Professional Documents
Culture Documents
In such a business a factory in addition to head office (in which there are admin and selling departments) is
needed to manufacture the goods. In such type of business an extra statement called as cost of goods
manufactured statement is also prepared in addition to an Income Statement.
Before the format of cost of goods manufactured; we have to understand the followings:
There are three types of stocks in a manufacturing business:
Raw Material also called as direct material (which is an integral part of finished goods)
Finished goods (the products which are manufactured for being sold)
Work-in-process (semi-finished goods).
Direct labor
Salary of those employees directly involved in converting the raw material into finished goods
Factory Overheads:
All expenses within factory except direct material and direct labor.
Indirect Material:
Any material other than raw material e.g cleaning material or oil and lubricants of machinery.
Indirect Labour:
Salary of employees within factory but outside the production department e.g security guards.
Cost of Goods Manufactured Statement:
Raw Material (Direct Material)
Opening Stock of Raw Material 10,000
Add: Purchases of Raw Material 500,000
Add: Carriage Inwards 3,000
Add: Import duties (Non-refundable) 2,000
Less: closing Stock of Raw Material (25,000)
Raw Material Consumed 490,000
Direct Labour (Wages) 200,000
Factory Overheads:
Rent --
Utilities --
Depreciation --
Indirect Material --
Indirect Labour -- 300,000
Total Manufacturing Cost 990,000
Opening WIP 25,000
Closing WIP (33,000)
Cost of Goods Manufactured 982,000
After the preparation of cost of goods manufactured statement; an income statement is prepared just like in
a trading business; except the following differences:
Income statement
Sales (of finished goods) --
Cost of Sales (1) (--)
Gross profit --
Other Income --
Selling Expenses (--)
Administrative Expenses (--)
Financial Charges (--)
Net Profit --
----------( 1 )----------
Notes:
(1) Cost of Sales:
Opening Stock --
Add: Cost of Goods Manufactured 982,000
Less: Closing Stock (--)
--
Q. 1 The following information relates to the factory of Hydel and Company limited for the month of March
2015.
Rupees
Inventories on March 1, 2015
Raw material 24,080
Work in process 47,130
Finished goods 34,842
Raw material purchases 148,580
Repair and maintainance 5,924
Gas, light and power 14,565
Indirect material consumed 3,480
Indirect labour 25,024
Direct labour 74,500
Factory supervisor salary 14,290
Inventories on March 31, 2015
Raw material 37,144
Work in process 49,460
Finished goods 32,956
Required:
The following computation for March 2015:
• Cost of raw material consumed
• Cost of goods manufactured
• Total cost of goods sold
Q.2 NKL Enterprises produces a single product. On July 31, 2008, the finished goods stock consisted of
4,000 units valued at Rs. 220 per unit and the stock of raw materials was worth Rs. 540,000. For the month
of August 2008, the books of account show the following:
Rupees
Raw material purchases 845,000
Direct labour 735,000
Selling costs 248,000
Depreciation on plant and machinery 80,000
Distribution costs 89,560
Factory manager’s salary 47,600
Indirect labour 148,000
Indirect material consumed 45,000
Other production overheads 84,000
Other accounting costs 60,540
Other administration overheads 188,600
Other information are as under:
(i) 8,000 units of finished goods were produced during August 2008.
(ii) The value of raw materials on August 31, 2008 amounted to Rs. 600,000.
(iii) There was no work-in-progress at the start of the month. However, on August31, the value of work-
in-progress is approximately Rs. 250,000.
(iv) 5,000 units of finished goods were available in stock as on August 31, 2008.
Required:
Compute the value of closing stock of finished goods as on August 31, 2008 based on
(a) Weighted average cost method.
(b) FIFO
Note: if question is silent then accounting cost is assumed to be an administrative expense.
----------( 2 )----------
Answers:
A.1 (a)Cost of raw material consumed
Opening inventory 24,080
Purchases 148,580
Less: Closing inventory (37,144)
Raw materials consumed 135,516
Factory Overheads
----------( 3 )----------
Extra practice questions
Q.1 Tuesday Manufacturers Limited produces a single product. The following costs were incurred in the
month of June 2019:
Rs. in '000
Direct labour 2,075
Depreciation on plant and machinery 380
Distribution costs 589
Factory manager’s salary 247
Indirect labour 848
Indirect material consumed 345
Raw material purchases 3,845
Selling costs 1,248
Other production overheads 580
Other administration overheads 388
Required:
Compute cost of goods sold for the month of June 2019. (07)
----------( 4 )----------
Answer. 1
Tuesday Manufacturer
Cost of Goods Sold Statement
for the month of June 2019
Rs in (000)
(W-1)
Rs in (000)
Opening Raw material 1,490
Raw material purchased 3,845
Closing raw material (970)
Raw material consumed 4,365
Direct labour 2,075
Prime cost 6,440
Factory Overheads;
Depreciation on plant and machinery 380
Factory manager’s salary 247
Indirect labour 848
Indirect material consumed 345
Other production overheads 580 2,400
Manufacturing cost 8,840
Opening stock of work in progress 208
Closing stock of work in progress -
Cost of goods Manufactured 9,048
9,048,000
=
5,200
----------( 5 )----------
Cost classification by behavior:
Fixed costs
Fixed costs are items of cost that remain the same in total during a time period, no matter how many units
are produced.
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
----------( 6 )----------
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
In total Increase with increase in production
Decrease with decrease in production
Per unit Constant
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.(not in syllabus)
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.
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.)
• Calculate the per unit variable cost as follows:
Difference in cost /difference in activity level
• Multiply the per unit variable cost with any selected activity level (either high or low) to get total
variable cost.
• Total cost - total variable cost = Total fixed cost
• Construct the total cost function i.e. y = a+bx
----------( 7 )----------
Example: High/low method
A company has recorded the following costs in the past six months:
Required:
a) Construct a total cost function by using high/low method.
b) Estimate the total cost of producing 7,000 units.
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
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 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.
----------( 8 )----------
Joint & By Product cost
Diesel
In some process manufacturing system, two or more different products are produced from a common
manufacturing process.
Manufacturing Process
----------( 9 )----------
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:
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 other income
Cash/Receivable ***
Other Income ***
2. 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 2nd method as given above.
----------( 10 )----------
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 other income; or
b) 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
Income statement
Revenue:
Sales of XX (80% x 6,000 units x Rs. 24) Rs.
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
b) 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
----------( 11 )----------
Rs.
XX: Rs. 144,000/ Rs. 192,000 x (Rs 100,000 - Rs. 1,000) 74,250
YY: Rs. 48,000/ Rs. 192,000 x (Rs 100,000 - Rs. 1,000) 24,750
99,000
The profit in the (a) is higher than the profit in (b) 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
Further processing costs Rs 8,000 Rs 5,000 Rs 2,000 Rs 15,000
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 sale value method.
Note: Even if it is not mentioned in sale value method, always use sale value at split-off point method.
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.
----------( 12 )----------
Discussion of FIFO & weighted Average:
Example:
FIFO / Weighted Average:
Units Amount
Opening Stock -- --
Add: cost of goods manufactured 50,000 1,000,000
Less: Closing Stock (10,000) (200,000)
Cost of sales 40,000 800,000
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
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).
