Adv

ancedCostAccount
ing
CASESTUDI
ES
(Speci
mencases)
CASENO. 1
Case: EBQ
Acont ract
orhas't osupply10, 000paperconesperdayt oaTex t
il
euni t
.He
fi
nds that
,
whenhest art
saproductionrun,
hecanproduce25000paperconesper
day .
Thecostofhol
din
gapaper coneinstockforoneyear
is2paiseandset
upcostofpr
oducti
onrunisRs.
18.Working
daysofthefact
oryare300inayear.
If
herunsafactor
yfor
all
365daysoft
heyear ,
whatwould be
yourcomment ?

CASENO.2
ABCLt
d.i
sasof
twarecompany.
Thesal
ary
packageof
the
Companyfori
tsemployeei
sasunder

Basi cPay Rs.20,000per

mont hDearnessAll
owance Rs. 15,
000
per '
mont hFri
nge Rs.10,000
per mont h
Numberofwor ki
ngday sinay earare300.30Daysfullpayand20dayshalfpay
l
eaveinay earisavai
ledandal l
owedt oeachempl oy
ee.Anempl oyeehastowor
kf or8
hoursinaday .
Thecompanyhast oquot eforanassignmentonhour l
yratebasi
s.Whatl
abour
hourrateshouldbeconsi deredont hebasisofabovedata?

1
CASENO.3
IDRAYANIENGI NEERI NGCOMPANY
Indray aniEngi neer ingCompanypr oducesel ect ri
calaccessor i
esl ikemet ers,
transf or mer s, swi tchgear s and aut omobi le accessor i
es l ike t aximet ers and
speedomet er s.
l
ndr ay ani buy stheel ectrical component sbut manuf act uresal l
mechani cal partswi t
hi
nitsf act orywhi chi sdividedi ntof ourpr oduct iondepar tment s.Machi ning, Fabr i
cat i
on.
Assembl y andPai ntingandt hr eeser vi
cesdepar t
ment s-
Stor es,Mai nt enance, andWor ksOf fice.
Though t he company pr epar ed annual budget s and mont hlyf i
nanci al
stat ement s,ithadnof or mal costaccount i
ngsy st em. Priceswer ef i
xedont hebasi sof
whatt hemar ketcanbear .Inv ent or yoff inishedst ock swasv al uedat90per centoft he
mar ketpr iceassumi ngapr of i
tmar ginof10per cent .
InMar cht hecompanyr ecei vedat rialor derf rom agov er nmentdepar tmentf ora
sampl e transf ormer oncost -
plus- fixed-
feebasi s.They took upthej ob( number edby thecompany asJob
No. 879) i
near ly Apr i
landcompl etedal lmanuf act ur i
ngoper ator bef or etheendof themont h.
SinceJobNo.879wasv erydi ffer entf rom t het ypeoft ransf ormer st heyhad
manuf act uredi nthepast .Thecompany didnot hav eacompar abl emar ketpr i
cef orthepr oduc
t.Thepur chasi ngof fi
ceroft hegov ernmentdepar tmentask edt hecompanyt osubmi t
a det ailed
cost sheet f
or thej obgi vi
ngasmuchdet ailsaspossi bleregar dingmat er i
all
abour andov erhea
dcost s.
Indray ani ,aspar tofi tsr out inef inanci al account ingsy stem hadcol lectedt he
th
act ualexpensesf ort hemont hofApr i
l,by5 ofMay .Someoft her elevantdat aar e
giveni nExhi bit
I.
Thecompanyt riedt oassi gndi rect ly,asmanyex pensesaspossi blet ot he
product iondepar tment s.Howev er ,itwasnotpossi blei nal lcases.I nmanycasesan
ov erheadcos t,whi chwascommont oal ldepar t
ment shadt obeal locat edt ot he
var i
ousdepar tment susi ngsomer ationalbasi s.Someoft hepossi blebaseswer e
col l
ec tedbycompany '
saccount ant .Thesear epr esent edi nex hibitII.
Heal sodesi gnedaf or matt oal l
ocat et heov erheadt oal lthepr oduct i
onand
ser vice
depar t
ment s. Itwasr ealizedt hat theex pensesof theser vicedepar tment sonsomer ational b
asis.
Theaccount ant thought of dist ri
but ingt heser vicedepar tment ’
scost sont hef ollowi ngbasi s.
a. Wor k sof fi
cecost sont hebasi sofdi r
ectl abour hour s.
b. Mai ntenancecost sont hebasi sof book val ueof plant andmachi ner y.
c. Stor esdepar tment cost sont hebasi sof di rectandi ndi rect mat er i
alsused.
Theaccount ant,whohadt ov i
si tthecompany '
sbank er , pass edont hepaper st o
youf ort her equi redanal y sisandcostcomput ations.

