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Activity Based Management & Quality Cost Management.

 Learning Objectives.

 Activity Based Costing.

 Throughput Costing.

 Just in Time & Back flush Accounting.

 Socio Economic Costing.

 Bench Marking.

 Quality Cost.

 Total Quality Management.

 PRAISE Analysis.

 Pareto Analysis.

 Lean Accounting.

 Six Sigma.

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 Activity Based Costing.

 Meaning,

 Modern technique of charging cost (Fixed overhead) to the cost object.

 Fixed overhead is charged on the basis of quantum of activity consumed by each
product.
 Under traditional costing system (absorption costing) the overhead is charged to the
products on the basis of predetermined rate or blanket rate, for Eg,
1) On the basis of labour hours.
2) On the basis of machine hours.
3) On the basis of units of production, etc…
 But under ABC assigns cost to activities based on their use of resources, then assign
activity cost to cost objects such as products or customers.

 Major steps under ABC system.

1) Identify the major activities,

 E.g.: Material purchasing & handling.

2) Create cost pool for each activity.

 E.g.:
Activity Cost Pools Budgeted overhead(₹)

Material Purchasing & handling Material procurement 100,000

 Salary of driver.
 Insurance.
Material handling 5,00,000
 Salary of handling worker.
 Depreciation of material
handling machines.

3) Cost drivers,

 It is a variable which determines the work volume or work load of a particular cost pool.
 E.g.
Cost Pools Budgeted overhead(₹) Cost drivers Volume of Cost driver
Material procurement 100,000 Number of orders 200 orders
Material handling 5,00,000 Number of movements 500 moves

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1. Cost driver rate,

 Cost driver rate = Budgeted overhead of each cost pool / Volume of cost driver.

Cost Pools Budgeted overhead(₹) Cost drivers Volume of Cost driver Cost driver rate
-A -B - A/B
Material 100,000 Number of orders 200 orders ₹ 500 per order
procurement
Material 5,00,000 Number of 500 moves ₹ 100 per move
handling movements

4) Computation of total cost of a product (Cost objects).

 Product A Consumes the following activities,

Particulars Activity Used

Material orders 50 orders
Material movements 100 moves

 Total cost allocated,

Particulars Cost driver rate - A Activity Used - B Overhead Allocated – A*B

Material orders ₹ 500 per order 50 orders ₹ 25,000
Material movements ₹ 100 per move 100 moves ₹ 10,000
Total Cost ₹ 35,000

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 Throughput costing.

 Meaning.

 It is a management accounting technique used as performance measure in the

theory of constraints.
 Constraints on throughput ( Bottleneck resources) might include,
1) Non availability of workers,
2) Lack of production quality & reliability,
3) Lack of reliable material suppliers.
4) Existence of shortage of other production resources.

 Concept of Throughput.

 It simply means revised contribution.

 It is the Excess of sale value over the Totally Variable cost.
 Throughput = Selling Price – TVC.

 Totally Variable Cost (TVC),

 Only Direct material is considered as TVC.

 Normally in practical scenario almost companies are paying their wages & salaries as
fixed cost (Monthly Basis), direct labour & Costs are considered as fixed cost.

 Process of Allocation of bottleneck activity or resources.

1) Identify the bottleneck activity ( Limiting Factor),

2) Compute throughput per bottleneck activity,

Particulars Amount($)
Selling Price xx
Less : Direct Material per unit (xx)
Throughput per unit -A xx
Limiting factor (Hours) -B x
Throughput or Return Per Hour -A/B xx

3) Optimum allocation of bottleneck resources.

4) Maximisation of profits.

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 Total factory cost,

 Total fixed cost including direct labour cost.

 Factory Cost per Bottleneck hours = (Total factory cost / Total available
bottleneck hours).

 Throughput Accounting Ratio.

 TAR = (Throughput per hour / Factory cost per hour).

 Throughput efficiency.

 Efficiency = Standard hours / Available hours.

Or

 Efficiency = Standard throughput cost / Actual Total Factory Cost.

 Standard Throughput cost = Standard hours * Factory cost per bottleneck hour.

 Operational constraints (Bottleneck Production).

 If the capacity of different operations in the production process are not balanced,
 Then the “bottleneck operation” which has the minimum capacity among all the
operations shall be the installed capacity.

 Example,
 There are 4 operations namely A,B,C,D
 Capacity of A, B & C is 15000 units & capacity of D is 12000 units.
 Then the capacity of the production will be 12000 units.

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 Back flush Accounting.

 Meaning.

 Recording of all related issues of inventory when the manufacturing has been
completed.
 It avoids allocation of cost to various production process.
 It eliminates large number of transactions & associated labour.
 Recording of the transactions only at the termination of production & sales.
 It is connected with JIT (Just in Time).
 Company operating in JIT ideally will have no inventories or less inventories.