----------( 13 )----------
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.
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 statement of profit or loss. 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:
Direct material 25,000 kg. @ Rs. 25 per kg.
Direct labor @ Rs. 15 per hour Rs. 432,000
Normal process loss 20% of the material consumed
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:
----------( 14 )----------
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.
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
----------( 15 )----------
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:
Calculate the joint costs to be apportioned to each product and allocate to the products. (13 Marks)
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.
----------( 16 )----------
Further scenarios in question No. 3:
(a) Binary Limited
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)
W-2 Calculation of Closing Stock of Zee (FIFO)
2,979,840 ÷ 96,000 × 10,000 = 310,400
----------( 17 )----------
(b) Binary Limited
Assuming that loss of Cee while further processing into Zee is normal upto 10% of input while balance
is abnormal loss which is identified after further processing.
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 manufactured 7,855,750 6,917,750 3,335,642 18,109,142
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
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
----------( 18 )----------
Solutions:
A.1
Product Ultimate Market Units Ultimate further Hypothetical Joint Cost Total Cost
Value per unit Produced Market Processing Market Allocation
Value Costs Value
A.2
2) Department
----------( 19 )----------
A.3 Binary Limited
Statement of profit or loss
For year ended 30-6-2007
Aay Bee Zee Total
Sale 8,792,250 8,560,560 3,003,300 20,356,110
(285,000 x 30.85) (212,000x40.38) (Given)
Less: Cost of sales
Opening Cost - - - -
Joint Production cost (W-1) 7,855,750 6,917,750 3,142,300 17,915,800
Closing Stock (W-2) (1,172,500) (1,946,350) (140,700) (3,259,550)
6,683,250 4,971,400 3,001,600 14,656,250
Additional further processing costs 803,200 803,200
(558,500+244,700)
Total Production cost 6,683,250 4,971,400 3,804,800 15,459,450
Less Recovery value by-product (80,000)
(8,000 x 10)
Net Total Manufacturing Cost 6,683,250 4,971,400 3,724,800 15,379,450
Opening stock - - 172,800 172,800
(Given)
Closing Stock (W-3) - - (388,000) (388,000)
Cost of sales 6,683,250 4,971,400 3,509,600 15,164,250
Gross Profit 2,109,000 3,589,160 (506,300) 5,191,860
Less: Selling and Distribution (W-4) (1,079,805) (1,051,350) (368,845) (2,500,000)
Net Profit 1,029,195 2,537,810 (875,145) 2,691,860
Working
W-1 Calculation of joint product cost (on the basis of weight of output)
Aay Bee Cee Total
Production (kg) 335,000 295,000 134,000 764,000
Allocation of cost 7,855,750 6,917,750 3,142,300 17,915,800
(335,000/764,000 (295,000/764,000 (134,000/764,000 (Given)
x17,915,800) x17,915,800) x17,915,800)
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
If weighted average then:
172,800 + 3,724,800 x 10,000 = 374,769
8, 000 + 96,000
----------( 20 )----------
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
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
----------( 21 )----------
(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
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)
Workings
W-1 Total Further processing cost of Product B and C
a) Packing material cost
----------( 22 )----------
Product B Product C Total
Units 16,000 20,000
Packing material/unit 4 sq feet 7.5 sq feet
Total packing material in 64,000 150,000 214,000
sq feet
Cost of packing material 2,560,000 6,000,000 8,560,000
(sq feet x 40)
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
Department 3 costs
Conv. Cost in Department 3 (880,000 + 660,000) 1,540,000
Less Sales of Leaf (14,400 x 12) (172,800)
Net Department 3 cost 1,367,200
----------( 23 )----------
(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 manufactured 8,368,984 7,633,216 16,002,200
(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
----------( 24 )----------
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.
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)
(3,000,000 / 50)
----------( 25 )----------
Joint Production Cost: Further Processing Costs:
= [3,000 + 2,500 + 1,850 – (5,845 × 40)] = [350 + 890] = 1,240
7,116,200
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: × Cost of Theta: 15,200
34,800 + 16 ,055 + 300
15,200 + 52
300
=1,235,772
= 41,733
Net Cost of Direct products to be allocated to Sigma and Beta: 7,116,200 – 41,733 = 7,074,470
(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
----------( 26 )----------
Test joint and by product
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:
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)
----------( 27 )----------
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 Further Allocation
Units Sale Value NRV
price/units 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
----------( 28 )----------
Question 2:
Scents Limited produces three joint products P, Q and R. Raw material is added at the beginning of process
I. On completion of process I, these three products are split in the ratio of 50:30:20 respectively. Joint costs
incurred in process I are apportioned on the basis of net realizable value of the three products at split-off
point. Products P and Q are sold in the same state whereas product R is further processed in process II
before being sold in the market. A by-product TS is also produced in process II.
Following information relating to the two processes is available for the month of February 2020:
Process I Process II
Raw material at Rs. 411 per kg 744,000 kg -
Direct labour at Rs. 200 per hour 611,568 hours 55,450 hours
Production overheads Rs. 91,456,000 Rs. 7,230,000
Additional information:
(i) Loss of 7% is considered normal in process I.
(ii) Details of opening and closing stocks, estimated cost to sell and selling price are given as
under:
Selling price Cost to sell Opening Closing
per kg (Rs.) per kg (Rs.) stock (kg) stock (kg)
Product P 1,045 15 - 20,200
Product Q 960 10 - 15,140
Product R 1,021 12 7,800 48,134
(iii) Values of opening and closing stocks of product R comprised of cost of both processes. Value of
opening stock of product R is Rs. 5,850,000.
(iv) In process II, 7450 kg of TS was produced and sold at Rs. 175 per kg. Proceeds from sale of TS are
adjusted against cost of process II.
(v) Selling and administration costs are charged to P, Q and R at 12% of sales.
Required:
Prepare product-wise income statement for the month of February 2020. (15)
----------( 29 )----------
A.2
Scent Limited
Rs. ‘000’
P Q R
Sales (W-1) 340,419 184,739 92,503
(325,760 x 1,045) (192,436 x 960) (90,600 x 1,021)
Cost of Sales:
Opening Stock - - 5,850
+ COGM(W1 & W3) 276,889 153,230 106,450
(89,434 + 17,016)
- Closing Stock (W-4) (16,167) (11,176) (39,133)
(260,722) (142,054) (73,167)
Gross Profit 79,697 42,685 19,336
Selling & Admin exp (40,850) (22,169) (11,100)
(12% of revenue)
Net Profit 38,847 20,516 8,236
P
b/d - Sales 325,760
Production 345,960
c/d 20,200
Q
b/d -- Sales 192,436
Production 207,576
c/d 15,140
----------( 30 )----------
“Salah is the key to all happiness and success.”
R
b/d 7,800 Sales 90,600
Production 130,934
c/d 48,134
----------( 31 )----------
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 input) 100 -
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 99,000
Normal loss(10% of input) 100 (×10) 1,000
Scenario No.4
Abnormal gain.
Process A/C
Particulars Units Rs. Particulars Units Rs.
Input Units 1,000 100,000 Output 920 101,200
Normal loss (10 % of input) 100 (×10) 1,000
Abnormal gain (bal) 20 2,200
----------( 32 )----------
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.