REQUIRED
Basedont hedat agiveninEx hibi
tsIandI Iyouar erequiredt o:
1. Compl etet heattached"ov erheadcostdi stri
butions heet"(Ex hibitI
II
).
Note:wher everpossi bl
e,i denti
fyt he ov erhead c osts char ged direct
lytothe
product i
onandser vi
cedepar tments.Ifsuchdi rectidentif
icationi snot possi bl
e
dist
ributet hecost sonsome" rati
onal"
bas is.
2.Calculatetheov erheadcost(
per di
rectl
abour hourforeachof t
hef our prosi
ngdepart
ment
s.Thisshoul dincludeshareoft hes ervi
cedepar tment’scosts.
3.Doy ouagr eewi t
h:
a)Thepr ocedur eadoptedby t
hecompany f
or t
hedi str
ibuti
onof ov erheadcosts?
2
 b)Thechoi ceof
thebaseofover
headabsorpti
on,i.
e.l
abourhour
rat
e?
4.JobNo.879wasex pectedtobecl earedbytheI nspecti
onDepartmentinthefir
st
weekofMay .Theact ualmateri
alscostapplicabletoJobNO. 879wasRs4879~.
Labour t
ime spent
onthejobwasest
imatedtobe50hoursinMachi
ning:10hoursi
nFabr
icat
ionand20hours
eachinAssemblyandPainti
ngDepartment,
tot
alRs.460.10Cal
cul
atedt
hetotal
costof
thi
s

3
 j
obi ncl
udingoverheadcosts.
5.IfaJobNo. 879i sacost-pl
us-f
ixedfees(CPFF)contr
actwiththegover
nment.
FixedfeebeingRs.200whatwouldbet
hetotal
chargesr
ecover
ablefr
omthecl
ient
?
6.Evaluat
ethecostaccount
ingsyst
emadopt edbyt
heaccount
antandsuggest
improveme
nt,
ifany,i
nit
.

4
 Exhibi
tI
I
ndrayani
Engi
neer i
ngCompany
Act
ual
Expenses(Manufactur
ingOv
erhead)f
orApr
il

Rs. Rs.
IndirectLabourandSuper visi
ons:
Machi ni ng 33,
000 -
-
Fabr icat ion 22,
000 -
-
Assembl y 11,
000 -
-
Pai nting 7,
000 -
-
Stor es 44,
000 -
-
Mai nt enances 32,
700 1,
49,
000
IndirectMat eri
alsandSuppl ies:
Machi ni ng 2,
200 -
-
Fabr icat ion 1,
100 -
-
Assembl y 3,
300 -
-
Pai nting 3,
400 -
-
Mai nt enances 2,
800 12,
800
Ot hers
Fact or yRent 1,
68,
000 -
-
Depr eci at i
onofPl ant andMachi ner
y 44,
000
-
- Bui l
di ngRat esandTax es 2,
400 -
-
Wel far eEx penses 19,
494 -
-
(At2per centofdirectlabour -
- -
-
Wagesandi ndir
ectl abour
andSuper visi
on)
Power 68,
586 -
-
(Mai nt enance-Rs. 366;
Wor ksOf f
iceRs. 2,220.
Bal ancet oProduci ng
Depar tment s)
Wor ksOf f
iceSalariesandEx penses 1,
30,
260 -
-
Mi scel laneousSt ores 1,
190
4,33,930Depar tment Ex penses
Tot al Rs.
5,96,
430

4
 Ex hi
bitII
I
ndray aniEngineeri
ngCompany
Pr
ojectedOper ati
onDat af
ortheYea
r
Ori
gin Direct Horse
al Materi
als Powe Direct Direct
Area
Depar
tmen Book Budget · r Labour Labour
(
sq.m)
t Value Rati
ng Hour s Budge
of t
Plant

Machi
ner
y
Rs. Rs. Rs.
Machi
ning 13.
000 26.
40.
000 62.
40.
000 20.000 14.
40.00 52.
80.
000
0
Fabricati
on 11.
000 13.
20.
000 21.
60.
000 10.000 5.
28.000 26,
40.
000
Assembl y 8.
800 6.
60.
000 - 1. 000 7.
20.000 13.
20,
000
Painting 6.
400 2.
64.
000 10.
80.
000 2.000 3.
30.000 6.60.
000
Stor e s 4.
400 1.
32,
000
Maint enances 2.
200 1,
98.
000
Wor ksOf fi
ce 2.
200 66,
000
Tot
al 48,
000 52.
80,
000 94,
80,
000 33.
000 30.
18,
00 99,
00,
000
0

Note:
Theestimatesgiveninthi
sex hi
bitar
ef orthebudgetedy earJanuar
yto
Decemberwher eastheact
ualgiv
eninExhibi
tIar
eforjustonemont h-Apr
il
ofthebudgetedyear
.