 Just in Time concept.

 2 approaches,
1) Push approach (Traditional Approach).
2) Pull approach (JIT Approach).

1. Push approach (Traditional Approach).

 Not based on the demand.

 Raw material Purchase Work in Process (WIP)  Finished Goods  Sold.

 Steps involved,

1) Purchase department purchases Raw material.

2) Raw material issued to the production process.
3) Finished goods are produced.
4) Finished goods are sold when demand arise.

 Limitations,

1) Company will have much more Inventory (RM, WIP, and FG)
2) Incur the huge carrying cost.

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2. Pull approach (JIT Approach).

 To avoid the limitations of Push approach introduced a new approach that is called JIT
system.
 It is also known as
3) Pull approach.
4) Demand pull.
5) Pull through system.

 Demand  Finished Goods  Work in process (WIP) Raw material purchase.

 Steps involved,

1) Customer demands for final product.

2) Production start to process the demand.
3) Material requirement is sent to the purchase department.
4) Purchase of raw material.

 Advantages,

1) Zero inventory in stores.

2) Reduce working capital requirements.
3) Reduce inventory damages.
4) Minimum carrying cost.
5) Strong supplier relationship.

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 Traditional cost accounting system & Back flush accounting system.

 Traditional costing system.

 In traditional costing system the accounting treatment is based on 4 Trigger points,

Trigger Points Journal Entry

1) Purchase of RM & Incurrence of Conversion Cost Raw Material Control A/C Dr
Conversion Cost A/C Dr
To Cash or Creditor.

2) RM & CC are issued to Production. WIP Control A/C Dr

To Raw Material Control A/C Dr
To Conversion Cost A/C Dr

3) When the goods are completed & Finished Goods Control A/C Dr
Issued to Warehouses. To WIP Control
4) When the goods are sold Cost of sales A/C Dr
To Finished Goods Control

 Major Accounts Related to Inventory Valuation.

1) Raw Material Control Account.
2) Work In Process Control Account.
3) Finished Goods Control Account.
4) Cost of Sales Control Accounts.

 Back flush Accounting System.

 It has 3 Variants of Cost accounting system.

1) 3 Trigger points with no WIP.
2) 2 Trigger points with no WIP & FG.
3) 2 Trigger points with no WIP & RM.

2. 3 Trigger points with no WIP.

Trigger Points Journal Entry

1) Purchase of RM & Incurrence of Conversion Cost Raw Material Control A/C Dr
Conversion Cost A/C Dr
To Cash or Creditor.
2) When the goods are completed & Finished Goods Control A/C Dr
Issued to Warehouses. To Raw Material Control
To Conversion Cost
3) When the goods are sold Cost of sales A/C Dr
To Finished Goods Control

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3. 2 Trigger points with no WIP & FG.

Trigger Points Journal Entry

1) Purchase of RM & Incurrence of Conversion Cost Raw Material Control A/C Dr
Conversion Cost A/C Dr
To Cash or Creditor.
2) When the goods are sold Cost of sales A/C Dr
To Raw Material Control
To Conversion Cost

4. 2 Trigger points with no WIP & RM.

1) Incurrence of conversion cost. Conversion cost a/c Dr

To Cash or Creditor.

2) When the goods are completed & Finished Goods Control A/C Dr
Issued to Warehouses. To Cash or creditor.
To Conversion Cost

3) When the goods are sold Cost of sales A/C Dr

To Finished Goods Control

 The completed goods (FG Control A/c) & Sale of goods (Cost of sale A/c) shall be
recognised in standard cost of raw material & conversion cost.

 Because under JIT system we follows Standard costing system.

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 Socio Economic Costing.

 Meaning.

 It is also known as social economics.

 It is a socials science that studies how economic activities affects the social processes.
 It analyse how this society,
1) Progress,
2) Stagnate &
3) Regress,
 Because of local, regional or global economy.
 Use of economics to study the society.
 Social impact on economic changes,
 Every companies are interested to measure the socio economic impact.

 Examples,

 Economic changes like,

1) New technology innovations,
2) Changes in laws & regulations,
3) Ecological changes,
 They may affect the society,
1) Pattern of consumption,
2) Distribution of income & wealth.
3) Quality of work life.

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 Bench Marking.

 Meaning.

 Traditionally controls means “comparison of actual results with established standards

or targets”.
 The practice of setting targets or standards using external information’s is known as
bench marking.
 It is the process of improving performance by continuously,
1) Identifying,
2) Understanding,
3) Adapting the best practices,
 After examinations of the present conditions of organisation & establish better
standards & focus on key areas which are more challenging.

 Types of bench marking.