Cost Accounting Procedures for factory overhead
The quantity and cost of materials and labour used on a given order can generally be measured in a straight
forward and reasonably exact manner. The cost element, factory overhead, presents a more detailed
problem.
If a company contracts to make 50 units, the material cost and labour cost can be taken from material
requisitions and labour time sheets. But how much depreciation of factory building and other factory assets,
how much power, light, insurance, repairs, security guard salary, plant manager salary etc were necessary
to produce 50 units of this contract. An extra difficulty is that some of these expenses remain fixed
regardless of units produced, while some overheads like lubricating oil, power vary with the quantity of
goods manufactured. How, then is it possible to charge a finished job (means a completed contract) at the
time of completion with reasonable share of factory overhead when actual amount of these expenses is
often not known until the end of accounting period.
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)
----------( 33 )----------
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 as a percentage of input (%) 4 5 5
The factory overheads are absorbed @ 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.
7.1 QB
Work in process
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% 200 units
completed)
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.
Scenario 2:
Process A/C (Incomplete)
Particulars Units Rs. Particulars Units Rs.
Material 4,000 16,000 Finished goods 2,750 ?
Normal loss (10% of 400 700
Direct Labor 8,125 input)
FOH 3,498 Abnormal Loss 150 ?
c/d 700 ?
4,000 27,623 4,000 ?
----------( 34 )----------
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**
*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**
*[1,000,000 + 8,400,000 / 10,000 + 70,000] x 8,000 = 940,000
** or[1,000,000 + 8,400,000 / 10,000 + 70,000] x 72,000 = 8,460,000
----------( 35 )----------
Q. 4 Production data of ABC Corporation for May 2019 is given below:
Started in May 50,000
Completed in May 46,000
Ending work-in-process 12,000
Beginning work-in-process 8,000
The beginning work-in-process was 90% complete regarding direct materials and 40% complete regarding
conversion costs. The ending work-in-process inventory was 60% complete regarding direct material & 30%
complete regarding conversion costs.
Costs incurred during the period are as follows:
Material 500,000
Conversion 200,000
Cost of opening work in process is 80,000 comprising of 70,000 material and 10,000 conversion.
Required:
Prepare process account by using:
• FIFO method
• Weighted average method
If there is opening work in process then Process Account can be prepared by using either:
Q. 5 On 1st September, 2018 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
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.
----------( 36 )----------
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 breakup 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.
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 81,840 50,000 81,840
----------( 37 )----------
WORKINGS:
Equivalent Units:
Material Conversion
Transferred out 45,000 45,000
Closing WIP 4,000 (100%) 2,000 (50%)
49,000 47,000
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 De-
partment. 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.23,798. 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.
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.
Q.10 Following is the data of Department B of EFG Company for December, 2003:
Work in process (opening) 8,500 units
(Completed as to material 20% and conversion cost 25%) Rs. 43,860
Work in process (ending) 11,540 units
(Completed as to material 50% and conversion cost 25%)
Current period transactions are:
Cost transferred from Department A Rs. 45,600
Units transferred from Department A 12,000 units
Units mishandled and lost before start of any process 460 units
Material consumed Rs. 27,654
Conversion cost incurred Rs. 47,689
Units transferred out 7,500
----------( 39 )----------
Normal spoilage is 6% of units transferred out. Company uses FIFO method for inventory valuation.
You are required to prepare a process account of Department B for December 2003
Note: This question can’t be solved by using weighted average method because break up of components of
opening WIP is not available.
Q. 11 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:
(i) Production details for the month of December 2016:
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)
Question of reverse working:
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 ?
Cost added by department 2:
Materials ?
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
----------( 40 )----------
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%
Following are per unit costs in department II:
Department I 39.75/unit
Material 19.8/unit
Required:
Prepare process account of department 2 for the month of November 2015.
----------( 41 )----------
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 (120/204)×357 210
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
----------( 42 )----------
194 ,000 − 2,000
Per Unit Cost = = 20 / unit
9,400 + 200
1,250 × 25 = 31,250
99 × 25 = 2,475
----------( 43 )----------
A.4
(a) ABC Corporation
Work in Process A/c – FIFO
Units Amount Units Amount
b/d WIP 8,000 80,000 Output 46,000 686,224
Input 50,000
Material 500,000
Conversion cost 200,000 c/d WIP 12,000 93,780
58,000 780,000 58,000 780,000
FIFO for the period only
WORKINGS:
500,000
Material = = 10.87 per unit
* 800 + 38,000 + * * 7,200
*8,000 x 10%; **12,000 x 60%
200,000
Conversion cost = = 4.31 per unit
* 4,800 + 38,000 + * * 3,600
*8,000 x 40%; **12,000 x 30%
OR
Equivalent Units:
Material Conversion
8,000 800 (10%) 4,800 (60%)
Output 46,000
38,000 38,000 38,000
c/d WIP 12,000 7,200 (60%) 3,600 (30%)
46,000 46,400
Per Unit:
500,000
Material = 10.87/unit
46,000
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
----------( 44 )----------
(b) Process account (Weighted average)
Units Amount Units Amount
b/d WIP 8,000 80,000 Output 46,000 687,240
Input 50,000
Material 500,000
Conversion cost 200,000 c/d 12,000 92,340
58,000 780,000 58,000 780,000
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
Equivalent Units:
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
----------( 45 )----------
Cost of Units Completed:
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
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
----------( 46 )----------
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/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
----------( 47 )----------
Cost Accounted For:
Units completed = 100,000 × 8.9 = 890,000
Abnormal loss = 3,000 × 8.9 = 26,700
Closing WIP = (18,000 × 3.84) + (9,000 × 2.3) + (9,000 × 2.76) = 114,660
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
A.8
Process Account – Painting Department
Units Amount Units Amount
b/d 2,400 6,650 Transferred to Finishing dep 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
----------( 48 )----------
WORKINGS:
Equivalent Units:
Proceeding Department Material Labor F-OH
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
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
----------( 49 )----------
(c) Accounting Entries:
Date Particular Rs. ‘000’ Rs. ‘000’
31-12-2014 WIP – A 36,240
Material Account 36,240
WIP – A 14,224
Payroll Account 14,224
WIP – A 11,379
F-OH Account (14,224 x 80%) 11,379
31-12-2014 F-OH Account 11,500
Cash/Payables 11,500
31-12-2014 COS (W - 1 ) 121
F-OH Account 121
W–I F-OH
Cash 11,500 WIP 11,379
COS (bal) 121
----------( 50 )----------
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
Cost Calculation:
Finished goods 7,500 units
Cost from opening WIP (7,500 × 5.16*) *[43,860/8,500] = 38,700
+ Material (6,000 × 2.28) = 13,680
+ Conversion (5,625 × 5.41) = 30,431 82,811
----------( 51 )----------
From current period:
Preceding department (10,540 x 3.95) = 41,633
+ Material (5,270 x 2.28) = 12,016
+ Conversion (2,635 x 5.41) = 14,255 73,748
A. 11
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
Equivalent Units:
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
A.12
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:
2,000 128,750 + 400 × 19.8 + 800 × 9.9 + 800 × 4.95 = 148,550
Transferred Units = 48,000
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
----------( 53 )----------
Extra practice questions
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
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.