5
 Exhi
bitII
I
Indr
ayaniEngineeri
ngCompa ny
Ac t
ualOverheadDistri
buti
onShe et
forApri
l
De pa rt
me nt Pr oducti
onDe part
me nt Servi
ce Total Bas
Department Amoun is
Ov erhe a Ma Fa b As s Pa i
nt St o Ma i Wor t fi
r
dCos t
s c r em ing re s nt e k s Ac t
ual Dist
hi
ni i cat bly n Off
i Rs. ri
.
ng i on anc c e
e
A - - - - - - - 1,
49,
70 -
Alloc ati
on 0
of
ove rhe ad
toa ll
De pa rt
me n
t
s
A.1I ndire ct -
l
a boura nd
supe rvisio
n
A. 2I ndirect - - - - - - - 12,
800 -
ma t
e ri
als
and
suppl ies
A. 3Fa ctory - - - - - - - 1,
68,
00 -
Re nt 0
A. 4 - - - - - - - 44,
000 -
De pre ci
a ti
o
nofPl ant
&
Ma chinery
A. 5 - - - - - - - 2,
400 -
Bui l
ding
Ra tes&
Ta xes
A. 6 - - - - - - - 19,
484 -
We l
fa r
e
Ex pens es
A. 7Powe r - - - - - - - 68,
586 -
A. 8 - - - - - - - 1,
30,
26 -
Wor k s 0
Off i
ce
Sa lari
e s&
Ex p.

6
A.9 - - - - - - - 1,
190 -
Miscel
laneo
usStores
Expenses
ATotal(A1 - - - - - - - 5,
96,
43 -
toA9) 0

7
 Se r
vice
Depar
tmen Pr
oduct
ionDepar
tment
t
De partmen Total Bas
t Amoun is
Wor t fi
r
Ma i
Over
hea Mach Fabri Ass Pai
nt Sto ks A ct
ual Dist
nte
d i c e ing r Offi Rs . ri
.
n
Costs ni
ng a t
ion mbl
y es ce
anc
e
B
Rea ll
oc ati
onof
Serv i
c e
- - - - - - - - -
De pa rt
me
ntc os tto
produc ti
o
n
De pt.
B.1
Distributio
nofwor k -- - - - - - - - -
office
wor ks
B.2
Distributio
nof
ma inte nan - - - - - - - - -
ce
De pa rt
me
ntsc os ts
B.3
Distributio
nof - - - - - - - - -
Stor es
De pa rt
me
ntCos ts
Tot al
cha rge d
to
- - - - - - - 5,
96,
43 -
produc i
n
0
gC.
De pa rt
me
nts(A+B)
D.
Labour 1, 000 4
20, 4, 000 2
000 60, 7,
50 - - - - -
Hour s 0
Act ual
for
Apr il
E.
Ove rhe a
- - - - - - - - -
dRa te
per
7
Hour(
D)

8
CASENO. 4
Case:-JobCost i
ng
Youareaskedtobr
ingt
hefol
lowingincompl eteaccountofapri
nti
ngpl
antupt
odat
e
3st
January,2004.
Alsoconsi
derthedat athatappear TheAccounts
Mat erialsCost s
31/12/2003
Bal
ance30,000 WagesLi abili
ty
31/12/2004Balance6000
Workinpr ogresscont rolFactory
Departmentov er headcont r
ol
TotalJanuary
Charges1,
14,00
0 Factor yov erheads
Appl i
edCost 'ofGoods
SoldFi nishedGoods
Cont rol
31/12/2003Balance
40,
000 CostofGoodsSol d

Addi
ti
onal
Inf
ormat
ion

I.Theov erheadi sappl iedusi ngabudget edr atethati ssetev eryDecember

by
forecast i
ngthefollowi ngyear sover headsandr el
atingi ttoforecastdir
ectl
ab
ourcost .Thebudgetf or2004cal ledf orRs.8, 00, 000ofDi rectLabour
andRs. 12,00,000' ofFact oryoverhead.
2. Theonl yJobunf urnishedon31stJanuar y2004wasNO. ,
819,onwhen
totaldi r
ectLabourcost swer eRs.4000( 125di rectl abourhour s)and
totaldirectmat er i
al costswer eRs. 16,000,
3. Tot al
Mat erial
placedi ntopr oduct i
ondur ingJanuar y wer eRs.1,
80,000
4. Costofgoodscompl eteddur ingJanuar ywer eRs. 3, 60,000
5. Mat erialinstockofJanuar y31was- Rs: 40,
000
6. Fi nishedGoodsi nv entoryasofJanuar y31wasRs. 30, 000
7. Al lFactorywor ker searnthesamer ateof pay .
Directlabour HoursforJanuary
total
5000ot herlabourandsuper visiont otalledRs. 20,000.
8. Gr ossf actor
y wagesonJanuar ypayday stot al
ledRs.1, 04, 00
0.Ignor ewithholiday s.
9. Al l
'actual'
Fact or
y ov erheadsincur reddur ingJanuar y hasal readybeenposted.

