suggested dec 11 costing

7/29/2019 Suggested Dec 11 Costing

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INTERMEDIATE EXAMINATION

GROUP II

(SYLLABUS 2008)

SUGGESTED ANSWERS TO QUESTIONS

DECEMBER 2011

Paper-8 : COST AND MANAGEMENT ACCOUNTING

Time A l lowed : 3 Hours Fu l l M arks : 100

The figures in the margin on t he right side indicate full marks.

AnswerQuest ion No. 1 which is compulsory andany f ive questions from t he rest.

Q. 1.(a) M atch the s ta tement in Column I w i th the appropr ia te sta tement in Column I I : [15]

Co lum n - I Co lum n - II

(i) Pe rf or m an ce o f Pu blic En te rp rises (A ) M easu res Divisio nal Pe rf or m an ce

(i i) Resid ual In co m e (B) Pu rch ase Ord er Processed(i ii ) Co st Dr iver (C) Fu t u re Co st s af fect ed b y d ecisio n m aking

(iv) Po in t Rat ing (D) Sho w s p ro f it ab i lit y an d cap acit y u t i l isat io n

(v) Relevant Co st (E) Jo b Evalu at io n

(b) Sta te w hether th e fo l lowing s ta tements are True or Fa lse : [15]

( i) Incent i ve system s benef i t on ly wo rkers.

( i i) Serv ice depar tm ents do no t render serv i ces to each o ther .

( i ii ) Cont ract cost ing is only a var iant of Job.cost ing.

( iv ) D i ffe ren t ial cost ing and M argina l cos t ing m ean the sam e th ing .

(v) Standards a re a r r ived a t based on past per fo rm ance.

(c) Fi l l up the b lanks su i tab ly : [15]

(i) In abso rp t io n cost in g cost is ad d ed t o invent or y.

(ii ) b eco m es m ore ef fect ive in a f i rm w it h t he u se o f st an dard cost ing.

( ii i ) In make or buy dec ision , i t i s p ro f i tab le to buy f rom ou ts ide on ly w hen th e supp l ie r s p r i ce isb elow t h e f irm s o w n .

(iv) A co st w h ich d oes n o t invo lve any cash ou t flo w is called .

(v) cost in g red u ces t h e p o ssib i lit y o f un d er pr icin g.


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2 Suggested Answers to Question CMA

(d) In the fo l low ing cases, one out of fou r answers is correct . You are requ ired to in dicate the correctansw er and g ive br ie f wo rk ings : [25]

( i ) XYZ Co. Ltd. is hav ing 400 wor kers at th e beginning of the year and 500 w orkers at t he end ofthe year. Dur ing the year 20 w orkers were d ischarged and 15 w orkers lef t t he com pany. TheLabour Turnover rate un der separat ion m etho d is:

A . 2 2.2 0%

B. 7.78%

C. 4 .0 0%

D. 1 4.4 0%

(i i ) A factor y operates a standard cost system , where 2000 kgs of raw m ater ia ls @ ` 12 per kgwe re used for a prod uct , resul t ing in pr ice var iance of ` 6000 (F) and usage variance of ` 3000(A). Then standard m ater ia l cost of actual produ ct ion w as

A. ` 20,000

B. ` 30,000

C. ` 25,000

D. ` 27,000

( i ii ) A company m ainta ins a margin of safety of 25% on i ts current sales and earns a prof i t o f ` 30lakhs per annu m . If th e company has a p/ v rat io of 40%, its current sales amo unt t o

A. ` 200 lakhs

B. ` 300 lakhsC. ` 325 lakhs

D. N o n e o f t h e a bo ve

( iv ) The annua l demand o f a cer ta in p roduc t i s 8000 un i ts , o rder ing cos t per o rder i s ` 40, carry ingcost is 10% of average inventory value and purchase cost is ` 10 per u ni t . The EOQ for t heproduc t i s

A. 1200

B. 1000

C. 900

D. 800

(v ) Sa les fo r tw o consequt i ve mont hs o f a com pany are ` 3,80,000 and ` 4,20,000. The com panysne t p ro f i t s fo r these mo nths am ounted to ` 24,000 and ` 40,000 respectively. There is nochange in P/ V rat io or f ixed costs. The P/ V rat io of the comp any is

A. 33 31 %

B. 40%

C. 25%

D. N o n e o f t h e a bo ve


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Suggested Answers to Question CMA 3