1) Product benchmarking.
2) Process benchmarking.
3) Internal benchmarking.
4) Global benchmarking.
5) Strategic benchmarking.
6) Competitive benchmarking.

1. Product benchmarking.

 Also known as “Reverse Engineering”.

 Designing new products or upgrading existing one.
 Taking competitive products ( rival products) & compare with our product,
 Find its strength & weaknesses.

2. Process benchmarking.

 Focused on best work processes.

 Improve specific key processes.

3. Internal benchmarking.

 Comparing internal process between different divisions, departments or similar

business units within the organisation.

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4. Global benchmarking.
 Comparison with foreign product at international level.

5. Strategic benchmarking.

 Study the strategies of other organisation.

6. Competitive benchmarking.

 Direct comparison of one own performance with the performance of best competitor in
same sector.

 Stages in the process of bench marking.

1) Planning,
2) Collection of data & information’s,
3) Analysis of findings,
4) Formulation & implementation.
5) Monitoring & reviewing.

 Pre requests of bench marking.

1) Commitment.
2) Communications,
3) Resources.
4) Skills,
5) Clarity of objectives.
6) Appropriate scope.

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 Quality Cost.

 Meaning,

 Every customers have certain needs & requirements.

 Hence every organisation should design their products as per the requirements, needs &
specification of customers.
 So they can ensure,
1) Value for price.
2) Fitness for use.
3) Conformance with specifications.
4) Support services.
 Cost incurred to maintain the quality standards is known as cost of quality.

 Classification of quality cost,

1st category 2nd category

To maintain high quality Consequences of poor quality.

1) Prevention cost & 1) Internal failure cost &

2) Appraisal or Inspection Cost 2) External failure cost.

 Prevention cost.

 To prevent poor quality from occurring.

 Examples,
1) Quality planning cost,
2) Quality training cost,
3) Quality circles cost,
4) Quality improvement cost,
5) System development for prevention.
6) Statistical process control activities.

 Appraisal cost.

 Also known as Inspection cost.

 Checking for failures,
 Examples,
1) Testing of materials,
2) Inspection of materials,
3) Testing & Inspection of WIP,
4) Testing & Inspection of Finished Goods,
5) Depreciation of Testing equipment ,
6) Package inspection,

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 Internal failure cost,

 Discover poor quality products before it reaches to the customers.

 Keeping defective products from falling in to the hands of customers.
 Examples,
1) Cost of scrap.
2) Cost of spoilage,
3) Cost of rework.
4) Retesting,
5) Down time due to defect in quality,

 External failure cost,

 Discover poor quality products after it reaches to the customers

 Cost of defects discovered by customers.
 Examples,
1) Warranty replacements.
2) Warranty repairs.
3) Cost of handling complaints.
4) Cost of field servicing.
5) Loss on contribution or sales.

Prevention Costs Appraisal Costs Internal Failure Costs External Failure Costs

Quality Engineering Inspection Scrap Revenue Loss

Quality Training Product Acceptance Rework Warranties

Quality Audits Packaging Inspection Re-Inspection Discount Due toDefects

Design Review Field Testing Re-Testing Product Liability

Quality Circles etc Continuing SupplierVerification Repair etc Warranty etc

etc

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 Total Quality Management (TQM).

 Meaning of Quality.

 Most important decision factor in selection of goods or services.

 Total feature of that fulfil the expectations or needs of customers.

 Meaning of TQM.

 Participation of all levels of management in the company from Top to Bottom For
continues improvement of quality.
 Continuously improving the quality of all the products & processes in response to
continues feedback for meeting customer requirements.
 It involves in an organization in a continues effort to improve quality & achieve
customer satisfaction.

Components Meaning

Total Everyone & all activities

Quality Understanding & meeting customer requirements.

Management Quality should be managed ( avoid defects rather than correct them)

 Principles of TQM.

1) Total Employee involvement.

2) Involvement of all customers & contributors.
3) Use of graphical & pictorial techniques to understand,
4) Use of statistics,
5) Continues improvement,
6) Elimination of irrelevant data,
7) Establishment of targets,

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 Steps in TQM.

1) Identification of customer or customer groups,

2) Identification of customer expectation,
3) Identification of customer requirements & product utilities,
4) Identification of problems regarding customer requirements,
5) Bench marking,
6) Customer feedback,
7) Identification of improvement opportunity.
8) Implementation.

 5 S + 6 C + 4 P.

 5 S.

SEIRI Sort Organize

SEITON Systemize Set in order

SEISO Sweep Cleaning

SEIKETSU Standardize Standardize

SHITSUKE Self-Discipline. Discipline.

 6 C & 4 P.

6C 4P

Commitment. People
Culture. Process

Customer Focus Problem

Continues Improvement Preparations.

