Cost & Management Accounting

December 2022 Examination

Q1. The data shown below relate to an industrial organization that manufactures
household appliances.
Standard quantity required of materials item 0009 1 kg.
Standard price per kg. ₹ 10
Product in a month appliances 100 kgs.

Actual quantity of materials used 98 kgs.

Actual price paid ₹ 11/kg

The following calculations for variances have been made:
Material usage variance = 2 kgs. @ ₹ 11 = ₹ 22
Material price variance = 100 kgs. × ₹ 1 = ₹ 100

Do you agree with these calculations? If not, provide a correct calculation for the
Variances. (10 Marks)

Answer:

INTRODUCTION:

When we talk about price, it refers to all the costs that the producer of any product needs to
sustain while creating the good. Standard price nevertheless refers to the expense which is pre
determined or the one which is decided by the manufacturer even before the item has been
introduced in the market. It is to be made a decision by the producer based on the expense of
factors of production. Essentially, the basic expenses are to be used in the manufacturing setups
and are also based on requirements: Direct labor, direct materials, and producing overhead.
Concept and Application:

Variance is an important concept in business economics, specifically for basic and supervisory
economics. Variance suggests the rate by which something either adjusts or varies from
something else. It is also a much utilized term in stats which would denote discrepancy. The
discrepancy is crucial and suggests the price of adjustment or amount at which anything
adjustments. If the price of any aspect of manufacturing goes through an adjustment, then it
needs to be appropriately kept in mind to make a proportion adjustment in the end product's
price. In cost management, stabilizing the variant is highly crucial in terms that it will assist in
examining the cost of any product.

In the above concern, we have been given Material Usage Variance and Material Rate Variance,
which can be recognized as below:

Material Usage Variance:

Material usage variance describes the variance that comes in cost due to the distinctions in the
raw material. Whatever the change in the materials utilized will be used to calculate the material
usage variance.
It can be calculated as complies with-.

Material Usage Variance = (SQ-AQ)*SP

Where,

SQ= Standard Quantity which is 1 kg for producing 1 unit of item 009. Here, 100 units are
produced, so the standard quantity will be 100kg

AQ= Actual Quantity which is given as 98kg

SP = Standard Price is 10 per kg

So, herein-

MUV = (100-98)*10 = Rs. 20 (Favorable)

However, as per the question, MUV is given as Rs. 22 which is incorrect. We can see that
instead of 100 kgs of material, the industrial organization only used 98 kgs of material and as a
result, we see 2 kg of material being saved. When we calculate the cost that it saved, it comes out
to Rs 20 i.e. (2kg* Rs.10) which is our MUV.

Similarly, Material Price Variance is:

Material price variance on the other hand means changes that come to the price of the raw
material or factors of production to be used in the production process.

It can be calculated as follows:

Material Price Variance = AQ*(SP-AP)

Wherein,

AQ= Actual Quantiy i.e. 98 kgs which was used for making 100 units of material 009

SP= Standard Price is Rs. 10/kg

AP = Actual price paid for the product which is Rs. 11/kg

So,

MPV = 98(10-11) = Rs. 98(Adverse)

From the above, we keep in mind that the business acquired the material at Rs. When the typical
cost was anticipated to be Rs 11/kg. 10/kg. This is why MPV is damaging, given that the
materials were acquired at the expense of what was to be anticipated. Since the business bought
just 98 kgs of item per need and not 100kg, the questions compute MPV as Rs.100, which is
incorrect.

Conclusion:

Variance means the rate through which something changes or varies from another thing. It is
additionally an exceptionally widely used term in statistics where it would represent
inconsistency. The discrepancy is again significant and implies the price of modification or
quantity at which anything changes. In cost management, balancing the variant is highly vital in
terms that it will aid in assessing the expense of any product. If the cost of any variable of
production undertakes a modification, then it has to be noted appropriately to make proportional
modifications in the final product cost.

Q2. ABC Ltd. started a factory in Kolkata on 1st April, 2021. Following details are
Furnished about its activity during the year ended 31st March 2022.

Raw Material consumed – 40,000 units @ ₹7 per unit.

Direct Wages:

Skilled worker – ₹9 per unit.

Unskilled worker – ₹6 per unit.
Royalty (on raw material consumed) @ ₹3 per unit.
Works overheads @ ₹8 per machine hour.
Machine Hours Worked 25,000.
Office Overheads at 1/3rd of works cost.
Sales Commission @ ₹4 per unit.
Units produced 40,000
Stock of units at the end 4,000 units, to be valued at cost of production per unit.
Sale price is ₹60 per unit.

Prepare Cost sheet showing the various elements of cost. (10 Marks)

Answer:

INTRODUCTION:

Price is a financial concept that suggests the expenses sustained by the manufacturer while
producing any item. It needs to be established at the expense of the factors of production like
land, resources, entrepreneurship, and labor. In return, the manufacturer earns a lot from the
customers by selling those items on the market. In any company, maintaining this cost sheet is
vital because it highlights the modification in the expense of production factors over time.

Concept and Application:

Elements of production play an essential function in the manufacturing procedure. Without

aspects of production, it becomes very hard to run an organization. A company nonetheless does
not refer to an office enclosed by four walls. It is essentially a group of a massive chunk of
human resources. That human resource is split into departments with separate duties and
responsibilities to release. Once more, in this capitalist world, a company will collaborate with a
revenue intention, so the management has to preserve a correct document of things occurring in
the business. It becomes of utmost crucial to compute the expense of these variables of
manufacturing. That is when the function of the expense sheet enters into play. A price sheet
refers to that data source that highlights the production elements' expenses.
The expense sheet becomes crucial in calculating the price of the final product. Given that the
selling expense of the final product relies on the cost that is sustained by the elements of
production, it ends up being significantly vital for the supervisor or the manufacturer to
recognize the variation of the deviance that can be found in the cost or rate of the elements of
production.