Answer 1. (a)

(i) D

(i i) A

(ii i) B

(iv) E

(v) C

Answer 1. (b)

(i ) Fa lse

( ii ) Fa lse

(iii ) Tr u e

( iv ) Fa lse

(v ) Fa lse

Answ er 1. (c)

(i) Fixe d

( ii ) Bu dg et a ry Co n t ro l

( ii i ) Var iab le Cos t

( iv ) Im p u t e d Co st

(v ) A b so r p t io n

Answer 1. (d)

(i) B 7 .78%

Average No. of w orkers (400 + 500) / 2 = 450 Labour Turno ver rate (Separat ion M etho d)

= 100Wo rk e rso fNo .Averageyeart h edur ingseparationo fNo.

= 10045035

100450

)1520(=

+= 7.78%

(i i) D ` 27,000

= M ater ia l pr ice var iance + mater ia l usage var iance

= 6000 (F) + 3000 (A) = 3 000 (F)Actual M ater ia l cost 2000 12 = ` 24000

Standard M ater ia l Cost of actual prod uct ion = ` 2 4 ,0 0 0 + ` 3 ,0 00 = ` 27,000.

(ii i ) B ` 300 Lakhs

M arging of Safety = Prof i t / PV rat io.

= 30 40 = 75 Lakhs

Total Sales25.75

= ` 200 Lakhs


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(iv) D 800

EOQ =i.C

AO2

=800

1001010

4080002=

(v) B 40%

PV Rat io = 1004000016000100

salesinChangeProfi tinChange

= = 40%

Q . 2 . ( a) A company prep ares a budget for a product ion of 20000 0 uni ts . Var iable cost per un i t is` 15 andthe f ixed cost is ` 2 per uni t . The com pany f ixes i ts sel l ing pr ice to fetch a prof i t of 10% on cost .

( i) W hat i s the b reak-even po in t? (bo th in un i ts and in )

( ii ) Wh a t i s p ro f it v o l u m e rat i o ?

( i ii ) I f i t reduces its sel l ing pr ice by 5%, how does the rev ised sel ling pr ice af fect t he break-evenpo in t and the p ro f i t vo lume ra t io?

( i v) I f a p ro f i t i ncrease o f 10% is desi red m ore than t he budget , what shou ld be the sa les a t thered u ced p r ice? [3+2+3+2]

(b ) St at e b ri ef ly t h e e ff ect o n p r of it a bi li t y u n d er m a r gi na l co st i n g a nd a bso r p t io n co st i ng . [ 5 ]

Answer 2. (a)

Budget ed Cost Price Str uct ure

Per Unit `

Var iab le Co st 15 .00

Fixed Co st 2 .00

Tot al Co st 17.00

Pro f i t (10% o f cost ) 1.70

Sale Pr ice 18.70

To t al Fixed Co st Rs. 2 200000 = ` 4,00,000

Cont r ibu t ion per un i t ` 18.70 15 .00 = ` 3.70

Total pro f i t = Total Cont r ibut ion Total Fixed cost

= (3.70 2,00,000) 4,00,000

= ` 3,40,000.

( i) B re ak Ev en Po i n t (i n u n i t ) =Uni tPero nCont r ibut i

CostFixedTotal

=3.70

4,00,000= 1,08,108 (approx imately)


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Break Even Point ( in Rup ees) = 1,08,108 sel l ing pr ice per u nit ( ` 18.70)

= ` 20,21,622

( ii ) P/ V Ra t io : %79.1918.70

1003.70=

( i i i) I f the sell ing pr ice is reduced by 5%, the rev ised

sel l ing price w il l be ` 17.765 [18.70 (5% o f 18.70)]

Under t he rev ised sel l ing pr ice :

Break Even (in u n it ) = )15765.17(000,00,4

= 144665 Uni tsBreak Even p rice (in ) = 144665 Selling p r ice/ un it ( ` 17.765)

= 2569982

P/ V Rated = 100765.17

15765.17

= 15.56%

( iv ) D esi red p ro f i t

= Budgeted pro f i t + 10% of the Budgeted p rof i t

= 3,40,000 + 10% of 3,40,000

= Rs. 3,74,00 0

Sales to achieve t he d esi red pro f i t (at t he redu ced sell ing pr ice)

= RatioP/ VProfi tdesiredCostFixed +

=%56.15

000,74,3000,00,4 +

= ` 49,74,293

Answer 2. (b)

Ef fect of prof i tabi l i t y under m arginal cost ing & absorpt ion cost ing :

(a) W hen un i t o f p roduc t ion and sa les un i t a re equa l , p ro f i t under m argina l cos t ing w i l l be same asprof i t un der the absorpt ion cos ing.