REQUI
RED
a. Materi
alpurchasedduri
ngJanuary.
b. CostofGoodssoldduri
ngJanuary
.
c. Dir
ectlabourcostsincurr
edduringJanuary.
d. Overheadappliedduri
ngJanuary.
e. Bal
ance, WagesLi abi
l
ity
,31"December 2003.
f. Bal
ance,wor k-
inPr
ogresscont
rol
,31"December2003.
g. Bal
ance,wor k-
inPr
ogresscont
rol
,31"December2004.
h. Overheadappliedorunappli
edov erheadfor
January
.

9
CASENO. 5
Asar esultofanex pansionprogr amme, Pidi
li
teIndustri
eshasexcesscapac
i
ty
whi chisexpect edtobeabsor bedby thedomest i
cmar keti
nafewy ear
s.Twentyfi
ve
thous andmachi nehour sar eavailablef orthenex tyear.
Ithasr eceiv edinqui r
iesfrom t wof i
rmsl ocatedabr oad.Oneof fersto
buy2000000uni tsofpr oductAatRs.3. 80peruni t,t
hesecondof f
erstobuy
5000000uni tsofpr oductBatRs ;5.00peruni t.Standar dcostsfort hese
product sar egi v
enbel ow:
It
emsof cost ProductA ProductB
Mat erial Rs.1.20 Rs. 1.
30
Labour Rs.0.60
Rs.0.80Ov erhead Rs. 0.12 Rs.0.16
Tot al Rs.1.92 Rs.2.26
Ov erheadi sappl i
edonaMachi ne-hourbasi satt her at
eofRs.2perhour .
Sev entyfiveper centoft heov erheadi sest imatedt obef i
x ed.Nosell
ingand
admi nistrativ
eex penseswoul dbeal locat edtoei t
heror der,tr
ansportat
ion
char gesar etobepai dbyt hebuy er.
Oneoft heor der swi l
lbeaccept ed. Whi chshoul ditbe?Why ?

10
CASENO.6
Case:
-Budget
ingCont
rol

Init
sroundoft al
kswi thther epresent ati
vesoftheTr adeUnion,
ArunLt d.isf acedwithuni ondemandf orani ncreaseof15%anhour lywage
rates,i
nr esponset oamanagementof f
erof5%.
Themanagementi smostr eluctantt oagr eetosuchademand
but is
will
ingtoconsi der
mak i
ngani ncr
easedof f
er providedthatit
infl
uencesproducti
vit
y.
Thesuggest iontooff
er5%onbasi shourlyr
at eplusRs.0.15forever
y st
andardhour
ofout putproduced.I fthisisagreedt o,itisex pectedthatpr oducti
onwoul d
i
ncr easeby10%wi t
hinthebudget edhour s(nor mal fact
orycapacity
)
I
nor dert osel lt
hei ncreasedout put,itwoul dbecomenecessar ytoef f
ect
reductonof2½%OR2.
i 5%i nthesel
lingprice.

Thedr
aftbudgetf
orf
ort
hcomi
ngy
ear
,excl
udi
ngt
hewagesandsal
esi
ncr
easear
e:

Rs.(
Inlakhs)
Sales(1,50,000uni ts) -
- 60
Dir
ect Mat eri
al 12 - -
Dir
ect Wages 18 - -
Variableproduct ionov erhead 3 --
Fix
edpr oduct ionov erhead 10 - -
Variablesalesov erhead 3 --
(5%ofTur nov er)
Fix
edsal esov erhead 6 -
-
Variabledistr
ibut i
onov erhead 1 -
-
Fix
eddi stri
but i
onov er
head 1 -
-
Fix
edadmi nistrationov erhead 2 56
Pro fi
t 4

Youar
erequiredtowor
k-outthealter
nationsinthebudget :
i
. Iftradeuni
onsdemandi sacceptedby management .
ii
. Ifthemanagementpr oposalofwagei ncr
easel i
nkedtoproducti
vi
tyis
acceptedbythetr
adeunion.
i
i
i. Alsowor koutmi
nimum out putnecessaryforthemanagement
proposaltobemorerewardi
ngtothelabour
forcethan115%wageincr
ease.

