Cost Accounting
Content
Student Name ____________________________________
Study Material
Accounting for Managers
(Cost Management)
For MBA (Full Time) – I Semester
Prepared by
Dr. Sachin Mittal
Associate Professor, PIMR, Indore
Basic Cost Concepts
Learning Objectives
• To understand the meaning of different costing terms • To understand different costing methods • To have a basic idea of different costing techniques • To understand the meaning of cost sheet
Meaning of Cost Accounting
According to Charles T. Horngren, cost accounting is a quantitative method that accumulates, classifies, summarizes and interprets information for the following three major purposes: • Operational planning and control • Special decisions • Product decisions According to the Chartered Institute of Management Accountants, London, cost accounting is the process of accounting for costs from the point at which its expenditure is incurred or committed to the establishment of the ultimate relationship with cost units. In its widest sense, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of the activities carried out or planned.
Objectives of Cost Accounting
The main objectives of cost accounting can be summarized as follows: 1. Determining Selling Price 2. Determining and Controlling Efficiency 3. Facilitating Preparation of Financial and Other Statements 4. Providing Basis for Operating Policy • Determination of a cost-volume-profit relationship • Shutting down or operating at a loss • Making for or buying from outside suppliers • Continuing with the existing plant and machinery or replacing them by improved and economic ones
Concept of Cost
The term cost cannot be exactly defined. Its interpretation depends upon the following factors: • The nature of business or industry • The context in which it is used
Elements of Cost
Following are the three broad elements of cost (refer to figure 12.1): 1. Material a. Direct Material b. Indirect Material 2. Labor a. Direct Labor b. Indirect Labor 3. Expenses a. Direct Expenses b. Indirect Expenses 4. Overhead a. Factory Overheads b. Office and Administration Overheads c. Selling and Distribution Overheads
Components of Total Cost
1. Prime Cost Direct material Direct labor Direct expenses 2. Factory Cost Work overheads 3. Office Cost Administrative overhead 4. Total Cost Selling and distribution expenses
Cost Sheet
Cost sheet is a document that provides for the assembly of an estimated detailed cost in respect of cost centers and cost units. It analyzes and classifies in a tabular form the expenses on different items for a particular period. Additional columns may also be provided to show the cost of a particular unit pertaining to each item of expenditure and the total per unit cost. Cost sheet may be prepared on the basis of actual data (historical cost sheet) or on the basis of estimated data (estimated cost sheet), depending on the technique employed and the purpose to be achieved.
Classification of Cost
1. Fixed, Variable and Semi-Variable Costs 2. Product Costs and Period Costs 3. Direct and Indirect Costs 4. Decision-Making Costs and Accounting Costs 5. Relevant and Irrelevant Costs 6. Shutdown and Sunk Costs 7. Controllable and Uncontrollable Costs 8. Avoidable or Escapable Costs and Unavoidable or Inescapable Costs 9. Imputed or Hypothetical Costs 10. Differentials, Incremental or Decrement Cost 11. Out-of-Pocket Costs 12. Opportunity Cost 13. Traceable, Untraceable or Common Costs 14. Production, Administration and Selling and Distribution Costs 15. Conversion Cost
Cost Unit and Cost Center Cost Unit
The quantity upon which cost can be conveniently allocated is known as a unit of cost or cost unit. The Chartered Institute of Management Accountants, London defines a unit of cost as a unit of quantity of product, service or time in relation to which costs may be ascertained or expressed.
examples of units of cost:
(i) Brick works (ii) Textile mills (iv) Electrical companies (v) Transport companies (vi) Steel mills per 1000 bricks made per yard or per lb. of cloth manufacturing per unit of electricity generated per passenger km. per ton of steel made
Cost Center
According to the Chartered Institute of Management Accountants, London, cost center means “a location, person or item of equipment (or group of these) for which costs may be ascertained and used for the purpose of cost control.”
Cost centers may be classified as follows:
• Productive, unproductive and mixed cost centers • Personal and impersonal cost centers • Operation and process cost centers
Cost Estimation and Cost Ascertainment
• Budgeting • Measurement of performance efficiency • Preparation of financial statements (valuation of stocks etc.) • Make or buy decisions • Fixation of the sale prices of products Cost Reduction and Cost Control (i) Cost control aims at maintaining the costs in accordance with established standards whereas cost reduction is concerned with reducing costs. It changes all standards and endeavors to improve them continuously. (ii) Cost control seeks to attain the lowest possible cost under existing conditions whereas cost reduction does not recognize any condition as permanent since a change will result in lowering the cost. (iii) In case of cost control, emphasis is on past and present. In case of cost reduction, emphasis is on the present and future. (iv) Cost control is a preventive function whereas cost reduction is a correlative function. It operates even when an efficient cost control system exists.
Methods of Costing 1. Job Costing 2. Contract Costing 3. Cost Plus Costing 4. Batch Costing 5. Process Costing 6. Operation Costing 7. Unit Costing (Output Costing or Single Costing) 8. Operating Costing 9. Departmental Costing 10. Multiple Costing (Composite Costing) Techniques of Costing 1. Marginal Costing 2. Direct Costing 3. Absorption or Full Costing 4. Uniform Costing 5. Standard Costing Summary 1.Cost accounting is a quantitative method that accumulates, classifies, summarizes and interprets information for operational planning and control, special decisions and product decisions. 2.Cost may be classified into different categories depending upon the purpose of classification viz. fixed cost, variable cost and semi variable cost. 3.Costing can be defined as the technique and process of ascertaining costs. Break Even Point Specific way to show relationship between costs, volume and profit. It indicates the level of sales at which total revenues is equal to total cost. It is no profit and no loss point.
BEP (units) = Total fixed cost / selling price per unit (SPPU) – variable cost per unit (VCPU)
Or Total FC / 1-(VCPU/SPPU)
BEP (Rs.) = FC X Sales / Contribution
Margin of safety: Excess of sales over the break even sales in known as the margin of safety. Margin of safety ratio = budgeted or actual sales – BE sales/ budgeted or actual sales
Process Costing
1. Product X requires three distinct processes and after the 3rd process the product is transferred to finished stock. You are required to prepare various process accounts from the following information. Total Rs. 5,000 4,000 800 6,000 P1 Rs. 4,000 1,500 500 P2 Rs. 600 1,600 300 P3 Rs. 400 900 -
Direct Material Direct labour Direct expenses Production overheads
Production overheads to be allocated to different processes on the basis of 150% of direct wages. Production during the period was 200 units. Assume there is no opening and closing stock. (Ans. Finished stock 79 per unit, total amt-15,800 in process III) 2. The product of a manufacturing concern passes through two processes A and B and then to finished stock. It is ascertained that in each process normally 5% of the total weight is lost and 10% is scrap which from Processes A and B realizes Rs. 80 per ton and Rs. 200 per ton respectively. The following are the figures relating to both the process : Materials in tons Cost of materials in rupees per ton Wages in rupees Manufacturing expenses in rupees Output in tons Process A 1,000 125 28,000 8,000 830 Process B 70 200 10,000 5,250 780
Prepare Process Cost Accounts showing cost per ton of each process. There was no stock or work-in-progress in any process (Ans-output 780 tons, Rs. 210
per ton, Amt. 163800)
3. Model Ltd. processes a patent material used in buildings. The material is produced in three consecutive grades – soft, medium and hard. Raw material used Cost per tonne Manufacturing wages and expenses Weight lost (% of input of the process) Scrap (sale price Rs. 50 per tonne) Process I 1,000 tones Rs. 200 Rs. 87,500 5% 50 tonnes Process II Process III
Rs. 39,500 10% 30 tonnes
Rs. 10,710 20% 51 tonnes
Sale price per tonne
Rs. 350
Rs. 500
Rs. 800
Management expenses were Rs. 17,500 and selling expenses Rs. 10,000. Two-thirds of the output of Process I and one-half of the output of Process II are passed on to the next process and the balances are sold. The entire output of process III is sold. Prepare the three process accounts and a statement of profit. Make approximations where necessary. (Ans. 153 sales, Rs. 122400, net
loss 3760)
4. Product X is obtained after it passes through three distinct processes. You are required to prepare Process accounts from the following information : Total Rs. 15,084 18,000 18,000 I Rs. 5,200 4,000 Process II Rs. 3,960 6,000 III Rs. 5,924 8,000
Material Direct wages Production overheads
1000 units @ Rs. 6 per unit were introduced in process 1. Production overhead to be distributed as 100% on direct wages. Actual output Unit 950 840 750 Normal loss Value of scrap per unit Rs. 4 8 10
Process I Process II Process III
5% 10% 15%
(Ans. Process III Rs. 2736, abnormal gain – 36 unit)
5. A product passes through three processes, A, B and C. 10,000 units at a cost Re. 1 were issued to process A. The other direct expenses were : Sundry materials Direct labour Direct expenses
(Ans. Process c unit 8664, 86,640)
Process A 1,000 5,000 1,050
Process B 1,500 8,000 1,188
Process C 1,480 6,500 1,605
6. The output from Process X totaled 2,5000 units. It was considered that 200 units were an abnormal loss. Normal loss allowed was 10%. The other information is given below : Material Labour Overheads Wastage realized @ Rs. 5 per unit Rs. 4,000 Rs. 3,350 Rs. 2.50 per unit
You are required to prepare Process Account and Abnormal Loss Account.