(b ) W hen un i t p rodu c t ion i s m ore than sales, p ro f i t under absorp t ion cost ing w i l l be greater then t heprof i t u nder m arginal cost ing.

(c) W hen un i t o f p roduc t ion i s less than sa les, p ro f i t under absorp t ion cost ing w i l l be lower th an theprof i t u nder m arginal cost ing.

Q . 3 . (a ) The fo l lowing facts are extracted f rom the b ooks of Alpha Radio M anufactur ing Com pany for th eyear 2010.

( i ) I t produ ces tw o types of radio-Type A and Type B and sel ls these in two m arkets-Kolkata andSiliguri.


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( i i) The budgeted and actual sales for t he year 2010 are as fo l lows:

Ko lkat a Siligur i

Typ e A Bu dget ed 1000 u n it s at ` 200 each 800 u n it s at ` 200 each

Act u al 900 un it s at ` 200 each 750 u n it s at ` 200 each

Typ e B Bu dget ed 800 u n it s at ` 300 each 600 u n it s at ` 300 each

Act u al 1000 u n it s at ` 300 each 750 un it s at ` 300 each

Analysis of variance discloses that Type A is overpriced and Type B is underpriced. If the price of AType radio set is reduced by 10% and pr ice of B Type radio set is increased by 20 % and i f a m odem andextensive advert isem ent camp aign is int ro duced, then t he fo l low ing volume o f sales could be m ade in

the n ext year as expected by the M arket ing M anager.Exp ect ed in crease/ d ecrease Ko lkat a Siligu r iover t h e cu r ren t b u d get M arket M arket

Pro d uct A: Du e t o chan ge in p r icing p o l icy +20% +15%

Du e t o in t ro du ct io n o f m od ern ad ver t isem ent cam paign +5% +3%

Pro d uct B: Du e t o ch an ge in p r icin g p o licy +10% ()2%

Du e t o in t ro d u ct io n o f m od em adver t isem en t cam paign .+5% +5%

On t he b asis o f ab ove yo u are req uired to p rep are sales b ud get fo r t he year 2 011 . [ 10]

(b ) St at e t h e d if feren ce b et w een Fo recast and Bu d get . [5]

Answer 3. (a) Budget fo r 2010 Act ual fo r 2010 Budget fo r 2011

A Ko lkat a 1000 200 2,00,000 900 200 1,80 ,000 1250 180 2,25 ,000

Siligu r i 800 200 1,60,000 750 200 1,50,000 944 180 1,69,920

To t al 1800 3,60 ,000 1650 3,30 ,000 2194 3,94,920

B Ko lkat a 800 300 2,40,000 1000 300 3,00,00 920 360 3,31,200

Sil igu r i 600 300 1,80 ,000 750 300 2,25 ,000 618 360 2,22480

To t al 1400 4,20 ,000 1750 5,25,000 1538 5,53 ,680

W o r ki n g N o t e : (1) Calculation o f Budget ed sales for 20 11Type A Type B

(a ) M ar ket : Kolkata

Bud get ed Sale fo r 2010 1000 800

For exp ect ed ch ange in p r icin g p o licy 200 80

Fo r in t ro du ct io n o f m o d ern adver t isem en t cam paign 50 40

Bud get ed sale fo r 2011 1250 920

ProductType

M

arketArea

Unit

Priceper

unit(`

)

Value

(`

)

Unit

Price

Unit(`

)

Value

Unit

Priceper

unit(`

)

Value

(`

)


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Type A Type B(b ) M a rket : Siliguri

Bud get ed Sale fo r 2010 800 600

Add : Expected in crease/ decrease

Fo r ch an ge in p r icin g p o licy 120 () 12

Fo r int ro d u ct io n o f m o d ern adver t isem en t cam paign 24 30

944 618

(2) Calculation o f sel l ing price for 2011Type A Type B

Pr ice per u nit Pr ice per u ni t

Pr ice in 2010 200 300Add in crease/ d ecrease () 20 (+) 60

Bu dget ed sel lin g p r ice 180 360

Answer 3. (b)

