQU = 155,000 kgs
Quantity Purchased = Consumed + Closing – Opening
= 155,000 + 8,219 – 10,274
= 152,945 kgs.
Std. Price of Y = 30/kg.
Actual Price of Y = 30 × 94% = 28.2/kg.
Therefore actual purchase of Y = 152,945 × 28.2
= 4,313,049
Page 43 of 78
(b) Skilled Labour:
Std. rate = 150/hour
Actual Rate = 165 (150 × 110%)
Std. hours required for A.P = 50,000 × 1.5 = 75,000
Actual hours spent/worked = 3/7 × 168,000 = 72,000
Total Skilled Labour Cost Variance:
Standard Labour Cost of Actual Production – Actual Labour Cost
(SHW for A.P × SR) – (AHW × A.R)
= (50,000 × 1.5 × 150) – (72,000 × 165)
= 630,000 A
80,000 A
Page 44 of 78
And fulfill the covenants. Indeed the covenants will be questioned (on the day of judgement). [17:34]
Total Factory Overheads Variance (not required just for additional information)
Actual (16,680,000 + 4,240,000) 20,920 =
Applied F-OH (50,000 × 390*) 19,500 1,180 A
1,420 A
240 A
Calculation of rates:
*V-OH rate /unit = [100 × 1.5 + 80 × 2] = 310
F-OH rate/unit = 4,000,000 ÷ 50,000 = 80
390
Page 45 of 78
A.11
Actual Material Cost:
[Std. Material Cost of A.P] – [Actual Material Cost]
(SQU × SR) – (AQU × AR)
(100,000 × 170) – 18,420,000 = 1,420,000 A
Rate Efficiency
(SR – AR) × AHW (SHW for A.P – AHW) x SR
16,250,000
120 − × 130,000 (100,000 × 1.25 – 130,000) × 120
130,000
650,000 A 600,000 A
Variable overheads total variance:
[SHW for A.P × S.R] – (AHW × AR)
(100,000 × 1.25 × 90) – (13,000,000) =1,750,000 A
2,560,000
Fixed OH Rate/Unit = = 25
102,400 *
*Budgeted Production – 128,000 ÷ 1.25 = 102,400
Page 46 of 78
And never say of anything, “I shall do such and such thing tomorrow” except (with the saying) if ALLAH wills!”
A.12
All solution same except four variances:
Combined factory overheads Expenditure Variance (as break up of actual factory overheads is not
available):
Actual Production overheads 15,500,000
Less: Total Std. Cost of Factory overheads
[AHW × S.R]
= 130,000 × 90 11,700,000
Budgeted Production × S.R
= (102,400 × 25) = 2,560,000
14,260,000
1,300,0000 A
Total Expenditure Variance 1,240,000 A
60,000 F
Remaining variable overheads efficiency, fixed overheads capacity and efficiency variances as in Q.11
[not required for additional information]
Total OH Variance Combined (VOH + F-OH)
Actual Factory OH = 15,500,000
Applied Factory OH 13,750,000
(100,000 × 137.5) 1,750,000 A (Under applied)
Page 47 of 78
Extra practice questions:
Question 1
Jack and Jill (JJ) manufactures various products. The following information pertains to one of its main products:
(i) Standard cost card per unit
Rupees
Direct material (5 kg at Rs. 40 per kg) 200
Direct labour (1.5 hours at Rs. 80 per hour) 120
Factory overheads 130% of direct labour
(ii) Fixed overheads are budgeted at Rs. 3 million based on normal capacity of 75,000 direct labour hours
per month.
(iii) Actual data for the month of June 2015
Units
Opening work in process (80% converted) 8,000
Started during the month 50,000
Transferred to finished goods 48,000
Closing work in process (60% converted) 7,000
Rupees
Material issued to production at: Rs. 38 per kg 1,900,000
Rs. 42 per kg 8,400,000
Direct labour at Rs. 84 per hour 6,048,000
Variable factory overheads 6,350,000
Fixed factory overheads 2,850,000
(iv) Materials are added at the beginning of the process. Conversion costs are incurred evenly throughout the
process. Losses up to 3% of the units are considered as normal. However, losses are determined at the
time of inspection which takes place when units are 90% complete.
(v) JJ uses FIFO method for inventory valuation.
Required:
(a) Compute equivalent production units (05)
(b) Calculate the following variances for the month of June 2015:
• Material rate and usage (03)
• Labour rate and efficiency (03)
• Variable factory overhead expenditure and efficiency (04)
• Fixed factory overhead expenditure and volume (04)
Note: if inspection stage is given, then multiply the normal loss percentage with the inspected units to get the
normal loss units.
Page 48 of 78
I am Muslim, Islam is my Deen,ALLAH is my LIGHT, Quran is my LIFE. Sunnah is my GOAL, and Jannah is my DREAM.
A. 1
Jack & Jill:
Equivalent Units Using FIFO
Quantity
Equivalent Production Units
Schedule
Material Conversion
Opening Units (80% Conversion) 8,000
Units started 50,000
58,000
Units transferred 48,000 8,000 -- 1,600
40,000 40,000 40,000
Closing WIP (60% Conversion) 7,000 7,000 4,200 (60%)
Normal loss (58,000 – 7,000) × 1,530 -- --
3%
Abnormal loss (90% Conversion) 1,470 1,470 1,323 (90%)
58,000 48,470 47,123
(b) Variances:
Material
Rate Usage
(40 – 38) × 50,000* = 100,000 F (48,470 × 5 – 250,000) × 40 = 306,000 A
300,000 A
(40 – 42) × 200,000** = 400,000 A
*1,900,000 ÷ 38 = 50,000
250,000 kgs
**8,400,000 ÷ 42 = 200,000
Labour
Rate Efficiency
(80 – 84) × 72,000* = 288,000 A (47,123 × 1.5 – 72,000) × 80 = 105,240 A
[6,048,000 ÷ 84]
Variable -OH
Expenditure Efficiency
(64 – 6,350,000/72,000) × 72,000 = 1,742,000 A (47,123 × 1.5 – 72,000) × 64 = 84,192 A
Fixed -OH
Expenditure Volume
2,850,000 50,000 × 60 = 3,000,000
3,000,000 47,123 × 60 = 2,827,380
150,000 F 172,620 A
Page 49 of 78
(W-1) Std. FOH rate/hr & per Unit:
Std. F-OH rate/hr (120 × 130%) ÷ 1.5 = 104/ hr & 156/unit
Std. Fixed F-OH rate / hr [3,000,000 ÷ 75,000] = 40 / hr & 60/unit
Std. Variable F-OH rate / hr (104 – 40) 64 / hr & 96/unit
Question 2
Sigma Limited (SL) is a manufacturer of product A. SL operates at a normal capacity of 90% against its available
annual capacity of 50,000 machine hours and uses absorption costing. The following summarised profit
statements were extracted from SL’s budget for the year ending 31 December 2015.
Required:
(a) What do you understand by under / over absorbed production overheads? (02)
(b) Analyse the under absorbed production overheads of SL for the year ended 31 December 2014, into
spending (means expenditure) and volume variances. Give two probable reasons for each variance.
(06)
(c) Prepare budgeted profit and Loss Statement for the year ending 31 December 2015, using marginal
costing. (07)
(d) Analyse the difference between budgeted profit determined under absorption and marginal costing, for
the year ending 31 December 2015. (02)
Answer 2
(a) Under / Over absorbed production Overheads:
Production overhead rate is predetermined at the beginning of the period based on budgeted annual
overheads and budgeted annual production. Overheads are applied to actual units using predetermined
overhead rate. However, actual overheads and actual production may differ from budgeted overheads
and production, therefore it would result in under / over absorption of production overheads.
Page 50 of 78
Never think any request is too much for Allah; He says: “BE” and “IT IS”
Capacity Efficiency
45,000 × 80 = 3,600 44,000 × 80 = 3,520
44,000 × 80 = 3,520 4,325 × 10 × 80 = 3,460
80 A 60 A
In 2014
F-OH rate/unit = 2,000 ÷ 10 = 200/hr.
F-OH rate/hr = 3,600,000 ÷ 45,000 = 80/hr.
Variable OH rate/hr (200 – 80) 120/hr.
Fixed F-OH rate / unit = 80 × 10 = 800
Variable F-OH rate / unit = 120 × 10 = 1,200
2,000
In 2015
F-OH rate/unit = 2,250 ÷ 10 = 225/hr.
Fixed OH rate / hr = 4,050,000 ÷ 4,500 = 90/hr.
VOH rate/hr (225 – 90) 135/hr.
Fixed F-OH rate/unit = (90 × 10) 900
Variable F-OH rate/unit (135 × 10) = 1,350
2,280
Page 51 of 78
(d) Reconciliation of Budgeted Profits:
Profit as per marginal costing 6,560
Opening stock as per M.C 4,920
(480)
Closing stock as per M.C (4,475)
Opening stock as per A.C (5,400
450
Closing stock as per A.C 4,925
Profit As Per Absorption Costing 6,530
Q. 3 MZ Limited (MZL) manufactures a single product X and uses standard marginal costing
system. The standard cost card of product X is as follows:
Rupees
Raw material (13 kg @ Rs. 135 per kg) 1,755
Labour (14 hours @ Rs. 100 per hour) 1,400
Variable production overheads (Rs. 75 per labour hour) 1,050
Following data is available in respect of operations for the month of February 2018:
1. 55,000 units were put into process. 1,500 units were lost in process which were considered
to be normal loss. Process losses occur at the end of the process.
2. 698,000 kg of material was purchased at Rs. 145 per kg. Material is added at the start of
the process and conversion costs are incurred evenly throughout the process.
3. 755,000 labour hours were worked during the month. However, due to certain labour
related issues, wages were paid at Rs. 115 per hour.
4. Fixed production overheads are budgeted at Rs. 40 million for the month of February 2018. Total
actual production overheads amounted to Rs. 95 million. Actual fixed production overheads
exceeded budgeted fixed overheads by Rs. 1.1 million.
5. Inventory balances were as under:
Required:
Compute material, labour and overhead variances. (14)
Page 52 of 78
Do not lose hope, nor be sad [Quran 3:139]
A. 3 MZL Limited
Variances:
Material
Rate Efficiency
(SR – AR) × AHW (SHW – AHW) × S.R
(100 – 115) × 755,000 [(54,300 × 14) – 755,000] × 100
11,325,000 A 520,000 F
Variable OH
Expenditure Efficiency
(SR – AR) × AHW (SHW – AHW) × S.R
53,900,000 * [(54,300 × 14) – 755,000] × 75
75 − 755,000 × 755,000
2,725,000 F 390,000 F
Page 53 of 78
Fixed OH
Expenditure
Budgeted Fixed OH 40,000,000
Actual Fixed OH 41,100,000
1,100,000 A
Workings:
(W-1) Process Account
Page 54 of 78
Do not cry at your loss, ALLAH will not take anything from a believer without replacing it with something better.