(Ans. Process unit 2500,Rs. 20,000, loss 1100)
7. A factory is engaged in the production of Chemical X and in the course of manufacture by-product Y is produced which after a separate process has a commercial value. Following are the information for the month of March. Joint Expenses Material Labour Expenses 10,000 4,000 2,500 Separate X 2,000 2,500 1,400 Expenses Y 2,800 2,500 1,000
The output for the month was 150 quintals of X and 50 quintals of Y. The selling price of product Y is Rs. 200 per quintal. The profit on Y product is 33.33 % on cost price. Prepare an account to show the cost of X per quintal. (Ans. Separate process y-7500 ,x-21,200) 8. X Ltd. manufactures product A which yields two by-products B and C. In a period the amount spent up to the point of separation was Rs. 20,600. Subsequent expenses were : Materials Direct wages Overheads A Rs. 300 400 300 ----------1,000 ----------B Rs. 200 300 270 ----------770 ----------C Rs. 150 200 280 ----------630 -----------
Gross Sales value of products A, B and C was Rs. 15,500, Rs. 10,000, Rs. 5,000 respectively. It was estimated that the net profit as percentage of sales in case B and C would be 25 per cent and 20 per cent, respectively. Ascertain the profit earned on A. (Ans. Profit – 3,500) 9. The following details are extracted from the costing records of an oil refinery for the week ended Sept. 30. Purchase of 500 tons of copra Rs. 2,00,000. Crushing plant Cost of labour 2,500 Electric Power 600 Sundry Material 100 Repairs of Machinery and Plant 280 Steam 600 Factory Expenses 1,320 Cost of casks 300 tons of crude oil was produced. 250 tons of oil was produced by refining process. 248 tons of refined oil was finished for delivery. Refining plant 1,000 360 2,000 330 450 660 Finished 1,500 240 140 450 220 750
Copra sack sold Rs. 400. 175 tons of copra residue sold Rs. 11,000. Loss in weight in crushing 25 tons. 45 tons by-product was obtained from refining process valued at Rs. 6,750. You are required to show the accounts in respect of each of the following stages of manufacture for the purpose of arriving at the cost per ton of each process and also the total cost per ton of finished oil. (a) Copra crushing process. (b) Refining process. (c) Finished product. (Ans. Finished stock 814.9 per ton, Rs. 202,100) 10. An oil company gives the following cost data. You are required to prepare various accounts. Purchases of 1000 quintals of copper @ Rs. 500 per quintal. Crushing Rs. 6,600 1,000 700 500 250 Refining Rs. 3,000 500 200 400 150 Finishing Rs. 3,000 400 400 100
Cost of Labour Electric Power Sundry Material Repair to Machinery and Plant Steam
Other Factory Exp. Rs. 9,450
To be charged 75% of wages Cost of casks Normal loss in 1 Process was 30% of input, actual output 690 quintals. Process II, By-product 90 quintals value Rs. 6,200. Process III, Normal loss 5%, Actual output 580 quintals. Scrap of 1st Process realized Rs. 10 per quintal.
(Ans. Finishing Process 580 quintal, 5,19,100)
st
580
11. Opening Stock 500 units @ 6 per unit Transferred from process II 15,000 units costing Direct Material, Added Direct wages Production wages Units scrapped Normal loss Transfer to process IV Closing stock
Rs. Rs. Rs. Rs.
32,175 10,350 27,260 21,845
5% 13,200 units 1,500 units Scrapped units 100% 80% 80%
Material Labour Overheads
6,150, loss Rs. 380)
Degree of Completion Opening stock Closing stock 80% 60% 50% 40% 50% 40%
Units scrapped were sold @ Rs. 2 each (Ans. Process III cl. Stock 1500 unit, Rs.
12. A factory producing article P also produces a by-product Q which is further processed into finished product. The joint cost of manufacture is given below:Rs. Material Labour Overheads 5,000 3,000 2,000 ---------10,000 ---------P Rs. 3,000 1,400 600 ----------5,000 ----------PQRs. Rs. Q Rs. 1,500 1,000 500 ----------3,000 -----------16,000 8,000
Subsequent costs are given below :
Material Labour Overheads
Selling prices are
Estimated profits on selling prices are 25% for P and 20% for Q. Assume that selling and distributing expenses are in proportion of sales price. Show how you would apportion joint cost of manufacture and prepare a statement showing cost of production of P and Q. (Ans. Cost of production P-11,733, Q-6267) 13. A product passes through two distinct processes A and B and thereafter. It is transferred to finished stock. The output of A pass to B and that of B to finished product. From the following information you are required to prepare process accounts. Process A Rs. 12,000 14,000 4,000 10,000 10,000 9,400 5% 8 Process B Rs. 6,000 8,000 4,000 8,300 10% 10
Material consumed Direct labor Manufacturing exp. Input in process A (units) Input in process A (value) Output (units) Normal wastage percentage of input Value of normal wastage (per 100 units)
(Ans. Process B normal loss – 940, abnormal loss 160, finished stock-8300, Rs. 56,358)
Uses of Marginal Costing or Cost Analysis for Decision Making
1. A company has capacity of producing 1,00,000 units of a certain product in a month. The sales department reports that the following schedule of selling price is possible : Volume of Production 60% 70% 80% 90% 100% Selling price per unit 0.90 0.80 0.75 0.67 0.61
The variable costs of manufacture between these levels are Rs. 0.15 per unit and fixed costs Rs. 40,000. At what volume (level) of production will the profit be maximum ? (Ans. 80% production will give maximum profit) 2. Juneja Ltd. manufactures readymade garments and uses its cutpieces of cloth to manufacture dolls. The following statement of cost has been prepared : Readymade Garments Rs. 1,60,000 26,000 34,000 48,000 -----------Total Cost 2,68,000 3,40,000 -----------+ 72,000 -----------Dolls Rs. 12,000 2,400 5,600 6,000 -----------26,000 24,000 ------------ 2,000 -----------Total Rs. 1,72,000 28,400 39,600 54,000 -----------2,94,000 3,64,000 -----------+ 70,000 ------------
Materials Labour Variable Overheads Fixed Overheads
Sales Profit (+) Loss (-)
Cutpieces used in the manufacture of dolls have a scrap value of Rs. 4,000, if sold in the market. As there is loss of Rs. 2,000 in the manufacturing of dolls, it is suggested to discontinue its manufacture. Advise the management. (Ans. Co. should not discontinue manufacturing of dolls otherwise profit will reduce by Rs. 12000) 3. Indian Rupsee Ltd. has three departments. each of which makes a different product. Cost and related data for the last year (not expected to change next year) are as follows :
Sales Marginal Costs : Direct Materials Direct Labour Variable Overheads Fixed Costs Rs. 50,000
A Rs. 80,000 ----------10,000 4,000 10,000
Departments B Rs. 40,000 ----------5,000 5,000 5,000
C Rs. 60,000 ----------10,000 16,000 20,000
The Manager of C department is very perturbed by the result. The product being made has an assured market and there is no other product which could be substituted for the product already being made. Prime and variable costs are down to a low level and there is little hope of these being reduced further. The fixed costs traceable to a particular departments are : A – Rs. 14,000; B- Rs. 8,000; C- Rs. 16,000. The balance of fixed costs is common to all the departments. You are required to present the information in the most suitable manner indicating whether or not department C should be closed down. (Ans. Should be closed department C) 4. Indu Enterprises produce three lines. Their details are : A 20% 2,000 Rs. 20 10 7 6 -----------43 40 ------------3 -----------Lines B 40/% 5,000 Rs. 32 12 9 9 -----------62 75 -----------+ 13 -----------C 40% 6,000 Rs. 36 16 11 10 -----------73 85 -----------+ 12 ------------
Capacity engaged Unit produced Cost per unit : Materials Wages Variable Overheads Fixed Overheads
Selling Price per unit Profit (+) Loss (-)
The management proposes to discontinue the line A and utilise the disengaged capacity of line A equally in lines B and C. Expected rise in price and cost Materials Wages Selling price B 10% 5% 2% C 10% 5% 5%
Fixed Overheads shall remain unchanged. You are required to prepare a statement of projected profitability and advise the management as to whether the scheme be adopted or abandoned. (Ans: discontinue the line A) 5. M/s. Bharat Furniture is thinking to drop one item from its product lines and to replace it with another. Below are given its present cost and output data : Product Chair Bench Table Price Rs. 60 100 200 Variable Cost per unit Rs. 40 60 120 Percentage of Sales Rs. 30% 20% 50%
The change under consideration is dropping the Bench and introducing BookShelf. If this change is made, the firm forecasts the following cost and output data : Product Chair Book-Shelf Table Price Rs. 60 160 200 Variable Cost per unit Rs. 40 60 120 Present Rs. 25,00,000 7,50,000 Percentage of Sales Rs. 50% 10% 40% Forecasts Rs. 26,00,000 7,50,000
Total fixed costs and sales for the present and forecasts are :
Sales Fixed Costs
will increase by Rs. 61,833)
Should the proposal be accepted ? (Ans: proposal should be accepted because profit 6. Nisha Ltd. produces three products A, B & C. The following are the cost data relating to these products : Sales (Rs.) Variable Costs (Rs.) Contribution Fixed Costs Profit A 75,000 60,000 ---------15,000 ---------B 45,000 31,500 ---------13,500 ---------C 30,000 18,000 ---------12,000 ---------D 1,50,000 1,09,500 -----------40,500 20,250 ---------20,250 ----------
You are required to prove how knowledge of marginal costing can help management in changing the product-mix in order to increase profit. (Ans: profit will increse by Rs. 4500) 7. Kailash Motor Ltd. has an annual production of 90,000 units for a motor component. The component cost structure is as below :
Materials p.u. Labour p.u. (25% fixed) Overheads : Variable p.u. Fixed p.u.
Rs. 270 180 90 135 ------675 -------
(a) The purchase manager has an offer from a supplier who is willing to supply the component at Rs. 540. Should the component be purchased and production stopped ? (b) Assume the resources now used for this component’s manufacture are to be used in producing another new product for which selling price is Rs. 485. In such a case, the material price will be Rs. 2000 per unit. 90,000 units of this product can be produced at the same cost basis as above for labour and overheads. Discuss whether it would be profitable to divert the resources to manufacture the new product, on the footing that the component currently being produced would be purchased from the market instead of being produced. (Ans. Should be purchased from market) 8. K. K. Industries Ltd. purchases 12,000 units p.a. of a spare part from another manufacturer @ Rs. 4 per unit. The production manager has put forward a proposal that the production of this spare part may be undertaken by the company in order to have full control over the supply of the spare part. He has submitted the following information alongwith the proposal : (i) (ii) (iii) (iv) (v) Material & Labour would cost Re. 0.60 and Re. 0.50 respectively per unit. Variable overhead will be 100% of labour. A foreman will be employed at Rs. 1,000 p.m. Machine needed would cost Rs. 50,000. It will have a production capacity of 15,000 units and its economic life will be 5 years. Funds need for the above (iv) can be obtained at an interest rate of 10% p.a.