Variation indicates the rate at which something changes or varies from something else. It is
likewise a very favored term in statistics, where it would represent deviation. The deviation is
again significant and indicates the rate of adjustment or amount at which anything modifications.
In price management, stabilizing the variant is essential because it will help evaluate the cost of
any item. After that, it has to be correctly noted to make in proportion modification in the cost of
the final item if the expense of any manufacturing factor goes through a modification.

Particulars Per Unit Amount

Quantity Sold (A) Rs. 60/- per unit 21,60,000

Direct Costs:    

Raw Material Rs. 7/- per unit 2,80,000

Skilled Worker Rs. 9/- per unit 3,60,000

Unskilled Worker Rs. 6/- per unit 2,40,000

Royalty Rs. 3/- per unit 1,20,000

Prime Cost   10,00,000

Indirect Costs:    
Rs. 8/- per machine
Works Overhead hour 2,00,000
Works Cost/Factory OH  
 12,00,000

Office Overhead 1/3rd of works costs 4,00,000

Cost of Production   16,00,000

Sales Commission Rs. 4/- per unit 1,44,000

Selling & Distribution Costs (B)   17,44,000

     

Profit (A-B)   4,16,000

Cost per Unit (B/40,000 units)   44

Closing Stock Rs. 44/- per unit 15,69,600

Good sold: Amount

Units Produced 40,000

Closing Stock 4,000

Units Sold 36,000

Sales commission (36,000*4) 1,44,000

Sales (36,000*60) 21,60,000

Conclusion:

Thus, a price sheet is essential in recognizing the selling and analyzing the cost of the product. It
is a part of an efficient business procedure and is essential to properly and efficiently fulfill the
business's vision and goal. It even helps the manufacturer understand where he needs to spend
more and where to stop investing or avoid unnecessary costs.

3.a. What are the implications of Economic Order Quantity in proper inventory
management? (5 Marks)

INTRODUCTION:

In a company, what comes to be essentially essential is the record of the occasions and the
critical things occurring in them. It is not only about the management of the personnel in the
business but also regarding the gratification of the demand of the customers. It is the customer's
demand that motivates the producer to proceed the production and give sufficient supply of the
commodity to accomplish the demand of the customer in that market.

Content and Application:

Economic order quantity, widely called EOQ, refers to the data maintained by the companies to
represent their excellent dimension, order size, the number of variables of production they are
holding, and the demand they have to satisfy. This data assists the manufacturer in recognizing
how much it has to create, for whom it has to produce, and what it needs to create, which is the
foremost thing to determine in the supply demand chain or market equilibrium, as is widely
known.

Maintaining the business stock is a crucial usage of economic order quantity data. Inventory is
where the added stock of the production is to be kept. It is like a go down in layperson's terms. In
every business, whether it is of massive turn over or a start up, inventory plays a very essential
function in satisfying the demand of the consumers. Whenever the customer's demand rises and
falls positively, then the stock is to be used to meet their demand effectively.

Conclusion:

Economic order quantity thus is of utmost value in the wholesome management of the business
enterprise. It is not just crucial for maintaining the supply for the situation of boost in demand
but additionally to preserve the price sheet and to make particular the supply of the item.

3. b X Ltd. estimates its carrying cost at 15% and its ordering cost at ₹9 per order. The
estimated annual requirement is 48,000 units at a price of ₹4 per unit.

a) What is the most economical number of units to order?

b) How many orders should be placed in a year?
c) How often should an order be placed? (5 Marks)

Answer:

INTRODUCTION:

Economic order quantity, commonly referred to as EOQ, refers to the data that the firms preserve
to represent their ideal size, order dimension, the amount of production they are holding, and the
demand they need to fulfill. This data assists the producer in identifying just how much it has to
generate, for whom it needs to produce, and what it needs to produce, which is the foremost
thing to figure out in the supply demand chain or market balance as is commonly recognized.

Content and Application:

In the above question, we can calculate the various parts as follows:

a. Economical Order Quantity: As clarified, the EOQ is the optimal number of quantities an
entity must have to decrease its expenses and meet its customer's demands on time. Economic
Order Quantity can be calculated as adheres to:

Wherein,

S= Ordering Cost i.e. Rs. 9 per order

D= Annual Quantity Demanded i.e. 48,000 units

H= Holding Cost i.e. 15%

So,

EOQ= ((2*9*48000)/15%)1/2 = 2,400 units

So, we conclude that the X Ltd. must always keep 2,400 units to minimize its costs and meet the
customers’ demands.

b. The yearly demand throughout the year is 48,000 units for X Ltd. If the company decides to
keep the EOQ at all times, then the number of times the business has to place an order would be.

Number of Orders = Total Annual Demand/ EOQ

 = 48,000/2,400

= 20

So, X Ltd. needs to order 20 times in order to meet its annual demand while keeping EOQ.

c. Since, the number of orders is 20 per annum, the company must order every 18.25 days
(365days /20times).

Conclusion:

Economic order quantity, therefore, is of utmost value in the wholesome management of the
business enterprise. It is not just crucial for keeping the supply for the scenario of boost sought
after but also to preserve the price sheet and to make sure the supply of the item.