For ecast VS Bud get

Fo recast Budget

Q . 4 . (a ) Dist inguish betw een Incent ives to ind i rect wor kers and Indi rect incent ives to d i rect wor kers .[5]

(b ) Both d i rec t and ind i rect em ployees o f a depar tment in a facto ry a re en t i t l ed to p roduc t ion bonusin accordance w i th a Grou p Incent ive Scheme, t he ou t l ines of w hich are as fo l lows:

( i ) For any produ ct ion in excess of s tandard rate f ixed at 10,000 tonnes per mont h of 25 days, a

general incent ive of ` 10 per t onne is paid in aggregate. The to ta l amo unt payable to eachseparate grou p is determ ined on the basis of an assumed p ercentage of such excess product ionbeing contr ibu ted by i t , nam ely @70% by di rect labour, @10% by inspect ion s taf f, @12% bym aintenance staf f and @ 8% by superv isory s taf f .

( i i ) M oreover, i f the excess prod uct ion is m ore than 20% above the standard, d i rect labou r a lsoget a special bonu s @ ` 7 per t onn e for a l l produ ct ion in excess of 120% of s tandard.

( ii i ) Inspec t ion s taf f a re pena l ised @ ` 20 per t onn e for re ject ion b y custom ers in excess of 1% ofproduct ion (Actual ) .

1 . I t i s m e r e ly a n e st i m a t e w h i ch i s li k el y t ohappen. I t is a s tatement of prof i table eventw hich are l ike ly to happen un der ant ic ipatedcondi t ion du r ing a speci f ied per iod of t im e.

A budget is a detai led p lan of operat ion forsom e specif ic per iod.

2 . I t be ing sta tements o f fu tu re events, do no tconnot e any sense of contro l .

I t is on t he ot her hand a to ol of contro l since itr e p r e s e n t s a c t i o n w h i c h c a n b e s h a p e daccording to w i l l so th at i t can be sui ted t o th econd i t i on wh ich may or may no t happen.


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( iv ) M a in tenance s taf f a re pena li sed @ ` 20 per hour of b reakdow n.From the fo l lowing part icularsfo r a month , wo rkout the p roduc t ion bonus by each group :

A. Produ ct ion 13,000 t onnes (Actual )

B. Reject ion by custom ers200 ton nes

C. M ach in e b reakd o w n 50 h o urs [4+2+2+2]

Answer 4. (a)

M ain condi t ion of incent ive system is that t he actual outpu t or t ime taken in re lat ion to s tandard set isdeterm inable. In case of indi rect w orks, thei r perfo rm ance cannot be d i rect ly measurable. St i l l i t is essent ia lto prov ide for incent ive to them . The fo l low ing are such incent ive to indi rect wo rkers

( i) Bonus to fo remen and superv isors.

( ii ) Bonus to repa irs and m a in tenance sta f f.

( ii i ) Bonus to s to res s taf f

The fo l lowing are th e indi rect incent ives to d i rect wo rkers.

( i) Pro f it sh a r in g

( ii ) Co -p ar t n e rsh i p

( ii i ) Educat ion fo r em ployees and t he i r ch ild ren

( iv ) H e al t h a n d sa fe t y

(v) Genera l Wel fa re, rec rea t ion fac il i t i es

(v i) Subs id ized m ea ls.

Answer 4. (b)

No. of w ork ing days p.m. = 25

Standard p roduct ion = 10,000 tonnes.

Actual product io n = 13,000 ton nes.

Excess pro duct ion = 3,000 to nnes.

20% of standard p roduct ion = 2,000 ton nes.

Excess product io n above 20% = 1000 t onnes

Statem ent show ing Bonus earned by each.

Cat ego ry General Incent ive Special Incent ive Penalt y Bonus

% Tonnes Am ount Tonnes ` ` `

Direct Labo u r 70 2,100 21,000 1000 7,000 28000

Insp ect io n St af f 10 300 3000 1,400 1,600

M ain t en an ce St af f 12 360 3600 1000 2,600

Su p er viso ry St af f 8 240 2400 2400

Tot al 100 3000 30000 1000 7000 2400 34,600


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Work ings :

Pena l ty fo r re jec t ion :

Reject io ns = 200 t o nes

Reject ion s allow ed 1% o f 13 ,000 = 130 t o nes

Pen alised = 70 t o nes

70 ` 20 = ` 1400

Break dow n 50 hours ` 20 = ` 1000

Q . 5 . (a ) Bu d get s are classif ied acco rd ing t o Tim e. St at e h o w th ey are classif ied . [5]