You are required to advise the management about the proposal. (Ans. Should produce 12000 unit) 9. Jayco Ltd. has tow factories – main and feeder. Main factory is run at 70% capacity (installed capacity is 1,20,000 units) and feeder factory supplies its requirements by working at 80% capacity. The cost structure of feeder factory is given below :
Materials Wages (50 paise per unit plus fixed D.A.) Overheads : Fixed Variable Rs. 1,68,000 60,000 75,000 42,000 ----------3,45,000
The production of main factory is to be raised to 80% capacity. The component can be bought from the market at Rs. 3.50 per unit. As cost of feeder factory exceeds Rs. 4 per unit, it is proposed to procure the additional requirements from the market instead of having them from the feeder factory. Advise the management. (Ans. Additional 12000 unit should get from feeder factory) 10. You are Management Accountant of a company. The Managing Director of the company seeks your advice on the following problem : The company produces a variety of products each having a number of component parts. Product B takes 5 hours to produce on a machine working at full capacity. B has a selling price of Rs. 50 and a marginal cost of Rs. 30 per units. ‘A/10’ a component part could be made on the same machine in 2 hours for a marginal cost of Rs. 5 per unit. The supplier’s price is Rs. 12.50 per unit. Should the company make or buy ‘A/10’ ? Assume that machine hour is limiting factor. Selling Price Less : Marginal Cost Contribution Contribution per machine hour = 20 = Rs. 4 5 Contribution Lost if A/10 is made = 4 x 2 = Rs. 8 (Opportunity Cost) Marginal Cost of A/10 Opportunity cost Total Cost Buying Price Saving if bought (Ans. Saving if bought .50) 11. Naithani Automobiles Ltd. manufactures certain parts. Following are the total costs and cost per unit of processing a component :
Units Cost Rs. 5 8 6 5 ------24 ------Total Costs for 1,00,000 units Rs. 5,00,000 8,00,000 6,00,000 5,00,000 ------------24,00,000 -------------
Rs. 50 Rs. 30 --------Rs. 20 ---------
Rs. 5.00 Rs. 8.00 ---------Rs. 13.00 Rs. 12.50 ---------------Re. 00.50 ----------------
Materials Labour Variable Factory Exp. Fixed Factory Expenses
Another manufacturer has offered to sell the same part to Naithani Automobiles Ltd. for Rs. 22 each. Fixed factory expenses would continue to be incurred even if the component is bought out, although there would be reduction of Rs. 1,50,000 due to savings in salaries of supervising personnel. (a) Should the part be made or bought considering that the present facility when released following a buying decision would remain idle ? (b) In the case the present facility can be rented to another manufacturer for Rs. 50,000 as there is good demand for spare facilities, what will be the position ? (Ans. Saving when make – Rs. 100,000) 12. A radio manufacturer finds that while it costs Rs. 6.25 per unit to make component XX-09 the same is available in the market at Rs. 5.75 each. Continuous supply is also assured. The break-down of costs is : Per unit Rs. 2.75 1.75 0.50 1.25 -------6.25 ---------
Materials Labour Other Variable Expenses Depreciation & Other Fixed Costs
(a) Will you make or buy ? (b) What would be your decision, if the supplier offered the component at Rs. 4.85 per unit ? (Ans. Saving when bought .15) 13. A manufacturing company is considering whether to buy a commodity with an annual sales potential of Rs. 10,00,000 and thereafter discontinue the manufacture of that commodity. Manufacturing Costs are Rs. 7,00,000 while purchase cost would be Rs. 7,50,000. Selling costs are Rs. 1,00,00. Administrative Costs are Rs. 40,000 and would be Rs. 10,000 less if the commodity was bought. Capital requirements are Rs. 16,00,00 for making and Rs. 9,60,000 for buying. The manufacturing plant has a life of four years of which three years have elapsed and before its renewal, a decision on making or buying has to be made. You are required to advise the management on the basis of above data whether to buy or to make the commodity. (Ans. Profit in buying is 12.5%) 14. Part 555 is being manufactures and used by Modern Engineers Ltd. in finished goods. The annual requirements of this part are 12,000 units. The lowest price quotation so far received from an outside supplier is Rs. 21.50 per unit. This is being considered as the company wants to discontinue the manufacture of this part and buy it from outside. You are asked to help the company for taking a decision. In this connection, following figures are given to you : The expenses when part 555 was in production for 12,000 units were :
Materials Direct Labour Indirect Labour Lighting Power Depreciation Insurance Miscellaneous
Rs. 3,50,000 4,00,000 1,60,000 20,000 30,000 2,00,000 15,000 27,000
Fringe benefits to labour work out 10% of total labour cost. Discontinuing the production of this component would not in any way permit the disposal of any of the factory’s assets. The following proportion of expenses can be avoided if the manufacture of part 555 is stopped : Materials Direct Labour Indirect Labour Power 30% 35% 25% 20%
When the part is purchased from an outside supplier, shipping charges would averages 75 paise per unit and indirect labour cost would be increased by Rs. 2,000 annually for receiving, inspecting and handling the purchased parts. Prepare a schedule showing the relative costs of buying and making and give your recommendation. (Ans. Net saving in bought is 39,800) 15. A new product was manufactured by Shobha Ltd. and was placed for sale in three regional markets for launching it nationally. Three prices were selected for testing each market. From the following particulars, ascertain the price to give maximum profitability : Selected Prices (Rs.) p.u. Estimated Sales (Nos.) Variable Costs (Total) : Production (Rs.) Selling (Rs.) Traceable Fixed Costs (Rs.) (Ans .Profit at 12.5 is highest i.e. 4560) 16. An umbrella manufacturer makes an average profit of Rs. 2.50 per piece in selling at price of Rs. 14.30 by producing and selling 60,000 pieces or 60 percent of potential capacity. The cost of sales is : Direct Material Direct Wages Works Overhead Sales Overhead Rs. 3.50 1.25 6.25 0.80 10 800 2,520 400 700 12.50 600.00 1,890.00 350 700 15 300 945 200 600
(50% Fixed) – 3.12 (25% Variable)
During the current year he intends to produce the same number but anticipates that his Fixed Charges will go up by 10 per cent while rates of direct labour and direct material will increase by 8% and 6% respectively. But he has no option of increasing the selling price. Under this situation he obtains an offer for a further 20% of his capacity. What minimum price will you recommend for the offer to ensure the manufacturing an overall profit of Rs. 1.673 Lakhs ? Reason your recommendation. (Ans. fixed cost – 2,45,850) 17. Sri Ram Prasad manufactures lighters. He sells his product at Rs. 20 each and makes profit of Rs. 5 on each lighter. He worked 50% of his machinery capacity at 50,000 lighters. The cost of each lighter is as under : Direct Material Wages Works Overhead Selling Expenses Rs. 6 2 5 2
(50% fixed) (25% variable)
His anticipation for the next year is that the costs will go up as under : There will not be any change in selling price. There is an additional order for 20,000 lighters in the next year. What is the lowest rate he quote so that he can earn the same profit as the current year? (Ans. Lowest rate 14.45 per lighter) 18. On account of trade depression, Dall Ltd. is experiencing a difficult trading period and as a result is operating well below the normal capacity to produce and to sell. An enquiry has been received for 100 0units of product X and the directors are very anxious to obtain the order. The cost data relating to product X are as under : (ii) Direct labour per unit 2 hours at Rs. 4 per hour. (iii) Direct Material Cost per unit Rs. 8. (iv) Overheads are recovered on the basis of Rs. 16 for direct labour hour for variable cost and Rs. 24 for direct labour for fixed costs. (v) Additional costs relate to special moulds which have to be purchased @ one per product at Rs. 1.60 each and special equipment costing Rs. 2,000 is also to be bought. In both the cases, there is no hope of the costs being recovered by other products. (vi) It is also desired that 40% of the fixed costs should be recovered. Assuming that the order can be fitted into existing capacity without difficulty, advise the price to be settled. (Ans. selling price 88.80) 19. B Ltd. is running its plant at present at 50% of capacity. The management has supplied you the following details :
Direct Materials Direct Labour Variable Overhead Fixed Overheads (fully absorbed)
Cost of Production per unit (Rs.) 4 2 6 4 ------16 -------
Production per month 40,000 units. Total cost of product = 40,000 x 16 = Rs. 6,40,000 Total Sales = 40,000 x 14 = Rs. 5,60,000 --------------Loss Rs. 80,000 --------------An exporter has offered to purchase 10,000 units per month @ Rs. 13 per unit and the company is hesitating in accepting the offer due to the fear that it will increase its already large operating losses. Advise the company as to accept or to decline the offer. (Ans. Profit Rs.10,000 is offer will accept ) 20. Rajhans Ltd. makes a single product and sales for Rs. 30 per unit and there is great demand of the product. The variable cost of the product is Rs. 16 as detailed below : Direct Materials Direct Labour (2 hrs.) Variable overhead Rs. 8 4 4 -----16 ------
The labour force is currently working at full capacity and no extra time can be made available. Mr. S.S. Lal, a customer has approached the company with a request for manufacture of a special order at Rs. 8,000. The cost of the order would be Rs. 300 for Direct Material and 600 hours (labour) will be required and variable overhead per hour shall be Rs. 2. Should the order be accepted ? (Ans. should not accept because loss is RS.1600) 21. The following flexible budget of Pyramid Ltd. indicates the cost position at 60% level : Production in units Materials Wages Cost per unit Rs. 3.00 1.50 15,000 units Total Rs. 45,000 22,500
Overheads : Fixed Variable
Sales per unit Profit per unit
2.00 0.50 ------7.00 9.00 ------2.00 -------
30,000 7,500
It is informed by the Chief Marketing Officer that the existing market will not absorb mass production. A special order for 5,000 units from Government may be obtained if the goods can be supplied at Rs. 6.50 per unit. Do you think that the order is worth trying ? (Ans. profit Rs. 7500, if order accepts) 22. A firm having a capacity of 15,000 units per year produces 10,000 units which are consumed in the home market at Rs. 25 per unit. The Cost Sheet (per unit) on the basis of this output is under : Material Labour Fixed Factory Expenses Variable Factory Expenses Office Expenses : Selling Expenses : Fixed Variable Total Cost Rs. 8.00 6.00 2.00 1.50 1.00 0.50 1.00 -------20.00 --------
A foreign customer is interested in the product but he is willing to buy only 5,000 units and that too at a price of Rs. 18 per unit. Do you advise the firm to accept to order? (Ans. should accept the offer, profit increase by Rs.7500) 23. Hind Motors Ltd. specialized manufacturer of a Motor Part, is operating at 60% of its capacity of producing 20,000 units per month. Its monthly budget for fixed expenses (including dep.) is Rs.1,20,000 p.m. The variable cost of making the part is as under : Direct Material Direct Labour Expenses Rs. 11.00 2.00 5.00 ------18.00 ------per unit per unit per unit per unit
The company has invested Rs. 48 lakhs in the business and currently earning a return of 6% p.a. before tax. The Managing Director is prepared to accept a new business at any price which will raise the return to 20% before tax. A car manufacturer has offered to buy 8,000 units of the part every month, if it could be supplied at Rs. 21 per unit. Would you advise the company to accept the offer ? (Ans. should not accept the offer because return is only 12%.)
