Q1.

(A) Prime cost- It refers to the total of direct costs and further includes cost of material which is
consumed for a product in a particular time frame.

(B) Factory overhead- It refers to the total cost incurred in operating a production facility of a
manufacturing business which can’t be traced directly to a product.

(C) Factory cost- In the prime cost if we add factory overheads we get the Total factory cost.

(D) Overhead- It refers to the business expenses not directly related to creating a product or service.

(E) Cost of sale- The selling and distribution cost required to be incurred in selling the available
units for sale.

COST SHEET Rs.

Opening stock 2,82,000

ADD: Purchases 12,48,000

ADD: Freight inward 48,000

LESS: Closing stock 3,00,000

Raw material consumed 12,78,000

Direct wages 3,57,000

(A) Prime cost 16,35,000

(B) ADD: Factory overheads

Indirect wages 24000

Repairs to plan and machinery 63600

Rent, rates and taxes of factory 18000

Depreciation - plant and machinery 42600

Electricity charges 72000

Fuel 96000

Managers salary 20% 14400 330600

(C) Factory cost 19,65,600

(D) ADD: Overheads

Salary for admin sta 60000

Freight outward 30000

Rent, rates and taxes of o ce 9600

Travelling expenses 18,600

ff
ffi
COST SHEET Rs.

Salesman salaries 50,400

Depreciation furniture 3600

Directors fees 36000

General charges 37200

Managers salary 80% 57600 303000

(E) Cost of sale 22,68,600

Q2.
There are various methods of labour turnover ratio which are as follows :-

1. ADDITION RATE- According to this method the number of employees added during a
particular time frame are used to measure the labour turnover ratio. The formula for calculating
addition rate is -

LABOUR TURNOVER = (NUMBER OF ADDITIONS DURING THE PERIOD/ AVERAGE

NUMBER OF WORKERS DURING THE PERIOD) * 100

LABOUR TURNOVER = (560/4000) * 100 = 14%

2. SEPARATION RATE- According to this method the number of employees who quit during a
particular time frame are used to measure the labour turnover ratio. The formula for calculating
separation rate is -

LABOUR TURNOVER = (NUMBER OF SEPARATIONS DURING THE PERIOD/ AVERAGE

NUMBER OF WORKERS DURING THE PERIOD) * 100

LABOUR TURNOVER = (130/4000) * 100 = 3.25%

3. REPLACEMENT RATE- According to this method the number of workers replaced in a

particular time frame is taken into consideration for calculating labour turnover. The formula for
calculating replacement rate is -

LABOUR TURNOVER ON ACCOUNT OF REPLACEMENT = (NUMBER OF

REPLACEMENTS DURING THE PERIOD/AVERAGE NUMBER OF WORKERS DURING
THE PERIOD) * 100

LABOUR TURNOVER = (60/4000) * 100 = 1.5%

4. FLUX RATE- This method is slightly different from the other ones where the labour turnover is
calculated by considering the additions of workers during the period and also the separations during
the period. It is calculated through the following method -

FLUX RATE = {[(NUMBER OF NEW JOINING + NUMBER OF SEPARATIONS DURING THE

PERIOD)/2] / AVERAGE NUMBER OF WORKERS DURING THE PERIOD} * 100

Remember, the average number is taken as the simple average.

FLUX RATE = {[(560 + 130)/2] / 4000} * 100 = 8.625%

Q3.

(a) Absorption costing- It refers to an approach which considers the fixed and variable costs while
considering production cost.

PARTICULARS YEAR 1 YEAR 2

(A) SALES @ 3 PER UNIT 4500 5400
(B) COST OF GOODS SOLD
COST OF PRODUCTION:
VARIABLE MANUFACTURING COST 1050 750
FIXED MANUFACTURING COST 1050 1050
COST OF PRODUCTION 2100 1800
ADD: OPENING STOCK - 600
LESS: CLOSING STOCK 600 360
COST OF GOODS SOLD 1500 2040
(C) GROSS PROFIT (A) - (B) 3000 3360
(D) MARKETING AND ADMINISTRATIVE COST:
VARIABLE 1500 1800
FIXED 600 600
TOTAL 2100 2400
(E) PROFIT (C) - (D) 900 960

*Working notes:

Cost of manufacturing per unit = Total manufacturing cost / Total production

Year 1: Rs. 2100/ 2100 = Re. 1

Year 2: Rs. 1800/ 1500 = Rs. 1.2
Valuation of closing stock:
Year 1: 600 @ Re. 1 = 600
Year 2: 300 @ Rs. 1.2 = 360
[Closing stock of Year 1 becomes the opening stock of Year 2]
Fixed manufacturing overhead allocation rate:

Year 1: Rs. 1050 / 2100 = Rs. 0.50 per unit

Year 2: Rs. 1050 / 1800 = Rs. 0.58 per unit

(b)
Income statement (variable costing):

PARTICULARS YEAR 1 YEAR 2

SALES (A) 4500 5400

COST OF GOODS SOLD

COST OF PRODUCTION:

VARIABLE MANUFACTURING COST 1050 750

ADD: OPENING STOCK - 300

1050 1050

LESS: CLOSING STOCK 300 150

COST OF GOODS SOLD (B) 750 900

GROSS MARGINAL CONTRIBUTION (A) - (B) = (C) 3750 4500

LESS: FIXED MANUFACTURING COST 1050 1050

VARIABLE MARKETING AND ADMINISTRATION 1500 1800

FIXED MARKETING AND ADMINISTRATIVE COST 600 600

TOTAL (D) 3150 3450

PROFIT (C) - (D) 600 1050

Variable costing- It refers to the concept of recognising income based on variable production cost.