Q. 4 (a)
Following information has been extracted from the records of Silver Industries Limited (SIL) for the
month of June 2017:
Production Direct labour Variable & fixed
Units hours Overheads (Rs.)
Available capacity 10,000 30,000 -
Budget 8,000 24,000 3,600,000
Actual 8,600 25,000 3,900,000
Fixed overheads were budgeted at Rs. 1,200,000. Applied fixed overheads exceeded actual fixed
overheads by Rs. 20,000.
SIL uses standard absorption costing. Over/under applied factory overheads are charged to profit
and loss account.
Required:
(i) Prepare accounting entries to record the factory overheads. (03)
(ii) Analyse under/over applied overheads into expenditure, efficiency and capacity
variances. (11)
(b) Comment on the difference between overhead variances under marginal and
absorption costing. (03)
A. 4
a) (i) Entries
1) F – OH 3,900,000
Cash/Payable 3,900,000
2) WIP 3,870,000
F – OH 3,870,000
3) P/L 30,000
F – OH 30,000
Actual Fixed OH (balancing) = 1,270,000
Applied Fixed OH (8,600 x 150*) = 1,290,000
Over applied Fixed OH 20,000
*[1,200,000 ÷ 8,000 = 150/unit]
Page 55 of 78
Under Absorbed Factory-OH 30,000 A
Factory-OH Expenditure V-OH Efficiency Variance (Not Required for Extra Information)
(SHW – AHW) x SR Fixed – OH Volume Variance
Variance
(8,600 x 3 – 25,000) x 100 Budgeted Fixed OH = 1,200,000
Actual Factory-OH 3,900,000
80,000 F (8,000 x 150)
Std. cost of Factory-OH:
Applied Fixed OH = 1,290,000
From fixed OH:
(8,600 x 150) 90,000 F
Budgeted Fixed OH1,200,000
From V – OH:
AHW x SR*(W-1) 2,500,000
(25,000 x 100)* 3,700,000
200,000 A
W-1)
V – OH rate/hr
[300 ÷ 3] = 100/hr
W-2)
F – OH rate/unit = 450
Fixed OH rate/unit = 150
V – OH rate/unit 300
(b) Comments on the difference between overhead variances under marginal and
absorption costing:
In absorption costing, fixed overheads are allocated to the products and these are included in
the inventory valuations as product cost (means applied to production).
In marginal costing, only variable overheads are assigned to the product; fixed overheads are
regarded as period costs and recognized as an expense in the period in which they are
incurred.
Variable and fixed overhead variances under marginal and absorption costing are same, except
for the Fixed overhead volume variance and therefore Fixed overhead capacity and Fixed
overhead efficiency variance are calculated only under absorption costing. In addition Fixed
overhead total variance is only calculated under Absorption costing.
Page 56 of 78
Loneliness is better than a bad company.
Q. 5 Seema Enterprises (SE) produces various leather goods. It operates a standard marginal
costing system. For one of its products Bela, following information was extracted for the month of
December 2015 from SE's budget document for the year 2015.
Rs. in million
Sales 9,800 units 25.00
Cost of production of 10,000 units:
Direct material 5,000 kg 9.00
Direct labour 24,000 hrs 3.60
Variable overheads 2,000 machine hrs 4.40
Fixed overheads 3.80
Actual production for the month of December 2015 was 12,000 units whereas SE earned
revenue of Rs. 30 million by selling 11,000 units of Bela. Following information pertains to
actual cost of production for the month:
(b) 5,700 kg material was issued to production. Raw materials are valued using FIFO
method. Other details relating to the raw material used for Bela are as follows:
kg Rs. in million
1-Dec-2015 Opening balance 3,000 5.70
10-Dec-2015 Purchases 15,000 26.25
(ii) To minimise labour turnover, SE increased production wages by 10% above the
standard rate, effective 1 December 2015. This improved labour efficiency by 5% as
compared to budget.
(iv) There was no opening finished goods inventory of Bela. Actual closing inventory
may be valued at standard marginal production costs.
Required:
a) Compute budgeted and actual profit of Bela for the month of December 2015 using marginal
costing. (6)
b) Reconcile the budgeted profit with actual profit using relevant variances under marginal
costing. (14)
Page 57 of 78
A. 5 Seema Enterprises
(a) Budgeted and actual profits for the month of December 2015
(Using marginal costing)
Rs. in million
(i) Budgeted profit:
Sales (9,800 units) 25.00
Variable cost of sale:
Opening Finished goods -
+ Variable COGM (10,000 units):
Direct Material 9
Direct Labor 3.6
Variable OH`s 4.4 17
Closing finished goods inventory at standard cost (16.66)
(0.34)
[17M ÷ 10,000×200[10,000 - 9,800]]
Gross Contribution 8.34
Fixed cost (3.80)
Net profit 4.54
Actual profit:
Sales (11,000 units) 30.00
Variable Cost of Sale:
Opening Finished Goods
+ variable COGM:
Direct Material Consumed:
Opening stock [3000 Kg] 5.7
+Purchases [15,000 Kg] 26.25
Closing cost [12,300* Kg x 1750**] 21.525
10.425
*[3,000+15,000-5,700]
**[26.25M/15,000]
OR : [3,000 kgs 5.7M + 26.25M/15,000 x 2700 kgs] =10.425 4.51
Direct labor [27,360*x165*]
*Actual labor hr`s 4.80
[24,000/10,000] = 2.4x12,000x95% =27,360
**Actual labor rate
[3,600,000/24,000 =150x1.1=165
Variable OH [2,100x2,288*] 4.80
*Actual variable OH rate/hr 19.74
[ 4,400,000/2,000] =2,200x1.04=2,288/machine hr.
Less: Closing finished goods inventory (at standard cost) [17M÷10,000×1,000](1.70) (18.04)
Gross Contribution 11.96
Fixed cost [1.6+1.2+(3.8-1.6-1.2)1.04] (3.84)
Actual Profit 8.12
Page 58 of 78
Death may not come to us today, but we are one day closer to it.
(ii)
Budgeted profit 4.54
Budgeted fixed cost 3.80
Budgeted contribution 8.34
Variances: (Workings below)
Sales price 1.94F
Sales volume 1.02F
Material price 0.17A
Material usage 0.54F
Labor rate 0.41A
Labor efficiency 0.22F
Variable overhead expenditure 0.18A
Variable overhead efficiency 0.66F
Actual Contribution: 11.96
Budgeted fixed cost 3.8
Fixed OH Expenditure Variance 0.04A (3.84)
Actual Profit 8.12
Working:
Calculation of Variances:
Sales
Price Volume
(BR – AR) × AQS (BQS – AQS) × Std.cont/unit
(25M/9,800 – 30M/11,000) × 11,000 [(9,800 - 11,000) x 8.34M/9,800
1.94 F 1.02 F
Material
Price Usage
(SR – AR) × AQU (SQU – AQU) × S.R
[1,800–1,900(5.7M/3,000)]× 3,000=0.3A [(12,000x0.5*)-5,700]x1,800
[1,800-1,750(26.25M/15,000)]x2,700=0.135 A 0.54 F
0.17A *5,000 kgs /10,000 units
Labour
Rate Efficiency
(SR – AR) × AHW (SHW – AHW) × S.R
(150 – 165) × 27,360 [(12,000 × 2.4) – 27,360] × 150
0.41 A 0.22 F
Page 59 of 78
Variable OH[On The Basis Of Machine Hrs As In Question]
Expenditure Efficiency
(SR – AR) × AHW (SHW – AHW) × S.R
[2,200-2,288]x2,100 [(12,000 × 0.2*) – 2,100] × 2,200
*[2,000/10,000]
0.18 A 0.66 F
Fixed OH
Expenditure
Budgeted Fixed OH 3.8
Actual Fixed OH 3.84
0.04 A
Question 6
Zamil Industries (ZI) produces and markets an industrial product Zeta. ZI uses standard absorption costing
system. The break-up of Zeta’s standard cost per unit is as under:
Rupees
Materials: Axe – 1 kg 160
Zee – 2 kg 210
Direct labour – 0.8 hours 200
Overheads – 0.8 hours 180
Production of Zeta for the month of August 2016 was budgeted at 15,000 units. Information pertaining to
production of Zeta for August 2016 is as under:
(i) Raw material inventory is valued at lower of cost and net realizable value. Cost is determined under
FIFO method. Stock cards of materials Axe and Zee are reproduced below:
Axe Zee
Date Description Cost per kg Cost per kg
Kg Kg
(Rs.) (Rs.)
1-Aug Opening balance 9,000 150 4,000 120
- - 8,000 122
3-Aug Purchase returns - - (2,000) 122
4-Aug Purchase 17,000 148 35,000 125
6-Aug Issues to production (16,000) - (29,000) -
(ii) Actual direct wages for the month were Rs. 3,298,400 consisting of 11,780 direct labour hours.
(iii) Fixed overheads were estimated at Rs. 540,000 based on budgeted direct labour hours.
(iv) The actual fixed overheads for the month were 583,000.
Actual sales of Zeta for the month of August 2016 was 12,000 units. Opening and closing finished goods
inventory of Zeta was 5,000 and 8,500 units respectively.
Required:
(a) Compute following variances:
(i) Material price, mix and yield variances (07)
(ii) Labour rate and efficiency variances (04)
(b) Compute applied fixed overheads and analyse ‘under/over applied fixed factory overheads’ into
expenditure, efficiency and capacity variances. (08)
Page 60 of 78
Beauty lies in beautiful behavior, manners and mind.
Answer 6
(a) (i) Material Variances:
1: Material Price Variance [Axe] [FIFO]
[SR – AR] × AQU
(i) [160 – 150] × 9,000 = 90,000 F
(ii) [160 – 148] × 7,000 = 84,000 F
16,000 kgs 174,000 F
Zee:
[SR – AR] × AQU
(i) [105* - 120] × 4,000 = 60,000 A
[105 – 122] × 6,000 = 102,000 A
[105 – 125] × 19,000 = 380,000 A
29,000 kgs 542,000 A
* [210 ÷ 2]
2. Material Mix and Yield Variance
Working of Actual Production:
Finished Goods Account
Yield Variance:
Axe (15,500 – 15,000) × 160 = 80,000 F
Mix Variance:
Axe (15,500 – 16,000) × 160 = 160,000 A
Page 61 of 78
(ii) Labour Variances
Page 62 of 78
Allah has heard the yearning of your quiet heart. Be patient, everything will be ok soon.
A.1
Operating Statement:
Budgeted Profit (3,000 × 12) 36,000
Sales Price Variance 4,200 F
Sales Volume Variance 1,800 A
38,400
Cost Variances:
Leather Price 600 F
Leather Usage 750 A
Other Material 100 F
Direct Labour – Rate 700 A
– Efficiency 1,200 A
– Idle Time 3,000 A
Variable OH: Expenditure 450 A
Efficiency 600 A
Page 63 of 78
Fixed OH: Expenditure 4,500 A
Volume 1,800 F
*Actual Profit 29,700
Calculation of Variances:
(a) Leather:
Price Usage
45,400
5 − 4,200 × 9,200 [(3,200 × 3) – 9,750) × 5]
600 F 750 A
Stocks are valued at std. costs and so price variance must be calculated on quantity purchased
rather than quantity used.