Standard Costing
Standard Cost is a predetermined cost which determines what each product or service should under given circumstances.
Variance
Variance as the difference between a standard cost and the comparable actual cost incurred during a given period. The purpose of knowing the variance is to enable the management to exercise control over cost. It enable to know whether the standards set is achieved or not. A variance is said to be favorable when the actual results are better than the standards and an adverse or unfavorable variance when actual are not up to the standards. VARIANCE
Material Material Cost Material Usage Material Price
MATERIAL VARIANCE
Labour Labour cost Labour Efficiency Labour Rate
Overhead OH Cost OH Values
SQ = Standard Quantity AP = Actual Price 1)
SP = Standard Price AQ = Actual Quantity
2)
Material Cost Variance (MCV) MCV = (SQ x SP) – (AQ x AP) MCV = MPV – MUV or SC – AC Material Usage Variance (MUV) MUV = (SQ - AQ) x SP Material Price Variances (MPV) MPV = (SP – AP) x AQ Material Mix Variance (SQ - AQ) x SP SR = Standard Rate AR = Actual Rate AH = Actual Hours
3)
4)
LABOUR VARIANCE
SH = Standard Hours AY = Actual Yield SY = Standard Yield 1) Labour rate variance = (SR - AR)AH 2) Labour usage / efficiency variance (SH - AH) x SR 3) Labour cost variance (SH x SR) – (AH x AR) Material yield variance (MYV) : Difference between Standard Normal Loss and Actual Normal Loss. (MYV) = (AY - SY) x SC per unit Some time revised yield will be used (MYV) = (AY - RV) x SC
Standard Costing
1. The standard cost card shows the following details relating to material requirement to produce one kg. of groundnut oil. Quantity of Groundnut Price of Groundnut Actual Production data : Production during one month Quantity used Price of Groundnut 3 kgs. 75 ps. per kg. 1,000 kgs. 3,500 kgs. Re. 1 per kg.
Calculate and analyse Material Cost Variance. (Ans. total 1250) 2. Following is the standard for producing ‘M’ : Material X 60 units @ Rs. 5 per unit. Material Y 40 units @ Rs. 10 per unit. Actual : Material X 50 units @ Rs. 6 per unit. Material Y 50 unmits @ Rs. 8 per unit. Analysis Material Cost Variance. (Ans. total nil) 3. Reliance Petrochemicals Ltd. which produces a product P uses Standard Cost System. Its Standard Product Cost specification per 1,000 kg. of P are : Raw Material Qty. Price per kg. Cost (kg.) Rs. Rs. A 600 4.00 2,400 B 600 1.00 600 Materials records for the month of January 2001 showed as under : Materials Consumed A 6,800 kg. @ 4.10
B 7,600 kg. @ 1.10 Actual finished product achieved during the month of January 2001 was 12,000 kg. Purchase Manager was quite surprised to learn that there has been favourable total raw material cost variance while the actual price paid for A and B raw materials have been higher than standard price. Can it really be so ? Why ? Show your calculations. (Ans. total 240) 4 Standard Mix for production of ‘X’ : ‘A’ 60 tons @ Rs. 5 per ton ‘B’ 40 tons @ Rs. 10 per ton. Actual Mixture being : ‘A’ 80 tons @ Rs. 4 per ton ‘B’ 70 tons @ Rs. 8 per ton Reconcile Actual Material Cost with Standard Material Cost. (Ans.A-320, B-560 ) 5 In a brass foundry, the Standard Mixture consists of 60% Copper and 40% Zinc. The Standard Loss of production is 10% on input. From the actual production in a month, calculate the Material Cost Variance and analyse it : Copper 25 kgs. @ Rs. 15 per kg. (Standard 30 kgs.), Zinc 25 kgs. @ Rs. 10 per kg. (Standard 20 kgs.) Actual output : 43 kgs. There is no difference between SP and AP. (Ans. total 4) 6. In a brass foundry, the Standard Mixture consists of 60% Copper and 40% Zinc. The Standard Loss of production is 30%. Standard Mixture and Yield were : Copper 60 kgs. Rs. 5 per kg. Zinc 40 kgs. @ Rs. 10 per kg. Standard yield 70 kg. The actual Mixture and Yield were : Copper 80 kgs. @ Rs. 4.50 per kg. Zince 70 kgs. @ Rs. 8.00 per kg. Actual yield 115 kg. Calculate the Mix Variance, Price Variance, Yield Variance and Usage Variance. (Ans.180,50,450,350 ) 7 The following standar and actual data relate to a manufacturing concern : Standard Material X Material Y Actual 40 kg. @ Rs. 6 = Rs. 240 60 kg. @ Rs. 4 = Rs. 240
Standard output is 80% of input i.e., 700 units. Process Loss is 20%.
Material X Material Y
600 kgs. at Rs. 4 400 kgs. at Rs. 6
Actual output is 70% of input i.e., 700 units. Process loss is 30%. You are required to calculate material cost variances. (Ans. total 600) 8 Raja Bros. manufactures a product ‘X’. It is estimated that for each ton of material consumed, 100 units should be produced. The standard price per ton of material is Rs. 10. During the first week of January 2001, 100 tons of materials were issued to production, the price of which was Rs. 10.50 per ton. Production during the week was 10,200 units. Calculate variances. (Ans .total 30 )
9 Calculate (i) Material Cost Variance, (ii) Material Price Variance, (iii) Material Usage Variance from the following information : Materials purchased 3,000 kg. Value of Materials purchased Rs. 9,000 Standard Quantity – 25 kg. for one kg. of finished goods Standard Price – Rs. 2 per kg. Closing Stock of Materials – 500 kg. Finished goods produced – 80 kg. (Ans. Total 3500) 10 Standard set for material consumption was 100 kg. @ Rs. 2.25 per kg. In a cost period : Opening Stock was 100 kg. @ 2.25 per kg. Purchases made 500 kg. @ 2.15 per kg. Consumption 100 kg. Calculate : (a) Usage Variance (b) Price Variance, when (i) It is calculated at point of purchase. (ii) It is calculated at point of issue on FIFO basis. (iii) It is calculated at point of issued on LIFO basis. (Ans. price variance Rs.11) 11. The following information is obtained form a Standard Cost records : Labour Rate 90 Paise per hour Hour – 3 Hours per unit Actual production data are : Units produced 250. Labour Rate Rs. 1.05 per hour Hours worked 800. Calculate Labour Rate and Labour Efficiency Variances. (Ans. 120, 45) 12. Given for a factory : Normal number of workers in the department Number of hours paid for in a week Standard rate of wages per hour Standard output of the department per hour 50 40 Re. 0.80
taking into account normal idle time
20 units
In the first week of March, it was ascertained that 1,000 units were produced despite 20% idle time due to power failure and actual rate of wages was Re. 0.90 per hour. Calculate Labour Variance. (Ans. total 200 ) 13. Analyse the labour cost variance from the following information Standard Hrs. Rates (Rs.) Workman A 20 3 Workman B 25 4 (Ans. Total5.50 ) 14. The following information relates to a manufacturing process of a company : Number of employees Weekly hours Standard wage rate Standard output 200 40 50 250 Hrs. 30 15 Actual Rates (Rs.) 2.90 4.50
Paise per hour Units per hour
During the first week of February, four employees were paid at 45 Paise per hour and two employees at 55 Paise per hour, the rest employees were paid at standard rates. Idle time is one hour per employees. Actual output was 10,250 units. Calculate Labour Cost Variance. (Ans. total labour variance104) 15 Calculate the various Fixed Overheads Variance from the following data : Standards Output in units Working hours Fixed Overheads (Ans.5000) 16 A Manufacturing Company operates a Standard Costing System and showed the following information for October 2001 : Budget Actual Units of Output 4,000 Working Days 20 Labour Hours 40,000 Overheads Expenses Rs. 20,0900 Calculate various overhead variances. (Ans. 2250) 4,250 22 43,000 Rs. 19,000 Actual 4,000 2,500 Rs. 20,000 5,000 2,400 Rs. 30,000
Study Material
Accounting for Managers
(Cost Management)
For MBA (Full Time) – I Semester
Prepared by
Dr. Sachin Mittal
Associate Professor, PIMR, Indore
Basic Cost Concepts
Learning Objectives
• To understand the meaning of different costing terms • To understand different costing methods • To have a basic idea of different costing techniques • To understand the meaning of cost sheet
Meaning of Cost Accounting
According to Charles T. Horngren, cost accounting is a quantitative method that accumulates, classifies, summarizes and interprets information for the following three major purposes: • Operational planning and control • Special decisions • Product decisions According to the Chartered Institute of Management Accountants, London, cost accounting is the process of accounting for costs from the point at which its expenditure is incurred or committed to the establishment of the ultimate relationship with cost units. In its widest sense, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of the activities carried out or planned.