(b ) XYZ Ltd. m anufactures four pro ducts A, B, C and D. Wh ose data are g iven below :

A B C D

Direct M ater ia ls ( ) 3 ,000 6,000 9,000 18,000

Direct Labour ( ) 1 ,500 3,000 4,500 9,000

Direct Lab o ur Ho urs 50 100 150 300

M ach in e Ho u rs 30 15 10 5

You are requi red to prepare a s tatement showing the al locat ion of factory overheads (whicha m o u n t e d t o ` 1,08,000) using the basis of a l locat ion as und er :

( i ) D i rec t M ater ia l Cos t

( ii ) D i rec t Labour Cos t

( ii i) D ir e ct La b o u r H o u rs

( iv ) M a ch in e Ho u r s

Ou t of t h ese fo u r b ases o f al lo cat io n , w hich yo u p refer an d w hy? [2+2+2+2+2]

Answer 5. (a)

Budget are div ided in th e fol low ing categor ies according to t ime :

(i ) Short term Budgets - Any budget th at is prepared for a per iod upt o one year general ly is know n asShor t Term Budget . Funct ion al budgets are norm al ly prepared for a per iod o f one year.

(ii) M edium Term Budget : Budget prepared for a per iod of 1-3 years is M edium Term Budget . Budgetl ike manpow er p lann ing are p repared fo r M ed ium Term.

(ii i) Long Term Budget : Any Budget exceedin g 3 years is know n as Long Term Budget s. M aster Budget is

normal ly prepared for Long Term. In the modern days due to uncerta inty , very few budgets areprepared for Long Term .

Answer 5. (b)

Work ings : Calculat ion of overhead rate us ing di f ferent b asis

( i) D ire ct M a t er i al Co st :

Rate =000,36

000,08,1CostM ate r ia lTotalO/ HFactoryTotal `

= = ` 3 per ` M ater ia l Cost


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( ii ) D irec t Labour Cos t :

Rate =000,18

000,08,1CostLabourTotalO/ HFactoryTotal `

= = ` 6 per ` Labo ur Cost

( ii i ) D i rec t Labour Hours =600

000,08,1`= ` 180 per hour

(iv) M ach in e Ho ur =60

000,08,1`= ` 1,800 per M / C. hour

Statem ent show ing allocat ion o f overheads

Basis Rat e A B C D Tot al

` ` ` ` ` `

Direct M at er ial Co st 3 9,000 18,000 27,000 54,000 1,08 ,000

Direct Lab o ur Co st 6 9,000 18,000 27,000 54,000 1,08,000

Direct Labo u r Ho u r 180 9,000 18,000 27,000 54,000 1,08,000

M ach in e Ho ur 1,800 54,000 27,000 18,000 9,000 1,08 ,000

Out o f t hese basis of a l locat ion, M achine Hour Rate is m ost preferable. Overheads are to b e al located onthe b asis of t ime t aken by each pro duct in t he shop, i .e. on t he basis of m achine hours requi red by eachproduc t .

Q . 6 . ( a) Fo l low ing are th e par t i cu la rs g iven by t he ow ner o f a ho te l . You, as a Cos t & M anagem entAccount ant , are requested to adv ise h im t hat w hat rent should h e charge f rom his custom ers perday so th at he is able to earn 25% on cost other than int erest :

( i) Sta f f sa la r ies ` 80,000 per annum .

( ii ) Room a t tendants sa la ry ` 2 per day. The salary is paid on dai ly basis and services of ro omat tendant a re needed on ly when the room is occup ied . There i s one room a t tendant fo r oner o o m .

( i ii ) Light ing, heat ing and pow er. The norm al light ing expenses for a room i f i t is occupied for thew h o l e m o n t h i s ` 50. Pow er is used only in w inter and no rm al charge per mo nth i f occupiedfo r a room is ` 20.

( iv ) Repa irs to Bu i ld ing ` 10,000 per annum

(v) Li n en , et c . ` 4,800 per annum

(vi ) Su n d r ie s ` 6,600 per annum

(v ii ) In te r io r decorat ion , e tc. 10,000 per annum

(v ii i ) Cos t o f Bu ild ing a t`

4,00,000 and i ts deprec iat ion rate is 5%( ix ) O t h er e q u ip m e n t a t ` 1,00,000 and i ts deprec iat ion rate is 10%

(x) In te rest @ 5% may be charged on i t s i nvestm ent in the b u i ld ings and equ ipment .