(b) Other Material:
We are not given a breakdown into units of material and price per unit of other material and so the
only material variance we can calculate is the total cost variance.
(SQU for A.P × S.R) – Actual Cost
3,200 × 3 – 9,500 = 100 F
9,600
(c) Labour Variances:
Page 64 of 78
اے ایمان والوں نماز اور صبر سے مدد تالش کرو۔بے شک ہللا صبر کرنے والوں کے ساتھ ہے ۔
Expenditure Volume
Actual Fixed OH = 31,500 Budgeted Fixed OH (3,000 × 9) 27,000
Budgeted Fixed OH (3,000 × 9) 27,000 Actual production × S.R (3,200×9) 28,800
4,500 A 1,800 F
Break-up of Fixed OH Volume Variance (not required only for additional information)
Page 65 of 78
Variance Analysis
1.LETTUCE
Lettuce makes a product – the vegetable guard. It is the organic alternative to slug pellets and chemical
sprays.
For the forthcoming period budgeted fixed costs were Rs.6,000 and budgeted
production and sales were 1,300 units.
The vegetable guard has the following standard cost:
Rs.
Selling price 50
Materials 5kg Rs.4/kg 20
Labour 3hrs Rs.4/hr 12
Variable overheads 3hrs Rs.3/hr 9
1. MOONGAZER
MoonGazer produces a product – the telescope. Actual results for the period were:
❑ 430 units made and sold, earning revenue of Rs.47,300.
❑ Materials: 1,075 kg were used.
❑ 1,200 kg of materials were purchased at a cost of Rs.17,700
❑ Direct labour: 1,700 hours were worked at a cost of Rs.14,637
❑ Fixed production overheads expenditure: Rs.2,400.
❑ Variable production overheads expenditure: Rs.3,870. The
standard cost card for the product is as follows:
Rs.
Direct material 2 kg Rs.15 30
Direct labour 4hrs Rs.8.50 34
Variable overhead 4hrs Rs.2.00 8
Fixed production overhead per unit 5
77
The standard unit selling price is Rs.100. The cost card is based on production and
sales of 450 units in each period.
Page 66 of 78
TAWAKKUL is having full faith that ALLAH will take care of you even when things look impossible.
Required
Produce an operating statement to reconcile budgeted and actual gross profit. (14)
2. CARAT
Carat plc, a premium food manufacturer, is reviewing operations for a three-month
period. The company operates a standard marginal costing system and manufactures
one product, ZP, for which the following standard revenue and cost data per unit of
product is available:
Selling price Rs. 12.00
Direct material A 2.5 kg at Rs. 1.70 per kg
Direct material B 1.5 kg at Rs. 1.20 per kg
Direct labour 0.45 hrs at Rs. 6.00 per
hour
Fixed production overheads for the three-month period were expected to be Rs.
62,500.
Required
(a)Calculate the following variances:
(i) sales volume contribution and sales price variances;
(ii) price, mix and yield variances for each material;
(iii) labour rate, labour efficiency and idle time variances. (15)
(b) Prepare an operating statement that reconciles budgeted profit to actual profit with each
variance clearly shown. (5)
c) Explain the reasons of variances.
Page 67 of 78
5. EXCELLENT LIMITED
Excellent Limited makes and sells a single product. The standard cost card for the product,
based on normal capacity of 45,000 units per month is as under:
Rupees
Material 60 kgs at Rs. 0.60 per kg 36.00
Labour ½ hour at Rs. 50.00 per hour 25.00
Variable factory overheads, 30% of direct labour cost 7.50
Fixed factory overheads 6.50
Total 75.00
Page 68 of 78
My Lord enable me to be grateful for your favour which you have bestowed upon me and upon my parents,
and to work righteousness of which you approve and make righteous for me my offspring. Truely, I have
turned to you in repentance and truly, I am one of the Muslims [46:15]
Rupees in ‘000
Sales 480,000 units 295,000
Direct material 950,000 kgs 55,000
Direct labour 990,000 hours 105,000
Variable overheads 26,000
Fixed overheads 5,100
Required: Reconcile budgeted profit with actual profit using relevant variances. (18)
7. STANDARD COST SHEET
The following data relates to actual output, actual costs and variances for the four- weekly
accounting period number 4 of a company which makes only one product.
The value of work-in-progress at the end of period 4 was the same as the value of work-in-
progress at the beginning of the month.
Actual production of Product XY 18,000 units
Actual costs incurred: Rs.000
Direct materials purchased and used (150,000 kg) 210
Direct labour costs (32,000 hours) 136
Variable production overhead 38
Rs.000
Variances:
Direct materials price 15 Favourable
Direct materials usage 9 Adverse
Direct labour rate 8 Adverse
Direct labour efficiency 16 Favourable
Variable production overhead expenditure 6 Adverse
Variable production overhead efficiency 4 Favourable
Variable production overhead varies with labour hours worked. A
standard marginal costing system is operated.
Required
Present a standard product cost sheet for one unit of Product XY, showing how the standard
marginal production cost of the product is made up.
Page 69 of 78
VARIANCE ANALYSIS (Reasons)
Direct materials: possible causes of variances
When variances occur and they appear to be significant, management should investigate the reason for
the variance. If the cause of the variance is something within the control of management, control action
should be taken. Some of the possible causes of materials variances are listed below.
The reasons for a favorable or an adverse volume variance might therefore be any of the
following.
• Working more hours than budgeted might be caused by working overtime, or taking on additional direct
labor employees.
• Working fewer hours than budgeted might be caused by staff shortages (due to employees leaving or absence
from work), hold-ups in production or lack of customer orders.
Page 72 of 78
All praises and thanks be to ALLAH, who has guided us to this (i.e. Jannah), and never could we have found
guidance, were it not that ALLAH has guided us [7:43] [a prayer of people of Jannah]
The importance of reliable standard costs
It is important to remember that the value of variances as control information for management depends on the
reliability and accuracy of the standard costs. If the standard costs are inaccurate, comparisons between actual
cost and standard cost will have no meaning. Adverse or favorable variances might be caused by inaccurate
standard costs rather than by inefficient or efficient working.
Page 73 of 78
A standard unit should have exactly the same input resources (direct materials, direct labor time) as
all other similar units, and these resources should cost exactly the same. Standard units should
therefore have the same cost.
Standard cost
A standard cost is a predetermined unit cost based on expected direct materials quantities and
expected direct labor time, and priced at a predetermined rate per unit of direct materials and rate per
direct labor hour and rate per hour of overhead.
Standard costs of products are usually restricted to production costs only, not administration and selling
and distribution overheads.
Overheads are normally absorbed into standard production cost at an absorption rate per direct labor
hour.(if absorption costing is used)
Example 01:
The standard cost of a Product XYZ might be (if absorption costing is used):
Rs. Rs.
Direct materials:
Material A: 2 litres at Rs.4.50 per litre 9.00
Material B: 3 kilos at Rs.4 per kilo 12.00
21.00
Rs. Rs.
Direct labor
Grade 1 labor: 0.5 hours at Rs.20 per hour 10.00
Grade 2 labor: 0.75 hours at Rs.16 per hour 12.00
22.00
Variable production overheads: 1.25 hours at Rs.4 per hour 5.00
Fixed production overheads: 1.25 hours at Rs.40 per hour 50.00
Standard (production) cost per unit 98.00
Page 74 of 78
Just because you cannot see the air, you do not stop breathing. Similarly, just because you cannot see ALLAH,
does not mean you stop believing.
1. Ideal standards.
These assume perfect operating conditions. No allowance is made for wastage, labor inefficiency or
machine breakdowns. The ideal standard cost is the cost that would be achievable if operating conditions
and operating performance were perfect. In practice, the ideal standard is not achieved.
Ideal standards are unlikely to be achieved. They may be very useful as long term targets and may
provide senior managers with an indication of the potential for savings in a process but generally the
ideal standard will not be achieved. Consequently, the reported variances will always be adverse.
Employees may be becoming de- motivated when their performance level is always worse than standard
and they know that the standard is unachievable.
Page 75 of 78
2. Attainable standards.
These assume efficient but not perfect operating conditions. An allowance is made for waste and
inefficiency. However, the attainable standard is set at a higher level of efficiency than the current
performance standard, and some improvements will therefore be necessary in order to achieve the
standard level of performance.
Attainable standards are the most likely to motivate employees to improve performance as they
are based on challenging but attainable targets. It is for this reason that standards are often based
on attainable conditions. However, a problem with attainable standards is deciding on the level of
performance that should be the target for achievement. For example, if an attainable standard provides
for some improvement in labor efficiency, should the standard provide for a 1% improvement in efficiency,
or a 5% improvement, or a 10% improvement?
3. Current standards.
These are based on current working conditions and what the entity is capable of achieving at the
moment. Current standards do not provide any incentive to make significant improvements in
performance, and might be considered unsatisfactory when current operating performance is considered
inefficient.
Current standards may be useful for producing budgets as they are based on current levels of
efficiency and may therefore give a realistic guide to resources required in the production
process. However current standards are unlikely to motivate employees to improve their performance,
unless there are incentives for achieving favorable variances (for achieving results that are better than the
standard), such as annual cash bonuses.
4. Basic standards.
These are standards which remain unchanged over a long period of time (out dated standards
prepared sometimes in past). Variances are calculated by comparing actual results with the basic
standard, and if there is a gradual improvement in performance over time, this will be apparent in an
improving trend in reported variances.
Basic standards will not motivate employees to improve their performance as they are based on
achievable conditions at some time in the past. They are also not useful for budgeting because they will
often be out of date. In practice, they are the least common type of standard.
Example 02:
A company produces bookshelves. Each bookshelf requires three planks of wood. A box
of wood contains 15 planks and costs Rs.45.
Currently 20% of wood is wasted during production. Management would like to reduce this
wastage to 10%.
Calculate a standard material cost for a bookshelf based on
a) Ideal conditions
Standard cost per plank = Rs.45/15 planks = Rs.3 per
plank
Ideal standard: 3 planks Rs.3 = Rs.9 per bookshelf
b) Current conditions
Current standard: 3/0.80 planks = 3.75 planks at Rs.3 = Rs.11.25 per bookshelf
c) Attainable conditions
Attainable or target standard: 3/0.9 = 3.33 planks at Rs.3 = Rs.10 per bookshelf
Reviewing standards
How often should standards be revised? Standards should be reviewed regularly.
There are several reasons why standards should be revised regularly.
Regular revision leads to standards which are meaningful targets that employees may be motivated to
achieve (for example, through incentive schemes).
Variance analysis is more meaningful because reported variances should be realistic.
