NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Cost & Management Accounting
Internal Assignment Applicable for June 2023 Examination

Question 1:

Office Products Ltd provides the Sales and the cost data for 60,000 units as given below.

At full capacity the plant can produce 100,000 units

Sales Rs. 12,00,000
Costs:
Variable:
Material Rs. 2,40,000
Labour Rs. 3,60,000
Overheads Rs. 1,80,000
Fixed Cost Rs. 3,20,000
Total Rs.11,00,000
PROFIT Rs. 1,00,000

Prepare the Income statement under marginal costing for production at 80,000 units.

Answer 1:

Introduction:
The income statement is a financial statement that provides an overview of a company's revenues,
costs, and profits over a specific period. Marginal costing is a costing technique that segregates costs
into fixed and variable components. It helps in determining the contribution margin, which is the
difference between sales revenue and variable costs. In this case, we will prepare an income
statement under marginal costing for the production of 80,000 units for Office Products Ltd, using the
provided sales and cost data.

Concept:
Marginal costing focuses on the behavior of costs in relation to the level of production or sales.
Variable costs are considered direct costs that vary with the level of output, while fixed costs remain
constant regardless of the level of production. The contribution margin is calculated by deducting
variable costs from sales revenue. It represents the amount available to cover fixed costs and
contribute to profit. By preparing an income statement using marginal costing, we can analyze the
impact of changes in production levels on profitability.
Income Statement under Marginal Costing for Production at 80,000 Units:

Sales Revenue:
Sales revenue for 60,000 units = Rs. 12,00,000
Sales revenue per unit = Rs. 12,00,000 / 60,000 = Rs. 20

Variable Costs:
Variable material cost per unit = Rs. 2,40,000 / 60,000 = Rs. 4
Variable labor cost per unit = Rs. 3,60,000 / 60,000 = Rs. 6
Variable overheads per unit = Rs. 1,80,000 / 60,000 = Rs. 3

Total variable cost per unit = Rs. 4 + Rs. 6 + Rs. 3 = Rs. 13

Contribution Margin:
Contribution per unit = Sales revenue per unit - Total variable cost per unit
Contribution per unit = Rs. 20 - Rs. 13 = Rs. 7

Total contribution for 80,000 units = Contribution per unit * 80,000

Total contribution = Rs. 7 * 80,000 = Rs. 5,60,000

Fixed Costs:
Fixed costs = Rs. 3,20,000

Operating Profit:
Operating Profit = Total Contribution - Fixed Costs
Operating Profit = Rs. 5,60,000 - Rs. 3,20,000 = Rs. 2,40,000

Income Statement under Marginal Costing:

Sales Revenue Rs. 12,00,000

Variable Costs:
Material Rs. 2,40,000
Labour Rs. 3,60,000
Overheads Rs. 1,80,000
Total Variable Costs Rs. 7,80,000

Contribution Rs. 4,20,000

Fixed Costs Rs. 3,20,000

Operating Profit Rs. 2,40,000

Conclusion:
The income statement prepared under marginal costing for the production of 80,000 units shows that
Office Products Ltd achieved sales revenue of Rs. 12,00,000. After deducting the variable costs of
material, labor, and overheads (totaling Rs. 7,80,000), the contribution margin amounts to Rs.
4,20,000. The fixed costs of Rs. 3,20,000 are then subtracted, resulting in an operating profit of Rs.
2,40,000.

By using marginal costing, the income statement helps in analyzing the impact of varying production
levels on profitability. It provides valuable insights into the contribution margin, fixed costs, and
overall operating profit. This information is crucial for decision-making, cost control, and assessing the
financial

Question 2:

Nikson Ltd provides the following information relating to the activities of a production department for
the month of January 2023
Material Used Rs. 72,000
Direct wages Rs. 60,000
Machine hours 20,000 hours
Labour hours 24,000 hours
Overhead chargeable to the department Rs. 48,000

The relevant data for carrying out one order in the month of February is given below:
Material used Rs. 4,000
Direct Wages Rs. 3,300
Machine hours 1,200 hours
Labour hours 1,650 hours

Using the rates of the month of January, prepare a comprehensive statement of cost for this order by
using the following absorption of overheads
1) Direct labour hours
2) Percentage of direct wages
3) Machine hour rate

Answer 2:

Introduction:
Cost statements are important tools for businesses to track and analyze the costs associated with their
operations. In this case, we have the activity data for the production department of Nikson Ltd for the
month of January 2023. We also have the relevant data for one order in the month of February. Using
the rates from January, we will prepare a comprehensive cost statement for this specific order. Three
different methods of absorbing overhead costs will be utilized: direct labor hours, percentage of direct
wages, and machine hour rate.
Concept:
The allocation of overhead costs is essential to determine the total cost of a product or service.
Absorption costing is a commonly used method where overhead costs are allocated to products or
orders based on a predetermined rate. Different allocation bases can be used, such as direct labor
hours, direct wages, or machine hours. Each method has its advantages and considerations. By
preparing a comprehensive cost statement using multiple absorption methods, we can analyze the
impact of different allocation bases on the cost of the order.