(xi ) There a re 100 rooms in the Hote l and 80% o f the room s are normal l y occup ied in sum m erand 30 roo m s are busy in wint er.

[You m ay assume th at per iod o f summ er and w inter is six mon ths each. Norm al days in a mo nthm ay be assum ed t o be 30.] [ 10]

(b ) Exp lain t h e co n cep t o f Jo in t Co st s in jo in t p ro d uct s an d b y p ro du ct s. [5]


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Answer 6. (a)

Room Rent f ixat ion of Hotel :

Calculat ion o f Room Rent per day

Part iculars ` `

(i) St af f Salar ies 80,000

( ii ) Ro o m a t t e n d an t s Sa la r ie s :

Su m m er : 2 1 00 10080

30 6 28,800

W in ter : 2 100 100

30

30 6 10,800 39,600( ii i) Li gh t in g / H ea t in g / Po w e r :

Su m m er : 50 6 10 0 10080

24,000

W in te r l igh t : 5 0 6 1 00 10030

9,000

Pow er : 2 0 6 100 10030

3,600 36,600

(iv) Repairs t o Bu i ld in gs 10,000

(v) Lin en , et c. 4,800

(vi) Sun d r ies 6,600

(vii) In t er io r deco rat io n , et c. 10,000

(v iii ) D ep re ciat io n : Bu ild in gs @ 5 % o f ` 4,00 ,000 20,000

Other Equipm ents 10% of ` 1,00,000 10,000 30,000

(ix) In t erest o n Invest m ent = 5,00,000 5% 25,000

To t al co st in clud in g in t erest 2 ,42,600

Add : 25% Prof i t on Cost other than Interest .

Or, (2,42,600 25,000) 10025

= 54,400

To t al reven ue requ ired 2,97,000

Ro o m Rent p er d ay = 2 ,97,000 / 19,800 15 Per d ay

Work ings :

Room days Com puta t ion :

No. o f Room s % occup ied Days in a mont h No. o f m onth

Su m m e r : 63010080

100 = 14,400 Days

W i nt er : 63010030100 = 5,400 Days

To t al Ro om Days = 19,800 Days


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Answer 6. (b)

Join t Costs :

Joint cost is the p re-separat ion cost of comm only used input factors for the p roduct ion of m ul t ip le produ cts.That is, a l l costs incurred before or upt o t he spl i t -of f point are term ed as jo int costs of pre-separat ion costsand the apport ionment of these costs is the main object ive of jo int product account ing. Costs incurredaf ter spl i t -of f point are post - separat ion costs and can be easi ly ident i f ied w i th t he pro ducts .

Here, spl i t -of f point is a point up to which, input factors are commonly used for product ion of mul t ip leproducts , which can be ei ther jo int -products or by products , af ter th is point , jo int products and/or byprod ucts gain indiv idual ident i ty .

Q . 7 . ( a) M /s. Jupi ter & Co. Ltd. m anufactures a product in i ts factory w hich present ly ut i l ises 60% of i tscapacity. The cost detai ls including sel l ing price are given below :

`

Sales 6000 un it s 5,40,000

Direct M at er ials 96,000

Direct Lab ou r 1 ,20 ,000

Direct Exp enses 20,000

Fact o r y Overh ead s 2,00,000

Ad m in ist rat io n Overhead s 21,000

Sell in g an d Dist r ib u t io n Overheads 25,000

Out o f f i xed overheads , 12 .5% and 20% o f se l l i ng and d is t r i bu t ion overheads var iab le w i thprod uct ion and sales. Admin ist rat ion overheads are w hol ly f ixed.

Now, i t is revealed that ex ist ing pro duct could n ot achieve budgeted level for t wo consecut iveyears, the managemen t dec ides to int ro duce a new p roduct w i th m arginal investm ent but largelyus ing present p lant and m achinery.

The cos t da ta o f the new produc t i s gi ven be low :

`

Direct M at er ials 16 p er u n it

Direct Lab o u r 15 p er u n it

Direct Exp en ses 2 p er u n itVar iab le Fact o r y Overh eads 2 p er u n it

Var iab le Sel lin g & Dist rib ut io n Over head s 1 .5 p er u nit

M arket ing M anager of the com pany is expect ing to sel l 2000 uni ts of new prod uct at a pr ice of` 60 per un i t .