In practice, standards are normally reviewed annually. Standards by their nature are long-term
averages and therefore some variation is expected over time. The budgeting process can therefore be
used to review the standard costs in use.
Ideal standard
No loss; therefore, standard cost =
1 unit of direct materials at Rs.4.50 per unit of material = Rs.4.50 per unit of output.
b) If the standard cost allows for a loss of 10% of input materials in producing each
unit of output, then Standard Direct material cost per unit of output would be:
Attainable or current standard: allow for 10% loss
Standard input to produce one unit of = 1/0.9 units = 1.111 units. Therefore, standard
cost = 1.111 units of materials at Rs.4.50 per unit = Rs.5 per unit of output.
Example 04:
A company produces sandwiches. Each sandwich requires two slices of bread and a loaf (packet) of bread
contains 24 slices. Each loaf of bread costs Rs.6. It is estimated that currently 20% of bread is wasted.
Management would like to reduce this wastage to 10%.
Calculation of a standard material cost for a sandwich based on various conditions are given below
a) Ideal conditions
Standard cost per slice of bread = Rs.6/24
slices = Rs.0.25
Ideal standard: 2 slices Rs.0.25 = Rs.0.50
b) Current conditions
Current standard: 2/0.80 slices = 2.5 slices at Rs.0.25 = Rs.0.625
c) Attainable conditions
Attainable or target standard: 2/0.9 = 2.22 slices at Rs.0.25 = Rs.0.555.
Note that the current and attainable standard costs include an allowance for wastage, and a materials
usage variance will occur only if the actual wastage rate differs from the standard wastage rate.
Page 77 of 78
This means that the labor time to make 1 unit of product X is 0.36/0.90 = 0.40 hours, of which
0.04 hours are idle time.
There are two ways of making an allowance for in the standard cost the expected idle time.
Method 1: Include idle time as a separate element of the standard cost. The standard cost per unit will
include the following items:
Rs.
Active hours worked: 0.36 hours Rs.18 per hour 6.48
Idle time: 0.04 hours Rs.18 per hour 0.72
7.20
Method 2: Include an allowance for expected idle time in the standard hours per unit for each product.
Standard cost = 0.40 hours Rs.18 per hour = Rs.7.20
Example:A company manufactures Product Y. Due to the nature of the production process, there is some
idle time and it has been estimated that the ‘normal’ amount of idle time is 20% of hours worked.
Ignoring idle time, the standard time to make 1 unit of Product Y is 0.56 hours. Labor is paid Rs.30 per
hour.
Calculate the standard cost of the expected idle time using each of the following three methods:
i. Include idle time as a separate element of the standard cost
ii. Include an allowance for expected idle time in the standard hours and standard
cost
The labor time to make 1 unit of product X is 0.56/0.80 = 0.70 hours, of which 0.14 hours are idle time.
i. Include idle time as a separate element of the standard
cost.
The standard cost per unit will include the following items:
Rs.
Active hours worked: 0.56 hours Rs.30 per hour 16.80
Idle time: 0.14 hours Rs.30 per hour 4.20
21.00
ii. Include an allowance for expected idle time in the standard hours and in
standard cost.
Standard cost = 0.70 hours Rs.30 per hour = Rs.21.00
Page 78 of 78
Do start with BISMILLAH!!
In Marginal costing fixed production overheads are not included in cost of production (and therefore to
closing stock).Therefore fixed production overheads are treated as period cost and are charged in the
profit and loss account of the period in which they are incurred. (Fixed production overheads are
treated as period cost).
Total absorption costing income statement for the period (assumed figures):
Rs. Rs.
Sales 430,000
Cost of sales
Opening inventory at full production cost 8,000
Production costs
Direct materials 60,000
Direct labour 30,000
Variable Production overheads 40,000
Fixed Production overheads 60,000
198,000
Less: Closing inventory at full production cost (14,000)
cost of sales (unadjusted) (184,000)
(Under)/over absorption:
Fixed production overheads absorbed / charged / applied 60,000
Actual Fixed production overheads incurred (assumed) (55,000)
Over-absorbed overheads 5,000
(179,000)
Gross Profit (adjusted) 251,000
Administration, selling and distribution costs (178,000)
Profit for the period 73,000
Marginal costing income statement for the period (assumed figures):
Rs. Rs.
Sales 430,000
Variable cost of sales:
Opening inventory at variable production cost 5,000
Variable production costs
Direct materials 60,000
Direct labour 30,000
Variable production overheads 15,000
110,000
Less: Closing inventory at variable production cost (8,000)
Page 1 of 21
102,000
Gross contribution 338,000
Variable selling and distribution costs 18,000
Net Contribution 320,000
Fixed Costs:
Production costs 120,000
Administration costs (usually 100% fixed costs*) 70,000
Selling and distribution costs 90,000 280,000
Profit for the period 40,000
*it is generally assumed if nothing is mentioned.
Page 2 of 21
Do end with ALHAMDULILAH!!
Q. 2 Following information has been extracted from the financial records of ATF Limited:
Production during the year Units 35,000
Finished goods at the beginning of the year Units 3,000
Finished goods at the end of the year Units 1,500
Sale price per unit Rs. 200
Fixed overhead cost for the year Rs. 1,000,000
Administration and selling expenses Rs. 200,000
Annual budgeted capacity of the plant Units 40,000
The actual cost per unit, incurred during the year, was as follows:
Rupees
Material 70
Labor 40
Variable overheads 30
Company uses FIFO method for valuation of inventory. The cost of opening finished goods inventory
determined under the absorption costing method system was Rs. 450,000. Fixed overhead constituted
16% of the total cost last year.
Required:
(a) Prepare profit statements for the year, under absorption and marginal costing systems.
(b) Prepare reconciliation between the net profits determined under each system. (12 Marks)
Note:
If there is no indication, then budgeted fixed overheads are equal to actual fixed overheads.
If there is no information then assume administrative and selling expenses as fixed.
Q. 3 XY Limited manufactures and sells a single product. The selling price and costs for the year ended
31 December 2013 were as follows:
Note: if there is no information then assume that normal capacity is equal to budgeted capacity.
Page 3 of 21
Q. 4 Silver limited (SL) produces and markets a single product. Following information is available from
SL’s records for the month of March 2012
Volumes:
Sales 100,000 Units
Production 120,000 Units
Standard cost;
Direct material per unit 0.8 Kg @ Rs. 60/Kg
Labor per unit 27 Minutes @ Rs. 80/Hour
Variable production overheads Rs. 40/Labor hour
Variable selling expenses Rs. 15/Unit
Fixed selling expenses Rs. 800,000
Fixed production overheads at a normal output level of 105,000 units per month are estimated at
Rs. 2,100,000. The estimated selling price is Rs. 180/unit.
Required:
Assuming there is no opening stock; prepare income statement for the month of March using:
➢ Absorption Costing
➢ Marginal Costing
Page 4 of 21
Do appreciate with Subhan ALLAH!!
Solutions
A.1
Page 5 of 21
Reconciliation of Profits
July August
Profit as per Absorption Costing 35,000 105,000
Closing Stock – Absorption Costing (60,000)
Opening Stock – Absorption Costing -- 60,000
Opening Stock – Marginal Costing -- (35,000)
Closing Stock – Marginal Costing 35,000
Profit as per Marginal Costing 10,000 130,000
A.2
Absorption Costing:
Sales (3,000 + 3,500 – 1,500= 36,500 × 200) 7,300,000
Less: Cost of Sales
Opening Stock (given) 450,000
Production Cost (70 + 40 + 30 + 25*) × 35,000 5,775,000
Closing Stock (165 × 1,500) (247,500)
*[1,000,000 / 40,000] (5,977,500)
Under absorbed (5,000 × 25) (125,000)
Cost of Sales – Adjusted (6,102,500)
Gross Profit 1,197,500
Admin & Selling (200,000)
Net profit 997,500
Marginal Costing:
Sales 7,300,000
Variable cost of Sales:
Opening Stock (450,000 × 84%) 378,000
Production cost (35,000 × 140) 4,900,000
Closing Stock (1,500 × 140) (210,000) (5,068,000)
Contribution 2,232,000
Fixed cost:
Production Cost (1,000,000)
Admin & Selling Cost (200,000)
1,032,000
Reconciliation:
Profit As per Absorption costing. 997,500
Closing As per A.C (247,500)
Opening As per A.C 450,000
Closing As per M.C 210,000
Opening As per M.C (378,000)
Profit as per Marginal costing 1,032,000
Page 6 of 21
Hope with INSHA ALLAH !!
A.3
(a) XY Limited
XY Limited
Absorption Costing:
Sales (4,000 + 12,000 – 3,000) × 1,600 20,800,000
Cost of Sales:
Opening Stock (4,000 × 980) 3,920,000
Production Cost:
Material (12,000 × 630) 7,560,000
Labour (12,000 × 189) 2,268,000
Variable overheads (12,000 × 132) 1,584,000
Fixed overheads (12,000 × 88) 1,056,000
12,468,000
Closing Stock (3,000 × 630 + 189 + 132 + 88=1,039) (3,117,000) (13,271,000)
Under applied (15,000 × 88 – 1,056,000) (264,000)
Cost of Sales – Adjusted (13,535,000)
Gross Profit 7,265,000
Selling & Distribution (13,000 × 165) (2,145,000)
Net profit 5,120,000
Calculation of under / over applied overheads:
Marginal Costing:
Sales (13,000 × 1,600) 20,800,000
Variable Cost of Sales:
Opening Stock (4,000 × 900) 3,600,000
Variable Production Cost:
Material (12,000 × 630) 7,560,000
Labor (12,000 × 189) 2,268,000
Variable overheads (12,000 × 132) 1,584,000
11,412,000
Closing Stock (3,000 × 951) (2,853,000) (12,159,000)
Gross contribution 8,641,000
Variable Selling & Distribution (13,000 × 165 × 40%) (858,000)
Net Contribution 7,783,000
Fixed Cost:
Production (15,000 × 88*) (1,320,000)
Selling & Admin (13,000 × 165 × 60%) (1,287,000)
Profit 5,176,000
Page 7 of 21
*[1,320,000 / 15,000 = 88]
Reconciliation:
Profit As per Absorption costing 5,120,000
Closing Stock A.C (3,117,000)
Opening Stock A.C 3,920,000
Closing Stock M.C 2,853,000
Opening Stock M.C (3,600,000)
Profit as per Marginal costing 5,176,000
Last year per unit rates were:
Material 630/105*100 = 600
Labor 189/105*100 = 180
VOH 132/110*100 = 120 = 900
951
FOH 88/110*100 = 80 = 980
1,039
A. 4
Silver Ltd.