Objectives of Cost Accounting
The main objectives of cost accounting can be summarized as follows: 1. Determining Selling Price 2. Determining and Controlling Efficiency 3. Facilitating Preparation of Financial and Other Statements 4. Providing Basis for Operating Policy • Determination of a cost-volume-profit relationship • Shutting down or operating at a loss • Making for or buying from outside suppliers • Continuing with the existing plant and machinery or replacing them by improved and economic ones
Concept of Cost
The term cost cannot be exactly defined. Its interpretation depends upon the following factors: • The nature of business or industry • The context in which it is used
Elements of Cost
Following are the three broad elements of cost (refer to figure 12.1): 1. Material a. Direct Material b. Indirect Material 2. Labor a. Direct Labor b. Indirect Labor 3. Expenses a. Direct Expenses b. Indirect Expenses 4. Overhead a. Factory Overheads b. Office and Administration Overheads c. Selling and Distribution Overheads
Components of Total Cost
1. Prime Cost Direct material Direct labor Direct expenses 2. Factory Cost Work overheads 3. Office Cost Administrative overhead 4. Total Cost Selling and distribution expenses
Cost Sheet
Cost sheet is a document that provides for the assembly of an estimated detailed cost in respect of cost centers and cost units. It analyzes and classifies in a tabular form the expenses on different items for a particular period. Additional columns may also be provided to show the cost of a particular unit pertaining to each item of expenditure and the total per unit cost. Cost sheet may be prepared on the basis of actual data (historical cost sheet) or on the basis of estimated data (estimated cost sheet), depending on the technique employed and the purpose to be achieved.
Classification of Cost
1. Fixed, Variable and Semi-Variable Costs 2. Product Costs and Period Costs 3. Direct and Indirect Costs 4. Decision-Making Costs and Accounting Costs 5. Relevant and Irrelevant Costs 6. Shutdown and Sunk Costs 7. Controllable and Uncontrollable Costs 8. Avoidable or Escapable Costs and Unavoidable or Inescapable Costs 9. Imputed or Hypothetical Costs 10. Differentials, Incremental or Decrement Cost 11. Out-of-Pocket Costs 12. Opportunity Cost 13. Traceable, Untraceable or Common Costs 14. Production, Administration and Selling and Distribution Costs 15. Conversion Cost
Cost Unit and Cost Center Cost Unit
The quantity upon which cost can be conveniently allocated is known as a unit of cost or cost unit. The Chartered Institute of Management Accountants, London defines a unit of cost as a unit of quantity of product, service or time in relation to which costs may be ascertained or expressed.
examples of units of cost:
(i) Brick works (ii) Textile mills (iv) Electrical companies (v) Transport companies (vi) Steel mills per 1000 bricks made per yard or per lb. of cloth manufacturing per unit of electricity generated per passenger km. per ton of steel made
Cost Center
According to the Chartered Institute of Management Accountants, London, cost center means “a location, person or item of equipment (or group of these) for which costs may be ascertained and used for the purpose of cost control.”
Cost centers may be classified as follows:
• Productive, unproductive and mixed cost centers • Personal and impersonal cost centers • Operation and process cost centers
Cost Estimation and Cost Ascertainment
• Budgeting • Measurement of performance efficiency • Preparation of financial statements (valuation of stocks etc.) • Make or buy decisions • Fixation of the sale prices of products Cost Reduction and Cost Control (i) Cost control aims at maintaining the costs in accordance with established standards whereas cost reduction is concerned with reducing costs. It changes all standards and endeavors to improve them continuously. (ii) Cost control seeks to attain the lowest possible cost under existing conditions whereas cost reduction does not recognize any condition as permanent since a change will result in lowering the cost. (iii) In case of cost control, emphasis is on past and present. In case of cost reduction, emphasis is on the present and future. (iv) Cost control is a preventive function whereas cost reduction is a correlative function. It operates even when an efficient cost control system exists.
Methods of Costing 1. Job Costing 2. Contract Costing 3. Cost Plus Costing 4. Batch Costing 5. Process Costing 6. Operation Costing 7. Unit Costing (Output Costing or Single Costing) 8. Operating Costing 9. Departmental Costing 10. Multiple Costing (Composite Costing) Techniques of Costing 1. Marginal Costing 2. Direct Costing 3. Absorption or Full Costing 4. Uniform Costing 5. Standard Costing Summary 1.Cost accounting is a quantitative method that accumulates, classifies, summarizes and interprets information for operational planning and control, special decisions and product decisions. 2.Cost may be classified into different categories depending upon the purpose of classification viz. fixed cost, variable cost and semi variable cost. 3.Costing can be defined as the technique and process of ascertaining costs. Break Even Point Specific way to show relationship between costs, volume and profit. It indicates the level of sales at which total revenues is equal to total cost. It is no profit and no loss point.
BEP (units) = Total fixed cost / selling price per unit (SPPU) – variable cost per unit (VCPU)
Or Total FC / 1-(VCPU/SPPU)
BEP (Rs.) = FC X Sales / Contribution
Margin of safety: Excess of sales over the break even sales in known as the margin of safety. Margin of safety ratio = budgeted or actual sales – BE sales/ budgeted or actual sales
Process Costing
1. Product X requires three distinct processes and after the 3rd process the product is transferred to finished stock. You are required to prepare various process accounts from the following information. Total Rs. 5,000 4,000 800 6,000 P1 Rs. 4,000 1,500 500 P2 Rs. 600 1,600 300 P3 Rs. 400 900 -
Direct Material Direct labour Direct expenses Production overheads
Production overheads to be allocated to different processes on the basis of 150% of direct wages. Production during the period was 200 units. Assume there is no opening and closing stock. (Ans. Finished stock 79 per unit, total amt-15,800 in process III) 2. The product of a manufacturing concern passes through two processes A and B and then to finished stock. It is ascertained that in each process normally 5% of the total weight is lost and 10% is scrap which from Processes A and B realizes Rs. 80 per ton and Rs. 200 per ton respectively. The following are the figures relating to both the process : Materials in tons Cost of materials in rupees per ton Wages in rupees Manufacturing expenses in rupees Output in tons Process A 1,000 125 28,000 8,000 830 Process B 70 200 10,000 5,250 780
Prepare Process Cost Accounts showing cost per ton of each process. There was no stock or work-in-progress in any process (Ans-output 780 tons, Rs. 210
per ton, Amt. 163800)
3. Model Ltd. processes a patent material used in buildings. The material is produced in three consecutive grades – soft, medium and hard. Raw material used Cost per tonne Manufacturing wages and expenses Weight lost (% of input of the process) Scrap (sale price Rs. 50 per tonne) Process I 1,000 tones Rs. 200 Rs. 87,500 5% 50 tonnes Process II Process III
Rs. 39,500 10% 30 tonnes
Rs. 10,710 20% 51 tonnes
Sale price per tonne
Rs. 350
Rs. 500
Rs. 800
Management expenses were Rs. 17,500 and selling expenses Rs. 10,000. Two-thirds of the output of Process I and one-half of the output of Process II are passed on to the next process and the balances are sold. The entire output of process III is sold. Prepare the three process accounts and a statement of profit. Make approximations where necessary. (Ans. 153 sales, Rs. 122400, net
loss 3760)
4. Product X is obtained after it passes through three distinct processes. You are required to prepare Process accounts from the following information : Total Rs. 15,084 18,000 18,000 I Rs. 5,200 4,000 Process II Rs. 3,960 6,000 III Rs. 5,924 8,000
Material Direct wages Production overheads
1000 units @ Rs. 6 per unit were introduced in process 1. Production overhead to be distributed as 100% on direct wages. Actual output Unit 950 840 750 Normal loss Value of scrap per unit Rs. 4 8 10
Process I Process II Process III
5% 10% 15%
(Ans. Process III Rs. 2736, abnormal gain – 36 unit)
5. A product passes through three processes, A, B and C. 10,000 units at a cost Re. 1 were issued to process A. The other direct expenses were : Sundry materials Direct labour Direct expenses
(Ans. Process c unit 8664, 86,640)
Process A 1,000 5,000 1,050
Process B 1,500 8,000 1,188
Process C 1,480 6,500 1,605
6. The output from Process X totaled 2,5000 units. It was considered that 200 units were an abnormal loss. Normal loss allowed was 10%. The other information is given below : Material Labour Overheads Wastage realized @ Rs. 5 per unit Rs. 4,000 Rs. 3,350 Rs. 2.50 per unit
You are required to prepare Process Account and Abnormal Loss Account.