11
CASENO.
7
Nashi kWar ehousi ngLt d. isconsi deringt hepur chaseofpowert rucks
torepl acet hehandt rucksi nusenow.Bysuchr eplacement ,i
ti sest imatedt hat
theef f
ect i
v est oragecapaci tyoft hewat erhousespacecanbei ncreasedby
50%.
Foruseof thepower t
ruck swi ll
requir ethef loor ofthewar ehouset ober einforcedat
anest imat edcostofRs.1, 00,000,t hisamountcanbewr i
ttenof fov ert he
remai ni ng
l
ifeof 10y ear sof thebui l
ding; Thewar ehousebui l
di ngwasacqui r
edonI "July1974
forRs. 10,00, 000anddepr eci ationhasbeenpr ovidedi ntheaccount seachy ear sat 2'
/,
%p. a. onst rai ghtlinebasi s.
Thepowert ruck swi l
lcostRs.1, 30, 000andwi l
lhav easer v i
cel i
feof10
years and wi llhav e an est i
mat ed sal vage v alue of Rs. 20,000.The
mai ntenancecostoft heset ruck si sest i
mat edatRs. 20000p. a.
Thel andt ruck swer eacqui redon1stJul y1991f orRs. 60,000.
Depr eci ati
onhasbeenpr ov i
dedi ntheaccount sat 5%p. a.onst rai
ght linebasis. The
set ruc kscanbesol df orRs. 24000.
Labourcost sv arypropor ti
onat elyt ot hev ol umeofbusi ness .
Howev er,t heuseofpowert r
uck si npl aceofhandt ruckswi llreducet he
l
abourcostby25%.
Thecompanyhas25000pr eferenceshar esi nMahi ndraandMahi ndral td.I t
i
s
proposedt odi sposeof f
20000shar estopr ov idefundsf orthecost of purchaseof .n
ewpower truck s.
Wi t
haddi t
ional eff
ect i
vewar ehousi ngcapaci tyt hecompanyhast woal ternat i
ves.
a.Reducest orager ack sby14%andsecur eanest i
mat ed20%i ncr ease
i
nt hev ol umeof busi ness.
OR
b.Toent erintoacont ract wi t
hacompany whi chwi ll
use80%of theaddi ti
onal
capaci tyat50%ofpr esent rates.
Fir
ei nsur ancepr emi um wi lli
nc reasebyRs. 4000p. a.Ot herex penses
wil1r emai nt hesameex ceptwher ei ndi cat ed.
Thef ollowi ngist hecondensedst atement ·ofpr ofitandl ossoft heNashi k
war ehousi ngLt d.forthey earended30' "June2004.

Rs. Rs.
I
ncome:
War
ehousi
ngr
ent 6,
00,
000 -

Di
v i
dendfr
om M&M Lt
d.
25,
000 6,
25,
000
Expenses:

War
ehousi
ngwages 2,
08,
200 -
Depr
eci
ati
on:
Bui
l
ding 25,
000 -
HandTr
ucks 3,
000 -
Mai
ntenanceofHandTr
ucks 5,
000 -
.
I
nsuranc 14,
000
-
e

12
Ot
herEx
penses 1,
091800 3,
66,
000
Net - 2,
59,
000
Prof
it

13
 Thecompanywantsy
ouradv
icewhether
tor
eplacet
heHandTr
ucksandi
fso
whichofthetwoalt
ernati
veopport
unit
iesbe'avail
edduri
ngtheyearended
June2005.Assumerepl
acementwill
beon1Jul y2004.

CASENO. 8
CostCont rol
The Hi ndust an Heav yEngi neer ing Ltd.Requi r
es 4000 uni ts ofa
parti
cularr aw mat er i
alpery ear .Att hebegi nni ngoft hecur renty eart he
purchasedepar t
mentex ceptst hepur chasepr ice@ Rs.90peruni twhi l
et he
accounting department
esti
mat edt hei ncrement edcostpr ocessi ng·anorder isRs.135andt hecostofst ora
geisest imat edt obeRs.12peruni t
.Butt hecost i
ngdepar t
menti sagai nst
the
i
ncrement alpr ocessi ngcostof
Rs. 135per unit
rather accordingt oit
,thisshouldhav
ebeenRs.80.Att hecommencementt hesuppl i
erof fers4000uni ts@ Rs. 86
perunit.Themat erialwillbedel iveredi mmedi atelyandpl acedi nthest or es.
Oneoft hedi rect orsoft hedirect orsoft hecompanysawt hat' duet opr esent
communi cat ionsy st em theincrement alcostofpl acinganor der. i
sz erobut
theaccount ingdepar t
ment '
sor i
gi nalest imateofRs.135f orpl acinganor der
foreconomi c bat ch i s correct .Af tera ser ies ofdi scussi ons .oft he
department alheadscompanyr eachedt odeci sionnott obuy4000uni tsat
ati
me.
REQUI RED: -
(a)Doy ouagr eewi ththecompany 'sdeci si
on? Why ?
(b)What i
sthet ot
alcost ,
whenincr ement alcostprocessonor derisRs. 135per unit?
(c)What i
sthet ot
alcost ,
whenincr ement alcostprocessinganor der i
sRs.86?