The f ixed factory overheads are expected t o increase by 10% and f ixed sel l ing and dis t r ibut ionexpense wi l l go up by ` 13,500 annual ly. Adm inist rat ion overheads wi l l remain u nchanged.

Yo u ar e ad vised t o gi ve yo u r op in io n . Sh o uld t h e ne w p r od u ct b e in t ro d uce d? [ 3+3 +3 +1 ]


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(b ) Dist in gu ish b et w een Jo b cost in g and Pro cess co st in g. [5]

Answer 7. (a)

Analysis of over h eads :

Par t icu lars To t al Fixed Var iab le` ` `

Fact o ry Over h ead (No t e 1 ) 2 ,00,000 1,75 ,000 25,000

Ad m in ist rat io n Over Head 21,000 21,000 -

Sellin g & Dist r ib u t io n Over Head 25,000 20,000 5,000Tot al 2,46,000 2,16,000 30,000

In crem ent al Fact o ry Fixed over h ead 17,500

(10% of 1,75,000)

Sellin g & d ist r ib u t io n over head 13,500

31,000

N o t e-1 : Out o f the t ota l factory overhead 12.5% is assumed as var iable cost .

Statem ent o f Prof its : Exist ing & New Products

Par t icu lars Exist ing Product New Product To t al Am ount

Sales Qu ant it y (Un it s) 6000 2000 8000

` ` `

Sales Valu e 5,40,000 1,20 ,000 6,60 ,000

Less: Direct M at er ials 96,000 32,000 -

Direct Labo u r 1 ,20,000 30,000 -

Direct Expen ses 20,000 4,000 -

Ot h er Var iab le Overheads 30,000 7,000 -

To t al var iab le cost 2,66 ,000 73,000 3,39,000

Co nt r ib u t io n 2 ,74,000 47,000 3,21,000

Less Fixed o ver head 2,16,000 31,000

Pro f it 58 ,000 16,000 74,000

The prof i t o f th e f i rm is expected t o increase by ` 16,000 i f the pro duct is int roduced. So, the com panyshou ld in t roduce the new produc t .


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Answer 7. (b)

The main po ints of d i f ference betw een job cost ing and process cost ing are as fo l low s :

Job Cost ing Process Cost ing

Q. 8 . Wr i te shor t notes on any threeo f t he f o l low ing : [53]

(a ) Limi tat ions of m arket-based t ransfer p r ic ing;

(b) Inter-Lock ing Account s;

(c) Cost-p lus Cont ract ;

(d) Pr incipal Budget Factor;

(e) Perpetu al Inventory System.

Answer 8. (a)

Lim itatio ns of M arket based Transfer Pricing :

1. There may be resistance f rom the bu ying div is ion. They may quest ion b uying f rom the sel l ing d iv ision

i f in any way they have to pay the m arket pr ice.

2. M arket pr ices m ay be f luctuat ing; and hence there m ay be di f f icu l t ies in f ixat ion of t hese pr ices.

3. M arket pr ice is rather a vague term as such pr ices may be ex-factor y pr ice, wholesale pr ice, reta ilprice, etc.

4. M arket pr ices m ay not be avai lable for in term ediate products , as these products may not have anymarke t .

5 . The method may be d i f f i cu l t to opera te i f the in te rmed ia te p roduc t i s fo r cap t i ve consumpt ion .

1 . Each job i s car r ied ou t aga ins t spec if i c o rders. Process cost ing has con t inuous f l ow .

2 . Each jo b m ay be d if feren t . Each p ro d u ct is h o m ogeno u s an d st an d ard ised .

3 . Th e cost cen t re is a jo b . Th e cost cen t re is a p ro cess.

4. Costs are col lected and ascerta ined for eachjo b separ at e ly.

Co s t s a re c o l l e c t e d a n d a sc e r t a i n e d f o r e a c hpro cess separately.

5 . Cos ts a re ca lcu lated on ly on comple t ion o fjo b .

Process costs are calculated at the end of eachper iod .

6 . Th e r e m a y o r m a y n o t b e a n y w o r k i nprogress.

There is always som e W IP because of cont inu ousnature o f p roduc t ion .

7 . H igher degree o f con t ro l i s requ i red becauseof hetero genous nature of job s.

Lower degree o f con t ro l i s requ i red because o fhom ogenous and standardised jobs.