Comprehensive Cost Statement for the Order:

Absorption based on Direct Labor Hours:

Overhead Rate per Labor Hour = Overhead chargeable to the department / Labor hours
Overhead Rate per Labor Hour = Rs. 48,000 / 24,000 hours = Rs. 2 per labor hour

Cost Statement based on Direct Labor Hours:

Material Used Rs. 4,000
Direct Wages Rs. 3,300
Overhead (1,650 labor hours x Rs. 2) Rs. 3,300
Total Cost Rs. 10,600

Absorption based on Percentage of Direct Wages:

Overhead Rate as a percentage of Direct Wages = (Overhead chargeable to the department / Direct
Wages) x 100
Overhead Rate as a percentage of Direct Wages = (Rs. 48,000 / Rs. 60,000) x 100 = 80%

Cost Statement based on Percentage of Direct Wages:

Material Used Rs. 4,000
Direct Wages Rs. 3,300
Overhead (80% of Direct Wages) Rs. 2,640 (Rs. 3,300 x 80%)
Total Cost Rs. 9,940

Absorption based on Machine Hour Rate:

Overhead Rate per Machine Hour = Overhead chargeable to the department / Machine hours
Overhead Rate per Machine Hour = Rs. 48,000 / 20,000 hours = Rs. 2.40 per machine hour

Cost Statement based on Machine Hour Rate:

Material Used Rs. 4,000
Direct Wages Rs. 3,300
Overhead (1,200 machine hours x Rs. 2.40) Rs. 2,880
Total Cost Rs. 10,180
Conclusion:
In conclusion, we have prepared a comprehensive cost statement for the specific order using three
different methods of absorbing overhead costs: direct labor hours, percentage of direct wages, and
machine hour rate. Based on the rates from the month of January, we calculated the overhead costs
for the order and added them to the material used and direct wages. The total costs varied depending
on the absorption method used.

The choice of absorption method can significantly impact the cost allocation and profitability of a
product or order. Each method has its own merits and considerations, and businesses should carefully
analyze the nature of their operations to select the most appropriate absorption base. By using
multiple absorption methods, businesses can gain valuable insights into the cost structure and make
informed decisions about pricing, resource allocation, and profitability.

Question 3a:

Samsung Ltd. are the manufacturers of Television. The following are the details of
a Product during the year 2022.

Ordering Cost Rs.50 per order

Inventory carrying cost 10% per annum
Cost of Product A is Rs. 500 per unit
Annual consumption of Product A is 5000 units.

Compute the Economic order quantity. What if the inventory maintained by the company is 200
units?

Answer 3a:

Introduction:
Efficient inventory management is crucial for companies to minimize costs and maintain optimal levels
of stock. Economic Order Quantity (EOQ) is a extensively used stock control method that allows decide
the perfect order amount to reduce ordering and wearing costs. In this scenario, Samsung Ltd., a
television manufacturer, provides details of a product during the year 2022, including ordering cost,
inventory carrying cost, cost per unit, and annual consumption. The objective is to calculate the
Economic Order Quantity and analyze the impact of maintaining a specific inventory level of 200 units.

Concept of Economic Order Quantity (EOQ):

Economic Order Quantity (EOQ) is a extensively used stock control method that allows decide the
perfect order amount to reduce ordering and wearing costs. It balances the cost of holding inventory
(inventory carrying cost) with the cost of ordering (ordering cost). The formula for EOQ is:

EOQ = √[(2 * Annual Consumption * Ordering Cost) / Carrying Cost per Unit]

By calculating the EOQ, companies can make informed decisions about the quantity of inventory to
order, resulting in cost savings and efficient inventory management.

Application to the Given Scenario:

In the given scenario, Samsung Ltd. provides the necessary data for calculating the EOQ: ordering cost
(Rs. 50 per order), inventory carrying cost (10% per annum), cost per unit (Rs. 500), and annual
consumption (5000 units).