Cooperation’s
Control

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 Praise Analysis.

 Meaning.

 Identification of improvement opportunities & implementation of quality improvement

process.

 PRAISE Process.

1) Problem identification.
2) Ranking.
3) Analyse.
4) Innovations.
5) Solution.
6) Evaluation.

Steps Elements

Problem identification  Areas of customer dissatisfaction.

 Absence of competitive advantages.

Ranking  Priorities the problems Based on its importance

Analyze  Ask,
1) Why? ( Cause & Effect)
2) What? ( Potential Implications)
3) How much? ( Quantify it)

Innovations  Use of creative thinking

Solutions  Implement the preferred solution.

Evaluation  Monitor the effectiveness of actions.

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 Pareto Analysis.

 Meaning.

 It is developed by an Italian economist “Wilfredo Parito”.

 Based on 80: 20 Rule.
 He observed that 80% of wealth of Milan (Italy) is owned by 20% population.
 80% Results can be achieved through 20% items,
 So, focusing on 20% items so they will get 80% Result.
 Identify that relevant 20% and concentrate on it.

 Example.

1) 80% of sales is generated by 20% customers.

2) 80% customers has same 20% problems.

 Uses of Pareto Analysis.

1) Select key customer relation.

2) Select key employee relation.
3) Select key quality improvement programmes.
4) Prioritise the problems, goals & objectives.
5) Allocation of resources.

 Application of Pareto Analysis.

1) Pricing of a product.
2) Customer profitability analysis.
3) ABC Analysis- Inventory Control.
4) Activity Based Costing.
5) Quality Control.

1. Pricing of a product.

 In case of multiple products,

 20% of Products gives 80% revenue,
 Focus on that 20% products,
 20% Products – More sophisticated pricing methods.
 80% products – Cost based pricing, Methods.

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2. Customer profitability analysis.

 20% Customers generate 80% of profits.

3. ABC Analysis- Inventory Control.

 20% of stocks accounts for 80% of Total Value.

4. Activity Based Costing.

 20% of Overhead Cost accounts for 80% of Total Cost.

5. Quality Control.

 80% of customers facing the same 20% problems.

 Lean Accounting.

 Meaning.

 It is developed by Toyota & other Japanese companies.

 It means changes required to a company in,
1) Accounting,
2) Control,
3) Measurement,
4) Management process.
 To support lean manufacturing & lean thinking.
 It helps to elimination of waste & reduction of inventory.
 Traditional accounting or costing systems are Anti - lean, because of following reasons,
1) Large, complex & waste full work,
2) Follows labour efficiency & OH absorption, which will leads to building
unnecessary inventory.
3) Using standard product cost.
4) No way to identify the financial impact of lean improvements.
 Major tools used under lean accounting.
1) Marginal costing system ,
2) Incremental cost analysis.
3) Kaizen costing,
4) PDCA.
5) Target costing.
6) Capital budgeting.

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 Six Sigma.

 Meaning.

 It is a quality improvement technique.

 It eliminates defects.
 Six Sigma tries to achieve Zero defects.
 It is developed by bills smith who worked in Motorola in 1986.
 6 Sigma = 3.4 defects per 1 million Opportunities.
 Defects % = 0.00034%
 That is Perfection % = 99.99966%.

 It is practically achieved by Mumbai dubbawalas who deliver the breakfast & lunch.

 Methodologies under Six Sigma.

1) DMAIC.
2) D MIA DV.

DMAIC D MIA DV
It is used for improve an existing product or process It is used to create new products or processes

D – Define D – Define.
M – Measure. M –Measure.
A – Analyze. I – Identify.
I – Improve. A – Analyze.
C – Control. D – Design.
V – Verify.

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 Activity based costing.

1. The budgeted overheads and cost driver volumes of XYZ are as follows.

Cost Pool Budgeted Overheads (₹`) Cost Driver Budgeted Volume

Material procurement 5,80,000 No. of orders 1,100
Material handling 2,50,000 No. of movements 680
Set-up 4,15,000 No. of set ups 520
Maintenance 9,70,000 Maintenance hours 8,400
Quality control 1,76,000 No. of inspection 900
Machinery 7,20,000 No. of machine hours 24,000

The company has produced a batch of 2,600 components of AX-15, its material cost was `₹
1,30,000 and labor cost` ₹ 2,45,000. The usage activities of the said batch are as follows.

Material orders – 26, maintenance hours – 690, material movements – 18, inspection – 28,
set ups – 25, machine hours – 1,800.