----------( 54 )----------
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
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
Moulding Assembly
Bicycles Conversion
Cost % Materials %
Costs %
Beginning Inventory 3,000 100 100% 80%
Transferred in from moulding dep. 45,000 100 - -
during the year
Transferred out to packing dep. during 40,000 100 100% 100%
the year
Ending Inventory 4,000 100 50% 20%
Required:
Process Account showing necessary computation, relating to assembly department.
----------( 55 )----------
Answer 1
Process Account
Rs. ‘000’
Units Amount Units Amount
b/d 5,000 4,212 Output 18,000 15,624
(2,713+1,499)
Input 20,000 N.Loss (5,000+20,000) × 5% 1,250 125
(1,250 x 100)
Material 10,000
Conversion 5,760 c/d 6,000 4,397
Ab. Gain (balance) 250 175
25,250 20,147 25,250 20,146
Equivalent Units:
Material Conversion
Output 18,000 18,000 18,000
c/d WIP 6,000 6,.000 3,600 (60%)
Answer 2
Process Account – II
----------( 56 )----------
(a) Equivalent Production Units: (FIFO)
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
(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
----------( 57 )----------
A.3 Process Account
Units Amount Units Amount
b/d 3,000 100,790** Output (to packing dept.) 40,000 1,478,800
From molding 45,000 1,237,800
Material 96,840 *Normal loss (working) 2,050 --
Conversion 236,590 Abnormal loss (bal.) 1,950 68,646
c/d 4,000 124,332
48,000 1,672,020 48,000 1,672,020
**[82,200 + 6,660 + 11,930]
*Working of Normal Loss Units:
Opening Units = 3,000 (should have already inspected at 70% stage in previous
period)
Input Units = 45,000
Less: c/d WIP = (4,000) (should not have been yet inspected in this department
because they are at less than 70% stage)
Units Inspected 41,000
× 5% 2,050
Equivalent Units: (Weighted Average)
Previous Material Conversion
Output 40,000 40,000 40,000 40,000
Abnormal loss 1,950 1,950 1,950 (100%) 1,365 (70%)
Closing WIP 4,000 4,000 2,000 (50%) 800 (20%)
45,950 43,950 42,165
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
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
----------( 58 )----------
Equivalent Units
Previous department Material Conversion
----------( 59 )----------
ICAP QUESTION BANK
PROCESS COSTING
7.1 PROCESS COSTING: THE BASIC RULES
The following examples take you through the basic rules for process costing.
Required
For each of the following examples, calculate:
(a) the cost of completed output from the process, and
(b) if there is any, the cost of any abnormal loss or the value of any abnormal gain
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.
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%
----------( 60 )----------
Required
Prepare the following for department B for the month:
a) A statement of equivalent units.
a) A statement showing cost per equivalent unit.
a) A statement showing the evaluation of output.
a) A process account. (15)
− Product- X 50,000 - -
− Product- Y 25,000
Loss due to rejection 12,500 - -
Closing work in process 10,000 - -
Additional information:
(i) Opening and closing work in process are 75% complete.
(ii) The normal loss is sold as scrap at the rate of Rs. 1.50 per unit.
(iii) Production costs are allocated to joint products on the basis of weight of output.
(iv) The company uses weighted average method for inventory valuation. Prepare
the following for department 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)
----------( 61 )----------
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.
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)
----------( 62 )----------
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
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
----------( 63 )----------
Answer: 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
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
Calculation of Cost:
----------( 64 )----------
If it would have been required
750,000
X= × 50,000
75,000
750,000
Y= × 25,000
75,000
Example:
The following information relates to a production process X
----------( 65 )----------
Test:
Q. Green Limited (GL) produces a chemical that passes through two processes before being transferred to
warehouse. Following information pertains to Process II for the month of August 2021:
In Process II, material is added at start of the process and conversion costs are incurred evenly throughout the
process. Process loss is determined on inspection which is carried out on 60% completion of the process. Process
loss is estimated at 10% of the inspected quantity and is sold for Rs. 200 per kg.
Required :
Prepare Process II account for the month of August 2021. (10)
A.4
Green Limited:
Process II Account
W-1
Opening WIP 5,250 (M100%;C.C80%)
Opening WIP 2,250 ( M 100% ; C.C 40% )
Input 67,500 ( 45,000+22,500)
Closing WIP 5,400 ( M 100% ; C.C 70% )
Closing WIP 3,600 (M100%;C.C30%)
Stage of Inspection ( M 100% ; C.C 60% )
2,250+67,500–3,600=66,150x10%
Normal Loss =6,615
----------( 66 )----------
Equivalent Production Units ( FIFO )
Process 1 Material Conversion
5,250 - - 1,050 (20%)
Finished Goods 7,500 2,250 - - 1,350 (60%)
52,500 52,500 52,500 52,500
5,400 5,400 5,400 3,780 (70%)
c/d WIP 9,000
3,600 3,600 3,600 1,080 (30%)
Abnormal gain (615) (615) (369) (60%)
60,885 60,885 59,391
27000−1323
Process 1 = = 0.42/Unit
60,885
11250
Material = = 0.18/Unit
60,885
1500
Conversion = =0.03/unit
59,391
0.63/unit
Cost Allocation
Finished goods = 60,000 units
7,500 units 3,000
+1,050 × 0.03 + 1,350 × 0.03 =72
+ 52,500 × 0.63 =33,075
36,147
Closing WIP: 54,00 × 0.42 + 5,400 × 0.185 + 3,780 × 0.03
+3,600 × 0.42 +3,600 × 0.185 + 1,082 × 0.03 =5,546
Abnormal gain : 615 × 0.42 + 615 x 0.18 +369 x 0.03 =380
----------( 67 )----------
Test question:
Q.1 Rafiqi Industry Limited (RIL) produces a product which passes through two departments, A and B. The details
relating to its production during the month of February 2023 is as follows:
Department A Department B
Description Material Conversion Material Conversion
Units Units
------- Rs. in '000 ------- ------- Rs. in '000 -------
Opening WIP 20,000 120,000 32,000 144,000 36,000
(100% complete) (40% complete) 18,000 (100% complete) (60% complete)
Input during the
155,000 - - - - -
month
Received from A - - - 140,000 ? ?
Costs for the month - 920,400 673,650 - 194,900 445,500
Transferred out 140,000 ? ? 120,000 ? ?
Closing WIP 25,000 ? ? 30,000 ? ?
(100% (60% (100% (80%
complete) complete) complete) complete)
Other information:
(i) RIL uses FIFO method for valuation of its inventories.
(ii) Rejected units are sold on an “as is, where is” basis. During the month, proceeds from sale of rejected
units in departments A and B were Rs. 4 million and Rs. 6 million respectively.
(iii) In both departments:
▪ 100% material is added at the start of the process.
▪ units are inspected when 90% complete as to conversion.
▪ normal loss is 5% of units transferred out.