Absorption Costing
Per Unit
Sales [100,000 × 800] 18,000,000
Cost of Sales:
Opening Stock Nil
Cost of Production:
Direct Material: (120,000 × 0.8 × 60) 5,760,000 48
27
Direct Labour: 120,000 80 4,320,000 36
60
27
Variable OH: 120,000 40 2,160,000 18
60
102
2,100,000
Fixed OH: 120,000 2,400,000 20
105,000
14,640,000 122
Less: Closing Stock 122 × 20,000) (2,440,000)
Cost of Sales 12,200,000
Less: Over absorbed [2,400,000 – 2,100,000] (300,000)
Gross Profit 6,100,000
Selling Expenses
Variable (100,000 × 15) 1,500,000
Fixed (Given) 800,000
Net Profit 3,800,000
Page 8 of 21
And INSHA ALLAH LIFE will be blessed by ALLAH
Marginal Costing
Sales 18,000,000
Variable Cost of Sales
Opening Stock Nil
Variable Cost of Production:
Direct Material 5,760,000
Direct Labour 4,320,000
Variable OH 2,160,000
12,240,000
Closing Stock (20,000 x 102) (2,040,000)
10,200,000
Gross contribution 7,800,000
Variable Selling Expenses (100,000 × 15) (1,500,000)
Net Contribution 6,300,000
Fixed cost:
(2,100,000)
Production
(800,000)
Selling
Net Profit 3,400,000
Reconciliation:
Profit As per Absorption costing 3,800,000
Closing Stock A.C (2,440,000)
Closing Stock M.C 2,040,000
Profit as per Marginal costing 3,400,000
Page 9 of 21
Extra practice questions:
1. Question
A division of Electronic Appliances Limited sold 6,000 units of refrigerators during the year ended
September 30, 2008, the sale price being Rs. 24,000 per unit.
The opening work in progress comprised of 500 units which were complete as regards material but only
40% complete as to labour and overheads. The closing work in progress comprised of 1,200 units which
were also complete as regards material but only 50% complete as to labour and overheads. The finished
goods inventory was 800 units at the beginning of the year and 1000 units at the year end.
The work in progress account had been debited during the year with the following costs:
Rs. In ‘000’
Direct material 83,490
Direct labour 14,256
Variable overheads 10,890
Fixed overheads 17,490
As compared to the previous year, the costs per units have increased as follows:
Rupees
Variable cost per unit sold 1,600
Fixed costs 12,000,000
Required:
(a) Compute the cost per unit by element of cost and in total, assuming FIFO basis.
(b) Prepare profit statements on the basis of:
(i) Absorption costing
(ii) Marginal costing.
(c) Prepare a reconciliation between profits.
Page 10 of 21
We worry about tomorrow as if its guaranteed to come.
2. Question
The following budgeted profit statement has been prepared using absorption costing principles.
January to June 20X7 July to December 20X7
Rs. 000 Rs. 000 Rs. 000 Rs. 000
Sales 540 360
Opening stock 100 160
Production costs:
Direct materials 108 36
Direct labour 162 54
Overheads 90 30
460 280
Closing Stock 160 80
300 200
Gross profit 240 160
Production overhead:
(Over)/under absorption (12) 12
Selling costs 50 50
Distribution costs 45 40
Administration costs 80 80
163 182
Net profit 77 (22)
Sales units 15,000 10,000
Production units 18,000 6,000
The members of the management team are concerned by the significant change in profitability between
the two six-month periods. As management accountant, you have analyzed the data upon which the
above budget statement has been produced, with the following results.
The production overhead cost comprises both a fixed and a variable elements, the latter appears to be
dependent on the number of units produced. The fixed element of the cost is expected to be incurred at a
constant rate throughout they year.
The selling costs are fixed.
The distribution cost comprises both fixed and variable element, the latter appears to be dependent on
the number of units sold. The fixed element of the cost is expected to be incurred at a constant rate
throughout the year.
The administration costs are fixed.
Required:
(a) Present the above budgeted profit statement in marginal costing format.
(b) Reconcile each of the six-monthly profit/loss values reported respectively under marginal and
absorption costing.
Page 11 of 21
Q.3 Frappe Limited (FL) manufactures and sells a single product Sigma. Following information is
available:
During the year ended 31 December 2018, FL sold 5,500 units at Rs. 25,000 per unit. Details of opening
and closing work in process and finished goods are as follows:
Percentage of completion
Number of units
Direct material Conversion costs
Work in process:
Opening 400 100% 60%
Closing 800 100% 40%
Finished goods:
Opening 600 - -
Closing 900 - -
The work in process account had been debited during the year with the following costs:
Rs. in '000
Direct material 82,350
Conversion costs (including fixed overheads of Rs. 16.762 million) 44,217
Variable operating costs amounted to Rs. 500 per unit whereas fixed operating costs for the year were
Rs. 7,500,000.
Effective from 1 January 2018, direct material price and conversion costs were increased by 5% and 10%
respectively.
Page 12 of 21
ALHAMDULILAH for the chances ALLAH has given us to be able to ask for forgiveness.
Page 13 of 21
Admin &Selling expense
Variable (6000x1,600) (9,600)
Fixed (12,000)
Net Profit 12,930
Page 14 of 21
The DUNIYA is not the RESTING place it is the TESTING place.
Answer 2 (a)
January – June July – December
Rs. 000 Rs. 000 Rs. 000 Rs. 000
Sales 540 360
Opening stock (Rs. 18 (W1) × 5,000/8,000 (W4)) 90 144
Production costs
Direct materials 108 36
Direct labour 162 54
Variable overhead (Rs. 3 (W1) × 18,000 / 6,000) 54 18
414 252
Closing stock (Rs. 18 (W1) × 8,000/4,000 (W4)) (144) (72)
270 180
270 180
Variable distribution cost (Rs. 1 (W5) × 15,000/10,000) 15 10
Contribution 255 170
Fixed costs
Production overhead (W2) 24 24
Selling costs 50 50
Distribution costs (W5) 30 30
Administration costs 80 80
184 184
Budgeted profit / (loss) under marginal costing 71 (14)
Workings:
1. Fixed and variable costs per unit
Rs.
Direct materials (Rs. 108,000 ÷ 18,000) 6
Direct labour (Rs. 162,000 ÷ 18,000) 9
Variable overhead (W2) 3
Page 15 of 21
Variable costs per unit 18
Fixed cost per unit (W3) 2
Total cost per unit 20
2. Fixed and variable overheads
January – June July – December
Rs. 000 Rs. 000
Overhead absorbed 90 30
(Over)/under absorption (12) 12
Actual overhead 78 42
Using the high-low method, we can determine the fixed and variable elements of the production
overheads.
Production Production
Units Overheads
Rs. 000 Rs. 000
High 18,000 78,000
Low 6,000 42,000
12,000 36,000
Rs. 36,000
Variable production overhead cost per unit = = per unit
12,000
When 18,000 units are produced, total variable production overheads = 18,000 × Rs. 3 =
Rs. 54,000.
Since total cost = Fixed cost + Variable costs
Rs. 78,000 = Fixed costs + Rs. 54,000
Fixed costs = Rs. 78,000 – Rs. 54,000
= Rs. 24,000
3. Total overhead cost per unit
January – June, total overheads = Rs. 90,000
January – June, production units = 18,000
Rs. 90,000
Total overhead cost per unit = = Rs. 5 per unit
18,000
In (W2) we established that the variable overhead cost per unit = Rs. 3. Therefore the fixed
overhead cost per unit = Rs. 5 – Rs. 3 = Rs. 2.
4. Opening and closing stock level:
January – July –
June December
Units Units
Opening stock
(Rs. 100,000 ÷ Rs. 20 (W1)) 5,000 (Rs. 160,000 ÷ Rs. 20 (W1)) 8,000
Closing stock
(Rs. 160,000 ÷ Rs. 20 (W1)) 8,000 (Rs. 80,000 ÷ Rs. 20 (W1)) 4,000
Page 16 of 21
We should be Proud to be Muslim. ALHAMDULLILAH!
5. Distribution Cost
Sales Units Distribution
Cost
Rs. 000 Rs. 000
High 15,000 45,000
Low 10,000 40,000
5,000 5,000
Rs. 5,000
Variable distribution cost per unit = = Rs. 1 Per unit
5,000
Fixed costs = Rs. 45,000 – (15,000 × Rs. 1)
= Rs. 45,000 – Rs. 15,000
= Rs. 30,000
Answer (b)
Reconciliation:
January – June July – December
Rs. ‘000’ Rs. ‘000’
Absorption costing profit 77 (22)
O.S as per A.C 100 160
C.S as per A.C (160) (80)
O.S as per M.C (90) (144)
C.S as per M.C 144 72
Marginal costing profit 71 (14)
Input(bal.)
6,200
Production (bal.)
5,800 c/d 900
Page 17 of 21
Equivalent Units:
Material Conversion
Finished Goods - 160 (40%)
400
5,800 5,400 5,400
800 320 (40%)
5,400 6,200 5,880
c/d 800
Rate/Unit:
Material = 82,350/6,200 = 13.28
Conversion Variable = 27,455/5,880 = 4.67
17.95
Conversion-Fixed = 16,762/5,880 = 2.85
20.8
Last Year
13.28/105 ×100 = 12.65
4.67/110 ×100 = 4.25
16.90
2.85
× 100 = 2.6
110
19.5
Page 18 of 21
ALLAH is sufficient for us.
Marginal costing is a method of costing with marginal costs. It is an alternative to absorption costing as a method of
costing. In marginal costing, fixed production overheads are not absorbed into product costs.
There are several reasons for using marginal costing:
• To measure profit (or loss), as an alternative to absorption costing
• To forecast what future profits will be
Page 19 of 21
• To calculate what the minimum sales volume must be in order to make a
profit It can also be used to provide management with information for
decision making (means used in breakeven analysis, target profit analysis and
decision making of limiting factor or make or buy decision etc.)
Its main uses, however, are for planning (for example, budgeting), forecasting and decision making as it deals
with costs that can be directly changed in the short term.
Contribution margin
In simple words…
Contribution margin is sales minus all Variable costs
Page 20 of 21
What if worldly life is not perfect? It is not Jannah. Worldly life is a test.
Always remember:
Fixed selling overhead or fixed administration overhead are written off in full as a period cost in both absorption
costing and marginal costing, and only fixed production overheads are included in inventory values.
• Marginal costing does not value inventory in accordance with the requirements of financial reporting.
(However, for the purpose of cost accounting and providing management information, there is no
reason why inventory values should include fixed production overhead, other than consistency with the
financial accounts.) (not consistent with financial reporting i.e. IAS 2)
• Marginal costing can be used to measure the contribution per unit of product, or the total contribution
earned by a product, but this is not sufficient to decide whether the product is profitable enough. Total
contribution has to be big enough to cover fixed costs and make a profit.(the decision as to whether the
products are generating the profit or loss cannot be made by using the marginal costing)
Page 21 of 21
Dunya is made for us but we are made for Akhira! [Alhadith]
Following information has been extracted from the budget for the year ending 31 August
2019:
Process I Process II
-------------- Rupees ------------
Direct material (500,000 liters) 98,750,000 -
Conversion cost 72,610,000 19,100,000
Additional information:
(i) Material is added at the beginning of the process and CCL uses 'weighted average
method' for inventory valuation.