Calculate – cost driver rates that are used for tracing appropriate amount of overheads to the
said batch and ascertain the cost of batch of components using activity Based Costing

2. A company produces four products, viz. P, Q, R and S. The data relating to production activity
are as under
Product Quantity of Material cost/ Direct labour Machine hours/ Direct Labour cost/
production unit ₹` hours/unit unit unit ₹
P 1,000 10 1 0.50 6
Q 10,000 10 1 0.50 6
R 1,200 32 4 2.00 24
S 14,000 34 3 3.00 18

Production overheads are as under: ₹

(i) Overheads applicable to machine oriented activity: 1,49,700
(ii) Overheads relating to ordering materials 7,680
(iii) Set up costs 17,400
(iv) Administration overheads for spare parts 34,380
(v) Material handling costs 30,294

The following further information have been compiled:

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Product No. of set up No. of materials No. of times materials No. of spare
orders handled parts
P 3 3 6 6
Q 18 12 30 15
R 5 3 9 3
S 24 12 36 12

Required:
(i) Select a suitable cost driver for each item of overhead expense and calculate the cost
per unit of cost driver. Using the concept of activity based costing, compute the factory
cost per unit of each product

3. Precision Auto comp Ltd. Manufactures and sells two automobile components A and B.
Both are identical with slight variation in design. Although the market for both the
products is the same, the market share of the company for product A is very high and
that of product B very low. The company’s accountant has prepared the following
profitability statement for the two products Cost of production: (same for both the
products)

Direct Material `₹ 125

Dirbect Labour ₹ 24
Direct Expenses (sub-contract charges) `₹ 36
Overheads (400% of direct labour) `₹ 96
Total Cost `₹ 281

Product A Product B Total

Quantity sold No. 1,24,000 23,150 1,47,150
Unit sale price ₹ 300 290
Total sales realisation ₹ 4,39,13,500
Cost of sales as above ₹ 4,13,49,150
Margin ₹ 25,64,350

The company’s marketing manager, after attending a workshop on activity-based

costing challenges the accountant’s figures. The nearest competitor’s prices for the
two products are `₹ 330 and `₹ 275 per unit respectively and, if the company can
match the competitor’s prices, it can sell 75,000 nos. each of the two products. The
Production Manager confirms that he can produce this product mix with the
existing facilities. The management engages you as consultant, and the following
facts have been identified by you:
(a) product A undergoes 5 operations and product B undergoes two operations by
sub-contractors, although the total subcontract charges are the same for both the
products, and
(b) 75% of the overheads is accounted for by three major heads relating to sub-
contracting operations, viz.,ordering, inspection and movement of components, to
and from the sub-contractor’s works.Prepare a revised profitability statement to
find out if the marketing manager’s proposal is viable

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4. Relevant data relating to a company are:

Products
P Q R Total
Production and sales (units) 60,000 40,000 16,000
Raw material usage in units 10 10 22
Raw material costs ₹ 50 40 22 24,76,000
Direct labour hours 2.5 4 2 3,42,000
Machine hours 2.5 2 4 2,94,000
Direct labour costs ₹ 16 24 12
No. of production runs 6 14 40 60
No. of deliveries 18 6 40 64
No. of receipts 60 140 880 1,080
No. of production orders 30 20 50 100

Overheads: ₹

Setup 60,000
Machines 15,20,000
Receiving 8,70,000
Packing 5,00,000
Engineering 7,46,000

The company operates a JIT inventory policy and receives each component once per
production run.
Required:
1) Compute the product cost based on direct labour-hour recovery rate of overheads.
2) Compute the product cost using activity based costing

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5. Trimake Limited makes three main products, using broadly the same production
methods and equipment for each. A conventional product costing system is used at
present, although an Activity Based Costing (ABC) system is being considered. Details of
the three products, for typical period are:

Labour Hours per Machine Hours per unit Material Per unit Volumes Units
unit ₹
Product X ½ 1½ ` 20 750
Product Y 1½ 1 12 1,250
Product Z 1 3 25 7,000

Direct labour costs `₹ 6 per hour and production overheads are absorbed on a machine hour basis.
The rate for the period is ` ₹ 28 per machine hours

You are required:

calculate the cost per unit for each product using conventional methods

Further analysis shows that the total of production overheads can be divided as follows
%

Costs relating to set-ups 35

Costs relating to machinery 20
Costs relating to materials handling 15
Costs relating to inspection 30
Total production overhead 100%

The following activity volumes are associated with the product line for
the period as a whole.Total activities for the period
Number of Set-ups Number of movements of materials Number of Inspections
Product X 75 12 150
Product Y 115 21 180
Product Z 480 87 670
670 120 1,000
You are required:
 To calculate the cost per unit for each product using ABC principles; c) to
comment on the reasons for any differences in the costs in your answers to (a)
and (b).