Required:
(a) Compute equivalent production units. (10)
(b) Compute the cost of finished goods, closing WIP and abnormal loss/gain. (10)
A.1
Rafiqi Industry Limited
Department A:
a) Equivalent production units:
Material Conversion
20,000 - 12,000(60%)
Process B 140,000 120,000 120,000 120,000
Abnormal Loss 3,000 3,000 2,700(90%) (inspection stage)
C/d WIP 25,000 25,000 15,000(60%)
148,000 147,700
----------( 68 )----------
b) Cost Allocation:
Process B 140,000 units
From opening 20,000 units 152,000
+ 12,000 x 4.5 54,000
206,000
+ 120,000 x 10.70 1,284,000
Total 1,490,000
Department B
b) Cost Allocation:
----------( 69 )----------
Workings:
Process account A Rs.000
Units Amounts Units Amount
b/d 20,000 152,000 Process B 140,000 1490,000
(120,000+32,000)
Material 155,000 920,400 Normal Loss 7,000 2,800 (7,000 x
400(working
below))
(140,000 x 5%)
Conversion 673,650 Abnormal 3,000 30,750
loss
(bal.)
c/d 25,000 222,500
175,000 1,746,050 175,000 1,746,050
4,000,000
Per unit recovery value: = 400/unit
7,000+3,000
6,000,000
Per unit recovery value: = 750/unit
6,000+2,000
----------( 70 )----------
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)
----------( 71 )----------
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
----------( 72 )----------
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
----------( 73 )----------
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
----------( 74 )----------
Q. 1 EPSN enterprises manufactures a food product, Details of which are as under:
Standard cost per unit
Materials 60 Kgs. @ Rs.48 per kg
Labor 480 Hours @ Rs.8 per hour
Actual cost for the month:
Material 5,900 Kgs. @ Rs.50 per kg
Labor 47,500 hours @ Rs.9 per hour
Actual production 100 units
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
----------( 75 )----------
Fixed overheads expenditure variance Fixed overheads volume variance
Actual overheads Budgeted overheads
2,500 2,400
(1,000 x 2.4)
Budgeted overheads Actual production x SR
2,400 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.
----------( 76 )----------
Subdivision of Fixed OH volume variance
Data from M/S Gamma & Sons
Fixed OH Volume variance
The above variance can also be calculated in hours for more detailed analysis as follows:
----------( 77 )----------
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) 200
Direct 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.
----------( 78 )----------
IDLE TIME VARIANCE
Generally Actual Hours Worked = Actual Hours Paid but if there is idle time (time when the employees are
being paid but there is no work to do, e.g there is no light or shortage of orders for production). In such a
case Actual Hours Paid may be more than Actual Hours Worked.
Example:
Idle Time Variance:
Std Labour Cost / unit = (4 hrs × 500/hr) = 2,000 / unit
Actual production = 1000 units
Labour hours paid for = 4,200 hours at a cost of = Rs. 2,121,000
Labour hours worked = 4,100 hours.
Total Labour Variance = (SHW for A.P × S.R) – (AHP × A.R)
2,121,000
= (1,000 × 4 × 500) – 4,200
4,200
= 2,000,000 – 2,121,000 = 121,000 A
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
----------( 79 )----------
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:
Calcualte sale variances.
(a) Sales Volume Variance:
(600 – 620) × 2*
= 40 F
*(30 – 28)
(b) Sales Price Variance:
(30 – 29) × 620
= 620 A
----------( 80 )----------
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] × AQU* 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
----------( 81 )----------
(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
----------( 82 )----------
If break-up of (j) is to be calculated:
Fixed Volume Variance
1,350 A
1,250 A 100 A
----------( 83 )----------
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
----------( 84 )----------
Fixed OHs
----------( 85 )----------
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
Actual Production × S.R (48,600 ×
Budgeted F-OH (45,000 × 6.5) 292,500 315,900
6.5)
2,500 F 23,400 F
----------( 86 )----------
Break up of volume variance
Capacity variance Efficiency variance
Budgeted capacity hrs. × S.R = Actual consumed hrs. × S.R =
(45,000 × 0.5 x 13*) 292,500 (25,000 × 13) 325,000
Std. hrs. for Actual production ×
Actual consumed hrs. × S.R =
S.R =
25,000 × 13 325,000 315,900
(48,600 × 0.5 × 13)
*6.5 x 2 = 13 / hr 32,500 F 9,100 A
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)
• Reconcile the budgeted expenditure of actual production with actual expenditure.
----------( 87 )----------
Discussion of Combined Factory Overhead Expenditure Variance (means sum of VOH Expenditure
+ FOH Expenditure)[this is required if breakup of variable factory overheads and fixed overheads is
not available]
Data from ABC Ltd. At the end Q.6
Factory overheads expenditure Variance
VOH
Expenditure
(SR – AR) × AHW
26,000,000
= 25 − × 990,000 = 1,250,000 A
990,000
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
Similarly in Excellent Ltd.
Actual factory overheads (310,000 +290,000) 600,000
Less: Std. Cost of Factory overheads
From Variable overheads: AHW × SR (25,000 x 15) 375,000
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
----------( 88 )----------
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 AQ in AM for
AP 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).
----------( 89 )----------
iii)
SQ in SM for AQ in SM for AQ in AM for
AP AP 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
----------( 90 )----------
Q.7 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
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
----------( 91 )----------
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
----------( 92 )----------
A
Income Statement (Absorption Costing)
Sales (1,500 × 150) 225,000
Less: Cost of Sales
Opening Stock --
Add: COGM
Direct Material (2,000 × 35) 70,000
Direct Labour (2,000 × 25) 50,000
Variable overheads (2,000 × 10) 20,000
Fixed overheads (2,000 × 55*) 110,000
250,000
Closing Stock (500 × 125**) (62,500) (187,500)
Gross Profit 37,500
----------( 93 )----------
STANDARD MARGINAL COSTING:
Previous discussion relates to companies; using standard total absorption costing.
Now we discuss what happens when a company uses std. marginal costing instead.
Marginal costing variances are calculated exactly as before with two important differences:
(a) Sales Volume Variance is calculated as follows:
(Budgeted Units Sold – Actual Units Sold) × Std. Contribution / Unit*
*(Std. Contribution / Unit = Sale price / Unit – Variable Cost / Unit)
(b) In marginal costing, fixed costs are not absorbed into product costs and so there is no fixed cost
variance to explain any under / over absorption of overheads. There will therefore be no fixed
overheads volume variance (and if no volume variance then no subdivision will be relevant). There
will only be fixed overhead expenditure variance which is calculated in exactly the same way as for
absorption costing system.
CARAT At the end
solution
(a) Contribution / Unit:
Standard Sale Price = 12
Material A (1.7 × 2.5) 4.25
Material B (1.2 × 1.5) 1.80
Labour (6 × 0.45) 2.70
(8.75)
Contribution 3.25
Sales
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
----------( 94 )----------
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.
----------( 95 )----------
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.
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
----------( 96 )----------
Material
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
----------( 97 )----------
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)
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
----------( 98 )----------
10.7
Solution of same above question assuming as if raw material stock is measured at actual cost then:
Operating Statement
Budgeted Profit 5,700
Budgeted Fixed Cost 6,000
Budgeted Contribution 11,700
Sale Volume Variance 2,200 F
Sale Price Variance 1,800 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)
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
----------( 99 )----------
Workings:
Material (8 × 1.5) = 12
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.