(ii) Joint costs are allocated on the basis of net realizable value of the joint products at
the split-off point. Proceeds from the sale of by-product are treated as reduction in
joint costs.
(iii) Joint product X-2 is sold after incurring packing cost of Rs. 75 per liter.
(iv) Normal production loss in process I is estimated at 5% of the input which occurs at
beginning of the process. Loss of each liter results in a solid waste of 0.7 kg which is
sold for Rs. 10 per kg. No loss occurs during process II.
(v) Budgeted conversion cost of process I and process II include fixed factory overheads
amounting to Rs. 7,261,000 and Rs. 3,820,000 respectively.
Required:
Prepare product wise income statement for the year ending 31 August 2019. (14)
Page 1 of 35
Ans 1:
Cricket Chemicals Limited
Product wise budgeted income statement:
For the year ended 31-08-2009
-------------------Rupees in thousand-------------------
X1 Plus X2 Total
Sales 200,640 101,080 301,720
COS:
Cost of Goods Manufactured (132,970) (68,715) (201,685)
(113,870+19,100) (54,465+14,250)
Workings: Rs.000
19,100
D.M 98,750
Conversion 72,610
Zee (2,850)
N. Loss (175)
168,335 Joint cost
Allocation:
Rs. ‘000’
Sale Allocation
Units Sale Value Further processing NRV
price/units
X1 plus 261,250 768 200,640 19,100 181,540 113,871
X2 190,000 532 101,080 14,250 86,830 54,464
(190,000x75)
268,370 168,335
Page 2 of 35
The most intelligent person is one who remembers death often [Hadith]
Test process costing
Q.1 Shahnawaz Private Limited (SPL) produces one of its products through two processes Alpha and
Beta. Following information has been extracted from the records of process Alpha for the month of
January 2016:
Quantity Material Conversion
Units ------ Rs. In ‘000’ ------
Opening work in process 2,500 2,713 1,499
Input during the month 10,000 10,000 5,760
Transferred to process Beta 9,000 - -
Closing work in process 3,000 - -
Additional information:
(i) Materials are introduced at the beginning of the process. In respect of conversion, opening and
closing work in process inventories were 30% and 70% complete, respectively.
(ii) Inspection is performed when the units are 60% complete. Expected rejection is estimated at 5%
of the inspected units. The rejected units are not processed further and sold at Rs. 100 per unit.
(iii) SPL uses ‘weighted average method’ for inventory valuation.
Required:
(a) Compute equivalent production units and cost per unit. (05)
(b) Prepare journal entries to record the above transactions. (06)
Q.2 ICI produces a chemical that requires two separate processes for its completion. Following
information pertains to process Z for the month of October 2018:
Kg’s Rs. in ‘000’
Opening work in process (75% to conversion) 2,500 4,000
Costs for the month:
Received from process Y 15,000 36,000
Material added in process Z 7,500 20,000
Conversion cost incurred in process Z - 22,000
Finished goods transferred to warehouse 20,000 -
Closing work in process (55% to conversion) 2,000 -
In process Z, material is added at start of the process and conversion costs are incurred evenly
throughout the process. Process losses are determined on inspection which is carried out on 70%
completion of the process. Process loss is estimated at 7% of the inspected quantity and is sold for Rs.
78 per kg.
Required:
(a) Prepare a statement of equivalent production units.
(b) Compute cost of:
i. finished goods
ii. closing WIP
iii. abnormal loss/gain
(c) Prepare accounting entries to record production gain/loss for the month.
Page 3 of 35
Ans.1
(a)
Page 4 of 35
Every day is Mother’s day and Father’s day in Islam
Workings:
Normal Loss Rs. ‘000’
Units Amount Units Amount
Process Alpha 625 62.5 Cash 500 50
Abnormal Gain 125 12.5
625 62.5 625 62.5
Cost Allocation:
Output = 9,000 × 1.726 = 15,534
c/d WIP = (3,000 × 1.065) + (2,100 × 0.661) = 4,583
Ab. Gain = 125 × 1.726 = 216
Calculation of normal loss (inspection stage is 60%)
Opening 2500 100 % M 30% C
Input 10,000 100%M 100%C
Closing 3000 100%M 70%C
Expected loss : (2,500+10,000)x5%=625
Page 5 of 35
Ans 2:
a) Equivalent Units:[FIFO] (3M)
Process Y Material Conversion
Output 2,500 - - 625 (25%)
20,000 17,500 17,500 17,500 17,500
Ab. Loss 1,565 1,565 1,565 1096 (70%)
c/d WIP 2,000 2,000 2,000 1,100 (55%)
21,065 21,065 20,321
(c) (4M)
Accounting entries of recording gain or loss for the month:
(i) Normal loss 112
Process – Z 112
(ii) Cash 112
Normal loss 112
(iii) Abnormal loss 5,331
Process – Z 5,331
(iv) Cash 122
Abnormal loss 122
Workings
Normal Loss Rs. ‘000’
Units Amount Units Amount
Process – Z 1,435 112 Cash 1,435 112
1,435 112 1,435 112
Page 6 of 35
Indeed, the death from which you Flee, Indeed it will meet you [62:8]
Closing WIP 2,000 (100% Material , 55% conversion) Will be tested in next period
(22,500-2,000) x 7% =1,435
Note:
As the question is silent and it is not possible to solve the question by using Weighted Average method
(Because breakup amount of opening WIP is not available) therefore use FIFO.
Page 7 of 35
Test joint and by product and variance
Q.1 Cricket Chemicals Limited (CCL) is a manufacturing concern and has two production
processes. Process I produces two joint products i.e. X-1 and X-2. Incidental to the production of
joint products, it produces a by-product known as Zee. X-1 is further processed in process II and
converted into ‘X1-Plus’.
Following information has been extracted from the budget for the year ending 31 August 2019:
(ii) Process wise budgeted cost:
Process I Process II
--------------Rupees ------------
Direct material (500,000 liters) 98,750,000 -
Conversion cost 72,610,000 19,100,000
(iii) Expected output ratio from process I and budgeted selling prices:
Output ratio Selling price
Products
in process I (Rs. per liter)
Joint product – X-1 55% -
Joint product – X-2 40% 532
By-product – Zee 5% 120
X1-Plus - 768
Additional information:
(vi) Material is added at the beginning of the process and CCL uses 'weighted average method'
for inventory valuation.
(vii) Joint costs are allocated on the basis of net realizable value of the joint products at the split-
off point. Proceeds from the sale of by-product are treated as reduction in joint costs.
(viii) Joint product X-2 is sold after incurring packing cost of Rs. 75 per liter.
(ix) Normal production loss in process I is estimated at 5% of the input which occurs at
beginning of the process. Loss of each liter results in a solid waste of 0.7 kg which is sold for
Rs. 10 per kg. No loss occurs during process II.
(x) Budgeted conversion cost of process I and process II include fixed factory overheads
amounting to Rs. 7,261,000 and Rs. 3,820,000 respectively.
Required:
(d) Prepare product wise budgeted income statement for the year ending 31 August 2019, under
absorption costing. (8)
(e) Prepare product wise budgeted income statement for the year ending 31 August 2019, under
marginal costing. (7)
Page 8 of 35
Death is the destroyer of all worldly pleasures.
Question: 2
Safety Products (Pvt) Limited (SPL) is engaged in the manufacturing of safety products for the
construction industry. The following production information, for further analysis, has been provided by
SPL:
Rupees
Per unit Budgeted Cost:
Direct material (10 kg @ Rs. 22 per kg) 220
Direct labour (1.5 hours @ Rs. 110 per hour) 165
Variable overhead (1.5 hours @ Rs. 55 per hour) 82.5
Fixed overhead (1.5 hours @ Rs. 110 per hour) 165
Total per unit budgeted cost 632.5
Budgeted variable overhead 866,250
Budgeted fixed overhead 1,732,500
Fixed and variable overheads are absorbed on the basis of direct labour hours, which are estimated to
be 15,750 hours per month.
Rupees
Actual cost results:
Direct material (100,000 kg) 1,650,000
Direct labour (13,000 hours) 1,573,000
Variable overhead 910,000
Fixed overhead 1,692,900
Total actual cost 5,825,900
Budgeted sales of SPL is 10,500 units at a price of Rs. 1,210 per unit and the actual sales revenue of the
company is Rs. 12,540,000 for 9,500 units.
Required:
a) Calculate the following variances: (1.5 x 08 =12)
i. Sales price variance
ii. Sales volume profit variance
iii. Material price variance
iv. Materials usage variance
v. Labour rate variance
vi. Labour efficiency variance
vii. Variable overhead expenditure variance
viii. Variable overhead efficiency variance
Page 9 of 35
Question:3
Choc Co is a company which manufactures and sell three types of biscuits in packets. One of them is
called ‘Ooze’ and contains three types of sweeteners: honey, sugar and syrup. The standard materials
usage and cost for one unit of ‘Ooze’ (one packet) is as follows:
Question: 4
Titan Manufacturing Company produces a consumer product. The company prepares its fixed
production budget annually and standard costing for the production budget annually and standard
costing for the production on monthly basis. The budget, the standard production cost and actual data
for the month ended June 30, 2016 are given below:
Budgeted and Standard Cost Data
Budgeted sales and production for the month (Units) 25,000
Standard cost for each unit of product:
Direct material: Beta 15 kgs @ Rs. 2 per kg
Gama 10 kgs @ Rs. 7 per kg
Direct labour incurred 10 hours @ Rs. 4 per hour
Fixed production overhead 200% of direct labour
Budgeted sales price has been calculated to give a profit of 20% on sales price.
Ans. 1 (a)
Cricket Chemicals Limited
Product wise budgeted income statement (Absorption costing)
for year ended 31-8-2019 Rs.000
X1 Plus X2 Total
Sales 200,640 101,080 301,720
COS:
Cost of goods (132,971) (68,714)
(201,685)
manufactured
(113,871+19,100) (54,464 + 14,250)
Gross profit 67,669 32,366 100,035
Workings:
D.M 98,750
Conversion 72,610
Zee (2,850)
N. Loss (175)
168,335
Allocation:
Rs. ‘000’
Sale price / Further Allocation
Units Sale Value NRV
unit processing
X1 plus 261,250 768 200,640 19,100 181,540 113,871
X2 190,000 532 101,080 14,250 86,830 54,464
(190,000x75)
268,370 168,335
Page 11 of 35
(b)
Cricket Chemicals Limited
Product wise budgeted income statement (marginal costing)
for year ended 31-8-2019 Rs.000
X1 Plus X2 Total
Sales 200,640 101,080 301,720
Variable COS:
Variable Production Cost (124,971) (65,633)
(190,604)
109,691 + 15,280 51,383 + 14,250
Net Contribution 75,669 35,447 111,116
Fixed Cost (7,261 + 3,820) (11,081)
Net profit 100,035
Workings:
D.M 98,750
Conversion 72,610
Zee (2,850)
N. Loss (175)
Fixed Cost (7,261)
161,074
Allocation:
Rs. ‘000’
Sale price / Further Allocation
Units Sale Value NRV
unit processing
X1 plus 261,250 768 200,640 15,280 185,360 109,691
X2 190,000 532 101,080 14,250 86,830 51,383
(190,000x75)
272,190 161,074
Page 12 of 35
Death may not come to us today but we are one day closer to it.