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6. Vikas Associates, a firm of Cost and Management Accountants, offers three different
types of services, namely, Accounting and Auditing, Taxation and Management
Consultancy. Each service is charged on the basis of number of billable hours. The
average charge per billable hours is ` 500. For the year ending 31.03.2022 the firm
projectsthe following estimate of direct and indirect costs:

Costs Particulars ( ` Lakhs) ( ` Lakhs)

Direct Costs: Accounting & Auditing 100.00
Taxation 100.00
Management Consultancy 50.00 250.00
Indirect Costs: Planning & Review 7.50
Computer Processing 7.20
Professional Salaries 5.60
Books, Seminars & Periodicals 1.80
Programming Costs 8.00
Building Costs 4.90
General Administration Costs 15.00 50.00
Total 300.00

Until 31.03.2021 the firm has been allocating the indirect costs on the basis of
billable hours. For the year ending 31.03.2022 it was decided to introduce a
system of activity based costing to capture the indirect costs moreaccurately. The
following data were gathered accordingly:

Accounting Managemen
Particulars Taxation
& Auditing tConsultancy
Billable Hours 55000 35000 10000
EDP Hours / CEP Hours 5000 2500 500
Professionals (Nos.) 30 16 10
Books, Seminars & Periodicals (`) 57500 62500 60000
Programming Hours 1250 500 2250
Building (Sqft.) space occupied 8000 4000 2000
Administration (No. of clients) 150 250 100
Required:
(i) Prepare a profitability statement on the basis of conventional costing
(ii) Prepare a profitability statement on the basis of activity- based costing
(iii) Draw a comparative Statement of Indirect Costs & Profits
(iv) Any suggestion for improving the billable charge on the basis of ABC
assuming the same rate of margin of66.667% on total cost?

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7. AML Ltd is engaged in the production of three types of ice-cream products viz. Coco,
Strawberry & Vanilla. TheCompany presently sells 50,000 units of Coco @ ` 25 per unit,
Strawberry 20,000 units @ ` 20 per unit and Vanilla 60,000 units @ ` 15 per unit. The
demand is sensitive to selling price and it has been observed that every reduction of ` 1
per unit in selling price increases the demand for each product by 10% to the previous
level. The companyhas the production capacity of 60,500 units of Coco, 24,200 units of
Strawberry, and 72600 units of Vanilla. The company marks up 25% of the cost of
product.
The management decides to apply ABC analysis. For this purpose, it identifies four activities
as store support costs. The cost driver rates are as follows.
Activity Cost Driver Rate
Ordering ` 800 per purchase order
Delivery ` 700 per delivery
Shelf Stocking ` 199 per hour
Customer Support and Assistance` 1.10 per unit sold
The other relevant information for the products is as follows

Coco Strawberry Vanilla

Direct Material p.u. (`) 8 6 5
Direct Wages p.u. (`) 5 4 3
No. of purchase orders 35 30 15
No. of Deliveries 112 66 48
Shelf stocking hours 130 150 160

Under the traditional costing system, store support costs are charged @ 30% of prime
cost.
Required:
(i)Calculate the unit cost and total cost of each product at the maximum level using
traditional costing.
(ii)Calculate the unit cost and total cost of each product at the maximum level using
activity-based Costing.

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 Quality Cost.

1. The following is the information regarding turnover and quality cost of a company.
a. Sales revenue Rs. 10,000,000 ; net income Rs. 10,00,000
b. During the year, customers returned 30000 units needing repair. Repair cost averages
Rs. 7 per unit.
c. Six inspector are employed, each earning an annual salary of Rs. 25,000. These six
inspectors are involved only with final section (Production acceptance).
d. Total scrap is 30000 units. All scrap is quality related. The cost of scrap is about Rs. 15
per unit.
e. Each year, approximately 150000 units are rejected in final inspection. Of these units, 80
per cent can be recovered through rework. The cost of rework is Rs. 3.00 per unit.
f. A customer cancelled an order that would have increased the profits by Rs. 2,50,000. The
customer’s reason for cancellation was poor product performance. The accounting and
marketing departments agree that the company loses at least this much during the year
for the same reason.
g. The company employs five full time employees in its complaint department. Each earns
Rs. 20,000 a year.
h. The company gave sales allowances totaling Rs. 1,30,000 due to substandard products
being sent to the customer.
i. The company requires all new employees to take in three hour Quality- Training
programme. The estimated cost for the programme is Rs. 80,000.
j. Inspection of the final product requires testing equipmenet. The annual cost operating
and manufacturing this equipment is Rs. 1,20,000.