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)
A.2
M/s Gamma & Son
(i) Material 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
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
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 – 80,640) × 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
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 27,000
F 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
24,300
2,700 A
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.
Reconciliation:
Budgeted Expenditures for actual production (W-1) 2,940,300
Variances: (Workings above)
Material price 40,320 F
Material usage 34,020 A
Labor rate 148,500 A
Labor efficiency 202,500 A
Variable overhead expenditure 3,200 F
Variable overhead efficiency 16,200 A
Fixed OH Expenditure Variance 17,550 F
Fixed OH Volume Variance 27,000 A
Actual Expenditure (W 2) 3,307,450
W-1 : Budgeted Expenditure for Actual Production:
Direct Material [27,000 x 2.8 x 6.75] 510,300
Direct Labor [27,000 x 30/60 x 150] 2,025,000
Variable overhead [27,000 x 30/60 x 12] 162,000
Fixed OH Expenditure [27,000 x 30/60 x 18] 243,000
Budgeted Expenditure 2,940,300
W-2: Actual Expenditure
Direct Material 504,000
Direct Labor [27,000 x 33/60 x 160] 2,376,000
Variable overhead 175,000
Fixed OH Expenditure [27,000 x 33/60 x 17] 252,450
Actual Expenditure 3,307,450
388 U
B 25 192 320 - [13 × 308] = 164 U
400
A. 8
Material Cost Variance
SQU X .S .R AQU A.R
−
A [[750⁄817 × 876] 𝑋 38 − [750 𝑋37] = 2,802 F
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
Price Variance Usage Variance
4,800 U
SQ in SM for AP AQ in SM for AP AQ in AM for AP
S 1,200 × 12,100 = 6,600 1,200 × 14,900 = 7,450 6,000
2,200 2,400
A 600 × 12,100 = 3,300 600 × 14,900 = 3,725 4,800
2,200 2,400
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.
----------( 110 )----------
(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
80,000 A
Labour Rate Variance Labour Efficiency Variance
(SR – AR) × AHW (SHW for Actual Production – AHW) x
SR
(100 – 105) × 96,000 (50,000 × 2 – 96,000) × 100
= 480,000 A = 400,000 F
Total Factory Overheads Variance (not required just for additional information)
Calculation of rates:
*V-OH rate /unit = [100 × 1.5 + 80 × 2] = 310
F-OH rate/unit = 4,000,000 ÷ 50,000 = 80
390
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
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)
(c) reconcile the budgeted expenditure of actual production with the actual expenditure. (03)
Note: if inspection stage is given, then multiply the normal loss percentage with the inspected units to get
the normal loss units.
Rate Usage
(40 – 38) × 50,000* = (48,470 × 5 – 250,000) × 40 = 306,000 A
100,000 F
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 = (47,123 × 1.5 – 72,000) × 64 = 84,192 A
1,742,000 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
W-1 :
Budgeted Expenditure for Actual Production:
Direct Material 48,470 x 200 9,694,000
Direct Labor 47,123 x 120 5,654,760
Factory OH Expenditure 47,123 x 120 x 130% 7,351,188
Budgeted Expenditure 22,699,948
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)
----------( 117 )----------
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.
(b) Total production (factory) Overhead Variance:
Actual Factory OH = 8,750,000
Applied Factory OH (4,320 × 2,000) = 8,650,000
100,000 A
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
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)
----------( 119 )----------
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
Fixed OH
Expenditure
Budgeted Fixed OH 40,000,000
Actual Fixed OH 41,100,000
1,100,000 A
Workings:
(W-1) Process Account
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]
Factory-OH Expenditure V-OH Efficiency Variance (Not Required for Extra Information)
Variance (SHW – AHW) x SR Fixed – OH Volume Variance
Actual Factory-OH 3,900,000 (8,600 x 3 – 25,000) x 100 Budgeted Fixed OH = 1,200,000
Std. cost of Factory-OH: 80,000 F (8,000 x 150)
From fixed OH: Applied Fixed OH = 1,290,000
Budgeted Fixed OH1,200,000 (8,600 x 150) 90,000 F
From V – OH:
AHW x SR*(W-1) 2,500,000
(25,000 x 100)* 3,700,000
200,000 A
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:
(i) 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.
(iii) 2,100 machine hours were worked. Details of overheads are as under:
• Depreciation amounted to Rs. 1.6 million (same as budgeted)
• Factory building rent amounted to Rs. 1.20 million (same as budgeted)
• All other overheads were 4% in excess of the 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)
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 stock [12,300* Kg x 1750**] 21.525 10.43
*[3,000+15,000-5,700] **[26.25M/15,000]
OR : [3,000 kgs = 5.7M + 26.25M/15,000 x 2700 kgs]
Direct labor [27,360*x165*] 4.51
*Actual labor hr`s
[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
[ 4,400,000/2,000] =2,200x1.04=2,288/machine hr. 19.74
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
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 0.54 F
F *5,000 kgs /10,000 units
0.17A
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
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
Scenario 2: If actual profit is measured by using standard cost for raw material stock as well; then actual
profit will be:
Seema Enterprises
Less: Closing finished goods inventory (at standard cost) (1.70) (17.12)
Gross Contribution 12.88
Fixed cost [1.6+1.2+(3.8-1.6-1.2) 1.04] (3.84)
Actual Profit 9.04
In this case material price variance would be calculated as follows and all other variances remain
same:
(SR – AR) × AQP
[1,800–26.25/15,000)]× 15,000=0.75 F
Scenario 3: If actual profit is measured by using actual cost for raw material stock as well as finished goods
stock; then actual profit will be:
Seema Enterprises
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)
Mix Variance:
Axe (15,500 – 16,000) × 160 = 160,000 A
Rs.
Selling price 50
Materials 5kg Rs.4/kg 20
Labour 3hrs Rs.4/hr 12
Variable overheads 3hrs Rs.3/hr 9
Actual results for the period were as follows:
1,100 units were made and sold, earning revenue of Rs.57,200.
6,600kg of materials were bought at a cost of Rs.29,700 but only 6,300 kg were used
3,600 hours of labour were paid for at a cost of Rs.14,220. The total cost for variable overheads was
Rs.11,700 and fixed costs were Rs.4,000.
The company uses marginal costing and values all inventory at standard cost.
Required:
(a) Produce a statement reconciling actual and budgeted profit using appropriate variances. (15)
(b) Assuming now that the company uses absorption costing, recalculate the fixed production overhead
variances (6)
(c) Discuss possible causes for the labour variances you have calculated. (4)
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.
The company values its inventories at standard cost.
Required
Produce an operating statement to reconcile budgeted and actual gross profit. (14)
Fixed production overheads for the three-month period were expected to be Rs. 62,500.
Sales and production 48,000 units of ZP were produced and sold for Rs.
580,800
Direct material A 121,951 kg were used at a cost of Rs. 200,000
Direct material B 67,200 kg were used at a cost of Rs. 84,000
Direct labour Employees worked for 18,900 hours, but 19,200 hours
were paid at a cost of Rs. 117,120
Fixed production overheads Rs. 64,000
Budgeted sales for the three-month period were 50,000 units of Product ZP.
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.
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
• Prepare a quantity and equivalent production schedules for material and conversion costs.