(Ans. Process unit 2500,Rs. 20,000, loss 1100)
7. A factory is engaged in the production of Chemical X and in the course of manufacture by-product Y is produced which after a separate process has a commercial value. Following are the information for the month of March. Joint Expenses Material Labour Expenses 10,000 4,000 2,500 Separate X 2,000 2,500 1,400 Expenses Y 2,800 2,500 1,000
The output for the month was 150 quintals of X and 50 quintals of Y. The selling price of product Y is Rs. 200 per quintal. The profit on Y product is 33.33 % on cost price. Prepare an account to show the cost of X per quintal. (Ans. Separate process y-7500 ,x-21,200) 8. X Ltd. manufactures product A which yields two by-products B and C. In a period the amount spent up to the point of separation was Rs. 20,600. Subsequent expenses were : Materials Direct wages Overheads A Rs. 300 400 300 ----------1,000 ----------B Rs. 200 300 270 ----------770 ----------C Rs. 150 200 280 ----------630 -----------
Gross Sales value of products A, B and C was Rs. 15,500, Rs. 10,000, Rs. 5,000 respectively. It was estimated that the net profit as percentage of sales in case B and C would be 25 per cent and 20 per cent, respectively. Ascertain the profit earned on A. (Ans. Profit – 3,500) 9. The following details are extracted from the costing records of an oil refinery for the week ended Sept. 30. Purchase of 500 tons of copra Rs. 2,00,000. Crushing plant Cost of labour 2,500 Electric Power 600 Sundry Material 100 Repairs of Machinery and Plant 280 Steam 600 Factory Expenses 1,320 Cost of casks 300 tons of crude oil was produced. 250 tons of oil was produced by refining process. 248 tons of refined oil was finished for delivery. Refining plant 1,000 360 2,000 330 450 660 Finished 1,500 240 140 450 220 750
Copra sack sold Rs. 400. 175 tons of copra residue sold Rs. 11,000. Loss in weight in crushing 25 tons. 45 tons by-product was obtained from refining process valued at Rs. 6,750. You are required to show the accounts in respect of each of the following stages of manufacture for the purpose of arriving at the cost per ton of each process and also the total cost per ton of finished oil. (a) Copra crushing process. (b) Refining process. (c) Finished product. (Ans. Finished stock 814.9 per ton, Rs. 202,100) 10. An oil company gives the following cost data. You are required to prepare various accounts. Purchases of 1000 quintals of copper @ Rs. 500 per quintal. Crushing Rs. 6,600 1,000 700 500 250 Refining Rs. 3,000 500 200 400 150 Finishing Rs. 3,000 400 400 100
Cost of Labour Electric Power Sundry Material Repair to Machinery and Plant Steam
Other Factory Exp. Rs. 9,450
To be charged 75% of wages Cost of casks Normal loss in 1 Process was 30% of input, actual output 690 quintals. Process II, By-product 90 quintals value Rs. 6,200. Process III, Normal loss 5%, Actual output 580 quintals. Scrap of 1st Process realized Rs. 10 per quintal.
(Ans. Finishing Process 580 quintal, 5,19,100)
st
580
11. Opening Stock 500 units @ 6 per unit Transferred from process II 15,000 units costing Direct Material, Added Direct wages Production wages Units scrapped Normal loss Transfer to process IV Closing stock
Rs. Rs. Rs. Rs.
32,175 10,350 27,260 21,845
5% 13,200 units 1,500 units Scrapped units 100% 80% 80%
Material Labour Overheads
6,150, loss Rs. 380)
Degree of Completion Opening stock Closing stock 80% 60% 50% 40% 50% 40%
Units scrapped were sold @ Rs. 2 each (Ans. Process III cl. Stock 1500 unit, Rs.
12. A factory producing article P also produces a by-product Q which is further processed into finished product. The joint cost of manufacture is given below:Rs. Material Labour Overheads 5,000 3,000 2,000 ---------10,000 ---------P Rs. 3,000 1,400 600 ----------5,000 ----------PQRs. Rs. Q Rs. 1,500 1,000 500 ----------3,000 -----------16,000 8,000
Subsequent costs are given below :
Material Labour Overheads
Selling prices are
Estimated profits on selling prices are 25% for P and 20% for Q. Assume that selling and distributing expenses are in proportion of sales price. Show how you would apportion joint cost of manufacture and prepare a statement showing cost of production of P and Q. (Ans. Cost of production P-11,733, Q-6267) 13. A product passes through two distinct processes A and B and thereafter. It is transferred to finished stock. The output of A pass to B and that of B to finished product. From the following information you are required to prepare process accounts. Process A Rs. 12,000 14,000 4,000 10,000 10,000 9,400 5% 8 Process B Rs. 6,000 8,000 4,000 8,300 10% 10
Material consumed Direct labor Manufacturing exp. Input in process A (units) Input in process A (value) Output (units) Normal wastage percentage of input Value of normal wastage (per 100 units)
(Ans. Process B normal loss – 940, abnormal loss 160, finished stock-8300, Rs. 56,358)
Uses of Marginal Costing or Cost Analysis for Decision Making
1. A company has capacity of producing 1,00,000 units of a certain product in a month. The sales department reports that the following schedule of selling price is possible : Volume of Production 60% 70% 80% 90% 100% Selling price per unit 0.90 0.80 0.75 0.67 0.61
The variable costs of manufacture between these levels are Rs. 0.15 per unit and fixed costs Rs. 40,000. At what volume (level) of production will the profit be maximum ? (Ans. 80% production will give maximum profit) 2. Juneja Ltd. manufactures readymade garments and uses its cutpieces of cloth to manufacture dolls. The following statement of cost has been prepared : Readymade Garments Rs. 1,60,000 26,000 34,000 48,000 -----------Total Cost 2,68,000 3,40,000 -----------+ 72,000 -----------Dolls Rs. 12,000 2,400 5,600 6,000 -----------26,000 24,000 ------------ 2,000 -----------Total Rs. 1,72,000 28,400 39,600 54,000 -----------2,94,000 3,64,000 -----------+ 70,000 ------------
Materials Labour Variable Overheads Fixed Overheads
Sales Profit (+) Loss (-)
Cutpieces used in the manufacture of dolls have a scrap value of Rs. 4,000, if sold in the market. As there is loss of Rs. 2,000 in the manufacturing of dolls, it is suggested to discontinue its manufacture. Advise the management. (Ans. Co. should not discontinue manufacturing of dolls otherwise profit will reduce by Rs. 12000) 3. Indian Rupsee Ltd. has three departments. each of which makes a different product. Cost and related data for the last year (not expected to change next year) are as follows :
Sales Marginal Costs : Direct Materials Direct Labour Variable Overheads Fixed Costs Rs. 50,000
A Rs. 80,000 ----------10,000 4,000 10,000
Departments B Rs. 40,000 ----------5,000 5,000 5,000
C Rs. 60,000 ----------10,000 16,000 20,000
The Manager of C department is very perturbed by the result. The product being made has an assured market and there is no other product which could be substituted for the product already being made. Prime and variable costs are down to a low level and there is little hope of these being reduced further. The fixed costs traceable to a particular departments are : A – Rs. 14,000; B- Rs. 8,000; C- Rs. 16,000. The balance of fixed costs is common to all the departments. You are required to present the information in the most suitable manner indicating whether or not department C should be closed down. (Ans. Should be closed department C) 4. Indu Enterprises produce three lines. Their details are : A 20% 2,000 Rs. 20 10 7 6 -----------43 40 ------------3 -----------Lines B 40/% 5,000 Rs. 32 12 9 9 -----------62 75 -----------+ 13 -----------C 40% 6,000 Rs. 36 16 11 10 -----------73 85 -----------+ 12 ------------
Capacity engaged Unit produced Cost per unit : Materials Wages Variable Overheads Fixed Overheads
Selling Price per unit Profit (+) Loss (-)
The management proposes to discontinue the line A and utilise the disengaged capacity of line A equally in lines B and C. Expected rise in price and cost Materials Wages Selling price B 10% 5% 2% C 10% 5% 5%
Fixed Overheads shall remain unchanged. You are required to prepare a statement of projected profitability and advise the management as to whether the scheme be adopted or abandoned. (Ans: discontinue the line A) 5. M/s. Bharat Furniture is thinking to drop one item from its product lines and to replace it with another. Below are given its present cost and output data : Product Chair Bench Table Price Rs. 60 100 200 Variable Cost per unit Rs. 40 60 120 Percentage of Sales Rs. 30% 20% 50%
The change under consideration is dropping the Bench and introducing BookShelf. If this change is made, the firm forecasts the following cost and output data : Product Chair Book-Shelf Table Price Rs. 60 160 200 Variable Cost per unit Rs. 40 60 120 Present Rs. 25,00,000 7,50,000 Percentage of Sales Rs. 50% 10% 40% Forecasts Rs. 26,00,000 7,50,000
Total fixed costs and sales for the present and forecasts are :
Sales Fixed Costs
will increase by Rs. 61,833)
Should the proposal be accepted ? (Ans: proposal should be accepted because profit 6. Nisha Ltd. produces three products A, B & C. The following are the cost data relating to these products : Sales (Rs.) Variable Costs (Rs.) Contribution Fixed Costs Profit A 75,000 60,000 ---------15,000 ---------B 45,000 31,500 ---------13,500 ---------C 30,000 18,000 ---------12,000 ---------D 1,50,000 1,09,500 -----------40,500 20,250 ---------20,250 ----------
You are required to prove how knowledge of marginal costing can help management in changing the product-mix in order to increase profit. (Ans: profit will increse by Rs. 4500) 7. Kailash Motor Ltd. has an annual production of 90,000 units for a motor component. The component cost structure is as below :
Materials p.u. Labour p.u. (25% fixed) Overheads : Variable p.u. Fixed p.u.
Rs. 270 180 90 135 ------675 -------
(a) The purchase manager has an offer from a supplier who is willing to supply the component at Rs. 540. Should the component be purchased and production stopped ? (b) Assume the resources now used for this component’s manufacture are to be used in producing another new product for which selling price is Rs. 485. In such a case, the material price will be Rs. 2000 per unit. 90,000 units of this product can be produced at the same cost basis as above for labour and overheads. Discuss whether it would be profitable to divert the resources to manufacture the new product, on the footing that the component currently being produced would be purchased from the market instead of being produced. (Ans. Should be purchased from market) 8. K. K. Industries Ltd. purchases 12,000 units p.a. of a spare part from another manufacturer @ Rs. 4 per unit. The production manager has put forward a proposal that the production of this spare part may be undertaken by the company in order to have full control over the supply of the spare part. He has submitted the following information alongwith the proposal : (i) (ii) (iii) (iv) (v) Material & Labour would cost Re. 0.60 and Re. 0.50 respectively per unit. Variable overhead will be 100% of labour. A foreman will be employed at Rs. 1,000 p.m. Machine needed would cost Rs. 50,000. It will have a production capacity of 15,000 units and its economic life will be 5 years. Funds need for the above (iv) can be obtained at an interest rate of 10% p.a.