2. NZ Ltd. implemented a quality improvement programme and had the following results:

Particulars 2012 2013

(Figures in ` ₹000)
Sales 6,000 6,000
Scrap 600 300
Rework 500 400
Production Inspection 200 240
Product Warranty 300 150
Quality Training 75 150
Materials Inspection 80 60

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3. Zebra Limited introduced a quality improvement program and following results are observed -
` In lakhs
Particulars 2020-21 2021-22
Sales 10,000 10,000
Scrap 100 50

Particulars 2020-21 2021-22

Rework 650 550
Production inspection 250 325
Product Warranty 500 250
Quality Training 125 250
Materials inspection 120 90
Required:
(a) Classify the quality costs and express each class as a percentage of sales
(b) Compute the increase in the amount of profit due to quality improvement.

4. A Company manufactures a single product, which requires two components. The Company
purchases one of the components from two suppliers: X Ltd and Y Ltd. The price quoted by X
Ltd is `180 per 100 units of the component and it is found that on an average 3% of the total
receipt from this supplier is defective. The corresponding quotation from Y Ltd is ` 174 per 100
units, with defect rate of 5%. If the defectives are not detected, they are utilized in production
causing a damage of `180 per 100 units of the defective component.
The Company intends to introduce a system of inspection for the components on receipt. The
Inspection cost is estimated at ` 24 per 100 units of the component. Such an inspection will be
able to detect only 90% of the defective components received. No payment will be made for
components found to be defective in Inspection.
Required:
(a) Please justify the Inspection at the point of receipt and give your working for the same.
(b) Assuming a total requirement of 10,000 units, ascertain the lowest supplier.

5. Rags Ltd. manufactures and sells premium quality of sports shoes in India. Noted sports clubs
and its members are the main customers. Finished products show some rectifiable defects.
These problems can be detected and rectified during internal inspection. Inspection cost is `30
per unit. Rectification / Re-work cost is ` 18 per unit.
During 2022, 60000 pairs of shoes were manufactured and sold. After inspection defect was
detected in respect of 5% of output. After sales, customers reported defects in respect of 6% of
output. These shoes were received back from customers at a transportation cost of `10 per
pair. Due to negative publicity arising out of sale of defective materials, loss in sales is
expected in next year to the extent of 5% of external failures.
Required:
a. Analyze the cost of quality showing its elements separately with working.
b. If the selling price per pair of shoes is ` 600 and variable cost is 60% of sales, fixed cost is `
5,50,000 p.a., prepare the profitability statement for the product during 2022.

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6. Hindustan Bikes Ltd. (HBL) formerly known as HELCO is an Indian multinational company. It’s
headquarter is located in Bengaluru, India. It has been founded in the year 1990 as a manufacturer
of locomotives. The company is presently listed locally as well as in international stock market.
HBL’s parent company is Hindustan Group. The management of HBL recognizes the need to
establish a culture at the company so that -

“Do the right things, right the first time, every time”.

Management has provide you following actual information for the most recent month of the current
year:

Cost Data `

Customer Support Centre Cost ₹35 per hr.

Equipment Testing Cost ₹18 per hr.
Warranty Repair Cost ₹1,560 per bike
Manufacturing Rework Cost ₹228 per bike

Volume and Activity Data

Bikes Requiring Manufacturing Rework 3,200 bikes

Bikes Requiring Warranty Repair 2,600 bikes
Production Line Equipment Testing Time 1,600 hrs.
Customer Support Centre Time 2,000 hrs.

 Additional information
HBL carried out a quality review of its existing suppliers to enhance quality levels during the
month at a cost of `₹ 1,25,000. Due to the quality issues in the month, the bike production line
experienced unproductive 'down time' which cost `₹ 7,70,000.

Required
Prepare a statement showing ‘Total Quality Cost’.

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 Throughput Costing.

1. Modern Co produces 3 products, A, B and C, details of which are shown below:

Particulars A B C
Selling price per unit (₹`) 120 110 130
Direct material cost per unit (₹`) 60 70 85
Variable overhead (₹`) 30 20 15
Maximum demand (units) 30,000 25,000 40,000
Time required on the bottleneck 5 4 3
resource (hours per unit)

 There are 3,20,000 bottleneck hours available each month.

2. Cat Co makes a product using three machines – X, Y and Z. The product has to pass
through all the three machines.
The capacity of each machine is as follows:
X Y Z
Machine capacity per week (in units) 800 600 500

The demand for the product is 1,000 units per week. For every additional unit sold per
week, profit increases by ₹ `50,000. Cat Co is considering the following possible purchases (they
are not mutually exclusive):

1) Purchase 1 Replace machine X with a newer model. This will increase capacity to 1,100 units
per week and costs` ₹ 60 Lakhs.

2) Purchase 2 Invest in a second machine Y, increasing capacity by 550 units per

week. The cost of this machinewould be ` ₹ 68 Lakhs.

3) Purchase 3 Upgrade machine Z at a cost of ` ₹ 75 Lakhs, thereby increasing capacity to 1,050

units.
Required:
Which is Cat Co’s best course of action under throughput accounting?