14
CASENO. 9
Prof itPl anni ng
TheSpar kleSoapManuf act uringCompany producessev er alvar i
et i
esof soapsha
ving di ffer ent br and names and char ac teristi
cs. Di ff
er ent per fumes,
appear ances, hygienic
andl ux ury pr oper t
ialmak et hedifferencei npr oduc tqual i
ty,althoughal l
thev arietie
soft hepr oducti nvest igat edar et hesameorsi milaruset ocust omer sina
ver ybr andsense.Ther awmat eri
al usedf ort hemanuf act ur eofs oapsi soi ls
and f ats,per f
ume,s yr up,col our s et c.Cost lierr aw mat erials,at tract ive
pack i
ng’ s and i
mpr oved met hod
ofpr oduct ioni ncreaset hecost aswel l
ast hev alueof theproduct ,
thoughi ndifferent
propor ti
ons. Thecompar at i
veeconomi csof different varietiesof pr oduct sunder st
udy
woul dbei nv ar yi
ngcost of qual ityandv alueof qual ity.Thebasi cpr obl emst ost r
ike
anac cept abl ebal ancebet weencostandv alueofqual ity.Thecostofqual i
ty
canber athereasi l
yev aluat ed.Butt hev alueofqual i
tyasdet er minedbyt he
pricet o bepai dbyt hecust omer satt hespeci fi
ed qual i
tyl eveldepends
l
ar gel y on numer ous ex t
er nal
fact ors.Int hepr esent cont extthev al
ueof qual i
tyistak entobet hepr ev ai
lingmar ket
price. It
is,of cour se,other impor tantfact or s.It
is,howev er,
ani ndi cat orofthev alue
remai ningsensi t
ivetosomeof theother f act orssev er al
ofwhi char ebut not i
onal .Th
ecostanal y sisofdi ffer entv ari
etiesoft hepr oductunderst udywhi char e
desi gned as A,BandCi nor dertost udythecost -qual i
ty-
pricebehav ior compar ativ eunitcost and sel l
ing pr i
cesoft hosev arieti
esar e
ev aluatedasf oll
ows.
SoapC SoapB SoapA
Rs. Rs. Rs.
Sel
l
ingpr
iceperuni
t 0.
925 1.
033 2.
16
LessCostperuni
t 0.
755 1.
049 1.
.69
Pr
ofi
tperuni
tbef
oreexci
se 0.
170 (
-)0.
016 0.
47
dutyandt
radediscount
Lessexci
sedutyperunit 0.
116 0.
130 0.
27
Pr
ofi
tperuni
tbef
oret
rade 0.
054 (
-)0.
146 0.
20

Itisobv i
ousf rom theabov ecal culationt hatpr oductB,i nspi teofi ts
super iori
tyi nqual i
tytopr oductC,i sal osingone.Thecostbehav iorof
productBcannotbef ull
yappr aisedbymeansofananal ysisofav erageuni t
cost.Thi si smor esobecausesuchanav eragehi desdi fferentpot entf actors
thatr equirescrut i
nyforpur pose' ofmanager i
aldeci sionmak i
ng.I naddi tion
accret i
on off ixed costi nt he av erage under playst he economi cs of
manuf actureoft heindivi
dualpr oductsf ori nstance,l argert henumberof
unitspr oduced.Lowerwi llbet hei ncidenceoff i
x edcostperuni tofpr oduct.
Speci fy f or t he pur pose of management , t he behav ior f i
x ed
andv ariablecostswouldrequiretobest udiedmor eclearlythant heav erageuni tcos
ts
permi ts.I
tisal
sonecessar yt
oemphasi zet
hat inacer t
ainr angeof output ,fixedcost
sdonothav emuchr el
evancef orpl anningi nt hesenset hatt hesecost swi l
l
hav et obei ncurredanyway .Itwi l
l,howev er ,presentadi f
ferentpi ct ureifthis
i
nv olvedi nstal
lationofnewf aci l
it
iesori ncr easei nt heut il
izat
ionofex i
sting
15
faci
lit
y.Wi thi
ntheli
mitedcapacityrange,therefor
e,ashi ftinqualit
yoft he
productwoul d notrequi
reanyaddi ti
onalfixedcostduet othepossi ble
maneuv eri
ngi nmanufact
uringprocess.Itisherethatmar ginalcostanalysis
becomes ver
y rel
evant, mar ginal cost
analysi
scanbesuit
ablymadeincomparingproductqual
it
y,gi
vent heexi
sti
ngfacili
t
yandset -upinwhichdifferentvari
eti
esoft heproductcanbepr oduced.
Mar gi
nalcost

