Q1.

Introduction:

Shubham Limited, a renowned player in the field of Fashion Designing, has been entrusted with a
substantial order by ABC Ltd. This order entails the creation of 25,000 custom-made jackets, a task
that necessitates meticulous cost analysis. The cost components encompass various aspects,
including cloth, threads, labor, factory overheads, and selling expenses. The challenge lies in
determining the appropriate pricing strategy for these jackets, taking into account both cost recovery
and profit margin. This scenario prompts a comprehensive evaluation of different pricing
methodologies to ascertain the most viable approach for Shubham Limited.

Concept and Applications:

1. Cost Plus 10% Margin on Cost:

Concept:

Cost Plus pricing involves adding a markup to the total cost of producing an item to determine the
selling price. In this case, a 10% margin is added to the total cost of producing the jackets.

Application:

Total Cost = Cost of Cloth + Cost of Threads and Decoration + Labor Cost + Factory Overheads +
Selling Expenses

Total Cost = (2500 reams Rs. 4000/ream) + Rs. 12,50,000 + (5000 hours Rs. 500/hour) + Rs.
8,00,000 + Rs. 75,000

Total Cost = Rs. 1,00,00,000

Selling Price = Total Cost + (10% of Total Cost)

Selling Price = Rs. 1,00,00,000 + Rs. 10,00,000 = Rs. 1,10,00,000

Price per Jacket = Selling Price / Total Jackets = Rs. 1,10,00,000 / 25,000 jackets = Rs. 4400 per
jacket

2. Variable Cost + 20% Margin:

Concept:

This approach considers only the variable costs associated with producing the jackets, excluding
fixed costs like factory overheads. A 20% margin is added to the variable costs.

Application:
 Variable Cost = Cost of Cloth + Cost of Threads and Decoration + (Labor Cost / Total Jackets)

Variable Cost = (2500 reams Rs. 4000/ream) + Rs. 12,50,000 + (5000 hours Rs. 500/hour) / 25,000
jackets

Variable Cost = Rs. 1,00,00,000

Selling Price = Variable Cost + (20% of Variable Cost)

Selling Price = Rs. 1,00,00,000 + Rs. 20,00,000 = Rs. 1,20,00,000

Price per Jacket = Selling Price / Total Jackets = Rs. 1,20,00,000 / 25,000 jackets = Rs. 4800 per
jacket

3. Target Profit of Rs. 200 per Jacket; Calculate the PV Ratio at that price:

Concept:

This pricing strategy sets a specific profit target per unit and calculates the selling price accordingly.
The Profit Volume (PV) Ratio is the proportion of contribution margin to total sales.

Application:

Target Profit = (Selling Price - Variable Cost) Total Jackets

Rs. 200 = (Selling Price - Rs. 4000) 25,000

Selling Price = Rs. 5000 per jacket

Contribution Margin = Selling Price - Variable Cost = Rs. 5000 - Rs. 4000 = Rs. 1000 per jacket

PV Ratio = (Contribution Margin / Selling Price) 100 = (Rs. 1000 / Rs. 5000) 100 = 20%

4. Pricing Strategy of Shubham Limited:

Concept:

Shubham Limited adopts a pricing strategy known as "Penetration Pricing." This approach involves
setting a relatively low initial price for a product, often below its market value, to attract a large
number of customers and gain market share quickly.

Application:

Shubham prices the jackets at Rs. 2400, which is below the perceived market value of Rs. 2500. This
strategy aims to entice customers with a competitive price point and establish a strong market
presence.
Conclusion:

In the dynamic realm of pricing strategies, Shubham Limited navigates the intricacies of cost analysis
and market positioning to determine the most appropriate approach for its custom-made jackets. By
evaluating Cost Plus, Variable Cost + Margin, Target Profit, and ultimately adopting a Penetration
Pricing strategy, Shubham Limited demonstrates strategic agility in adapting its pricing model to
meet specific market demands. This versatile approach exemplifies the importance of aligning pricing
strategies with business objectives and market dynamics, ensuring both profitability and market
competitiveness.

Q2.

Introduction:

In the dynamic landscape of manufacturing and selling lubricants, M/s Priya Industries operates with
a diverse range of products, each characterized by distinct production parameters. Understanding
the cost implications of these products is crucial for informed decision-making and efficient resource
allocation. This scenario calls for a thorough analysis of costing methodologies to ascertain the most
accurate and beneficial approach for pricing the products. Traditional Costing and Activity-Based
Costing (ABC) emerge as two significant techniques for this purpose.