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3. A factory has a key resource (bottleneck) of Facility A which is available for 31,300
minutes per week. Budgeted factory costs and data on two products, X and Y, are
shown below:

Product Selling Price/Unit Material Time in Facility A

Cost/Unit
X ` ₹ 35 ` ₹ 20.00 5 minute
Y ` ₹ 35 ` ₹ 17.50 10 minutes

Budgeted factory costs per week:

₹`
Direct labour 25,000
Indirect labour 12,500
Power 1,750
Depreciation 22,500
Space costs 8,000
Engineering 3,500
Administration 5,000

Actual production during the last week is 4,750 units of product X and 650 units of product Y.
Actual factory costwas ` ₹ 78,250.

Calculate:
(i) Total factory costs (TFC)
(ii) Cost per Factory Minute
(iii) Return per Factory Minute for both products
(iv) TA ratios for both products.
(v) Throughput cost per the week.
(vi) Efficiency ratio

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4. T Ltd, produces a product which passes through two processes - cutting and finishing.
The following information is provided:

Cutting Finishing
Hours available per annum 50,000 60,000
Hours needed per unit of product 5 12
Fixed operating costs per annum excluding direct material 10,00,000 10,00,000

The selling price of the product is `₹ 1,000 per unit and the only variable cost per unit is direct material,
which costs`₹ 400 per unit. There is demand for all units produced.
Evaluate each of the following proposals independent of each other:
(i) An outside agency is willing to do the finishing operation of any number of units
between 5,000 and 7,000 at₹` 400 per unit.

(ii) An outside agency is willing to do the cutting operation of 2,000 units at `₹ 200 per unit.

(iii) Additional equipment for cutting can be bought for `₹ 10,00,000 to increase the cutting facility
by 50,000 hour, with annual fixed costs increased by `₹ 2 lakhs.

5. H Ltd. manufactures three products. The material cost, selling price and bottleneck
resource details per unit areas follows:

Particulars Product X Product Y Product Z

Selling price (₹`) 66 75 90
Material and other variable cost (`₹) 24 30 40
Bottleneck resource time (minutes) 15 15 20

Budgeted factory costs for the period are ` ₹ 2,21,600. The bottleneck resources time available
is 75,120 minutes per period.
Required:
(i) Company adopted throughput accounting and products are
ranked according to ‘product return perminute’.

Select the highest rank product.

(ii) Calculate throughput accounting ratio and comment on it.

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 Back flush Accounting.

1. The following example will be used to illustrate the first two variant outlined above. The
manufacturing cost information for March for a division of XYZ plc. Is as follows:
Cost incurred in March ₹ ’000
Purchase of raw materials 4,250
Labour 2,800
Overheads 1,640

Activity in March Units

Finished goods manufactured during the period 180

Sales 145

Standard cost per unit

Amount(₹)
Materials 20
Labour. 15
Overhead. 9
Total 44

There were no opening stocks of raw materials, WIP or finished goods. It should be assumed
that there are no direct materials variance for the period.

2. Dandia Ltd. follows JIT system. It had following transactions in May, 2014:
(i) Raw materials were purchased for `₹ 2,00,000.
(ii) Direct labour cost incurred ₹ `36,000
(iii) Actual overhead costs `₹ 3,00,000
(iv) Conversion costs applied `₹ 3,16,000.

All materials, that were purchased, were placed into production and the production was
also completed and sold during the month. The difference between actual and applied costs
is computed.
You are required to pass both Traditional journal entries and Back flush journal entries.

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 Just In Time.

3. B Ltd. has decided to adopt JIT policy for materials. The following effects of JIT policy are
identified-
(1) To implement JIT, the company has to modify its production and material
receipt facilities at a capital cost of ₹`10,00,000. The new machine will require
a cash operating cost `₹ 1,08,000 p.a. The capital cost will be depreciated over
5 years.
(2) Raw material stockholding will be reduced from `₹ 40,00,000 to `₹ 10,00,000.
(3) The company can earn 15% on its long-term investments.
(4) The company can avoid rental expenditure on storage facilities amounting to `₹
33,000 per annum. Property Taxes and insurance amounting to ₹ 22,000 will be
saved due to JIT programme.
(5) Presently there are 7 workers in the store department at a salary of ₹
5,000 each per month. After implementingJIT scheme, only 5 workers
will be required in this department. Balance 2 workers’ employment
will be terminated.
(6)Due to receipt of smaller lots of Raw Materials, there will be some disruption of
production. The costs of stock-outs are estimated at `₹ 77,000 per annum.
Determine the financial impact of the JIT policy. Is it advisable for the company to
implement JIT system.

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