• Calculate material, labour and variable overhead variances. (Assume that the material price
variance is calculated as materials are used rather than as they are purchased).
• Calculate the over(under) absorption of fixed production overhead and analyse it into
expenditure variance and volume variance.
• Analyse the fixed production overhead volume variance into efficiency and capacity
variances. (20)
6. ABC LIMITED
ABC Limited produces and markets a single product. The company operates a standard costing
system. The standard cost card for the product is as under:
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)
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.
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)
Who sets standard costs?
Standard costs are set by managers with the expertise to assess what the standard prices and rates should
be. Standard costs are normally reviewed regularly, typically once a year as part of the annual budgeting
process.
• Standard prices for direct materials should be set by managers with expertise in the purchase costs
of materials. This is likely to be a senior manager in the purchasing department (buying department).
• Standard rates for direct labor should be set by managers with expertise in labor rates. This is likely
to be a senior manager in the human resources department (personnel (HR) department).
• Standard usage rates for direct materials and standard efficiency rates for direct labor should be
set by managers with expertise in operational activities. This may be a senior manager in the
production or operations department, or a manager in the technical department.(Production
deparment)
• Standard overhead rates should be identified by a senior management accountant, from budgeted
overhead costs and budgeted activity levels that have been agreed in the annual budgeting process (at
the beginning of the period)
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
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.
(i) Production for the month was budgeted at 12,000 units. The standard cost per unit of Violet is as
follows:
Rupees
Direct materials:
Alpha – 4 kg 800
Beta – 6 kg 900
Direct labour – 2 hours 300
*Production overheads – 2 direct labour hours 260
*Fixed production overheads were estimated at Rs. 1.2 million based on budgeted
direct labour hours
(ii) Direct materials are added at the beginning of the production process. BL accounts for material
price variance at the time of issuance of material to production and uses FIFO method for inventory
valuation. Following information has been extracted from the stock cards of Alpha and Beta:
Alpha Beta
Date Description Cost per kg Cost per kg
kg kg
(Rs.) (Rs.)
2,000 220 4,000 140
1-Aug Opening balance
4,000 190 4,000 150
2-Aug Purchase returns (1,000) 190 - -
3-Aug Purchases 75,000 195 86,000 155
5-Aug Purchase returns - - (500) 140
7-Aug Issues to production (60,000) - (70,000) -
(iii) Conversion costs are incurred evenly throughout the process. Conversion costs incurred for
August 2021 are as under:
Rupees
Direct labour paid for 24,300 hours 4,000,000
(iv) Actual sales for the month of August 2021 were 12,500 units. Details of opening and closing
inventories are hereunder:
Opening Closing
Finished goods 1,200 units 1,500 units
Work in process 1,000 units (60% complete) 500 units (80% complete)
W-1)
Finished goods
b/d 1,200 Sales 12,500
W-2)
Work in process A/C (Units)
b/d 1,000 F.G(from F.G) 12,800
Working:
SQ in SM for AP AQ in SM for AP AQ in AM for AP
Alpha 49,200 52,000 60,000
(12,300 x 4) (130,00 x 4/10)
Beta 73,800 78,000 70,000
(12,300 x 6) (130,000 x 6/10)
123,000 130,000 130,000
Expenditure Efficiency
(SR – AR) × AHW (SHW – AHW) × S.R
(80 – 2,000,000/24,300)x24,300 [(12,600 × 2) – 24,300]× 80
56,000 A 72,000 F
Working:
Std.Production OH rate/hr (260/2) = 130
Std.Fixed OH rate/hr (1,200,000/(12,000x2)) = (50)
Std.Variable OH rate/hr 80
Efficiency Capacity
45,000 F 15,000 F
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)
102,000
Gross contribution 338,000
Variable selling and distribution costs 18,000
Net Contribution 320,000
Requirement:
Prepare an statement of profit or loss for each month by using;
➢ Marginal Costing
➢ Absorption Costing
Q. 2 Following information has been extracted from the financial records of ATF Limited:
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 year30.06.2020, 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.
Note: if there is no information then assume that normal capacity is equal to budgeted capacity.
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 profit statement for the month of March using:
➢ Absorption Costing
➢ Marginal Costing
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
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
A.3
(a) 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
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
*[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
A. 4
Silver Ltd.
Absorption Costing
Per Unit
Sales [100,000 × 180] 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
60
4,320,000 36
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.
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 Conversion
Direct material 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.
(b) Kenya Limited (KL) is involved in the manufacture of a single product and has a total
production capacity of 60,000 units per month. It is currently operating at its normal
capacity of 80% and uses absorption costing. Below is the extract from KL's budget
for the month of February 2022:
Rupees
Selling price per unit 210
Fixed costs:
Factory overheads 2,016,000
Selling and admin expenses 800,000
Required:
(i) Prepare profit or loss statement for the month of February 2022 using marginal
costing and absorption costing. (11)
(ii) Reconcile the difference in profits under the two methods. (02)
i. All elements of cost-production, administration and selling and distribution can be segregated into
fixed and variable components.
ii. Variable cost remains constant per unit of output irrespective of the level of output and thus fluctuates
directly in proportion to changes in the volume of output.
iii. The selling price per unit remains unchanged or constant at all levels of activity.
iv. Fixed cost remains unchanged or constant for the entire volume of production.
v. The volume of production or output is the only factor which influences the costs.
(b)
(i)
Kenya Limited
Profit Statement under Absorption Costing
Rupees
Sales (47,000×210) 9,870,000
Cost of sales
Opening stock (10000 units) 1,600,000
Cost of Goods manufactured:
Prime cost (45,000 x 75) 3,375,000
V.OH (45,000 x 45) 2,025,000
F. OH (45,000 x 2,016,000/48,000) 1,890,000 7,290,000
Rupees
Sales (47,000×210) 9,870,000
Variable Cost of sales
Opening stock (1,600,000 – 10,000 x 40) 1,200,000
Variable Cost of Goods manufactured:
Prime cost (45,000 x 75) 3,375,000
V.OH (45,000 x 45) 2,025,000
5,400,000
(5,640,000)
Gross contribution 4,230,000
Less: Variable selling Expense (47,000 x 15) (705,000)
Net contribution 3,525,000
Less: Fix costs
Fix selling expense (800,000)
Fix FOH (Actual) (2,016 + 500) (2,516,000)
Profit 209,000
Rupees
Profit under absorption costing 145,000
Opening stock as per absorption costing 1,600,000
Closing stock as per absorption costing (1,296,000)
Opening stock as per marginal costing (1,200,000)
Closing stock as per marginal costing 960,000
Profit under marginal costing 209,000
Workings:
Finished Goods (Units)
FOH
COS (bal.)
626,000
Input(bal.)
6,200
Production (bal.)
5,800 c/d
900
Equivalent Units:
Material Conversion
Finished Goods - 160 (40%)
400
5,800 5,400 5,400
800 320 (40%)
5,400
c/d 800 6,200 5,880
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
Contribution margin
Contribution is a key concept in marginal
costing.