Concept and Applications:

1. Traditional Costing:

Concept:

Traditional costing is a conventional method of cost allocation that primarily relies on the
application of indirect costs to products based on a predetermined overhead rate. This rate is usually
calculated based on a single cost driver, such as direct labor hours or machine hours.

Application:

In the case of M/s Priya Industries, the total indirect costs (Fixed Costs) are allocated based on a
predetermined allocation base, which may be labor hours, machine hours, or any other suitable
measure.

Product P1:

 Labor Cost: 250 hours Rs. 500 per hour = Rs. 125,000

 Packaging Cost: (1300 units / 2 units per packet) Rs. 100 per unit = Rs. 65,000
  Total Direct Cost: Rs. 125,000 (Labor) + Rs. 65,000 (Packaging) = Rs. 190,000

 Indirect Cost: Rs. 625,000 (Calculated in previous response)

 Total Cost: Rs. 190,000 (Direct Cost) + Rs. 625,000 (Indirect Cost) = Rs. 815,000

Product P2:

 Labor Cost: 350 hours Rs. 500 per hour = Rs. 175,000

 Packaging Cost: (2000 units / 5 units per packet) Rs. 100 per unit = Rs. 40,000

 Total Direct Cost: Rs. 175,000 (Labor) + Rs. 40,000 (Packaging) = Rs. 215,000

 Indirect Cost: Calculated in previous response

 Total Cost: Rs. 215,000 (Direct Cost) + Rs. 723,000 (Indirect Cost) = Rs. 938,000

Product P3:

 Labor Cost: 200 hours Rs. 500 per hour = Rs. 100,000

 Packaging Cost: (1500 units / 3 units per packet) Rs. 100 per unit = Rs. 50,000

 Total Direct Cost: Rs. 100,000 (Labor) + Rs. 50,000 (Packaging) = Rs. 150,000

 Indirect Cost: Calculated in previous response

 Total Cost: Rs. 150,000 (Direct Cost) + Rs. 608,000 (Indirect Cost) = Rs. 758,000

Product P4:

 Labor Cost: 200 hours Rs. 500 per hour = Rs. 100,000

 Packaging Cost: (1200 units / 3 units per packet) Rs. 100 per unit = Rs. 40,000

 Total Direct Cost: Rs. 100,000 (Labor) + Rs. 40,000 (Packaging) = Rs. 140,000

 Indirect Cost: Calculated in previous response

 Total Cost: Rs. 140,000 (Direct Cost) + Rs. 400,000 (Indirect Cost) = Rs. 540,000

2. Activity-Based Costing (ABC):

Concept:

Activity-Based Costing (ABC) is a modern costing methodology that allocates indirect costs to
products based on their actual consumption of resources or activities. It identifies various cost
drivers related to specific activities and assigns costs accordingly.

Application:
 In this case, the activities could be related to labor hours, machine hours, packaging, and
supervision. Each product's consumption of these activities will determine its allocation of indirect
costs.

Product P1:

 Total Indirect Cost (Labor): Rs. 625,000 (Calculated in previous response)

 Total Indirect Cost (Machine): Rs. 208,000 (Calculated in previous response)

 Total Indirect Cost (Packaging): Rs. 65,000 (Calculated in previous response)

 Total Cost: Rs. 190,000 (Direct Cost) + Rs. 625,000 (Indirect Labor) + Rs. 208,000
(Indirect Machine) + Rs. 65,000 (Indirect Packaging) = Rs. 1,088,000

Product P2:

 Total Indirect Cost (Labor): Rs. 175,000 (Direct Labor)

 Total Indirect Cost (Machine): Rs. 450 hours Rs. 800 per hour = Rs. 360,000

 Total Indirect Cost (Packaging): Rs. 40,000 (Calculated in previous response)

 Total Cost: Rs. 215,000 (Direct Cost) + Rs. 175,000 (Indirect Labor) + Rs. 360,000
(Indirect Machine) + Rs. 40,000 (Indirect Packaging) = Rs. 790,000

Product P3:

 Total Indirect Cost (Labor): Rs. 100,000 (Direct Labor)

 Total Indirect Cost (Machine): Rs. 360 hours Rs. 800 per hour = Rs. 288,000

 Total Indirect Cost (Packaging): Rs. 50,000 (Calculated in previous response)

 Total Cost: Rs. 150,000 (Direct Cost) + Rs. 100,000 (Indirect Labor) + Rs. 288,000
(Indirect Machine) + Rs. 50,000 (Indirect Packaging) = Rs. 588,000

Product P4:

 Total Indirect Cost (Labor): Rs. 100,000 (Direct Labor)

 Total Indirect Cost (Machine): Rs. 180 hours Rs. 800 per hour = Rs. 144,000

 Total Indirect Cost (Packaging): Rs. 40,000 (Calculated in previous response)

 Total Cost: Rs. 140,000 (Direct Cost) + Rs. 100,000 (Indirect Labor) + Rs. 144,000
(Indirect Machine) + Rs. 40,000 (Indirect Packaging) = Rs. 424,000

Conclusion:

In conclusion, the choice between Traditional Costing and Activity-Based Costing (ABC) is pivotal in
accurately assessing the cost of each unit of the products for M/s Priya Industries. While Traditional
Costing relies on a predetermined overhead rate and allocates costs based on a single cost driver,
ABC takes a more granular approach by considering multiple activities and their respective cost
drivers.
The application of ABC provides a more nuanced understanding of cost allocation, allowing for a
more accurate reflection of actual resource consumption by each product. This is particularly
beneficial when products have varying production characteristics, as in the case of M/s Priya
Industries. By adopting ABC, the company can make more informed pricing decisions, ultimately
enhancing profitability and competitiveness in the lubricants market.

Q3.A.

Introduction:

In the realm of production and profitability, XYZ Ltd. stands as a dynamic entity engaged in the
manufacturing of four distinct products, namely P, Q, R, and S. The company operates in an
environment characterized by various cost components, including labor costs, raw material expenses,
factory rent, and other overheads. Understanding and effectively managing these financial aspects
are essential for devising a comprehensive Budgeted Profit and Loss Statement. This statement will
provide a clear financial outlook for XYZ Ltd., enabling informed decision-making and ensuring
sustainable growth and profitability.

Concept and Applications:

1. Cost Components Analysis:

- Labor Costs: The labor costs are incurred at a rate of Rs. 10 per hour of work. This cost component
is crucial in the production process and varies for each product based on the hours required for
production.

- Raw Material Expenses: The raw material cost for all products is standardized at Rs. 25 per
kilogram. This is a fundamental cost component, directly influencing the production cost of each
unit.

- Factory Rent and Other Overheads: The factory rent amounts to Rs. 1,00,000, representing a fixed
cost associated with the production facility. Additionally, other overheads contribute Rs. 20,000 to
the total expenses.

2. Budgeted Profit and Loss Statement:

To prepare a comprehensive Budgeted Profit and Loss Statement for XYZ Ltd., we will calculate the
total revenue, total expenses, and ultimately, the projected profit or loss. This will be done by
considering the production quantities, sales prices, labor hours, and raw material requirements for
each product (P, Q, R, and S).

Certainly, let's perform the calculations for Products P, Q, R, and S:

Product P:

- Total Revenue: 50 units Rs. 700 per unit = Rs. 35,000

- Total Labor Costs: 50 units 10 hours per unit Rs. 10 per hour = Rs. 5,000

- Total Raw Material Costs: 50 units 6 kg per unit Rs. 25 per kg = Rs. 7,500

- Total Expenses for Product P: Rs. 5,000 (Labor) + Rs. 7,500 (Raw Material) = Rs. 12,500

- Profit for Product P: Total Revenue - Total Expenses = Rs. 35,000 - Rs. 12,500 = Rs. 22,500

Product Q:

- Total Revenue: 45 units Rs. 700 per unit = Rs. 31,500

- Total Labor Costs: 45 units 12 hours per unit Rs. 10 per hour = Rs. 5,400

- Total Raw Material Costs: 45 units 5 kg per unit Rs. 25 per kg = Rs. 5,625

- Total Expenses for Product Q: Rs. 5,400 (Labor) + Rs. 5,625 (Raw Material) = Rs. 11,025

- Profit for Product Q: Total Revenue - Total Expenses = Rs. 31,500 - Rs. 11,025 = Rs. 20,475

Product R:

- Total Revenue: 80 units Rs. 900 per unit = Rs. 72,000

- Total Labor Costs: 80 units 8 hours per unit Rs. 10 per hour = Rs. 6,400

- Total Raw Material Costs: 80 units 10 kg per unit Rs. 25 per kg = Rs. 20,000

- Total Expenses for Product R: Rs. 6,400 (Labor) + Rs. 20,000 (Raw Material) = Rs. 26,400

- Profit for Product R: Total Revenue - Total Expenses = Rs. 72,000 - Rs. 26,400 = Rs. 45,600

Product S:

- Total Revenue: 90 units Rs. 950 per unit = Rs. 85,500

- Total Labor Costs: 90 units 4 hours per unit Rs. 10 per hour = Rs. 3,600

- Total Raw Material Costs: 90 units 12 kg per unit Rs. 25 per kg = Rs. 27,000

- Total Expenses for Product S: Rs. 3,600 (Labor) + Rs. 27,000 (Raw Material) = Rs. 30,600

- Profit for Product S: Total Revenue - Total Expenses = Rs. 85,500 - Rs. 30,600 = Rs. 54,900
Total Profit and Loss Statement:

- Total Revenue = Rs. 35,000 (Product P) + Rs. 31,500 (Product Q) + Rs. 72,000 (Product R) + Rs.
85,500 (Product S) = Rs. 2,24,000

- Total Expenses = Rs. 12,500 (Product P) + Rs. 11,025 (Product Q) + Rs. 26,400 (Product R) + Rs.
30,600 (Product S) + Rs. 1,00,000 (Factory Rent) + Rs. 20,000 (Other Overheads) = Rs. 2,00,525

- Total Profit = Total Revenue - Total Expenses = Rs. 2,24,000 - Rs. 2,00,525 = Rs. 23,475

Conclusion:

In conclusion, the Budgeted Profit and Loss Statement for XYZ Ltd. provides a clear financial outlook
for the company based on the production and sales of Products P, Q, R, and S. The statement reveals
a projected profit of Rs. 23,475 after accounting for all relevant costs and overheads. This
information serves as a valuable tool for XYZ Ltd. in making informed decisions regarding resource
allocation, pricing strategies, and overall financial management. It lays the foundation for sound
financial planning, ensuring the company's sustainable growth and success in the competitive market
landscape.

Q3.B

Introduction:

Profitability analysis is a crucial aspect of financial management, enabling businesses to assess their
financial performance and make informed decisions. The Profit or Loss statement provides a
comprehensive overview of a company's revenues, costs, and profits. In this context, we will delve
into the Profit or Loss statement of SRT & Co. to calculate the contribution per unit, the Profit
Volume (PV) ratio, and determine the number of units needed to achieve a specific profit target.

Concept & Application:

a) Contribution per Unit: Contribution per unit is a key metric that indicates the amount each unit
contributes to covering the fixed costs and generating profit. It is calculated by deducting the variable
costs per unit from the selling price per unit.

Contribution per Unit = Selling Price per Unit−Variable Cost per Unit

In the case of SRT & Co., the selling price per unit is Rs. 50, and the variable costs include raw
material, labor, and variable overheads. The variable cost per unit is calculated by dividing the total
variable costs by the number of units.
Variable Cost per Unit = Total Variable Costs / (Number of Units)

Substituting the values:

Variable Cost per Unit = (250000+345000+150000)/25000

Variable Cost per Unit = 29.8

Next, the Contribution per Unit is calculated:

Contribution per Unit = 50 − 29.8

Contribution per Unit = 20.2

This provides the contribution that each unit makes towards covering fixed costs and contributing to
overall profit.

b) Profit Volume (PV) Ratio: Profit Volume (PV) ratio is a crucial measure indicating the proportion of
contribution to sales. It is calculated by dividing the contribution by sales and multiplying by 100 to
express it as a percentage.

PV Ratio = (Contribution/Sales) × 100

In the case of SRT & Co., the PV ratio is calculated using the previously determined values of
contribution and sales.

PV Ratio = (105000/1250000) × 100 = 8.4

The PV ratio is an essential tool for managers to assess the impact of changes in sales on profits and
make informed decisions about pricing, cost control, and sales strategies.

c) Number of Units to Earn a Profit of Rs. 70,000: To determine the number of units needed to
achieve a specific profit target, the following formula is employed:

Number of Units= (Fixed Costs + Target Profit) / Contribution per unit

In the case of SRT & Co., the fixed costs are Rs. 400,000, and the target profit is Rs. 70,000. The
contribution per unit, calculated earlier, is used to determine the required number of units.

Number of Units = (40000 + 70000) / 20.2

Number of Units = 23267.32

Conclusion:

In conclusion, analyzing the Profit or Loss statement of SRT & Co. has allowed us to calculate critical
financial metrics. The contribution per unit, PV ratio, and the number of units needed to achieve a
specific profit target provide valuable insights into the company's financial health and performance.
These metrics empower managers to make informed decisions regarding pricing, cost management,
and sales strategies, contributing to the overall success and sustainability of the business. Financial
analysis is an ongoing process, and understanding these concepts is vital for effective financial
management and strategic planning.