16
analysi
swoul drefl
ectthemov ementofv ariablesi nthegi venci r
cumst ances
parti
cularl
yt hei nt
eracti
onamongdi fferentv ar i
ables.Var iabl
eormar ginal
cost
analysi
smak esit
imperati
v etodistinguishbetweenf ixedandvar i
ablecostinvi
ewo
f
thedist
inctpatter
nofbehav iorthatcanbedi scernedi nthetwo.Her e,
forthepurpose
of the pr esentanalysis,thet
otalcostshave
beendividedintofi
xedandv ariablescost assumed f or t he pur pose of
approximat i
on.Ther adiusofcont ri
butiont osal espr i
cesar ecomput edfr
om
thev ar
iablecost sofdif
f erentv ariet
iesoft hepr oductandt hecor responding
SoapC SoapB SoapA
sell
ing pr i
ces. The compar ati
v e pr ofi
tabili
ty's ar er ev eal
ed f r
om t he
Rs. Rs. Rs.
foll
owingrati
os:
Selli
ngpr i
ceperuni t 0.925 1. 033 2.16
Variablecostperunit 0.
536 0.
802 1.
18
Cont r
ibut
ionperunit 0.
389 0.
231 0.
98
beforeex ci
seduty&trade
di
scount ,
Less-Excisedutyperuni
t 0.
lJ6 0.
130 0.
27
Contr
ibut
ionperunit 0.
273 0.
101 0.
71
bef
oreTradeDiscount
Cont
ri
but
ionperuni
tas 29.
5% 9.
8% 32.
9%'
percent
aget
osal
es
pri
ceperuni
t ,

Thel ower rat

ioofcontributiontosalespr i
ceofpr oduct Bi ncompar i
sonwi th
thoseofA andC si gnifi
est hei mbal ancebet weent hev ar
iablecostand
sell
ingpr i
ce.Themar ginalincreasei nt hecostofpr oduci ngqual i
tyBinst ead
of C is Rs. 0.266. It
becomescl earthatt
headdi ti
onal amount of Rs.0.266per unitrequi redtobeincur re
dtoachi ev eachangei nqual ityofgr adef rom Ct oB, int ermsofr awmat erial
,
attr
activepack ingetc.
against anincreasei nsell
ingpriceof Rs. 0.18onl y.
Thel ackofcompat i
bili
tybet weencostand sel l
ingspr icei ndicatest wo
possibili
ti
esv i
z.
1. Adequat edat aoncostmi ghtnothav ebeenav ailabl ef orgui danceon
fi
xationpr ices.
2. Pr oduct costofBhasincreasedconsi der ablysi
ncet heor iginalfi
x ati
onofpricet
o
eataway asignifi
cantpartofcont ri
butionbut correspondi ngi ncreaseinthepr i
c
ecoul dnotbeopt ionedduet oex t
er nalconstraints.
Goingthrought heabov ecase,what l
ogicalcour sesofact i
oncanbesuggest edfor t
hepur poseofmax imizationof profit
?

17
CASENO.10
PLt
d.Manufact
ureasi
ngl
eproduct
.I
tscondensedpr
ofi
tandl
ossst
atementf
ort
heyearended31"March2004isasfoll
ows:
Rs.
Rs.