In simple words…
Contribution margin is sales minus all Variable costs
• 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)
Absorption costing
We have already discussed the use of factory overhead rate for product costing. When this is
established, the production capacity volume must be selected, so that all costs and expenses can be
expected to be recovered over a certain period of time. This concept of costing is known as
“Absorption costing” and it is, sometimes, termed as “Full costing” or “Conventional costing”. It
includes direct materials, direct labour, direct expenses, variable production overheads and fixed
production overheads. In absorption costing, fixed production cost is product cost, and inventory is
valued at full production cost. Still, fixed non-production overheads are period cost and charged to
profit or loss for the year.
At end of each period, differences between absorbed and fixed production overheads are closed to
cost of sales. The under or over absorption of production overheads arise because of actual
production level was less or more than budgeted or normal activity level.
Arguments in favour of absorption costing
• Absorption costing does not understate the importance of fixed production overheads. Inventory
in this method is calculated on realistic cost of production because of inclusion of fixed
production overheads.
• Absorption costing avoids fictitious losses being reported as in seasonal sales situation, it
provides realistic profit or loss for the period. Unlike in marginal costing, where in low sales
season, fixed cost in total is deducted from contribution margin, resulting losses.
• Another argument towards absorption costing is that the production of goods is not possible
without incurring fixed manufacturing cost. As a result, we add fixed production overhead in
inventory valuation.
• Most important argument is that absorption costing is in consistent with external reporting.
What would have been the profit for the year if marginal costing had been used?
Ignore the fixed selling overheads. These are irrelevant since they do not affect the difference in profit
between marginal and absorption costing.
There is an increase in inventory by 2,000 units, since production volume (16,000 units) is higher than sales
volume (14,000 units).
If absorption costing is used, the fixed production overhead cost per unit is Rs.5 (Rs.80,000 / 16,000 units).
The difference between the absorption costing profit and marginal costing profit is therefore Rs.10,000
(2,000 units x Rs.5).
Absorption costing profit is higher, because there has been an increase in inventory. Marginal costing profit
would therefore be Rs.60,000 – Rs.10,000 = Rs.50,000.
Example:
Red Company is a manufacturing company that makes and sells a single product. The following information
relates to the company’s manufacturing operations in the next financial year.
Using absorption costing, the company has calculated that the budgeted profit for the year will be Rs.43,000.
What would be the budgeted profit if marginal costing is used, instead of absorption costing?
In completing the requirement, Production overhead per unit, with absorption costing, please see below:
= Rs.117,000/18,000 units
= Rs.6.50 per unit.
The budgeted increase in inventory = 3,000 units (18,000 – 15,000).
Production overheads in the increase in inventory = 3,000 × Rs.6.50 = Rs.19,500.
With marginal costing, profit will be lower than with absorption costing, because there is an increase in
inventory levels.
Marginal costing profit = Rs.43,000 - Rs.19,500 = Rs.23,500.
Example:
Entity T manufactures a single product, and uses absorption costing. The following data relates to the
performance of the entity during October.
Profit Rs.37,000
Over-absorbed overhead Rs.24,000
Sales (48,000 units) Rs.720,000
Non-production overheads (all fixed costs) Rs.275,000
Opening inventory Rs.144,000
Closing inventory Rs.162,000
Answer:
Sales 720,000
Cost of sales:
Opening cost [16,000(w-1) x 9] 144,000
+ Cost of goods manufactured
Variable Cost [50,000 (w-1) x 3] 150,000
Fixed OH [50,000 X 6] 300,000
-Closing Stock [18,000(w-1) x 9] (162,000)
Unadjusted Cost of sales 432,000
Over-absorbed Fixed OH (24,000)
Adjusted Cost of Sales 408,000
Gross Profit 312,000
Non-Production OH (275,000)
Profit 37,000
a)
Fixed Production OH
Factory Expenses 276,000 WIP
COS 300,000
24,000 [50,000 x 6]
W-1)
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:
(i) 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
(ii) 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:
1. Material is added at the beginning of the process and CCL uses 'weighted average method' for
inventory valuation.
2. 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.
3. Joint product X-2 is sold after incurring packing cost of Rs. 75 per liter.
4. 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.
5. 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:
1. Prepare product wise budgeted income statement for the year ending 31 August 2019, under
absorption costing. (8)
2. Prepare product wise budgeted income statement for the year ending 31 August 2019, under
marginal costing. (7)
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.
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:
Honey 20 grams at 0.02 per gram 0.40
Sugar 15 grams at 0.03 per gram 0.45
Syrup 10 grams at 0.025 per gram 0.25
1.10
In the three months ended 30 November 2011, Cho Co produced 101,000 units of ‘Ooze’ using 2,200 kg of
honey, 1,400 kg of sugar and 1,050 kg of syrup.
Note: there are 1,000 grams in a kilogram (kg).
Required:
Calculate the following variance for materials in Ooze:
i. Total materials usage variance. (4 marks)
ii. Total materials mix variance. (4 marks)
iii. Total materials quantity (yield) variance. (4 marks)
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.
Other information:
Volume efficiency variance (Rs.) 584,000 (F)
Volume capacity variance (Rs.) 1,424,000 (A)
Required:
a) Prepare a statement for month ended June 30, 2016 showing:
i. The standard production cost and selling price per unit. (03)
ii. The actual profit for the period.
(03)
b) Determine the variance for:
i. Direct material price and usage.
(03)
ii. Direct labour rate and efficiency.
(03)
iii. Fixed overhead expenditure and volume.
(02)
iv. Sales price and volume.
(02)
c) Reconcile the budgeted and actual profit.
(04)
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
(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
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
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
----------( 170 )----------
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
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
(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
----------( 172 )----------
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:
Quantity Process A Process B cost
cost Material Conversion
Liters ------------- Rs. in '000 -------------
Opening work-in-process – Process B 10,000 1,500 600 400
(80% complete as to conversion)
Cost for the month:
- Received from process A 90,000 14,000 - -
- Added during process B 12,000 - 7,000 5,600
Closing work-in-process – Process B 9,500 - - -
(70% complete as to conversion)
Additional information:
1. Materials are added at start of the process.
2. 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.
3. Solid waste is sold for Rs. 170 per kg after incurring further cost of Rs. 20 per kg.
4. 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
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:
WIP-B 26,600
WIP-A 14,000
Raw material 7,000
Conversion 5,600
Workings:
Process-B Rs. ‘000’
Litres Amount Litres Amount
b/d [1,500 + 600+ 400] 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
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
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
(i) Budgeted profit for the month of December 2016 (Marginal costing)
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 Material NIL
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
----------( 179 )----------
Variable OH
Expenditure Efficiency
(SR – AR) × AHW (SHW – AHW) × S. R
2,975,000 [(12,000 × 3) –35,000] × 70
[70 - ] x 35,000
35,000
525,000 A 70,000 F
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:
(475,000 x 55%)
(19,100 - 3,820 = 15,280)
X1 [261,250] (55%) ll X1 Plus [261,250]
(55%)
X2 [190,000] (40%) Packing Cost 75/L
500,000
Zee [23,750] (5%) (23,750 x 120) = 2,850
N. Loss [25,000 L] (25,000 x0.7 x10) = 175
D.M 98,750
Conversion 72,610
Zee (2,850)
N. Loss (175)
161,074
272,190 161,074
Conclusion:
Offer should not be accepted.