8 . Th e re i s u su a ll y n o t r a n fe r s b e t w e e n jo b s. Th e o u t p u t o f o n e p ro ce ss i s t r a n sf e rre d t o n ex t asi n p u t .


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Answer 8. (b)

Inter- locking Accounts :

Cost and Financial Account s are said to be inter locked, wh en indep endent set of bo oks are m ainta ined foreach of them. These accounts are inter locked through contro l accounts mainta ined in the two sets ofbooks. Cost Ledger Contro l Account is mainta ined in t he f inancia l books and a General Ledger Adjustm entAccount is mainta ined in cost ing books. In th is manner, connect ion between the two sets of books ismaintained. In costing books, al l entries relating to f ixed assets, cash, etc. are posted in General LedgerAdjustment Account . In case i t is des i red to integrate the two t r ia l balances into one, the Cost LedgerCont ro l Account and General Ledger Adjustm ent Account can be om i t ted because they are m ainta ined onCont ra pr inc ip le. The in tegrat ion as above aim s at m aintenance of on ly one set of bo oks in w hich thetransact ions are recorded; thereby reconci l ia t ion is e l iminated. However, due to some di f f icu l t ies l ike

imp lemen tat ion p roblem of in tegrat ion , som et im es in t er lock ing of accounts is preferred. For example, aseparate cost of account ing departm ent b ecause of i ts imp ort ance, in t er lock ing account ing system m ayhave to be operated.

Answ er 8. (c)

Cost p lus Cont ract :

In th is type of contracts the contractor is usual ly ent i t led to a s t ipulated amount of prof i t in addi t ion toactual cost of th e serv ice. The amoun t of p rof i t t o be added to t he actual cost of contract m ay be in th eform of f ixed am ount on a percentage on actual cost .

This type of contract is general ly entered into for execut ing specia l type of work which is not usual lyunder taken by the con t rac to r . Examples o f th i s t ype o f con t rac ts a re cons t ruc t ion work dur ing war ,prod uct ion o f new ly designed ship, etc . This type o f contract is advantageous both t o th e contractor andthe contractee. Cont ractor general ly receives a reasonable p rof i t . He is protected f ro m any loss or unusualr isk . Cont ractee can ensure a fa i r pr ice of t he contr act because th e contractee is ent i t led to ver i fy the b ooksof cont ractor.

Answer 8. (d)

Principal Budget Factor :

A Pr inc ipal Budget Factor, a lso kno w n as key factor is that factor the extent of w hose inf luence m ust f i rs t beassessed in order to prepare t he fu nct ional bu dgets. Norm al ly sales is the PBF but oth er factors l ike sk i lledlabour, product ion , purchase, raw m ater ia ls m ay also be PBF. For exam ple, a com pany has produ ct ioncapaci ty to p rodu ce 30,000 tonn es p.a. but t he sales forecast t e l ls that th e m arket can absorb only 20,000unit s, th ere is no poin t in p rod ucing 30,000 u nits. Thus sales is th e PBF in t his case. The PBF put s restrict ionson t he ot her fun ct ions and hence i t mu st be considered carefu l ly in advance.

A typical l is t of som e of t he PBF is g iven below -

(i ) Sales - consumer dem and,

(ii) M ater ials - Availabi l it ies of supply , restr ic t ions on imp ort .

(ii i) Labour - Shor tage of labo ur.

(iv) Plant - Lack of capital, bo t t len ecks in key pr ocesses.

(v ) M anagemen t - Short age of ef f ic ient execut ives, lack of know how, faul ty des ign, pr ic ing pol icy etc .


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Answer 8. (e)

Perpetual Inventory System :

Perpet ual Inventory System m eans cont inuou s stock t ak ing. CIM A def ines Perpet ual Inventory System as the recording as they occur of receipts, issues and resul t ing balances of indiv idual i tem s of s tock in e i th erquant i ty or quant i ty and value.

Under th is system a cont inuou s record o f receipt and issue of m ater ia ls is m ainta ined by th e s tores dept &the inform at ion abo ut the s tock of m ater ia ls is always avai lable. Entr ies in th e Bin card and stores ledgerare m ade af ter every receipt and issue and the balance is reconci led o n regular bas is w i th t he phys icals tock. The main advantage of t h is system is that i t avoids d isrupt ions in the p rodu ct ion caused by p er iodicstock taking. It s a very rel iable check on t he stocks.

suggested dec 11 costing

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