Sales
Price Volume
(BR – AR) × AQS (BQS – AQS) × Std. profit / unit
12,540,000 [(10,500 – 9500)x 577.5 (1210-632.5)
[1210 - ] x 9500
9,500
1,045,000 F 577,500 A
Material
Price Usage
(SR – AR) × AQU (SQU – AQU) × S.R
1,650,000 [(9.500 x 10)-100,000]x22
[22 - ] x 100,000)
100,000
550,000 F 110,000 A
Labour
Rate Efficiency
(SR – AR) × AHW (SHW – AHW) × S.R
1,573,,000 [(9500 × 1.5) – 13,000] × 110
[110 - ] x 13,000
13,000
143,000 A 137,500 F
Variable OH
Rate Efficiency
(SR – AR) × AHW (SHW – AHW) × S. R
910,000 [(9500× 1.5) –13,000] × 55
[55 - ] x 13,000
13,,000
195,000 A 68,750 F
Page 13 of 35
(4) Fixed Overhead volume capacity variance:
Budgeted hrs (10,500x1.5 x110) 1,732,500
Actual hrs (13,000x110) 1,430,000
302,500 A
Answer:3
SQU in SM for A.P AQU in SM for A.P AQU in AM for A.P
H 2,020 (110,000*0.02) 2,067 (4,650*20/45) 2,200
S 1,515 (101,000*0.010) 1,550 (4,650*15/45) 1,400
S 1,010 (101,000*0.010) 1,033 (4,650*10/25) 1,050
4,545 4,650 4,650
Usage variance:
H (2,020 – 2,200) x 20 = 3,600 A
S (1,515 – 1,400) x 30 = 3,450 F
S (1,010 – 1,050) x 25 = 1,000 A
1,150 A
Mix variance:
H (2,067 – 2,200) x 20 = 2,660 A
H (1,515 – 1,400) x 30 = 4,500 F
S (1,033 – 1,050) x 25 = 425 A
1,415 F
Yield variance:
H (2,020 – 2,067) x 20 = 940 A
S (1,515 – 1,550) x 30 = 1,050 A
S (1,010 – 1,033) x 25 = 575 A
2,565 A
Answer: 4
(a) Operating Statement for the month ended June 30, 2016.
(i) Calculation of standard Product cost and selling price/unit:
Rs. /unit
Direct Material:
Beta (15 Kg @ rs. 2) 30
Gama (10 Kg @ Rs.7) 70
Direct Labour:
(10 hours @ Rs. 4) 40
Fixed production overhead (Rs. 40 x 200%) 80
Standard Cost: 220
Profit (220 x 20/80) 55
Budgeted sale Price 275
Page 14 of 35
AND WORSHIP YOUR LORD UNTIL THERE COMES INTO YOU THE CERTAINITY (I.E DEATH). [15:99]
Direct Labour
(72,000 @ Rs. 5) 360
Fixed production overhead 1,800
Total (3,060
Actual Profit 1,725
(b) Variances:
Price Variance:
Beta 150,000 kgs. (Rs. 2 - @ Rs.3) (150) A
Gamma 75,000 kgs. (Rs. 7 - @ Rs. 6) 75 F
(75) A
Usage Variance:
Beta Rs. 2 (14,500 units x 15 kg – 150,000) 135 F
Gamma Rs. 7 (14,500 units x 10kg – 75,000) 490 F
625
(c) Reconciliation
Budgeted profit (25,000 x 55) 1,375
Material variance (625 – 75) 550 F
Labour variance (292 – 72) 220 F
FOH variance (200 – 840) (640) A
Sales variance (797.5 – 577.5) 220 F
Actual profit 1,725
Page 15 of 35
Extra questions
Q.1 Tulip Enterprises (TE) manufactures a product Alpha that requires two separate processes, A
and B. Following information has been extracted from the cost records of Process B for the month of
February 2019:
Additional information:
(iii) Materials are added at start of the process.
(iv) Normal loss is estimated at 5% of the inspected units and loss is determined at
completion of the process. Loss of each liter results in a solid waste of 0.75 kg.
During the month of February 2019, solid waste produced was 6,000 kg.
(v) Solid waste is sold for Rs. 170 per kg after incurring further cost of Rs. 20 per kg.
(vi) TE uses weighted average method for valuation of inventory.
Required:
Prepare accounting entries to record the transactions of process B.
(Narrations to accounting entries are not required)
(12)
Q.2 Daisy Limited (DL) manufactures and markets product Zee. DL uses standard absorption
costing. Following information pertains to product Zee for the month of February 2019.
(a) Data extracted from the budget for the month of February 2019:
Production Units 27,000
Page 16 of 35
No one besides ALLAH can rescue a soul from hardship.
(vi) 27,400 units of Zee were transferred to finished goods. There was no opening or
closing work in process. Finished goods inventory at the beginning and closing of
the month was 1,000 units and 1,500 units respectively.
Required:
Compute the following:
(a) Material price, mix and yield variances (06)
(b) Labour rate and efficiency variances (04)
(ii) Over/under applied overheads and analyse it into:
(iii) variable overhead expenditure and efficiency variances
(ii) fixed overhead expenditure and volume variances (06)
Q.3 Hexa Limited is using a standard absorption costing system to monitor its costs. The management is
considering to adopt a marginal costing system. In this respect, following information has been
extracted from the records for the month of December 2016:
(i) Actual as well as budgeted sale was 10,500 units at Rs. 2,000 per unit.
(ii) Standard cost per unit is as follows:
Rupees
Direct material 5 kg @ Rs. 158 790
Direct labour 3 hours @ Rs. 150 450
Production overheads (fixed & variable) Rs. 120 per labour hour 360
1,600
Units
Production: Budgeted 11,000
Actual 12,000
Required:
(a) Compute the budgeted and actual profit for the month of December 2016, using standard
marginal costing. (8)
(b) Reconcile the above profit by incorporating the related variances. (8)
Q.4 Cricket Chemicals Limited (CCL) is a manufacturing concern and has two production
processes. Process I produces two joint products i.e. X-1 and X-2. Incidental to the production of
joint products, it produces a by-product known as Zee. X-1 is further processed in process II and
converted into ‘X1-Plus’.
Following information has been extracted from the budget for the year ending 31 August 2019:
Page 17 of 35
Process wise budgeted cost:
Process I Process II
--------------Rupees ------------
Direct material (500,000 liters) 98,750,000 -
Conversion cost 72,610,000 19,100,000
Answer 1:
Tulip Enterprises
Accounting entries for Process B:
WIP-B 26,600
WIP-A 14,000
Raw material 7,000
Conversion 5,600
Page 18 of 35
My ALLAH has always been kind to me.
Abnormal Loss
WIP 2,875 771 Cash 2,875 367
Cash 43,125 P/L (BAL.) 447
P/L 447
Ab. Loss 447
Workings:
Process-B Rs. ‘000’
Litres Amount Litres Amount
b/d [1,500 + 600+ 600] 10,000 2,500 Finished Goods (Bal.) 94,500 25,326
Process A 90,000 14,000 Normal Loss (Working) 5,125 577
Material 12,000 7,000 Abnormal Loss 2,875 771
(6,000 / 75 – 5,125)
Conversion 5,600
c/d 9,500 2,381
Page 19 of 35
Equivalent Production Units:
Process A Material Conversion
Finished Goods 94,500 94,500 94,500 94,500
Ab.Loss 2,875 2,875 2,875 2,875
C/d WIP 9,500 9,500 9,500(100%) 6,650 (70%)
106,875 106,875 104,025
Cost/unit:
Process – A: 1,500 + 14,000 – 577 / 106,875 = 0.14
Material: 600 + 7,000 / 106,875 = 0.07
Conversion: 400 + 5,600 / 104,025 = 0.058
0.268
Cost Allocation:
Finished Goods = 94,500 x 0.268 = 25,326
Ab.Loss =2,875 x 0.268 =771
C/D WIP =9,500 X 0.14 +
9,500 X 0.07 +
6,650 X 0.058 = 2,381
Answer 2:
a) Material Price, Mix and Yield Variances:
i. Material Price Variance: no variance as there is no change in prices of material.
ii. Material Yield Variances:
X [16,237 – 15,490] x 400 = 298,800 F
Y [14,207 – 13,554] X 300 = 195,900 F
494,700 F
iii. Material Mix Variances:
X [15,490 – 15,974] x 400 = 193,600 A
Y [13,554 – 13,070] X 300 = 145,200 F
48,400 A
Workings:
106 100
6
Page 20 of 35
Loneliness is better than a bad company.
b) Labor rate variance:
(SR - AR) X AHW for A.P
(220 – 228.15*) X 9,641** = 78,574 A
*(220 / 108 x 112) = 228.15
**(10,000 / 27,000 x 27,400 x 95%) = 9,641
Labor Efficiency variance:
(SHW for A.P - AHW) X S.R
[(27,400 X 10,000 / 27,000) – 9,641] X 220
[(10,148 – 9,641)] X 220 = 111,540 F
Applied OH:
Actual Production x Std OH rate/ unit
[27,400 x (2,500,000 / 27,000)] =2,537,037
Overheads under applied = 52,077 A
Page 21 of 35
A.3 Hexa Limited
(i) Budgeted profit for the month of December 2016 (Marginal costing)
ii) Actual profit for the month of December 2016 (Marginal costing)
Page 22 of 35
And never say of anything, “I shall do such and such thing tomorrow” except (with the saying) if ALLAH wills!”
Price Volume
(BR – AR) × AQS (BQS – AQS) × Std.cont/unit
(2,000 - 2,000) × 10,500 [(10,500 - 10,500) x 550 [2,000-790-450-
210]
NIL NIL
Material
Price Usage
(SR – AR) × AQU (SQU – AQU) × S.R
(158 ̶ 160) x 58,000 [(12,000 x 5)-58,000]x158
116,000 A 316,000 F
Labour
Rate Efficiency
(SR – AR) × AHW (SHW – AHW) × S.R
(150 – 155) × 35,000 [(12,000 × 3) – 35,000] × 150
175,000 A 150,000 F
Variable OH
Expenditure Efficiency
(SR – AR) × AHW (SHW – AHW) × S. R
2,975,000
[70 - ] x 35,000 [(12,000 × 3) –35,000] × 70
35,000
525,000 A 70,000 F
Page 23 of 35
Fixed OH
Expenditure
Budgeted Fixed OH 1,650,000
Actual Fixed OH 1,600,000
50,000 F
Ans. 4 (a):
Cricket Chemicals Limited
Product wise budgeted income statement (marginal costing)
for year ended 31-8-2019 Rs.000
X1 Plus X2 Total
Sales 200,640 101,080 301,720
Variable COS:
Variable Production Cost (124,971) (65,633) (190,604)
109,691 + 15,280 51,383 + 14,250
Net Contribution 75,669 35,447 111,116
Fixed Cost (7,261 + 3,820) (11,081)
Net profit 100,035
Workings:
D.M 98,750
Conversion 72,610
Zee (2,850)
N. Loss (175)
161,074
Allocation:
Rs. ‘000’
Sale price / Further Allocation
Units Sale Value NRV
unit processing
X1 plus 261,250 768 200,640 15,280 185,360 109,691
X2 190,000 532 101,080 14,250 86,830 51,383
(190,000x75)
272,190 161,074
Page 24 of 35
ALWAYS REMEMBER, Allah is watching us anytime, anywhere.