You are required to advise the management about the proposal. (Ans. Should produce 12000 unit) 9. Jayco Ltd. has tow factories – main and feeder. Main factory is run at 70% capacity (installed capacity is 1,20,000 units) and feeder factory supplies its requirements by working at 80% capacity. The cost structure of feeder factory is given below :
Materials Wages (50 paise per unit plus fixed D.A.) Overheads : Fixed Variable Rs. 1,68,000 60,000 75,000 42,000 ----------3,45,000
The production of main factory is to be raised to 80% capacity. The component can be bought from the market at Rs. 3.50 per unit. As cost of feeder factory exceeds Rs. 4 per unit, it is proposed to procure the additional requirements from the market instead of having them from the feeder factory. Advise the management. (Ans. Additional 12000 unit should get from feeder factory) 10. You are Management Accountant of a company. The Managing Director of the company seeks your advice on the following problem : The company produces a variety of products each having a number of component parts. Product B takes 5 hours to produce on a machine working at full capacity. B has a selling price of Rs. 50 and a marginal cost of Rs. 30 per units. ‘A/10’ a component part could be made on the same machine in 2 hours for a marginal cost of Rs. 5 per unit. The supplier’s price is Rs. 12.50 per unit. Should the company make or buy ‘A/10’ ? Assume that machine hour is limiting factor. Selling Price Less : Marginal Cost Contribution Contribution per machine hour = 20 = Rs. 4 5 Contribution Lost if A/10 is made = 4 x 2 = Rs. 8 (Opportunity Cost) Marginal Cost of A/10 Opportunity cost Total Cost Buying Price Saving if bought (Ans. Saving if bought .50) 11. Naithani Automobiles Ltd. manufactures certain parts. Following are the total costs and cost per unit of processing a component :
Units Cost Rs. 5 8 6 5 ------24 ------Total Costs for 1,00,000 units Rs. 5,00,000 8,00,000 6,00,000 5,00,000 ------------24,00,000 -------------
Rs. 50 Rs. 30 --------Rs. 20 ---------
Rs. 5.00 Rs. 8.00 ---------Rs. 13.00 Rs. 12.50 ---------------Re. 00.50 ----------------
Materials Labour Variable Factory Exp. Fixed Factory Expenses
Another manufacturer has offered to sell the same part to Naithani Automobiles Ltd. for Rs. 22 each. Fixed factory expenses would continue to be incurred even if the component is bought out, although there would be reduction of Rs. 1,50,000 due to savings in salaries of supervising personnel. (a) Should the part be made or bought considering that the present facility when released following a buying decision would remain idle ? (b) In the case the present facility can be rented to another manufacturer for Rs. 50,000 as there is good demand for spare facilities, what will be the position ? (Ans. Saving when make – Rs. 100,000) 12. A radio manufacturer finds that while it costs Rs. 6.25 per unit to make component XX-09 the same is available in the market at Rs. 5.75 each. Continuous supply is also assured. The break-down of costs is : Per unit Rs. 2.75 1.75 0.50 1.25 -------6.25 ---------
Materials Labour Other Variable Expenses Depreciation & Other Fixed Costs
(a) Will you make or buy ? (b) What would be your decision, if the supplier offered the component at Rs. 4.85 per unit ? (Ans. Saving when bought .15) 13. A manufacturing company is considering whether to buy a commodity with an annual sales potential of Rs. 10,00,000 and thereafter discontinue the manufacture of that commodity. Manufacturing Costs are Rs. 7,00,000 while purchase cost would be Rs. 7,50,000. Selling costs are Rs. 1,00,00. Administrative Costs are Rs. 40,000 and would be Rs. 10,000 less if the commodity was bought. Capital requirements are Rs. 16,00,00 for making and Rs. 9,60,000 for buying. The manufacturing plant has a life of four years of which three years have elapsed and before its renewal, a decision on making or buying has to be made. You are required to advise the management on the basis of above data whether to buy or to make the commodity. (Ans. Profit in buying is 12.5%) 14. Part 555 is being manufactures and used by Modern Engineers Ltd. in finished goods. The annual requirements of this part are 12,000 units. The lowest price quotation so far received from an outside supplier is Rs. 21.50 per unit. This is being considered as the company wants to discontinue the manufacture of this part and buy it from outside. You are asked to help the company for taking a decision. In this connection, following figures are given to you : The expenses when part 555 was in production for 12,000 units were :
Materials Direct Labour Indirect Labour Lighting Power Depreciation Insurance Miscellaneous
Rs. 3,50,000 4,00,000 1,60,000 20,000 30,000 2,00,000 15,000 27,000
Fringe benefits to labour work out 10% of total labour cost. Discontinuing the production of this component would not in any way permit the disposal of any of the factory’s assets. The following proportion of expenses can be avoided if the manufacture of part 555 is stopped : Materials Direct Labour Indirect Labour Power 30% 35% 25% 20%
When the part is purchased from an outside supplier, shipping charges would averages 75 paise per unit and indirect labour cost would be increased by Rs. 2,000 annually for receiving, inspecting and handling the purchased parts. Prepare a schedule showing the relative costs of buying and making and give your recommendation. (Ans. Net saving in bought is 39,800) 15. A new product was manufactured by Shobha Ltd. and was placed for sale in three regional markets for launching it nationally. Three prices were selected for testing each market. From the following particulars, ascertain the price to give maximum profitability : Selected Prices (Rs.) p.u. Estimated Sales (Nos.) Variable Costs (Total) : Production (Rs.) Selling (Rs.) Traceable Fixed Costs (Rs.) (Ans .Profit at 12.5 is highest i.e. 4560) 16. An umbrella manufacturer makes an average profit of Rs. 2.50 per piece in selling at price of Rs. 14.30 by producing and selling 60,000 pieces or 60 percent of potential capacity. The cost of sales is : Direct Material Direct Wages Works Overhead Sales Overhead Rs. 3.50 1.25 6.25 0.80 10 800 2,520 400 700 12.50 600.00 1,890.00 350 700 15 300 945 200 600
(50% Fixed) – 3.12 (25% Variable)
During the current year he intends to produce the same number but anticipates that his Fixed Charges will go up by 10 per cent while rates of direct labour and direct material will increase by 8% and 6% respectively. But he has no option of increasing the selling price. Under this situation he obtains an offer for a further 20% of his capacity. What minimum price will you recommend for the offer to ensure the manufacturing an overall profit of Rs. 1.673 Lakhs ? Reason your recommendation. (Ans. fixed cost – 2,45,850) 17. Sri Ram Prasad manufactures lighters. He sells his product at Rs. 20 each and makes profit of Rs. 5 on each lighter. He worked 50% of his machinery capacity at 50,000 lighters. The cost of each lighter is as under : Direct Material Wages Works Overhead Selling Expenses Rs. 6 2 5 2
(50% fixed) (25% variable)
His anticipation for the next year is that the costs will go up as under : There will not be any change in selling price. There is an additional order for 20,000 lighters in the next year. What is the lowest rate he quote so that he can earn the same profit as the current year? (Ans. Lowest rate 14.45 per lighter) 18. On account of trade depression, Dall Ltd. is experiencing a difficult trading period and as a result is operating well below the normal capacity to produce and to sell. An enquiry has been received for 100 0units of product X and the directors are very anxious to obtain the order. The cost data relating to product X are as under : (ii) Direct labour per unit 2 hours at Rs. 4 per hour. (iii) Direct Material Cost per unit Rs. 8. (iv) Overheads are recovered on the basis of Rs. 16 for direct labour hour for variable cost and Rs. 24 for direct labour for fixed costs. (v) Additional costs relate to special moulds which have to be purchased @ one per product at Rs. 1.60 each and special equipment costing Rs. 2,000 is also to be bought. In both the cases, there is no hope of the costs being recovered by other products. (vi) It is also desired that 40% of the fixed costs should be recovered. Assuming that the order can be fitted into existing capacity without difficulty, advise the price to be settled. (Ans. selling price 88.80) 19. B Ltd. is running its plant at present at 50% of capacity. The management has supplied you the following details :
Direct Materials Direct Labour Variable Overhead Fixed Overheads (fully absorbed)
Cost of Production per unit (Rs.) 4 2 6 4 ------16 -------
Production per month 40,000 units. Total cost of product = 40,000 x 16 = Rs. 6,40,000 Total Sales = 40,000 x 14 = Rs. 5,60,000 --------------Loss Rs. 80,000 --------------An exporter has offered to purchase 10,000 units per month @ Rs. 13 per unit and the company is hesitating in accepting the offer due to the fear that it will increase its already large operating losses. Advise the company as to accept or to decline the offer. (Ans. Profit Rs.10,000 is offer will accept ) 20. Rajhans Ltd. makes a single product and sales for Rs. 30 per unit and there is great demand of the product. The variable cost of the product is Rs. 16 as detailed below : Direct Materials Direct Labour (2 hrs.) Variable overhead Rs. 8 4 4 -----16 ------
The labour force is currently working at full capacity and no extra time can be made available. Mr. S.S. Lal, a customer has approached the company with a request for manufacture of a special order at Rs. 8,000. The cost of the order would be Rs. 300 for Direct Material and 600 hours (labour) will be required and variable overhead per hour shall be Rs. 2. Should the order be accepted ? (Ans. should not accept because loss is RS.1600) 21. The following flexible budget of Pyramid Ltd. indicates the cost position at 60% level : Production in units Materials Wages Cost per unit Rs. 3.00 1.50 15,000 units Total Rs. 45,000 22,500
Overheads : Fixed Variable
Sales per unit Profit per unit
2.00 0.50 ------7.00 9.00 ------2.00 -------
30,000 7,500
It is informed by the Chief Marketing Officer that the existing market will not absorb mass production. A special order for 5,000 units from Government may be obtained if the goods can be supplied at Rs. 6.50 per unit. Do you think that the order is worth trying ? (Ans. profit Rs. 7500, if order accepts) 22. A firm having a capacity of 15,000 units per year produces 10,000 units which are consumed in the home market at Rs. 25 per unit. The Cost Sheet (per unit) on the basis of this output is under : Material Labour Fixed Factory Expenses Variable Factory Expenses Office Expenses : Selling Expenses : Fixed Variable Total Cost Rs. 8.00 6.00 2.00 1.50 1.00 0.50 1.00 -------20.00 --------
A foreign customer is interested in the product but he is willing to buy only 5,000 units and that too at a price of Rs. 18 per unit. Do you advise the firm to accept to order? (Ans. should accept the offer, profit increase by Rs.7500) 23. Hind Motors Ltd. specialized manufacturer of a Motor Part, is operating at 60% of its capacity of producing 20,000 units per month. Its monthly budget for fixed expenses (including dep.) is Rs.1,20,000 p.m. The variable cost of making the part is as under : Direct Material Direct Labour Expenses Rs. 11.00 2.00 5.00 ------18.00 ------per unit per unit per unit per unit
The company has invested Rs. 48 lakhs in the business and currently earning a return of 6% p.a. before tax. The Managing Director is prepared to accept a new business at any price which will raise the return to 20% before tax. A car manufacturer has offered to buy 8,000 units of the part every month, if it could be supplied at Rs. 21 per unit. Would you advise the company to accept the offer ? (Ans. should not accept the offer because return is only 12%.)