Using the formula for EOQ, we can calculate the optimal order quantity:

EOQ = √[(2 * Annual Consumption * Ordering Cost) / Carrying Cost per Unit]
EOQ = √[(2 * 5000 * 50) / (500 * 0.10)]
EOQ = √[500000 / 50]
EOQ = √10000
EOQ = 100 units

The Economic Order Quantity is determined to be 100 units.

Now, let's analyze the impact of maintaining an inventory level of 200 units. If the company maintains
an inventory of 200 units, it exceeds the EOQ of 100 units. This means that the company will have
higher inventory carrying costs due to the increased stock levels. However, it may also reduce the
frequency of orders and associated ordering costs. To fully evaluate the impact, additional calculations
are required to determine the exact costs incurred.

Conclusion:
Calculating the Economic Order Quantity (EOQ) allows companies like Samsung Ltd. to determine the
optimal order quantity that minimizes inventory costs. In this scenario, the EOQ is computed to be
100 units based on the given data. By maintaining an inventory level of 200 units, the company
deviates from the optimal order quantity, which may result in higher carrying costs but potentially
lower ordering costs. Analyzing the impact of different inventory levels enables companies to make
informed decisions regarding inventory management and cost optimization. Effective implementation
of EOQ can enhance operational efficiency and improve the financial performance of the company.

Question 3b:

New Corp Ltd. Incurs fixed costs of Rs. 5,00,000 per annum. The company produces a single product
with annual sales budgeted to 70,000 units at a sales price of Rs. 300 per unit. Variable costs are Rs.280
per unit You are required to determine the breakeven point and explain the significance of breakeven
point.

Answer 3b:

Introduction:
In business, the breakeven point is a critical concept that helps companies assess their profitability
and determine the level of sales necessary to cover all costs. It is the point at which total revenue
equals total costs, resulting in zero profit or loss. This analysis provides valuable insights into a
company's financial viability and helps guide decision-making. In this scenario, New Corp Ltd. incurs
fixed costs, produces a single product with specific sales and cost data. The objective is to calculate
the breakeven point and discuss its significance.

Concept of Breakeven Point:

The breakeven point is the level of sales at which a company neither makes a profit nor incurs a loss.
It represents the point where total revenue equals total costs, both fixed and variable. The formula to
calculate the breakeven point is:

Breakeven Point (in units) = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)

By determining the breakeven point, companies can understand the minimum level of sales required
to cover all costs and make informed decisions about pricing, production volumes, and cost control
measures.

Application to the Given Scenario:

In the given scenario, New Corp Ltd. incurs fixed costs of Rs. 5,00,000 per annum. The company's single
product has an annual sales budget of 70,000 units, a sales price of Rs. 300 per unit, and variable costs
of Rs. 280 per unit.

Using the breakeven formula, we can calculate the breakeven point:

Breakeven Point (in units) = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)
Breakeven Point (in units) = Rs. 5,00,000 / (Rs. 300 - Rs. 280)
Breakeven Point (in units) = Rs. 5,00,000 / Rs. 20
Breakeven Point (in units) = 25,000 units

Therefore, the breakeven point for New Corp Ltd. is 25,000 units.

Significance of Breakeven Point:

The breakeven point is significant for several reasons:

Financial Viability: The breakeven point helps determine the minimum level of sales needed to cover
all costs, indicating whether a business is financially viable.

Decision-making: It assists in making informed decisions regarding pricing strategies, production

volumes, cost control measures, and sales targets. Companies can evaluate the impact of changes in
costs, pricing, or sales volumes on profitability.

Profit Planning: Understanding the breakeven point helps in setting profit targets and developing
strategies to achieve desired profit margins.
Risk Assessment: The breakeven analysis allows businesses to assess the risk associated with sales
fluctuations, pricing decisions, and cost variations. It provides insights into the sensitivity of profits to
changes in various factors.

Conclusion:
The breakeven point is a crucial tool for businesses to evaluate their financial viability and make
informed decisions. In this scenario, New Corp Ltd. determined their breakeven point to be 25,000
units. This means that they need to sell at least 25,000 units to cover all costs and break even, neither
making a profit nor incurring a loss. Understanding the breakeven point helps in profit planning,
pricing decisions, risk assessment, and overall financial management. It enables companies to set
realistic sales targets and make strategic choices to achieve profitability and long-term success.

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