The management believes that it can increase/decrease the production of K2 and K9, if
required.
Required:
Determine the maximum profit that can be earned by SL, in the above situation. (10)
Page 25 of 35
Q.2 Lily (Private) Limited (LPL) has two factories. LPL manufactures a product Delta in its Quetta
factory. One unit of Delta is assembled from three components P, Q and R which are produced
in the Hub factory. Monthly demand of Delta is estimated at 5,000 units.
P Q R
Quantity required for one unit of Delta 2 2 3
Machine hours required for producing each component 4 3 5
Cost of production: --------- Rupees ------
Production capacity at Hub factory is restricted to 100,000 machine hours per month. In order
to meet the demand, LPL is considering to purchase P, Q and R from a vendor at Rs. 1,700, Rs.
1,800 and Rs. 870 per unit respectively.
Required:
Determine how LPL can optimise its profit in the above situation. (11)
Q.3 Snooker (Private) Limited (SNPL) manufactures a component ‘Beta’ which is used as input
for many products. The current requirement of Beta is 18,000 units per annum. Current
production cost of Beta is as follows:
A supplier has recently offered SNPL to supply Beta at Rs. 7,000 per unit. The management has
nominated a team to evaluate the offer which has gathered the following information:
1. There is a shortage of labour. However, some of the labour would become available due
to outsourcing of Beta, which would be utilized for production of a product ‘Zee’. The
estimated selling price of Zee is Rs. 5,800 per unit whereas production cost would be as
follows:
i. Direct material would cost Rs. 2,600 per unit.
ii. Each unit of Zee would require 20% more labour as compared to each
unit of Beta. Estimated variable manufacturing overheads would be Rs.
480 per unit.
2. Outsourcing of Beta and production of Zee would result in net reduction in fixed
manufacturing overheads by Rs. 1,900,000 per annum.
Required:
Advise SNPL whether it should outsource component Beta or not. (09)
Page 26 of 35
ALLAH has heard the yearning of your quiet heart. Be patient, everything will be ok soon.
Q.4 Following information has been extracted from the projected results of Saffron Limited (SL) for the
year ending 31 March 2019:
Page 27 of 35
Ans.1 Sarwar Limited
K2 K9 A-1
-------------------- Rs. per unit --------------------
Selling price Given 16,500.00 26,000.00 35,000.00
Variable cost 12,375.00 18,625.00 23,270.00
(6,000+4,500+1,875) (8,000+7,500+3,125) (W-1)
Contribution per unit A 4,125.00 7,375.00 11,730.00
Ranking 3 2 1
Allocation of 300,000
hours C - 195,000 105,000
(300,000–105,000) (35×3,000)
7,800.00
Units to be produced C/B - (195,000/25) 3,000.00
Contribution margin for the month after accepting special contract Rs. in million
A-1 (3,000×11,730) 35.19
K-9 (7,800×7,375) 57.53
Contribution margin 92.72
Fixed cost (1,500/15)×300,000 30.00
Maximum profit 62.72
W-1: Relevant cost for
A-1 Rs. per unit
Material cost - B1 (3×2,500) 7,500.00
Material cost - C3 (2,400,000/3,000) 800.00
Labour cost (35×300) 10,500.00
Variable overheads [{1875÷(4,500÷300)}×35] 4,375.00
Machine hire cost [Lower of (57,000×5) and {900,000– (20,000×25)}]/3,000 95.00
Variable cost per unit of A-1 23,270.00
Workings:
Identification of limiting factor:
Available Hrs. 300,000
Required Hrs.:
K2 (5,000 x 15) = 75,000
K9 (8,000 x 25) = 200,000
A-1 (3,000 x 35) = 105,000
Shortfall Hrs. 80,000
Page 28 of 35
We all prepare for Birthdays but what about Death day?
Answer: 2
P Q R
Direct Material 900 800 300
Direct Labour 270 250 240
FOH 420 640 180
(500 – 20 x 4)
Total variable cost per component 1,590 1,690 720
Outstanding cost 1,700 1,800 870
Cost saving per component 110 110 150
Limiting factor (machine hours) 4 3 5
Cost saving per limiting factor 27.5 36.67 30
Priority in production 3 1 2
Page 29 of 35
Answer: 3
Conclusion:
Answer: 4 (a)
Budgeted statement of profit or loss for the year ending 31 March 2020
Rs. in million
Sales (Workings) 200.75
Variable cost (200.75/100x71.62*) (143.76)
*(if contribution sales ratio is 28.38% the variable cost is eequal to 100 – 28.38 =
71.62)
Contribution margin 56.97
- For 2020:
Depreciation (36×40%) 14.40
Other fixed cost (36-14.40)×1.08 23.33
Sales compaign 5.0
42.73
W 3) From this revised fixed cost and revised contribution margin ration, we can
calculate revised breakeven sales and therefore budgeted sales in 2020.
Fixed cost = 42.73
25 = 100 -75
Page 31 of 35
Extra question CVP
Q.1 Digital Industries Limited (DIL) incurred a loss for the year ended 30 June 2017 as it could
achieve sales amounting to Rs. 89.6 million which was 80% of the break-even sales. Contribution
margin on the sales was 25%. Variable costs comprised of 45% direct material, 35% direct labour
and 20% overheads.
During a discussion on the situation, the Marketing Director was of the view that no increase in
sales price was possible due to severe competition. However, sales volume can be increased by
reducing prices. The Production Director was of the view that since the plant is quiet old, the
production capacity cannot be increased beyond the current level of 70%.
Accordingly, the management has developed the following plan:
• A new plant would be installed whose capacity would be 20% more than installed
capacity of the existing plant. The cost and useful life of the plant is estimated at Rs. 30
million and 10 years respectively. The funds for the new plant would be arranged through
a long-term bank loan at a cost of 10% per annum. Capacity utilization of 85% is planned
for the first year of the operation.
• The new plant would eliminate existing material wastage which is 5% of the input and
reduce direct labour hours by 8%.
• The existing plant was installed fifteen years ago at a cost of Rs. 27 million. It has a
remaining useful life of three years and would be traded in for Rs. 2 million.
• DIL depreciates its fixed assets on straight line basis over their estimated useful lives.
• To sell the entire production, selling price would be reduced by 2%.
• Material would be purchased in bulk quantity which would reduce direct material cost by
10%.
• Direct wages would be increased by 8% which would increase production efficiency by
10%.
• Impact of inflation on overheads would be 4%.
Required:
Compute the projected sales for the next year and the margin of safety percentage after
incorporating the effect of the above measures. (12)
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Faith is trusting ALLAH even when you do not understand his plan.
Ans 1: Digital Industries Limited
Projected sales and margin of safety % for the next year:
M
Projected sales for the next year [89.6 ÷ 0.7] x 1.2 x 0.85 x 0.98] 127.95
[Production = Sales because on stock]
Margin of safety % to projected sales [127.95 – 108.72] / 127.95 x 100 = 15%
Breakeven sales: [33.36 / 30.68%] [Fixed cost/CS ratio] 108.72
Workings:
Variable cost for next year: [After incorporating impact of changes]
Direct Material [89.6 x 75% x 45% ÷ 0.7 x 1.2 x 0.85] = 44.064
[44.064 ÷ 100 x 95 x 90%] 37.67
Direct labour [89.6 x 75% x 35% ÷ 0.7 x 1.2 x 0.85] = 34.272
[34.272 x 92% x 1.08 x 0.9] 30.65
Overheads [89.6 x 75% x 20% ÷ 0.7 x 1.2 x 0.85] = 19.584
[19.584 x 1.04] 20.37
88.69
Note: [Decrease in selling price will not result into decrease in variable cost and vice versa].
Contribution sales ratio:
Sales 127.95
V.C (88.69)
Contribution 39.26
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Q. 2 Washington Limited (WL) is a listed company having paid-up capital of Rs. 140 million. WL
deals in the manufacturing of washing machines. Following are the extracts from the budgeted
statement of profit or loss for the year ending 31 December 2018:
Rs. in ‘000
Sales revenue (Rs. 10,000 per unit) 168,000
Cost of goods sold (including fixed cost of Rs. 21.2 million) (127,000)
Gross profit 41,000
Operating expenses (including fixed cost of Rs. 4.5 million) (16,000)
Profit before taxation 25,000
Taxation @ 30% (7,500)
Profit after taxation 17,500
Additional information:
(i) An analysis of actual results for the first two months of the year 2018 shows that:
▪ Due to change in import duty structure, imported products have become
available in the market at much cheaper prices. Consequently, it was
decided to reduce the selling price to Rs. 9,500 per unit with effect from
1 January 2018.
▪ 1,500 washing machines were sold during the period.
▪ Due to increase in raw material prices with effect from 1 January 2018,
variable cost of sales has increased by 5%.
(ii) To boost the sales, WL has decided to launch a promotion campaign at an estimated
cost of Rs. 5 million.
(iii)The directors of WL wish to pay 5% dividend to its ordinary shareholders.
However, according to the agreement with the bank, WL cannot pay dividend
exceeding 80% of its profit after taxation.
Required:
Calculate the minimum number of units to be sold in remaining 10 months to enable WL
to pay the desired dividend. (10)
Ans: 2
Minimum number of unit to be sold in remaining 10 months to pay the desired dividend:
= Total fixed cost + Profit before tax
Contribution per unit
= 30,700,000 (W-1) + 12,500,000 (W-2)
2,203 (W-3)
= 19,609 units
Units already sold during the first two months of the current year = 1,500
Remaining units to be sold (19,609 – 1,500) = 18,109 units
Or
By using CS Ratio:
Contribution/Unit x 100
Sale price/Unit
2,203/9,500 x 100 = 23.19%
30,700,000 + 12,500,000 = 186,287,193
23.19%
186,283,193 ÷ 9,500 = 19,606 units
Remaining units = 19,609 – 1,500 = 18,109 units
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The DUNIYA is not the RESTING place it is the TESTING place.
(W-1) Total fixed cost:
Production fixed cost = 21,200,000
Operating fixed cost = 4,500,000
Additional promotion campaign = 5,000,000
Total 30,700,000
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