Standard Costing
Standard Cost is a predetermined cost which determines what each product or service should under given circumstances.
Variance
Variance as the difference between a standard cost and the comparable actual cost incurred during a given period. The purpose of knowing the variance is to enable the management to exercise control over cost. It enable to know whether the standards set is achieved or not. A variance is said to be favorable when the actual results are better than the standards and an adverse or unfavorable variance when actual are not up to the standards. VARIANCE
Material Material Cost Material Usage Material Price
MATERIAL VARIANCE
Labour Labour cost Labour Efficiency Labour Rate
Overhead OH Cost OH Values
SQ = Standard Quantity AP = Actual Price 1)
SP = Standard Price AQ = Actual Quantity
2)
Material Cost Variance (MCV) MCV = (SQ x SP) – (AQ x AP) MCV = MPV – MUV or SC – AC Material Usage Variance (MUV) MUV = (SQ - AQ) x SP Material Price Variances (MPV) MPV = (SP – AP) x AQ Material Mix Variance (SQ - AQ) x SP SR = Standard Rate AR = Actual Rate AH = Actual Hours
3)
4)
LABOUR VARIANCE
SH = Standard Hours AY = Actual Yield SY = Standard Yield 1) Labour rate variance = (SR - AR)AH 2) Labour usage / efficiency variance (SH - AH) x SR 3) Labour cost variance (SH x SR) – (AH x AR) Material yield variance (MYV) : Difference between Standard Normal Loss and Actual Normal Loss. (MYV) = (AY - SY) x SC per unit Some time revised yield will be used (MYV) = (AY - RV) x SC
Standard Costing
1. The standard cost card shows the following details relating to material requirement to produce one kg. of groundnut oil. Quantity of Groundnut Price of Groundnut Actual Production data : Production during one month Quantity used Price of Groundnut 3 kgs. 75 ps. per kg. 1,000 kgs. 3,500 kgs. Re. 1 per kg.
Calculate and analyse Material Cost Variance. (Ans. total 1250) 2. Following is the standard for producing ‘M’ : Material X 60 units @ Rs. 5 per unit. Material Y 40 units @ Rs. 10 per unit. Actual : Material X 50 units @ Rs. 6 per unit. Material Y 50 unmits @ Rs. 8 per unit. Analysis Material Cost Variance. (Ans. total nil) 3. Reliance Petrochemicals Ltd. which produces a product P uses Standard Cost System. Its Standard Product Cost specification per 1,000 kg. of P are : Raw Material Qty. Price per kg. Cost (kg.) Rs. Rs. A 600 4.00 2,400 B 600 1.00 600 Materials records for the month of January 2001 showed as under : Materials Consumed A 6,800 kg. @ 4.10
B 7,600 kg. @ 1.10 Actual finished product achieved during the month of January 2001 was 12,000 kg. Purchase Manager was quite surprised to learn that there has been favourable total raw material cost variance while the actual price paid for A and B raw materials have been higher than standard price. Can it really be so ? Why ? Show your calculations. (Ans. total 240) 4 Standard Mix for production of ‘X’ : ‘A’ 60 tons @ Rs. 5 per ton ‘B’ 40 tons @ Rs. 10 per ton. Actual Mixture being : ‘A’ 80 tons @ Rs. 4 per ton ‘B’ 70 tons @ Rs. 8 per ton Reconcile Actual Material Cost with Standard Material Cost. (Ans.A-320, B-560 ) 5 In a brass foundry, the Standard Mixture consists of 60% Copper and 40% Zinc. The Standard Loss of production is 10% on input. From the actual production in a month, calculate the Material Cost Variance and analyse it : Copper 25 kgs. @ Rs. 15 per kg. (Standard 30 kgs.), Zinc 25 kgs. @ Rs. 10 per kg. (Standard 20 kgs.) Actual output : 43 kgs. There is no difference between SP and AP. (Ans. total 4) 6. In a brass foundry, the Standard Mixture consists of 60% Copper and 40% Zinc. The Standard Loss of production is 30%. Standard Mixture and Yield were : Copper 60 kgs. Rs. 5 per kg. Zinc 40 kgs. @ Rs. 10 per kg. Standard yield 70 kg. The actual Mixture and Yield were : Copper 80 kgs. @ Rs. 4.50 per kg. Zince 70 kgs. @ Rs. 8.00 per kg. Actual yield 115 kg. Calculate the Mix Variance, Price Variance, Yield Variance and Usage Variance. (Ans.180,50,450,350 ) 7 The following standar and actual data relate to a manufacturing concern : Standard Material X Material Y Actual 40 kg. @ Rs. 6 = Rs. 240 60 kg. @ Rs. 4 = Rs. 240
Standard output is 80% of input i.e., 700 units. Process Loss is 20%.
Material X Material Y
600 kgs. at Rs. 4 400 kgs. at Rs. 6
Actual output is 70% of input i.e., 700 units. Process loss is 30%. You are required to calculate material cost variances. (Ans. total 600) 8 Raja Bros. manufactures a product ‘X’. It is estimated that for each ton of material consumed, 100 units should be produced. The standard price per ton of material is Rs. 10. During the first week of January 2001, 100 tons of materials were issued to production, the price of which was Rs. 10.50 per ton. Production during the week was 10,200 units. Calculate variances. (Ans .total 30 )
9 Calculate (i) Material Cost Variance, (ii) Material Price Variance, (iii) Material Usage Variance from the following information : Materials purchased 3,000 kg. Value of Materials purchased Rs. 9,000 Standard Quantity – 25 kg. for one kg. of finished goods Standard Price – Rs. 2 per kg. Closing Stock of Materials – 500 kg. Finished goods produced – 80 kg. (Ans. Total 3500) 10 Standard set for material consumption was 100 kg. @ Rs. 2.25 per kg. In a cost period : Opening Stock was 100 kg. @ 2.25 per kg. Purchases made 500 kg. @ 2.15 per kg. Consumption 100 kg. Calculate : (a) Usage Variance (b) Price Variance, when (i) It is calculated at point of purchase. (ii) It is calculated at point of issue on FIFO basis. (iii) It is calculated at point of issued on LIFO basis. (Ans. price variance Rs.11) 11. The following information is obtained form a Standard Cost records : Labour Rate 90 Paise per hour Hour – 3 Hours per unit Actual production data are : Units produced 250. Labour Rate Rs. 1.05 per hour Hours worked 800. Calculate Labour Rate and Labour Efficiency Variances. (Ans. 120, 45) 12. Given for a factory : Normal number of workers in the department Number of hours paid for in a week Standard rate of wages per hour Standard output of the department per hour 50 40 Re. 0.80
taking into account normal idle time
20 units
In the first week of March, it was ascertained that 1,000 units were produced despite 20% idle time due to power failure and actual rate of wages was Re. 0.90 per hour. Calculate Labour Variance. (Ans. total 200 ) 13. Analyse the labour cost variance from the following information Standard Hrs. Rates (Rs.) Workman A 20 3 Workman B 25 4 (Ans. Total5.50 ) 14. The following information relates to a manufacturing process of a company : Number of employees Weekly hours Standard wage rate Standard output 200 40 50 250 Hrs. 30 15 Actual Rates (Rs.) 2.90 4.50
Paise per hour Units per hour
During the first week of February, four employees were paid at 45 Paise per hour and two employees at 55 Paise per hour, the rest employees were paid at standard rates. Idle time is one hour per employees. Actual output was 10,250 units. Calculate Labour Cost Variance. (Ans. total labour variance104) 15 Calculate the various Fixed Overheads Variance from the following data : Standards Output in units Working hours Fixed Overheads (Ans.5000) 16 A Manufacturing Company operates a Standard Costing System and showed the following information for October 2001 : Budget Actual Units of Output 4,000 Working Days 20 Labour Hours 40,000 Overheads Expenses Rs. 20,0900 Calculate various overhead variances. (Ans. 2250) 4,250 22 43,000 Rs. 19,000 Actual 4,000 2,500 Rs. 20,000 5,000 2,400 Rs. 30,000