Sal
es 45,
00,
000
.
.
Lesscostof -
28,
00,
000
sal
es
17,
00,
000
Lesssel
l
ingand
di
stri
buti
on
expenses:
Variabl
e 4,
00,
000
Fi
xed 9,
00,
000 13, 00,000
NetProf
it 4,
00,060
Dur
ingthey
ear
ended31"Mar
ch2004t
hecompany,
manufact
uredandsold1lakh
sunit
s.Thecostofsal
eswasasfol
lowsfort
heyear
:
Tot
alCost Uni
tCost
Rs. Rs.
Mat
eri
als 12,
00,
000 12.
00
6,
00,
000
Di
rectl
abour 6.
00
.
Vari
abl
eoverhead 2,
00,
000 2.
00
Fi
xedover
head.
8,
00,
000 8.
00
.
28,00,000 28.00
Theco.i sf acingser i
ouscompet it
ionandwant st or educet hesel ling
pri
cebyRs.5,ast hecompet iti
onsar esel l
ingt hepr oductatRs,42i na
meet ingofal lex ecut iv
esf oll
owi ngpr oposal shav ebeensuggest ed.
Thesal esmanagerpr ovi
dedt heest i
mat et hatsal escanbei ncreased
by 60%
i
f"sell
ingpr i
ceisreducedby Rs.5perunit.Thecost account ant adv icethatthefixed
sell
ingcost sshoul dber educedbyRs. 1,00,000byr educi ngt hebudgetof
advertisement swhi chi sagr eedby' t
hesal esmanager .
Thelabour Uni onisnot r
eady toreducewager ates ortoincr easepr oductiv i
ty.
The uni on is demandi ng 25% i ncrease in wage r at es.I nat i
me st udy
under takentoi ntroducepi ecer atesy stem ofpay mentofwages,i tisnot ed
thateachwor kerspr oduct ionandhencet otal product ioncanbei ncreasedby
60% of the pres ent l
ev el.
Consi deringt
her esul tsoftheti
mest udythecostaccount ant recommendedt hat pi
ecer atesy stem ofpay mentofwagesbei ntr
oducedwi th25%i ncreasei nt he
presentav er
agel abourcostofRs.6peruni t,itwi llenabl et hewor kerst o
i
ncreaset hei
rear ningsbymor et han25%oft hepr esent ear nings.
Thepur chas emanager andthepr oducti
onmanager arerequest edtoecono
miesont heuseandex pens esofmat eri
alsoas' tor educemat eri
alcostby

18
10% of the
present
per
uni
tcost
ofRs.
12per
uni
t.
Thepr
oduct
ionmanager
hasassur
edf
ort
he

19
same.
Thecompanyseek sy ouradvi
cewhet
hertheproposal
shouldbeimplemented?
Whatwi l
lbet
heef f
ectoncostandprofi
tperunitandt
otalpr
ofi
tift
hepriceis
reducedandotherproposalsar
eimpl
emented?

CASENO. 11
CostAudi tor'
sObserv ati
ons:
Inthe costaudi trepor tunderPar a 14 costaudi t
ors’observati
on and
conclusions a cost audi tor has toi nter al
ia,f ur
nish suggestion for
i
mpr ovementi nperf
or manceandot herobservat
ions.Asacostaudi torofa
manuf acturecompany ,f
urnishyoursuggesti
onsandobser vat
ionsbasedon
thefoll
owi nginfor
mat i
on( youmaymak enecessaryassumptions)
2002-03 2003-04
1. Pr ofi
t(inRs.Lakhs) 250 340
2. Capacit
yut
il
izat
ion 90% 95%
3. Consumpti
onofelect
ri
cit
y 4.
07 3.
98
Tonesofoutput(KWH)
4. Capit
alEmployed(inRs.l
akhs) 1200 1100
5. Sal
ari
es&Wages(
inRs.
l
akhs) l
I7 98
6. Pr
oduct
ion(
M.T) 1.
80,
000 1,
90,
000

CASENO.12
Equipmenthasapur chasevalueofRs.70,
000.I
tsr
unningcostspery
earand
resaleval
uesaregiv
enbel ow.
Year Runningcost s Resale
Rs. val
ue
Rs.
1 20,000 40,000
2 21,000 30,000
3 23,000 22,000
4 26,000 16,000
5 30,000 14,000
6 35,000 7,000
7 41,000 7,000
8 46,000 7,000
Atwhi chyeari
sthereplacementdue?

20
Fol
l
owi
ngaddi
ti
onal
casesber
efer
red:
-

PageNo.3.38CaseNo.
3.43:-TreatmentofVar iousresear
chexpenses
PageNo.10.45CaseNo.10.46:-Constructi
ngownt oymouldVs.Sub
Cont
racti
ngPageNo.15.
58CaseNo. 15.58:-Replacementofexi
sti
ng
machinebyuseofT-Di
str
ibuti
ont est

PageNo.
16.
43CaseNo.
16.41:
-Whet herornott
obuycar
s
PageNo.
16.
53CaseNo.
16.49:
-ProjectEvaluat
ion
PageNo.A.
13CaseNo.17:-Choiceofsuppl i
er&customer

Forabov ecases, pleasereferthebook-

“ADVANCEDCOSTANDMANAGEMENTACCOUNTI NG”Pr
obl
ems&
Solutions
Author :
-V. K.Saxena,C.
D.Vashist
Publisher:-SULTANCHAND&SONS.
Edi
tion: -8thRevi
sedEditi
on

21